Coty Inc. (NYSE:COTY) Q3 2024 Earnings Call Transcript

Coty Inc. (NYSE:COTY) Q3 2024 Earnings Call Transcript May 6, 2024

Coty Inc. misses on earnings expectations. Reported EPS is $0.00987 EPS, expectations were $0.06. COTY 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, this is Olga Levinzon, Coty’s Senior Vice President of Investor Relations. Thank you for joining us today for the prepared remarks portion of Coty’s Third Quarter Fiscal 2024 Earnings. On Tuesday, May 7, 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 we’re 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: Welcome everyone, first, let me begin by saying that Coty’s very strong Q3 results, with double-digit growth, reinforce our nearly four-year track record of delivering results in-line to ahead of expectations. We continue to see a strong and dynamic global beauty market even in the midst of a challenging geopolitical and macroeconomic environment. Coty’s diversified portfolio and strong execution have enabled us to once again outperform the broader global beauty market; and, our global and multi-category presence has proven to be a key area of strength and differentiation, as subdued trends in very few markets and subcategories, such as U.S. mass cosmetics, were more than offset by continued strong momentum in the majority of our core categories and markets.

This global and multi-category presence, coupled with our industry-leading capabilities and desirable brand portfolio, equipped Coty to boost consumers’ desire for beauty through our disruptive innovations and established icons. Our strong growth in Q3 was accompanied by strong and disciplined financial delivery, as we generated robust profit growth and margin expansion, allowing us to raise the midpoint of our guidance for the third time this year. Overall, we continue to target sales growth ahead of the beauty market, growing our profit ahead of sales, steadily deleveraging our balance sheet, and positioning Coty as a beauty powerhouse with still significant untapped potential. Let me summarize the key messages from our results today. First, we saw continued double-digit like-for-life growth in Q3 and year-to-date as we once again delivered market leading revenue growth, marking nearly four years of Coty reporting results in-line to ahead of expectations.

Our like-for-life revenues grew 10% in Q3 and grew 13% year-to-date, trending above our guidance of plus 9% to 11% like-for-life for the current fiscal ‘24. In Q3, we continued to deliver on our balanced growth agenda, with strong like-for-life growth in both Prestige and Consumer Beauty, across all regions and in each of our core categories fragrances, color cosmetics, skin care, and body care, all supported by a broad range of our leading brands, and with contribution from volumes and price mix. Second, in Q3 and year-to-date, we delivered strong profits and margin expansion despite reinvestments in the business, with adjusted gross margin increasing by 190 basis points in Q3 and up 20 basis points fiscal year-to-date to 64.4%. At the same time, our Q3 adjusted operating income and adjusted EBITDA both increased double-digits year-over-year, which drove 30 basis points of expansion in the EBITDA margin.

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Q&A Session

Third, we continued to execute and make progress across our strategic growth pillars, which we’ll discuss in more detail later in the call. Finally, we are achieving strong results and milestones while delivering robust profit growth and margin expansion, allowing us to raise the midpoint of our fiscal ‘24 guidance for the third time this year. We expect FY ‘24 like-for-life revenues to grow at the upper end of the previously announced plus 9% to plus 11% range, which is clearly ahead of our mid-term target growth of plus 6% to plus 8%. We continue to expect modest gross margin expansion in fiscal ’24. And, we are raising our FY ‘24 adjusted EBITDA margin expansion to the upper end of the 10 basis points to 30 basis points guidance range.

At the same time, we expect fiscal ‘24 adjusted EBITDA to be consistent with our previously guided range of $1,080 million to $1,090 million as EBITDA margin at the upper end of the guidance range is partially balanced by FX headwinds expected in Q4. We now expect adjusted EPS, excluding the equity swap, to be at the high-end of prior guidance range of $0.44 to $0.47, implying strong year-over-year growth at the upper end of 16% to 25% range. 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 now with our revenue performance. As you can see in the third quarter, like-for-like revenues grew 10%, which is trending ahead of our second half revenue guidance of plus 6% plus 8% in like-for-like growth.

Fiscal year-to-date, our revenues grew 13% like-for-like, coming in ahead of our full-year fiscal 2024 guidance of plus 9% to plus 11%. Our Prestige business grew 13% like-for-like in Q3 and 17% like-for-like fiscal year-to-date. The continued strong like-for-like sales growth in Prestige was well balanced across regions and categories, including: Robust growth across all regions, and outperformance in APAC, EMEA and the Travel Retail channel. And, solid growth in our key categories of prestige fragrances, prestige cosmetics, and skin care. In the quarter, we saw minor impact from retailer restocking in the prior year, with a much more significant headwind from restocking expected in the fourth quarter, as we have previously discussed. The category’s continued strong growth and Coty’s sell-out momentum meant that retailers in key markets continue to hold healthy inventory levels.

In Consumer Beauty, revenues grew 6% like-for-like in Q3 and 7% like-for-like fiscal year-to-date. Our Q3 Consumer Beauty growth was driven by growth across all categories, with particular strength in mass fragrances, skin care and body care momentum in Europe, LATAM and Asia excluding China. Geographically, all regions contributed to the strong like-for-like growth of 10% in the quarter. In Americas, like-for-like sales grew 11% in Q3 and 13% fiscal year-to-date, with Latin America, Canada, and the regional Travel Retail channel delivering very strong double-digit percentage growth in the quarter. In the EMEA region, like-for-like revenues grew 9% in Q3 and 12% fiscal year-to-date supported by growth in most markets and the regional Travel Retail channel here again.

In Asia Pacific, like-for-like revenues grew 11% in Q3 and 16% fiscal year-to-date fueled by strong growth across many markets and the regional Travel Retail channel. As we have continued to discuss, we are focused 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 Q3, we saw low to mid-single-digit percentage volume growth in both Prestige and Consumer Beauty, supporting mid-single-digits percentage volume growth for total Coty. Volumes also grew low-single-digits year-to-date. Our modest volume growth in Consumer Beauty included volume growth in the Brazil business and in mass fragrances, partially offset by moderate declines in the rest of the business.

In Q3, price grew an estimated high-single-digits percentage, primarily reflecting the carryover from earlier pricing actions. As we have discussed, we will remain very targeted in any future pricing actions. At the same time, the estimated impact from mix and other was slightly negative in the quarter largely driven by the strong performance in our Brazil business, while mix had an estimated positive low-single contribution fiscal year-to-date. 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:

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.: Regarding the conflict in the Red Sea and the Baltimore port closure, it is important to highlight that we currently see limited risk from these events 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. Finally, with more elevated impact from excess & obsolescence in first-half ‘24, we see these headwinds moderating in H2 ‘24 and in to fiscal year ‘25 I will now provide an update on our All-in-to-Win program. In the third quarter, we delivered savings of approximately $25 million, bringing our fiscal year-to-date total savings to over $90 million. We are maintaining our savings target in fiscal ‘24 of $110 million to 120 million which reflects ongoing productivity projects whose savings are partially reinvested in our structural growth capabilities and teams, particularly in digital advocacy, skin care and retail.

Looking to next year, we reaffirm our fiscal ‘25 savings target of $75 million. In sum, having delivered approximately $700 million of savings life-to-date, we continue to optimize our processes and expenditures, positioning Coty to be flexible and fully equipped to invest in our strategic priorities. Moving tour gross margin performance. Q3 adjusted gross margin of 64.8% increased substantially by 190 basis points from last year, as we anticipated. Our Q3 adjusted gross margin improvement was driven by: Ongoing premiumization of the portfolio coupled with the benefit from carryover pricing. The positive impact of easing inflation and continuous supply chain productivity. While Q3 gross margin was negatively impacted by excess & obsolescence expenses, the trend has continued to improve over the course of the year.