Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Q3 2021 Earnings Call
Company Participants
Laurent Mercier, Deputy Chief Financial Officer
L Sue Y. Nabi, Chief Executive Officer, Director A N I
F Other Participants
Andrea Teixeira Faiza Alwy Lauren Lieberman Mark Astrachan Nik Modi Robert Ottenstein Stephanie Wissink Wendy Nicholson
Presentation
Operator t Good morning, ladies and gentlemen. My name is Maria, and I'll be your conference p i operator today. At this time, I would like to welcome everyone to Coty's Third Quarter r Fiscal 2021 Results Conference Call. As a reminder, this conference call is being recorded c today May 10, 2021. s n
a On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial r Officer. I would like to remind you that many of the comments today may contain forward- T
looking statements. Please refer to Coty's earnings release and the reports filed with the
g SEC, where the company lists factors that could cause actual results to differ materially r from these forward-looking statements. e b In addition, except where noted, the discussion of Coty's financial results and Coty's
m expectations reflect certain adjustments as specified in the non-GAAP financial measures
o section of the company's release. o l I will now turn the call over to Ms.Nabi. B
Sue Y. Nabi {BIO 21845588
Ladies and gentlemen, with another quarter now complete, I'm once again very pleased to share with you our results as well as highlight a number of green shoots we are seeing
Page 1 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
as we continue to execute on our growth strategy which I shared with you last month.
Importantly, our results this quarter further exemplify the urgency with which we have reacted during our fiscal '21 to ensure Coty emerge from COVID-19 as a much stronger, more nimble and more focused organization.
Our third quarter net revenue trends improved sequentially from Q2, despite many L markets, most notably Western Europe remaining under lockdown during much of the A
N quarter. I'm very pleased to say that our prestige business return to growth this quarter I
F led by China and the U.S.
Building on the progress in the first half of '21, we once again delivered very strong profit as adjusted EBITDA increased over $180 million from last year. This was supported by both substantial gross margin expansion and continued cost reductions.
Importantly, this allowed us to start the virtuous circle of stepping up our media spending and reinvesting behind our newly repositioned brands.
A little over two weeks ago, Laura and I presented our strategy to accelerate sales and profit growth. And today, I'm excited to tell you that we are rapidly executing and seeing initial results on all of our key strategic growth pillars. The green shoots we have seen are encouraging, and we have a strong cadence of portfolio milestones planned through the end of calendar '21.
So let me spend a few minutes reviewing our revenue trends in the third quarter before I t hand it over to Laurent to take you through our financials, then I will wrap it up with an p i update on our strategic progress. r c
s Sales trends in the quarter were led by the Asia Pacific region, which increased 20% like-
n for-like. This was primarily driven by the very strong performance in China. Even when
a compared to our fiscal '19, the pre-COVID baseline sales in China rose double digits. We r are very encouraged by the momentum we are seeing in China, which as you know, is a T
key pillar in our strategy. g r In the Americas, our sales declined 3% like-for-like. This decline was largely the result of e softness within our mass business driven by lower cosmetics consumption. At the same b time, our U.S. prestige business returned to strong growth in the quarter while our mass
m business in Brazil maintained its momentum. EMEA continued to be our softest region with sales declining 13% like-for-like. o o l Throughout the quarter, much of the region was impacted by strict lockdowns and B restrictions, which weighed heavily on the sales performance as well as low international traffic in travel retail. However, with the U.K. having recently opened and many other markets putting in place reopening plans, we remain optimistic the region will soon see an inflection.
Page 2 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Moving on to sales by China now. Our prestige business returned to growth this quarter with sales increasing 2% like-for-like. As I just mentioned, this performance was really driven by the U.S. and China with strong performance across fragrances, makeup and also skincare. Many of our key focus brands delivered strong double-digit revenue growth in the quarter, including Gucci, Burberry, Marc Jacobs and Philosophy.
The growth in the prestige business was noteworthy as it came in spite of Coty's
L continued active reduction of sales in low-quality channels which represented a high-
A single-digit negative impact to prestige business in the last two years. On the other hand, N I the mass beauty business declined 15% like-for-like. This was largely the result of softness F within mass color cosmetics that has stemmed from the lack of
On a positive note, with the lapping of the COVID-driven demand decline in March of last year, we have seen mass beauty category sales reach to global growth in March. I'm pleased to say that we continue to make progress on one of our key strategic pillars of increasing e-commerce sales, further building on our efforts during the first half of the year.
During the third quarter, our e-commerce sales grew nearly 30%. The strength that we saw was fairly broad-based across both regions and categories. Luxury e-commerce sales increased over 20% and penetration year-to-date stands in the mid-20% level.
Consumer beauty e-commerce sales increased 56%, with penetration reaching a high- single-digit percentage level year-to-date. And importantly, in Q3, we saw equally strong performance across e-com pure players and brick and click as we work closely with both
t sets of strategic customers to improve the consumer experience and elevate our brands in these two important channels. Overall, e-com sales now represent a high-teens percent p i of Coty sales fiscal year-to-date. r c s I will now hand the call over to Laurent to take you through our financial results. n a r Laurent Mercier {BIO 22079608
Of the gross margin improvement delivered this quarter, we are confident that approximately half is structural and therefore, can be maintained. This is part of our multi-
Page 3 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
branch efforts to steadily improve our gross margins with contributors coming from channel, category and regional mix as well as various COGS-related efforts.
As detailed during our recent strategic update, we have implemented greater discipline in our A&CP as part as our pay as we process for assuring nimble and highest ROI resource allocation. Our investments have also been more concentrated in fewer but bigger initiatives. As our sales and profit have improved, we have already begun
L increasing our A&CP ratio sequentially. A N I
F A&CP in Q3 was close to 23% as a percentage of sales, up from 20% in H1 '21. We expect A&CP to step up further in Q4 '21, with absolute working media dollars above the Q4 '19 pre-COVID levels. This step-up is enabled by our strong profit delivery year-to-date, which is allowing us to both deliver on our profit commitments for the year, while at the same time, providing significantly more fuel for our brands right as the beauty market is inflecting and in support of strong initiatives planned for the remainder of the year.
Turning to profit growth. The Q3 adjusted EBITDA increased by 180 million year-on-year, reaching 183 million for the quarter and delivering an EBITDA margin of 17.8%. While sales declined somewhat during the quarter, this substantial profit growth was supported by; A, strong gross margin improvement, as mentioned earlier; B, very focused marketing investment; and C, strong fixed cost reduction which I will cover next.
As a reminder, with Q3 marking the first full quarter for Coty ex-Wella, we have begun delivering various transitional services to Wella as aligned in the transition in the separation agreement. t
p In the third quarter, we added certain services that we provide to Wella, principally IT i
r activities for which we have been compensated by Wella largely on a cost-plus basis c resulting in fairly neutral impact to our profit. s n In summary, the robust profit growth achieved is further evidence of our strategy yielding a
r strong results and we expect to continue to build on this momentum in the coming years. T
g Focus and discipline across the business is a key part of our strategy. Our fixed cost r reduction program has allowed us to redirect capital to accelerate our brands and focus e on profit delivery. b
m In Q3 '21, fixed costs decreased 15% year-on-year, and during Q3, we achieved approximately 110 million of savings. This brings our year-to-date savings to over 270 o million. The largest contributor of the savings year-to-date has been streamlining the o l organization. In line with our prior quarterly update, the additional key contributors have
B been savings in business services, including consultants, recruiters, IT, real estate and facility management costs.
As previously mentioned, the consolidation of our fragrance manufacturing footprint is ongoing and expected to be completed by summer '22. Some of these changes are not
Page 4 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
easy decisions to make, but necessary to modernize the business and position Coty for long-term sustainable growth.
Our progress over the last three quarters put us on track to achieve our fiscal year '21 of cost savings target of 300 million and fiscal year '23 target of 600 million.
Turning now to EPS. With adjusted EBITDA for the quarter of 183 million, less 87 million in L depreciation and non-cash stock compensation close to 50 million of interest expense, a A
N low-teens adjusted effective tax rate and 944 million diluted shares factoring full dilution I
F from the convertible preferred shares issued to KKR. The Q3 diluted adjusted EPS for Coty ended at $0.0 and therefore, had no impact.
As for the fiscal year-to-date based on 633 million of adjusted EBITDA, 268 million of depreciation and stock compensation, roughly 172 million of interest expense and an adjusted effective tax rate in the low-teens, the diluted adjusted EPS for Coty ended at $0.10.
Let me spend a minute on a few accounting dynamics impacting our EPS. First, as we described on the last earnings call, we have taken a decision to carry our 40% stake in Wella as a fair value asset, recognizing changes in its fair value in our P&L rather than the equity income.
This quarter, there was an improvement in the general market environment due to COVID reopening and vaccinations that led to an increase in Wella's valuation by $64 million. While this is clearly a positive and speaks to the value accretion, we expect to seeing t Wella over time, since this is not a core activity of our business, we have, therefore, p decided to exclude these fair value changes from our adjusted net income and adjusted i
r EPS. c s Second, we were required by accounting rules to value the preferred dividend to fair n value based on the quarter-end stock price. As thus far, we have not paid the dividend in a
r cash. This increased the value of the Q3 preferred dividend by 11 million to 34 million. T
g At the same time, once the mechanical EPS calculation will yield several cents of adjusted r diluted EPS. The accounting rules state that the diluted EPS cannot be higher than basic e EPS. Hence, the result of our Q3 adjusted diluted EPS being zero. b
m Looking to next quarter, we expect to pay the convertible preferred dividend for Q4 in cash. And we therefore, do not expect to have a similar adjustment for fair value. o o l Looking now at free cash flow for the quarter, which came in line with expectations at B approximately minus $218 million, reflecting typical seasonal weakness and the Wella- related working capital reversal of over $100 million. We also continued with our tight management of CapEx and one-off costs.
Page 5 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Looking at free cash flow fiscal year-to-date, we have generated $143 million, based on this delivery, we continue to expect to end the year with positive free cash flow for fiscal year '21.
Turning now to our capital structure. During the quarter, the combination of the completed KKW deal for 200 million, approximately 100 million of organic cash outflow, roughly 100 million of Wella working capital reversal and some positive ForEx resulted in
L a financial net debt balance exiting Q3 of 5.1 billion. And factoring in the 64 million
A increase in our retained relate to approximately 1.25 billion, our economic net debt at the N I end of the period was approximately 3.9 billion. F
Additionally, in Q3, we successfully completed the issuance of $900 million, 5% senior secured notes due in 2026. We benefited from very strong demand and increased the bond offering from 750 million to 900 million. Our capital structure remains very attractive with key maturities in 2023 and 2025 and a net blended cost of debt below 4%.
It is quite clear that we have made tremendous progress over the last year in lowering our net debt balance and resetting our leverage levels. While our retained wella stake will likely represent a significant monetization opportunity at some point in the coming years, we will continue to be active and tactical in intensifying opportunities to monetize nonstrategic assets and further reduce our leverage.
Let me now turn it back to Sue for a discussion of our operational progress and forward outlook. t Sue Y. Nabi {BIO 21845588
r Thank you, Laurent. So many of you joined us several weeks ago as we walked you
c through our plan to accelerate sales and profit growth and what each strategic pillar s entails. As we have hit the ground running in executing our plans, I'm excited to update n you on the progress we are making and some of the early green shoots we are already a seeing. r T Due to the pandemic over the past year, the global consumer beauty market, particularly g cosmetics, has come under significant pressure. It has been quite clear that social r distancing, mask-wearing and less opportunities to socialize have impacted consumption e of consumer beauty products. While we are not yet to a point where we are back to pre- b pandemic levels, the global consumer beauty market returned to positive growth in
m March, even despite many markets such as Western Europe being under tight restrictions. o
o I'm even more pleased to say that Coty is continuing to narrow its underperformance l relative to the overall market. We believe we are progressing towards stabilization as our B brand repositioning gets underway.
This is certainly true for our first brand repositioning with CoverGirl. The team has been working hard and the efforts are paying off. The early results have been stellar, with CoverGirl recording the first full month of market share gains in four years.
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The new brand positioning, which presents a modern take on CoverGirl's brand heritage and distinctive media assets are really resonating with consumers, as you can see it. Importantly, it's becoming even more clear that Clean Beauty is what consumers demand. Recent Nissan data shows Clean Beauty is outpacing the U.S. color cosmetics category by 17 points with CoverGirl as the second clean beauty brand in America. We are leveraging CoverGirl positioning as the inventor of Clean Beauty and we continue to lean into clean innovation. L
A While the early results are encouraging, we are just getting started. Activations behind the N I Simply Ageless franchise with a new spokesperson, Niki Taylor only recently began to air. F Recall this utilizes the power of nostalgia in promoting brand trust post-COVID, the milestone of CoverGirl's 60th birthday this year. Simply Ageless, America's number one anti-aging foundation, and last but not least, the self-issued beauty ad with Niki Taylor shooting the full video herself.
While CoverGirl may be our first brand repositioning that is well underway, we are also moving at full speed across our other key mass brands. Today, I wanted to specifically highlight how we are in the process of rapidly repositioning both the Rimmel and Max Factor brands. These brands recently announced new global spokespersons. Two beautiful women who have strong supporters of individual expression, female empowerment and challenging stereotypes.
Let's start with Rimmel. We last week announced Adwoa Aboah as their global brand activist. Adwoa is an activist, a model and a designer. As a model, she's made the cover of Vogue multiple times and in parallel built an NGO advocating for the mental health of young women. Adwoa really personifies the new direction for Rimmel as the brand that t represents the freeing power of makeup. p i r Moving on to Max Factor now. Today, we announced that Priyanka Chopra-Jonas has c
s been named as the global brand spokesperson. Priyanka is a global icon with a
n tremendous social media reach of over 60 million followers and has been named one of
a the most influential people in the world by Times Magazine. She is the perfect choice to r represent Max Factor's new purpose of transforming from ordinary to extraordinary. We T
are very pleased to have Adwoa and Priyanka joining forces with our key brands. g r In the coming months, we will be deploying media assets and in-store visuals behind e Rimmel and Max Factor featuring this new global brand spokespersons. We see this as yet b another leg towards stabilizing our mass beauty business. m
o Moving on to our next strategic pillar of accelerating prestige fragrance and makeup growth. I'm very pleased to say that our prestige fragrance business in the U.S. is o l booming. The prestige fragrance category continues to drive the overall performance of
B the United States luxury beauty space, which is even growing compared to fiscal '19.
Importantly, Coty has been growing faster than the market in recent months and gaining market share driven by several focused brands. The exceptional performance of Marc
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Jacobs Perfect has helped boost the overall Marc Jacobs franchise up five spots fiscal year-to-date to be the fifth luxury fragrance house in America.
Burberry Her was the fastest-growing Coty icon in the U.S. helping propel the brand up nine spots in March for women's fragrances. We continued to see very strong growth from Gucci fragrances, led by the recent Gucci Guilty and Gucci Bloom innovations.
L Last but not least, Hugo Boss also outperformed in the U.S. market during March. Our A
N prestige fragrance performance in China and the broader Asia Pacific region was similarly I
F impressive with the fragrance market there growing strong double digits and Coty sell-out outpacing the market. The robust sell-out growth has been driven by Gucci sellout growing triple digits in China and double digits in the rest of APAC. Burberry sellout doubling in China and up double digits in Australia, Calvin Klein sell-out double digits in China and Thailand.
While the U.S. has helped to lead our performance in prestige fragrances, they have certainly been bright spots in markets across the globe. I won't go into all of the details on this slide, but you can clearly see that our brands are winning in various markets and with various franchises.
Moving on now to prestige makeup, where I'm quite pleased to say that both Gucci and Burberry are delivering very robust performance across the globe. In the U.S., Gucci makeup sell-out is growing in the triple digits this fiscal year, this has been supported by the recently launched beauty bronzing powder and continued momentum for the lead products. t
p In the Asia Pacific region, Gucci and Burberry are seeing top digit sell-out growth with i
r particularly strong trends in China led by face products. And in EMEA, Gucci makeup is c now a top 10 prestige maker brand in Sephora stores where the brand is present. s n Touching on our third prestige makeup brand, Kylie Cosmetics. As we discussed last a
r quarter, Kylie Cosmetics sales in recent months has been limited by the completion of the
T former manufacturing contracts and transition from Kylie's purchase manufacturing
supplier even as demand for cosmetic broadly remains weak. g r e However, the launch of the new Kylie Cosmetics line remains on track for this summer.
b And in fact, you may have already seen and began to see Kylie's purse on the brand's social media channels hinting at this. While we cannot reveal many details just yet, we are m excited about this new initiative built on a true collaboration between Kylie and Coty, o which will include an updated cosmetic product assortment and omnichannel approach, o and a best-in-class web platform, which will allow consumers to seamlessly shop the full l assortment of Kylie Cosmetics and Kylie's skincare products. B
In sum, while we are still in the very early stages of building out our prestige makeup portfolio, the trends we are seeing today are very encouraging and give us confidence that we have the right brands to meaningfully expand our footprint in the very profitable prestige cosmetics.
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During our strategy call last month, I told you that Gucci has over 220 SKUs and Burberry has just over 150 SKUs, which compares to industry leaders that have over 600 SKUs. We have, therefore, a multi-year innovation road map to continue building out the assortment of both brands.
In conjunction with our innovation pipeline, we also have plans to selectively expand distribution of our prestige makeup brands though with a focus on ensuring we are in the
L right doors and listed on the right website. A N I
F For Gucci Beauty, we plan to end the fiscal year with a presence in approximately 250 doors and e-commerce sites. We expect to grow this by approximately 150 doors and e- commerce site in fiscal '22, bringing the total to approximately 400 doors and website with Asia Pacific as the leading region.
Now moving to our third pillar of building out a skin care portfolio. One of the ways by which we want to accomplish this is by further elevating one of the deals in our portfolio, Lancaster.
In Hainan, where we are positioning Lancaster as not just a sun care brand, but the full skin care offering, we have recently set up Lancaster with a temporary counter which utilize generic fixtures with no media support yet behind the brand. And despite these limitations, the strong heritage of the brand and superior product performance have allowed Lancaster sales in the Hainan (inaudible) location in March to be on par with the top 20 skin care brands with sales further doubling in April.
t Needless to say, we are very excited to be opening Lancaster, a very beautiful permanent p counter at the end of May. Here, you can see a visual of what discounter will look like. We i
r will support the opening of the counter with a grand opening ceremony in June. We will c then follow this up with additional dedicated Lancaster counters in the remainder of s calendar '21. n a
r This represents the first steps we are taking to leverage Lancaster's Monaco routes and
T long history of leading skin care innovations ranging from retinal to skin repair and
position it as a full-fledged premium and regenerative-focused skin care brand in Asia. g
r Here, you can see some of Lancaster's leading skin care lines, including its top-selling 365 serum as well as the latest sun sensitive lotion, which was recently certified clean and e ocean friendly. b m Philosophy is another skin care asset we own, which will play an important role as we o build -- we further build out our skin care portfolio. This is -- there is work ahead as we o reposition the brand to being a leader in clean, green ceutical skin care. However, even l now Philosophy is showing some bright spots. B
For instance, in the U.S., Coty skin care grew twice the market in March and almost 10% compared to 2019 driven by Philosophy skin care. After launching on Amazon this past summer, Philosophy is now the second luxury skin care brand on Amazon with sellout
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growing in the triple digits. In this strong position, Philosophy has surfaced many leading in the skin care brands who are also present on Amazon.
Our third skin care asset is Kylie Skin. On Kylie Skin, one of our key focus has been on enhancing the platform, which we really view as being the model for other Coty brands. I'm pleased to say that some of the KPIs that we track are showing good progress with social media followers and traffic rising. L A
N We also continue to see a solid balance of both new and existing customers. On the brick- I
F and-mortar side of Kylie Skin, we have also seen strong launches in both Russia and France with sellouts ahead of targets.
Now on to our fourth strategic pillar of e-commerce. The digital team has been put in place, and quite honestly, we are continuing to build out. As once again utilized some very innovative digital activations to support our online performance. Some of our recent digital activations include during Q3, our sales on Amazon doubled. The performance was supported by live stream events hosted by CoverGirl and Sally Hansen. This live streams events helped to drive double-digit sales growth following the events.
We sponsored and promoted micro influencers TikTok post on -- for CoverGirl Simply Ageless, which led to a very strong sell-out growth at key accounts. We also used premium site placements for CoverGirl Lash Blast Clean, which boosted the franchise to the number one position at these key accounts.
CoverGirl also hosted a 30-minute Spring Clean Beauty event on Instagram with Lili t Reinhart and mega skin influencer, Hyram Yarbro. The event had record view ship for p CoverGirl and resulted in a product endorsement from Hyram. i r c I'm also pleased to announce that Kylie Skin is one of the first brands to test social s commerce features on TikTok leading this fast-growing social media platform in its n transition to make shopping more seamless. a r T
The digital organization at Coty has been tasked with moving us closer to the consumer.
g We call this social listening, and the goal is to help us better understand the consumers in r real time. e b These recent digital activations are examples of what could feed into our social listening
m and allow us to harness data to move closer to the consumer and ultimately, of course, drive sales. o o l Now moving on to our fifth strategic pillar of strengthening our presence in China. As I B highlighted earlier, both Burberry and Gucci Beauty saw very strong performance in China during the quarter. Gucci Beauty was launched on Tmall during the quarter, and performance remained stellar with Gucci Beauty being a top 4 luxury beauty brand launch on Tmall since 2018.
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Burberry also saw magnificent performance during the third quarter, exceeding our internal expectations as March sellout grew over 600%, supported by the newly launched Burberry Cushion Foundation, which has sold out in multiple retailers.
In fact, on this slide, you can see the absolutely beautiful Burberry makeup podium and displays, which have been recently unveiled in Daimaru department store in heart of Shanghai, which is our number one door in China. While we are in the process of
L repositioning Lancaster as a skin care brand, starting with Hainan, I would like to highlight
A that this sun care range continues to resonate with consumers in China and is now the N I number one sun care brand in Sephora, China. This is an important milestone as sun care F has the deepest penetration in the China market.
Finally, Chloe Atelier des Fleurs remains the number one productivity in China Sephora amongst artisanal fragrances. As part of our expansion strategy in China, we are also growing our footprint in Hainan through additional doors and a larger presence on e- commerce.
As you can see on this chart, we have seen exponential sales growth in Hainan over the past year. Today, prestige maker from Gucci and Burberry contributes over 20% of our sales in Hainan. And our fragrance sales in Hainan are being led by Gucci, Burberry, Chloe and new Miu Miu [ph].
I would now like to briefly touch on our fiscal '21 outlook, which we presented during our strategic update in April. For fiscal '21, we continue to expect total sales of $4.5 billion to $4.6 billion with adjusted EBITDA of approximately $750 million. t
p Importantly, our virtuous circle of the reinvestment has commenced. During Q4, we plan i
r to meaningfully increase our A&CP to support our key focus brands and growth initiatives. c This means that we expect our working media dollars to surpass that of the fourth quarter s of 2019. We have multiple brand repositionings in place. And this increased investment n will help to fuel them, ensuring we are of the best footing as more markets move out of a lockdowns and beauty demand recovers. r T
Lastly, we remain very focused on continuing to deleverage and are committed to exiting g
r calendar '21 with a leverage ratio moving towards 5 times. e
b Having detailed our growth strategy and with another quarter of sales trends improvement and solid profit delivered behind us, should be coming clear that the new m day is upon us at Coty. o o l During the fourth quarter, we will be ramping up our work in media investment to support
B our focused brands and key growth pillars. Please recall that we are focusing on our top 15, top 20 brands. Our media will be supporting these brands behind fewer at bigger and better bets.
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Importantly, the cycle has now started. As we move into fiscal '22, we fully expect our reinvestments to be funded through both gross margin expansion and further cost reductions. This means that we do not view increased profitability and sales growth as trade-offs, we see a clear path towards achieving both sales and profit growth even as we continue to steadily reduce sales in low-quality channels.
Today, we reported a quarter that shows great improvement compared to where we were
L just four quarters ago, and we outlined a number of green shoots, which we are pleased
A with. However, much work remains ahead, and we will continue to act with a strong sense N I of focus and urgency. F
I must say that I continue to be very excited for the many opportunities ahead and cannot wait to share our future milestones and achievements with you.
Thank you all for your time today. We are now happy to take your questions.
Questions And Answers
Operator
(Question And Answer)
Thank you. The floor is now open for questions. (Operator Instructions) Our first question comes from the line of Nik Modi of RBC. t
p Q - Nik Modi {BIO 7351672
And then the bigger picture question is really around shelf space. I mean, one of the g
r things that has played Coty, especially in the U.S. in mass has been shelf space losses.
e And so given some of your investments and some of the momentum that it looks like you're seeing right now, curious on how your discussions with retailers are looking in b terms of shelf space. Thank you. m o A - Sue Y. Nabi {BIO 21845588
B how April has been, I can say that the region that was under the strictest lockdown was the European one and we started to see some improvement in countries such as UK that started to open back the stores early in March. So, we are starting to see some great signs from there and we see hopefully -- we'll see hopefully the same kind of things happening in France, in Italy, in Germany in the coming weeks if I may say. So we clearly see that this
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region that was the most impacted by the lockdowns is going into another story; and hopefully during Q4, we'll have better I would say vision of how this is going to act.
When it comes to the shelf space that you are referring to in mass, remember during the first earnings call I've been doing, the great news was that, because of the success of Clean Fresh makeup in America that started somewhere around Q3 of last year -- last fiscal year, I may say. We had this great news to share with you that for the first time since
L many years, because of our shelf space was stable and it's likely to be the case in fall, and
A again thanks to this green shoots that I'm very proud and very happy to share with you N I today, which for the first time have shown because they're growing its market share since F what four, five years now and significantly growing the market share. We believe that this is clearly another element that's strongly building even stronger confidence in the turnaround we are doing on this brand in America and the reactions from retailers be it in the U.S. or in Europe has been very positive to the plans that we've been presenting.
Please remember that the success of CoverGirl in the Clean Beauty area is strategic for our key partners and retailers. This is an area in which retailers are betting, are investing in CoverGirl and Coty more largely is leading the game in this area. You may have heard that this category is trending 17 points ahead of the cosmetics category in America. So the bet that I have been sharing with you earlier is clearly the right one, when it comes to where Coty needs to invest its money and where CoverGirl need to invest. And again this is a win-win situation between us and our partner retailers.
Q - Nik Modi {BIO 7351672
i A - Sue Y. Nabi {BIO 21845588
r Q - Stephanie Wissink {BIO 17692025
e Thank you. Good morning, everyone. Our question is on the working media. So if you
b could talk a little bit about which brands, which channels, how you're thinking about leaning into some of the momentum you're seeing already and then, is there any working m media planned in Q4 and into Q1 that would be on brands that are not already seeing o momentum? Thank you. o l
B A - Sue Y. Nabi {BIO 21845588
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first half and again a significant progress versus the Q3. So, clearly, Q4 will be an area where we'll be back at the front of the scene if I may say.
In terms of brands, clearly, we'll be investing behind CoverGirl, you've heard that we've made an announcement recently around Max Factor and around Rimmel will be investing behind these brands benefiting of course from the reopenings that we are seeing in Europe for these brands. We'll be investing also heavily on -- in China specifically behind
L Gucci, Burberry to really fuel the -- margin expansion but also the brick-and-mortar
A momentum we're seeing there. So, is there, are there brands that behind which we are N I going to invest more during Q4? Clearly, we will start to put more money behind skincare, F Philosophy on one side in America, of course, Kylie skin in America, but also Lancaster in APAC and specifically in China. So, these are the areas where we see the next I would say story around Coty.
Q - Stephanie Wissink {BIO 17692025
A - Sue Y. Nabi {BIO 21845588
Q - Stephanie Wissink {BIO 17692025
s As you know it's Stephanie, we don't disclose this elements of A&CP today. And I think
n what I said to you around what we are going to do in terms of absolute dollars. Honestly,
a it gives a sense of how strong this will be because you have to imagine that the fourth r quarter of 2019, the absolute media dollars were invested behind a much broader T
number of brands and number of franchises, what we are going to do during this fourth quarter is going to be much more focused and therefore the share of voice of each and g r every brand/product we've been investing behind will be much stronger. And again, we e don't know what the competition is going to do, but for sure we are prepared for this. b
m Q - Stephanie Wissink {BIO 17692025
o Very helpful. Thank you, Sue. o l
B A - Sue Y. Nabi {BIO 21845588
Operator
Page 14 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Our next question comes from line Faiza Alwy of Deutsche Bank.
Q - Faiza Alwy {BIO 16413618
N sequentially decelerating. So I wonder if there's any perspective around that or if you're I
F just being cautious?
And then my second question was just I was hoping Laurent could explain a little bit around his gross margin comments and I think he said that roughly half is structural and half is temporary. So, just more color around that would be helpful. Thank you.
A - Sue Y. Nabi {BIO 21845588
T Yeah. So hello Faiza, thanks for your question. So, indeed the gross margin improvement in Q3 is very important for our model, but this is really the way we are going to generate g fuel and invest in the brand. So indeed as we say, half is structural, so it means that now r we can say that 60% is a new base looking forward. How we are coming to this structural e gross margin improvement? So, I explained that I can elaborate a little more on the big b drivers. So, number one is definitely the mix management. So without disclosing precise
m numbers that we discussed last time that e-commerce is a quite either is a new strategy we are implementing skincare, prestige, so these activities are accretive in the gross o margin and I would say that even within mass, we are really working in depth to make sure o l that innovations, new initiatives, they are accretive. So it's a detail work that we are going
B to go with the market with each brand to make sure that all the initiatives are accretive in the model, so that we invest and we are creating gross margin and we are fueling the model. So this is number one.
Page 15 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Number two is, what we are calling revenue management? So here we need to review in the trade terms is how to optimize what is about promotion. So, it's really again to be more in-depth, more detail related to the pricing strategy. So really being very to nail down on this promotion strategy to optimize returns, which is sometimes a big element in our equation. So here, again, it's back to the focus, accuracy and optimizing these returns. So these are really precise element, which are structural and will remain and will even accelerate. L
A And last but not least is of course, on supply chain. Reducing excess and obsolescence. N I Again, very detailed work, 360 degree with a brand, with the market. So being better on F focused accuracy. And of course, more efficiency from a supply chain standpoint and procurement teams. So again, these are really the three pillars we are pushing and ready to build the 60% gross margin as a new base looking forward.
Q - Faiza Alwy {BIO 16413618
A - Sue Y. Nabi {BIO 21845588
Operator
Our next question comes from line of Andrea Teixeira of JPMorgan.
t Q - Andrea Teixeira {BIO 1941397
i Good morning. I would just want to follow up a bit on the shelf space comment in the r U.S., and if you can also elaborate in Europe. I do understand obviously the percentage of c the new closures, but thinking overall distribution for Coty going forward. And also like as s you see as you (inaudible) in your guidance, I understand there's a lot of puts and takes n there and a lot of conservatism out being built there. But can you comment a little bit a more what are you seeing in terms of like coming back to opening, reopening everything r
T in the UK, if you're seeing some buildup of inventory into that market? Thank you. g r A - Sue Y. Nabi {BIO 21845588
Page 16 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
When it comes to how are we expanding, if I understand what your question the distribution, in mass, this one is clearly brought to this table, where we are extending the distribution is clearly on the prestige side, especially in Asia. You've heard our plans to increase the distribution be it online or in brick-and-mortar for Gucci of course, you've heard how much we intend to strongly increase the distribution of our skincare Lancaster brand in Asia. So this is clearly the path I would say of the business that's going to see strong distribution gains. L
A The last part of your question was about the inventory in trade entering the fourth quarter. N I And again, what we are seeing is that retailers has been very vigilant in controlling F inventory, which is pretty lean today. And in fact, U.S. retailers have been struggling to keep up with the demand for luxury fragrances to give you an example. So we are not worried about that building a sub-building, it's not at all like this. There is a kind of I would say consistency between sell-outs and sell-ins.
Q - Andrea Teixeira {BIO 1941397
A - Sue Y. Nabi {BIO 21845588
r When it comes to the KKW line as you heard it, Kim is working very diligently on her
e skincare line behind the scenes at the moment. She's -- as I've said it several times, she's clearly at the forefront of every new trend that's happening in the beauty and in the b skincare arena, and we are super excited to be working with her. And we are all looking m forward to the upcoming launch that's happening in fiscal '22 as we already announced it,
o and of course, Kim will personally share more details when she'll be ready too. o l
B Q - Andrea Teixeira {BIO 1941397
Operator
Page 17 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Our next question comes from the line of Wendy Nicholson of Citi.
Q - Wendy Nicholson {BIO 2081269
L A - Sue Y. Nabi {BIO 21845588
Q - Wendy Nicholson {BIO 2081269
A - Sue Y. Nabi {BIO 21845588
Q - Wendy Nicholson {BIO 2081269
r Absolutely Wendy. And that's was what I was about to say. When I interrupted you, in fact
c you're totally right. Digital is clearly the area in which we are investing the majority of our s money. But the great news is that we are back on TV. And by the way, the great market n share progress we've seen on CoverGirl during these quarters the last quarter Q3 is -- was a clearly also driven by the return of CoverGirl on TV. And as you've said it very truly, these r brands have such a deep distribution in the middle of America that TV is mandatory. So T
it's really a mix of the two. Clearly digital driving I would say, the excitement driving the
g awareness, making sure we are supporting the fact that we are doubling our sales at r Amazon, but at the same time especially for example for Simply Ageless which is going to e be a TV campaign with the return of Niki Taylor as you imagine, this campaign has to b reach America in every part of the country. m
o Q - Wendy Nicholson {BIO 2081269
Page 18 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
A - Sue Y. Nabi {BIO 21845588
L times that the brand is already seeing a level of sales that position it in Hainan but we can A do a kind of extrapolation. It gives us an idea that this baseline could be around the N I around the top 20 skincare brand in China, which is I think a long journey and an exciting F journey to start. But it doesn't mean we are not supporting the brand in Europe.
The brand is a European leader in UV protection. European innovator recently having this certification for the first suncare that's cradle to cradle silver certificated, which is the first in the world of suncare. So it's really one brand two stories from the different regions. Skincare is you huge in China. So we would need to benefit from this I would say big trend. And of course in Europe, we are continuing to build a brand around its suncare, I would say, brand equity. Of course the future, no one knows. We see what happens in China. Sometimes there is what we call reverse innovation, but that's not the plan that the moment.
To answer your question on Max Factor which is almost the same kind of question. We concentrating the investments and the announcement around Priyanka Chopra to really take Max Factor as the premium brand of the European markets, but not just the European markets. It's a brand that highly popular in China too. It's the brand that highly popular in the Middle East. So I think we have some homework to do in Europe and in the t rest of the world before going back to America. p i r
c Q - Wendy Nicholson {BIO 2081269
You're welcome. g r
e Operator b Our next question comes from the line of Lauren Lieberman of Barclays. m o Q - Lauren Lieberman {BIO 4832525
Page 19 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
why you would have the degree of confidence to maintain that level of growth further out in the period, particularly just on an organic basis? Thanks.
A - Sue Y. Nabi {BIO 21845588
N and again the potential is infinite I think skincare, the potential at Gucci is clearly infinite. I
F And of course, imagine adding Kim's skincare on top of this, what we are doing today with Lancaster in China. So again there is big potential there and of course, this is not limited to this, but this growth areas are those on which we are going to focus our investments to make sure we work this out.
When it comes to the second part of the question, it was about what you -- you meant, if I understand well, will the growth will be a 100% organic is that the question?
Q - Lauren Lieberman {BIO 4832525
A - Sue Y. Nabi {BIO 21845588
p the cosmetic side or on the skincare side and you could see clearly that we can build a i
r skincare portfolio from the entry price level to the super premium price level without the
c need for any kind of acquisition. And same thing when it comes to our makeup portfolio. s The make a portfolio especially on the prestige side is super comprehensive with Gucci,
n Burberry and Kylie Cosmetics that we intend to relaunch that's going to be relaunched a this summer. You've seen probably what's happening on Kylie's social media, she's been r doing something great, deleting all her past posts, announcing in a way in a very strong T
teaser, what's going to happen during this summer. So we think that we have what we
g need to achieve the growth that we've shared with you several times now. r e {BIO 4832525
b Q - Lauren Lieberman Okay. Thank you very much. m o A - Sue Y. Nabi {BIO 21845588
Operator
Our next question comes from line of Rob Ottenstein of Evercore.
Page 20 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Q - Robert Ottenstein {BIO 1498660
Number two. One of your competitors remarked that because of increased seasonality in L China, their sales were a little bit depressed in the quarter because of the strong impact of A
N 11.11. So wanted to get a sense of that, was something that impacted you as well. I F And then finally in the slides and in the discussion we talk the fair value of Wella increasing $64 million. Can you discuss to what extent at all that you're involved in that asset? Any color about the turnaround there and the ultimate outcome and how that would affect you? Thank you.
A - Sue Y. Nabi {BIO 21845588
A - Laurent Mercier {BIO 22079608
i On your second question, which is indeed any seasonality or increased seasonality impact r in China. As we say, early stage China is still more for us. So China is great opportunity c and we don't see hit any impact from that. s n
a Your third question on Wella. As I explained, the $60 million impact on fair market value is r more an external impact due to the economic, the macroeconomic context, that salon as - T
- are reopening and so on. And this is what is included in the fair market value. So there is no element about the organic performance of Wella. And at this stage as you understand g r that the new team, I mean, is really working the whole model. And so there is no an e indication from the organic performance in this fair market value. b
m Q - Robert Ottenstein {BIO 1498660
o You cut out or at least for me, you cut out on the low quality sales you said high-single-
o digits over two years, so should we be thinking in this quarter something like 3% to 4%. l B A - Sue Y. Nabi {BIO 21845588
Page 21 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
Q - Robert Ottenstein {BIO 1498660
A - Sue Y. Nabi {BIO 21845588
L is working and over -- and taking the business model. So no more elements that we can
A share with you. But definitely, the impact of the fair market value is again that that you N
I know the haircare segment back to growth, salon are reopening, and of course, very F quickly this benefit to the organic performance of Wella.
Q - Robert Ottenstein {BIO 1498660
A - Sue Y. Nabi {BIO 21845588
Operator
And we have time for one more question. Our final question will come from the line of Mark Astrachan of Stifel.
Q - Mark Astrachan {BIO 15313233
b A - Sue Y. Nabi {BIO 21845588
Page 22 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
What was the second part of your question? I'm sorry, because I didn't understand very well.
Q - Mark Astrachan {BIO 15313233
Second thing accelerating the prestige business, which is highly accretive, which will allow us in a way to go stronger in APAC and in China, but also in America and of course, the rest of the world as soon as lockdowns are behind us. Prestige fragrances is concentrating more focused on creating top selling female fragrances, building artisanal fragrance houses, of course, the prestige makeup story I've shared with you several times and we do have the right brands.
And last but not least, building a skincare portfolio across both divisions, these are things on which hopefully will be showing new things, new innovations and you'll be able to assess the progress of the company on this areas. t p i
r Last but not least, e-comm which was not part of the questions, but again e-comm has
c been growing again 30% during the quarter, both divisions, both businesses if I may say s mass brands and the prestige brands have been growing very, very strongly and Coty's
n leading the game in many, many areas such as at Amazon doubling the sales at T-Mall in a China, thanks to Gucci and Burberry, but also on our own DTC. Thank you again for your r questions and very, very happy that we've been able to share with you this results, and T
first green shoots. g r
e A - Laurent Mercier {BIO 22079608
b Thank you, all. Bye. m
o Operator o l Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect. B
Page 23 of 24 Company Name: Coty Inc Company Ticker: COTY US Equity Date: 2021-05-10
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