Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coty Third Quarter Fiscal 2022 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, May 9, 2022. Please note that earlier this morning, Coty issued a press release and prepared remarks, which can be found on our Investor Relations website. On today's call is 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 those forward-looking statements. In addition, except where 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. With that, we will now open the line for questions. Thank you. Our first question today will come from Andrea Teixeira with JPMorgan. Please, go ahead.

Hi, good morning, everyone. Sue, could you elaborate a bit more on your assumptions for the fourth fiscal quarter, considering your commentary in the press release and prepared remarks? How do you see that evolving? Specifically regarding your Prestige segment, how confident are you about your performance as we exit the quarter? Additionally, in relation to the fourth-quarter top line in Consumer Beauty, what are your thoughts on innovation and market share trends as you conclude the quarter? Thank you.

Hello, Andrea, this is Sue speaking. Thank you for your question. As you pointed out, the Q3 results showed very strong growth in our Prestige division and good growth in the Consumer Beauty division, with 25% for Prestige and 10% for Consumer Beauty. For the fourth quarter, we believe the momentum behind our Prestige brand will continue. We plan to have a more balanced media investment between the two divisions during Q4, as Q3 focused heavily on Consumer Beauty while Q2 was focused on Prestige. The momentum we're seeing for the Prestige business should hopefully be maintained and potentially accelerated, especially if the lockdowns in China are lifted, since it's a key market for the Prestige division. Our guidance excludes the situation in Russia and assumes limited, if any, recovery in China. Therefore, we might see some upside if conditions improve there. The trend for April 1 aligned with our outlook. Regarding Consumer Beauty, we've faced supply issues with our best-selling mascara line in the US, specifically with CoverGirl, but we hope to see improvements in the next couple of months. We believe we will return to nearly normal supply levels for CoverGirl by June or July.

As we approach the end of the quarter, there was an impact in China in March, particularly affecting Travel Retail. With ongoing lockdowns, especially worsening in Shanghai and Beijing, what are your expectations for the fourth quarter? Are you assuming there will be no recovery, and are you factoring in the effects observed in the third quarter? Some of your peers have mentioned the significant impact they experienced in China in March. Could you clarify how that has affected your performance and how the rest of the world performed in the fiscal third quarter excluding China?

We have structured our fourth quarter with the assumption that COVID will be very limited in China, a perspective that is cautious and somewhat relative. Despite the lockdowns in Mainland China during the third quarter, our Travel Retail in Hainan has managed to compensate for the revenue losses experienced in the largest cities, which is encouraging. We believe this will help mitigate the impact on our sales in Mainland China. In fact, our sales were slightly positive in the third quarter, largely due to the strong performance in Hainan that offset the losses from other regions in China.

Thank you. Our next question comes from Steph Wissink with Jefferies.

Hi, good morning, everyone. Would like to focus in on gross margins, if we could. If you could talk a little bit about where some of that upside came from, whether it was mix or some of your internal strategies to unlock value. And then related, as you reinvested into A&CP, any areas that were particularly productive in the quarter that you'll be emphasizing further going forward? Thank you.

Hello, Steph. Regarding gross margin, we had an excellent performance this quarter, which is 240 basis points better than last year, and about 450 basis points higher year-to-date. This improvement results from all the work and initiatives we've discussed previously, particularly our strong focus on cost reduction in supply chain and procurement. For example, we have seen significant benefits from ELO due to better forecast accuracy, and we are committed to continuing this focus. Additionally, we are enhancing the value aspect of our gross margin. The strategic initiatives we have implemented have positively impacted gross margin. This includes our e-commerce efforts, the China Prestige makeup line, and the premiumization of our portfolio, as well as our new initiatives in Consumer Beauty that have shown gross margins comparable to Prestige. We are also implementing pricing strategies to combat cost inflation and to leverage the pricing power we are gaining through premiumization. This is beneficial for gross margin, especially within the framework of our revenue management efforts, where we maintain strict control over our trade terms. In summary, the combination of cost management and value creation is essential for sustaining and building our gross margin. This success in Q2 allows us to invest in advertising and consumer promotions with a strong focus on return on investment. Sue can provide you with some specific examples. Absolutely. Thank you Laurent. So A&CP, clearly, we are going to continue to invest during the quarter Q4. As you've seen, it's been very, very productive for Q2 and Q3. So we continue with the same story. And again, it's always the same story of the flywheel. Net revenue growing, gross margin better. This allows us to, at the same time, deleverage the company and reinvest behind the brand while continuing our cost savings programs. In terms of particularly predictive items, we have seen and we are going to accelerate, the Rimmel brand is going to have some acceleration behind tendency, that's doing some fantastically well. We've seen the results. This is representing high single digits of the net revenues of most of the countries, sometimes much more than this. We are going to continue to invest behind this brand because we are seeing the strong momentum everywhere we put money behind it. And CoverGirl, exhibition is doing fantastically well and the signature of Kelsea Ballerini as the Gen-Z face for the brand is, by definition, going to help us again to regain the momentum during the Q4. And our leading fragrances, as you can imagine, Gucci Flora Gorgeous Gardenia, fantastic success; Burberry Hero, fantastic success; HUGO BOSS The Scent; same thing. And last but not least behind Prestige makeup, you've seen the momentum we are having behind Gucci makeup and this is something that we intend to accelerate.

Very helpful as always. Thank you.

Thank you, Steph.

Our next question will come from Robert Ottenstein with Evercore.

Great. Thank you very much. I was wondering if you could drill down a little bit more into the US makeup market, how that's developing into April. Obviously, there's increased mobility, but any new trends? And then taking it further into CoverGirl specifically, and I know there's lots of give and takes there, puts and takes on CoverGirl with supply issues, et cetera, but maybe tell us the signs that you were seeing that give you the most confidence that, that brand is on a positive path. Thank you.

Hi, Robert, thank you so much for your question. So again, what we are seeing in the US market is clearly after two years, if I may say, of mainly eye category being the key category during the pandemic, we are seeing categories such as face on one side and lips on the other side, back to visibility, if I say, on people and, therefore, on the figures. It started already some quarters in the past, specifically the new one. So clearly, we are, I would say, back to what I would call normality. And therefore, CoverGirl, it's very good news because, again, the brand has been very strongly investing behind eye makeup. And again, you've seen the momentum we had last year behind last – last Clean and the overall the last, last franchise. We have CT age lips that we have reactivated last spring, that's continuing to gain share quarter after quarter. And we'll have new news arising behind this time very, very soon. And we have also, now we are activating, I would say, the second level of the CoverGirl rebirth. Remember, when I told you the story of CoverGirl one and half years ago, it was about bringing back the brand to its heritage and its first equity which was around Clean make up and Clean beauty in general. This, I would say, is continuing, of course, and we are launching a lot of bigger things behind Clean beauty. But Level 2 of CoverGirl rebirth is what we call cool or easy brand beauty. And there, we are very confident that with these new faces we are adding recently, especially Kelsea Ballerini, behind exhibition is and mascara, but also exhibition is it color, we do have the second leg or second muscle to really boost CoverGirl and the category overall because I do believe that the two growth drivers of the makeup category in America are on one side Clean healthy beauty and cool trending beauty. And these are the two areas that we are pushing behind CoverGirl. I can give you just a hint of something we just saw recently. We just launched, which probably could be in the two categories, a new lead ball clean fashion born behind CoverGirl is we can very quickly the number one lead ball, I think, in the US, thanks to being clean on one side and probably a category that Gen Zs are looking for today as a good compromise between color and care. So this kind of product gives you an idea to the areas where the brand is going to invest, continuing the clean story, while pushing strongly on the cool beauty designates. We just made the announcement that we have a new face that's not a new face, that's a face that was part of CoverGirl years ago, Queen Latifah, she was one of the most iconic CoverGirl faces for years the same way Kiki Taylor was, and she's back on CoverGirl and this is clearly going to help us to continue to activate the different tribes of targets that CoverGirl is made of today.

Thank you. Our next question will come from Nik Modi with RBC Capital.

Yes. Thank you. Good morning, everyone. Two questions. Just one big picture on how do you see some of the changes in the consumer behavior just with inflation, with mobility. I'm just curious on your kind of global landscape; is Europe getting impacted by the amount of inflation because that is certainly worse than it was here in the US? So that was just the first question. And then just more specifically, any clarity on the Tim launch, a number of products you can assume at the launch, timing, initial geographies? Any perspective would be helpful.

Thank you for your question, Nik. Regarding consumer behaviors, we are observing significant resilience, with consumers continuing to spend in the Prestige category, particularly in fragrance. The positive momentum we've noted in the US for several quarters is carrying through Q3. We're also starting to see this trend in Europe, which is notable, especially since Europe was previously below 2019 levels but is now exceeding them. Fragrance remains the largest category within the Prestige segment in Europe. In China, fragrance was one of the fastest-growing categories until late February, and we await to see how the situation evolves once lockdowns are lifted. Consumers at the high end are demonstrating strong resilience, and I believe they will continue to support these categories. It's important to remember that this summer marks the first without restrictions, aside from China, since the pandemic began. With many people returning to festivals and travel, there is a strong desire for life, which should boost beauty consumption. While some categories may experience a slowdown and certain consumers could feel pressure from rising prices, our Consumer Beauty division is stronger than ever. Our brands are at the forefront, launching highly profitable products that rival those in Prestige. No matter what happens, we are equipped to adapt through both divisions. As for the Tim launch, we have mentioned before that this will take place in Q4, and we are excited about what's in store.

Thank you. Our next question comes from Wendy Nicholson with Citi.

Hi, my first question just has to do with the target of the $900 million in adjusted EBITDA. I know you talked that down just a little bit on the prepared comments. I think you made the point that, that was primarily a function of exiting Russia. But can you talk about any other moving pieces in terms of the revision to that target? And I know it's early, obviously, to talk about fiscal 2023, but just in terms of your confidence regarding continuing gross margin progression, EBITDA margin progression given the headwinds that everyone is facing. Thanks.

Hello Wendy. First of all, we have clearly stated that the impact from Russia was very limited in the fourth quarter regarding net revenue and EBITDA. That's why we are confirming the $900 million adjusted EBITDA for the full year. We do face some headwinds, and we have the ability to manage them. While we observe increasing inflation, we want to reiterate that inflation is not a new issue; it has been present for more than a year. Our pricing office has been actively working on implementing price increases. We have seen low single-digit increases this year, and we will continue with this strategy. When combined with the various factors I mentioned earlier, this provides us with the necessary resources to continue investing in the fourth quarter as we discussed in relation to Prestige and Consumer Beauty. We are focused on amplifying and expanding our gross margin and effectively managing A&CP to achieve our EBITDA targets. Looking ahead, while Russia's impact is more pronounced in the first half of next year, excluding Russia, the fundamental dynamics concerning our top line and EBITDA will remain unchanged.

To build on Laurent's comments, we are significantly reinvesting in our momentum. It is crucial for us to continue our strong efforts in supporting our brands. This allows us to maintain our commitment to the brand in terms of advertising and promotional costs.

Fantastic. And then, if I can, I just had a second question with regard to China. Given some of the comments from some of the other beauty players in the group, obviously, the lockdowns are having huge pressures on the China marketplace. But can you just take a step back and comment your take on the China beauty market generally. Is the pressure we're seeing really just a function of the lockdowns and supply chain challenges? Do you think there's anything changing underlying with the Chinese consumer in terms of their preference for Western brands versus local brands? Anything that makes you nervous about the long-term growth potential for the China market. Thank you so much.

Thank you, Wendy. This is clearly a question we focus on daily, observing how the market reacts. Despite the lockdowns, Coty has continued to achieve impressive results. Our business is rapidly evolving and becoming more premium. Just a year and a half ago, we were primarily a fragrance company. Today, brands like Gucci and Burberry generate half of their revenue from fragrances and Prestige makeup, creating a new growth engine in China and across APAC, including Travel Retail. More than 10% of fragrance sales from these brands are now coming from ultra-premium products, which is significantly improving our profitability. This also confirms that Chinese consumers are increasingly focused on premiumization, seeking highly desirable brands and their most expensive products. I see no change in confidence regarding this market potentially becoming the largest prestige or luxury market globally in the coming years. I am more confident than ever that our brand portfolio contributes to our status as the fastest-growing beauty company in China among the top 10 beauty companies, with a sellout growth of 14% last quarter, far exceeding the stagnant market. These factors not only instill confidence in Coty's potential for continued growth in this market but also highlight that Chinese consumers remain highly engaged and enthusiastic about increasing their spending on beauty products.

Terrific. Sounds great. Thank you so much.

Thank you, Wendy.

Thank you. Our next question will come from Steve Powers with Deutsche Bank.

Yes, good morning. Thank you. Building on the earlier discussion, it appears that the focus remains on continuity going forward. The strategy does not seem to have changed significantly, and the adjustments made for the exit from Russia appear stable. I’d like to reflect on this in relation to the six priorities introduced around a year ago and described in November. If consumer demand weakens in the US and Europe and volatility persists in emerging markets, will the approach to those six strategic priorities shift in relation to the algorithm, or is the strategy designed to be independent of economic cycles?

Thank you for the question. The strength of our six-pillar strategy lies in its balance. It does not favor one division, region, or pricing category over others. This approach allows us to adapt to varying market conditions while capitalizing on any potential opportunities. Currently, we are witnessing stabilization in Consumer Beauty, with five months of global market share growth in this segment and in color cosmetics. This trend is encouraging, especially as some consumers from the Prestige segment may return to these brands, where we also offer Clean Beauty options they may be seeking. In terms of Prestige, we anticipate continued momentum in fragrances. Despite potential lockdowns in China impacting growth in the short term, both Europe and Travel Retail are experiencing robust growth, with fragrance shopping levels surpassing those of 2019. Our presence in Prestige makeup is relatively small, so we believe that adding new products and expanding distribution will enable further growth. Regarding skin care, our primary focus is to develop our Prestige skin care brands. The market is competitive, and achieving high targets is more feasible with dedicated skin care players. We are refining our approach, learned over the past year and a half, to ensure we implement and adapt effectively. On the Prestige side, we have significant ambitions for our skin care brands to drive our agenda forward. Overall, I do not foresee any changes to the strategic framework we shared with you in November. This balanced approach across divisions, categories, and price tiers should help us navigate any challenges that arise.

Thank you. Our next question will come from Olivia Tong with Raymond James. Olivia, your line is open. Please make sure your phone is not on mute.

Great. Thank you. Good morning. I was wondering, if you could first quantify how much of an impact the supply issue has had in Consumer Beauty and whether the constraint in supply makes you potentially would consider how much inventory you should be holding because unlike others your inventory balance hasn't increased versus recent quarters. But my real question is more around the environment. And you're hearing a lot of different views on how the environment is evolving and the consumer may or may not be responding to inflation and other market dynamics. So I'm curious how you think about your ability to continue to drive growth in Prestige versus Consumer Beauty and your ability to continue to drive price mix? Thanks.

Hello, Olivia. So I will take the first part. So basically, I mean, and you know and you're seeing in the whole industry that we are facing some global supply constraints. But we see an investing in supply chain procurement and we navigate quite well in this environment, as we said, and service level in 2019, which is among the best performance. So indeed as we flag them, we can create a few issues. But basically, these are implementing all the actions and actions are really put in place that we are solving and improve this service level. We remain very agile. We keep what we explained several times, we have this dual sourcing approach, so that we can absorb some potential issues. We have weekly reviews between commercial and supply chain. We need to adapt in a way in how we allocate the products. So definitely, we keep this focus and it is good monitoring and controlling of all supply chains. Inventory, yeah, you're absolutely right. And this is what we are doing. And so always on the one hand managing the cash, but at the same time, being super pragmatic and agile that where we need indeed to build some inventory and some routine resources, we do. So definitely, this is what we are managing, but always in the frame that it doesn't change our cash trajectory. And that's why we are constantly moving towards this four times leverage end of calendar year 2022.

And Olivia to compliment Laurent's answer on the second part. But before moving to the second part, which is around the trends that we are seeing, et cetera, please keep in mind that on CoverGirl, which is I know a brand that everyone is looking at, the supply chain issues we had, had nothing to do with what's happening in terms of shortage we are seeing for components. In fact, this was in line with some decisions that were not made prior to the pandemic. So the season that should have been done somewhere in 2019 but we have not done the delayed the availability of some key things that were part of the mascara of CoverGirl. So it's something that we are mastering. It's not something that we are hoping to get in to improve. So that's point number one, and this finishes the inventory and supply part that Laurent was commenting. When it comes to the second part, how do we see in terms of consumer? I do believe that, consumers who are shopping for Prestige products, specifically knowing that, we have done the job of doing price increases on to that are very, very specific to each and every brand on key items where we felt there was room, I think the difference between the former price and the new pricing is not going to be big enough for someone who is spending over $30 to $40. So I do believe that the impact, at least for Coty Prestige, because of the way we have done things, because of the granularity and because of the desirability and therefore ability to price up for Prestige, we won't see any kind of impact. When it comes to Consumer Beauty, if you take the example of CoverGirl there again that everyone knows in the US CoverGirl has one of the best-selling foundations under $8 and it has some of the best selling new foundations between $15 and $20. So there, we have the ability to direct sell like this consumer either for a foundation that's under $8 or for something that's between $15 to $20, which is still very, very affordable compared to, I would say, other categories coming from Prestige. So that's what we at least focusing confidence that whatever are going to be the behaviors depending on the different tiers of consumers, we will be able to adapt and therefore to invest where people are going to start.

Thank you. Our next question will come from Chris Carey with Wells Fargo.

Hi, good morning. So I just wanted to have a follow-up on a couple of items that have been discussed this morning. So first, just on Consumer Beauty. I appreciate there was investing in the quarter and you're anticipating a more balanced Q4 between the two divisions from a profit standpoint. But can you unpack perhaps some of the drivers of the margin in the quarter between the spending, supply chain, inflation, anything else that might be able to give us a bit of context on the underlying here? And then just secondly, as it pertains to China, clearly, there is a strategy in place to take this market to a certain size by fiscal 2025 that's a long time out. Is there anything going on in the market right now going to delay the – you achieving those targets, or would you view the business as on track with the initiatives that you laid out? Thanks so much.

Hi, Chris. So I would take the first part. So what I can tell you is that, drivers of the margin of Consumer Beauty, it's the same as a global Coty question. I will start first with gross margin. What I'm explaining on the gross margin expansion journey that we are implementing in Coty, we see absolutely valid for Consumer Beauty. So, we see, we are working on improving the mix and we gave a lot of examples, again all the new innovation that we are launching in Consumer Beauty, I think the example of, guidance, all these initiatives are very accretive in the equation. So, this is definitely giving us some levers or headroom in terms of gross margin expansion. So, this is, of course, on pricing. We also with the pricing team working at a very granular level or specific how to drive pricing in Consumer Beauty. And third element, revenue management, on tight control and trade terms promotion and all this in the context of value creation. So, this is again describing the vicious cycle we are building is absolutely valid for Consumer Beauty. And this is what we continue, increasing the gross margin, keeping discipline on supply chain and fixed cost, and fueling density. So, what we have explained in the significant investment in Prestige because we have great initiatives and this is going to kick-off the machine and of course, in Q4 we will be more balanced. And on the second part which is around China, which is there anything that's going to jeopardize our fiscal 2025 target? Again, what we are trying to do in China is to do what we have done one year and a half ago when we were in the middle of the pandemic and we were trying to fix everything that was needed to be fixed, if I may say, waiting for the rebound post-pandemic. We're doing more or less the same thing in China, which is to make sure we are continuing to up the NP in terms of expertise, in terms of capabilities, in terms of the brands that we are entailing today. At the moment, I don't see anything from a Coty, I would say, point of view and Coty ability to implement the things we are working behind that will jeopardize our algorithm and fiscal 2025 target.

Thank you. Our last question comes from Mark Astrachan with Stifel.

Yes, thanks and hello everyone. I guess I wanted to start with fragrances in China, thinking about a bit more longer term. Could you remind us what the category share is today as a percent of total beauty spend? How does that compare to some other markets? It would seem, I think you talked before about, it being lower at this point, but obviously growing faster. And then maybe more importantly, how do you think about competition stepping up given that they presumably I think have directionally talked about seeing kind of similar trends in development of the fragrances category. And how do you think about your relative positioning in anticipation of them kind of going at you a bit more there? Thank you.

Yes, Mark. Let me address the various aspects of your question. First, regarding China. Currently, only 2% of the population uses fragrances daily. If we were to increase this to 10%, it would represent a significant rise in fragrance consumption, especially among Gen Z, who will likely lead this shift. In China, the fragrance category is around 15% to 20%, which is much lower than the 70% of the skincare market. Skincare takes the largest share, followed by makeup and then fragrances. However, fragrances are the fastest-growing category in China, with only 2% of the population using them daily. This contrasts sharply with Europe, where fragrances dominate the market, and the US, where they are the smallest category within skincare. This scenario presents a substantial growth opportunity for us. As for competition in China, we haven't observed any significant threats that indicate we are lacking in our portfolio. We focus on understanding trends and consumer preferences, and we recognize that our brands such as Gucci, Burberry, Kylie, Hugo Boss, and Tiffany can cater to mainstream demand. Notably, 10% of the sales from these brands come from premium fragrances, a category where we have made considerable progress over the past year and a half, as it was almost non-existent in our turnover back then. We believe we have the right strategies and price points to meet the rising consumption driven by Gen Z in the Chinese market. Regarding competition, while they are investing, we view this positively. It indicates overall growth in a promising market, which ultimately benefits everyone involved. That sums up my thoughts. Thank you for your questions and for recognizing the entire team at Coty for this seventh quarter of outstanding results. We look forward to maintaining this success in the near future. Thank you.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.