Coty Inc. (NYSE:COTY) Q2 2024 Earnings Call Transcript

Coty Inc. (NYSE:COTY) Q2 2024 Earnings Call Transcript February 7, 2024

Coty Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone, welcome to the prepared remarks portion of Coty’s Second Quarter Fiscal 2024 Earnings. On Thursday, February 8th, 2024, at approximately 8.15 a.m. Eastern Time or 2.15 p.m. Central European Time, we will hold a separate live Q&A session on our results, which you can access via our Investor Relations website. Joining me for our presentation are Sue Nabi, Coty’s CEO, and Laurent Mercier, Coty’s CFO. Before I hand the call over to Sue, I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to 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 noted, the discussion of Coty’s financial results and Coty’s expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company’s release. Thank you. I will now turn it over to our CEO, Sue Nabi.

Sue Nabi: Thank you, Olga. Welcome, everyone. The strength of our Q2 and first half results reinforce several of our convictions, including: Number one, the attractiveness of the beauty market; two, the strength of our brands; and number three, Coty’s transformed and industry-leading capabilities and of course our disciplined financial execution. The momentum of the global beauty market in the midst of geopolitical and macroeconomic disruptions confirms that consumers continue to gravitate and prioritize beauty as a fundamental pillar in their well-being. At the same time, our amazing brands and our industry-leading capabilities are enabling Coty to bring exceptional innovations to the market which further strengthen consumers’ desire for beauty.

We are continuing to deliver on our balanced growth agenda, with like-for-like growth in both Prestige and Consumer Beauty, in each of our regions, in each of our categories of fragrances, cosmetics, skincare bodycare, and across volumes, price and mix. As a result, we are once again outperforming the beauty market. And this growth is accompanied by strong and disciplined financial delivery, as we generate robust profit growth, operating and EBITDA margin expansion, free cash flow, and deleveraging progress. We therefore continue to target sales growth that is ahead of the beauty market, growing our profit ahead of sales, steadily deleveraging our balance sheet, and positioning the company as a beauty powerhouse with still significant untapped potential.

Let me summarize the key messages from our results. First, we continued tdeliver market leading revenue growth ahead of both expectations and raised guidance for the first half of fiscal 2024, fueled by the strength of the beauty category and Coty’s successful icons and top notch innovations. Our like-for-like revenues grew 11% in Q2 and 14% in the first half, which was ahead of our updated first half 2024 guidance of 11 to 13% growth. Both Prestige and Consumer Beauty contributed to the strong like-for-like growth in the second quarter, with outperformance in Prestige. We continued to drive our balanced growth agenda supported by volumes and premiumized mix, complemented by pricing. Second, in Q2, we delivered strong profits and both operating and EBITDA margin expansion despite reinvestments in the business, with adjusted operating income growing 18% year-on-year and adjusted EBITDA growing 15%, fueling expansion in the EBITDA margin.

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Q&A Session

I am very pleased to confirm that we once again met a key milestone in our deleveraging agenda, as we exited calendar year 2023 with leverage of approximately 3 time, in line with our guidance. Third, we continued to execute and make progress across our strategic growth pillars, which we’ll discuss in more detail. As part of our strategic progress, we further strengthened our portfoli. In Prestige, we signed a license with Marni, an Italian luxury brand which is very complementary to our prestige portfolio. And in Consumer Beauty, we extended two of our key licenses, brunbanani and Mexx for over 20 more years. Finally, we are reiterating our fiscal 2024 outlook, supported by the very strong delivery in the first half of the year. We continue to expect to grow FY 2024 like-for-like revenues at +9% to 11%, driven by outperformance in Prestige, ahead of our mid-term target range of plus 6% to 8%.

We continue to expect modest gross margin expansion, 10 to 30 basis points of adjusted EBITDA margin expansion, and fiscal 2024 adjusted EBITDA of $1,080 million to $1,090 million, as well as 16% to 25% adjusted EPS growth, excluding the equity swap. I will now take a few moments to cover our revenue trends during the quarter, before Laurent takes you through our financials. Then I will finish with an update on our strategic progress and our outlook. Starting with our revenue performance like-for-like revenues grew 11% in the second quarter. In the first half, our like-for-like revenue grew 14%, coming in ahead of our raised guidance of 11% to 13% growth. Our Prestige business grew 15% like-for-like in Q2 and 18% like-for-like in the first half.

The very strong sales growth in Q2 and the first half were broad-based, with double-digit percentage growth across all regions, and especially strong growth in APAC, Americas and Global Travel Retail. Importantly, the strong category and Coty sell-out momentum meant that retailers exited the holidays with broadly healthy inventory levels in key markets. In Consumer Beauty, revenues grew 5% like-for-like in Q2 and 7% like-for-like in first half. Our Q2 Consumer Beauty growth was driven by all categories and momentum in Americas and EMEA. I’d like to provide a bit of additional color on the outperformance in Prestige. While we don’t have perfect data on the global prestige market, we have internal estimates on Coty’s prestige sell-out performance, which we believe are helpful to frame our Prestige performance in fiscal 2024.

Our Prestige revenue growth and sell-out are continuing to outperform the very strong prestige fragrance market. While the prestige fragrance market grew close to 10% in both Q1 and Q2, our sell-out in both quarters outperformed, growing 12% to 13%. At the same time, our like-for-like revenue growth was higher, as we benefitted from the year-on-year recovery in fragrance service levels following the supply challenges last year. We estimate this benefit tbe in the low-to-mid-single-digits percentage. Geographically, all regions contributed to the strong like-for-like growth of 11% in the quarter. In Americas, like-for-like sales grew 11% in Q2 and 14% in the first half, driven by robust double-digit percentage growth in Latin America and mid-single-digit percentage growth in North America.

In the EMEA region, like-for-like revenues grew 10% in Q2 and 14% in the first half with most markets and regional Travel Retail delivering strong growth in the quarter. In Asia Pacific, like-for-like revenues grew 16% in Q2 and 17% in the first half, fueled by strong growth across many markets. In the quarter, our Prestige revenues in China grew by a double-digit percentage like-for-like, while Consumer Beauty revenues were lower, as retailers continued to work down inventory We are focused, as you know, on driving balanced growth across the portfolio. An important piece of this balanced growth agenda, is that our sales growth is supported by a combination of volumes, pricing and mix. In Q2 and the first half, we saw mid-to-high single-digit percentage volume growth in Prestige fueled by the success of the core business as well as new launches, like Burberry Goddess, Boss Bottled Elixir and Gucci Flora Gorgeous Magnolia.

Volumes in Consumer Beauty remained stable, supported by fragrance and Brazil. As a result, for the total company, volumes grew in the low-single-digits percentage. In addition to volume growth, price grew an estimated high-single digits percentage, and mix and other grew an estimated low-single-digits percentage. Our intent is to continue to drive this balanced growth in the coming quarters and years fueled by volumes and premiumized mix, complemented by targeted pricing. I will now hand the call over to Laurent to take you through our financial results.

Laurent Mercier: Thank you, Sue. In the current macroeconomic environment, I am pleased to share that we continued to deliver strong financial performance, with the Q2 results marking the 14th consecutive quarter of operational results in-line to ahead of expectations. Let’s begin with an update on how we’re managing the global supply chain, as well as our visibility in to the inflationary environment. In Q2, Prestige and Consumer Beauty service levels remained very strong at approximately 96%. And, as anticipated, COGS inflation moderated quarter-over-quarter and was in line with our expectations, benefitting from stabilization in commodities and transportation inflation. We have been balancing these inflationary impacts through a combination of our execution on premiumization, mix management, and productivity, complemented by price increases.

In the second half of fiscal 2024, we continue to expect COGS inflation to ease significantly, with the main inflationary remnant being general inflation. It’s important to note that with the significant moderation in inflation, we will be very limited and targeted on any future price increases. Finally, with the conflict in the Red Sea dominating headlines, it’s important to highlight that we currently see limited risk from this as we have been using alternate routes and purchasing some safety stock. This inventory build does represent a moderate headwind to our free cash flow expectations for the year. I will now provide an update on our All-in-to-Win program. In the second quarter, we delivered savings of approximately $30 million, bringing our fiscal year-to-date total savings to approximately $65 million.