Good day. My name is Chelsea, and I'll be your conference operator. At this time, I would like to welcome everyone to Coty's Fourth Quarter and Fiscal 2022 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, August 25, 2022. Please note that earlier this morning, Coty issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from 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 lines for questions. Our first question will come from Stephanie Wissink with Jefferies.

We have 2 questions. The first is just on Travel Retail, China and e-commerce. Those really stood out to us in the quarter and the year as big drivers of growth. So can you talk about your expectations for those drivers in your fiscal '23 guidance, specifically China, if you can give us some sense of what you're assuming? And then Sue, I'm going to ask you a tough question. I'm hoping you're willing to answer, but there's been a lot made about the carrying relationship in that portfolio of brands. And I'm hoping you can share a little bit about since you've arrived at Coty, how that relationship has changed, the commitment you have to those brands and maybe some of the performance indicators that you're looking at to reinforce that relationship?

Yes, thank you for your questions. Let me start by discussing the strength of the business. Travel Retail, e-commerce, and China are significant contributors to the strong performance we experienced in Q4 and fiscal '22. I hope it's clear that our results over the last eight quarters have met or exceeded expectations, as well as those of our peers, which is a notable achievement. In Travel Retail, we have seen a tremendous surge in global travel, which has positively impacted our beauty sales, particularly at Coty. Our Travel Retail channel has performed exceptionally well this quarter, with triple-digit growth year-on-year. This success spans all categories, particularly fragrances, including our high-end and niche offerings that have gained market share through exclusives and innovative products. Travel Retail has expanded beyond just fragrances to include Prestige Makeup and skincare. Our Prestige Makeup brands, including Burberry Makeup, Gucci Makeup, and Kylie Cosmetics, have also seen significant success at major airports. Additionally, Lancaster is benefiting from its repositioning as a skincare brand, currently gaining traction in both Hainan and Mainland China through an exclusive partnership with Sephora, resulting in double-digit growth linked to Travel Retail performance. E-commerce is thriving, especially in the Prestige division, but even more so in the Consumer Beauty division. Our brands, especially CoverGirl and Rimmel, are becoming dominant on social media. A recent launch called Thrill, co-created with TikTok creators, has performed exceptionally well, further establishing this segment as a key contributor to our business. Regarding China, we faced challenges due to lockdowns at the end of Q3 and during Q4, but there has been a strong rebound. In the first two months of Q1, we're seeing double-digit growth, which, while not at pre-restriction levels, remains robust. Coty China had an 11% growth in fiscal '22 compared to a market that saw a decline. As for your second question, I don't have much to say on speculation. However, our long-term partnerships with top fashion houses remain strong. I want to emphasize that no key license is up for renewal in the next five years, so anything else is just speculation. I hope this addresses your questions.

It does.

Thank you.

Our next question will come from Nik Modi with RBC.

Sue, I was hoping you could provide some context. The resilience of beauty products seems quite evident during downturns. However, I would like to understand how you're framing the macroeconomic situation within your guidance. Do you anticipate this will be a gradual, mild situation, or are you expecting further deterioration? That's my first question. The second question is for an update on inventory levels at Retail, considering they are currently managing their inventories very tightly. I would like to get some insight into the inventory situation.

Yes. Thank you for the question. So again, what I can tell you when it comes to the macro and what we are seeing currently, which is the best indicator of what we will hopefully oversee is that the beauty category is not showing any sign of slowdown, specifically when it comes to Prestige, but also the premiumized part of Consumer Beauty. Clearly, consumers more than ever are premiumizing, which is again, I guess, for all of us is a kind of surprise in the middle of this inflationary pressure that they are premiumizing more and more. During Q4, what we have seen is the movement, if I take the fragrance category, moving from Eau de Toilette to Eau de Parfum, which are more expensive because more concentrated versions of scenting. This movement is confirmed and it's only accelerating, I have to say. So we don't see consumers trading down. We see them trading up in Prestige behind categories such as fragrances, but also behind categories such as Prestige Makeup. On the Consumer Beauty side, the part that's the best preserved. If you listen to what some of our partner retailers have been sharing recently during their earnings, it's clearly the premiumized part of Consumer Beauty that's doing fantastically well. Probably, I would say that in the past, we were putting on one side the things that are priced and then things that are very, very affordable. I do believe that in beauty today, the market will be all about cool or desirable brands, be it from Max or Prestige, and not cool and not desirable brands be it from Max and Prestige. Those that are cool and desirable are by definition going to be protected, or overprotected probably because this has become, I would say, we call it the fragrance index or the fragrance effect. It's clearly these products that are not only female but also male, fragrances are really consumed today by men, women, Gen Zs, Latins, et cetera. And these are categories that I do believe because they are making you look or feel better, are becoming more and more essential categories rather than what we could consider as categories that you would shop only when you're okay. So I think it's really this that I see in terms of macro trends. In terms of inventory, to answer the second part, the retailers have indeed excess inventories in some other categories, but not in beauty. In fact, if you listen again to the earnings from the different retailers, if there is one preserved category, it's beauty.

Our next question will come from Javier Escalante with Evercore.

My question has to do with the consumer division. If you can give us an update with regards to the supply chain challenges that CoverGirl had or were in the quarter? And also, how do you see the profitability of the business going forward? It improved at least more than I thought in Q4. So if you can expand that, that would be great.

Yes. So Javier, I would take the question. So consumer beauty, on the first question on supply chain. And I would say, it's not specific to consumer beauty. I will make a comment on global supply chain. So number one, indeed, I mean, the issue we raised last time in our last webcast was the result, I remember when we had the call, we were telling you that this was really in good progress. So now this is resolved. However, from a global standpoint, obviously, as our peers, we are not immune from current supply issues. But definitely, we are well protected, and we know we have a service level which is in the low 90s, which is a good performance. So why we are protecting this is definitely because we worked now for several quarters on dual sourcing, on local sourcing and also, we had some contracts on freight which could protect us. So this is really the combination of all these levers. As you can imagine and as you know, this is a daily focus from all the teams; we need to keep a strong improvement and control on the supply chain. There is another angle on the supply chain and demand is higher. So we have both elements, and this is indeed what we have to manage. But we are gaining control and managing nicely the current constraints. Second, you're absolutely right, consumer beauty profitability is moving better than expected. I mean the reason is very simple. When I talk every time about the virtuous cycle, we apply this approach from both segments. This is the case for Prestige. So this is also the case for Consumer Beauty. The recipe that has really improved the gross margin is something that is really part of the DNA of Consumer Beauty teams, thanks to all the levers mix. Sue rightly just mentioned that we are premiumizing all the new innovations tangent-free. So this is really a key element; the new innovations we are launching are really premiumized and really helping definitely the mix on the gross margin. We are doing pricing in the current context, but we are assisting every time in a very granular manner, in a very detailed manner, so it's very, very precise and also optimizing cost of goods because rationalization of the portfolio is platforming, which is really a key element. We raised a few times that when we are doing astute innovation, for example, CoverGirl we can use the same platform to replicate a Max Factor or Rimmel, and by doing this efficiently. So that's really the virtuous cycle. And then, of course, we are using this money to inject the media into the new city. You remember, this is what we did in Q3. Since we had the question that indeed in Q3, the level of A&CP was rather high in consumer beauty, this was a conscious decision to support all those initiatives and then indeed now delivering sustainable profitability in consumer beauty and obviously, we continue in fiscal '22 and beyond.

Our next question will come from Olivia Tong with Raymond James.

My first question is on fiscal '23 EBITDA expectations. I see continued strong margin expansion plans. It looks like you're expecting about 200 basis points of margin improvement in the first half, but before the second half. So I was just wondering if you could expand on that and what's driving the first half versus second half expectations? And then my follow-up question is around your view on celebrity influencer-led brands. It's obviously a space that you have great insight into, but it is becoming more and more crowded. So I'd love to hear your views in terms of the relative success of your brands versus others, and how these brands differ in terms of growth expectations and support levels relative to the rest of your portfolio?

Thank you. So I will take indeed the first part on EBITDA expectation. And first of all, I really want to remind that on some of the metrics on top line and EBITDA, indeed, our fiscal year '23 guidance is completely in line with the midterm guidance that we gave you, remember in November. So this is really confirming the robustness of the model, and really the strong achievement of fiscal '22 continues in fiscal '23 in a very consistent manner. Definitely, the marginal guide implies this, but I would say it's still a little too early to go more in that between H1 and H2. So it is really definitely we continue the gross margin expansion, disciplining fixed costs, investing, and delivering this full year guidance. Now navigating H1 and H2 may be something that we adapt during the year depending on the evolution of all the metrics. So still too early to debate on this.

Laurent Mercier. So I'm going to take the second part of the question, which is around celebrity and influencer-led brands. So if I remember well, the question was around, is it more competitive? The answer is clearly yes. This is a very, very competitive part of the business. I think all of us see a lot of brands launched on a daily basis, almost daily, so it's very, very competitive. I do believe that there is a place where there is a kind of moment of truth, which is marketability. There is a selection that's happening because the ability to have a go-to-market that's strong as a Coty go-to-market, to be present in hundreds if not thousands of stores globally, this is clearly an element that selects a lot of DTC brands as potentially becoming bigger brands. And by the commission makes the competition less important. In terms of the right level of investment, as you can imagine, these brands are born on social media. They have natural reach due to their community connections, leading to less need for heavy media investments, unlike traditional brands. So it's really this kind of, I would say, compromise that we need to find depending on the brand and depending on the kind of innovation.

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

So your new launch activity was a theme that came up through our prepared remarks and a little bit in the Q&A session here. A lot of focus was on the Kim launch in the front half. You noted that you're at 20% of your full-year sales expectations already. Is there any way you can frame what the contribution from the Kim launch will be to the outlook this year? And in general, what the contribution from new launches will be to your fiscal ‘23 overall on sales and potentially on profits, then I have a quick follow-up?

Yes. Thank you, Chris, for the question. So again, when it comes to the first part, which is the contribution, as you can imagine, we do not share figures of how much this brand is going to contribute to the growth of the company. But clearly, the start of this new line is very good. We are above our expectations. And something that's for me and for all of us is a very, very strong sign is that the best-selling item is not a single product; the best-selling item is the full line of 9 SKUs, which is priced at $575. So for us, if consumers are ready to spend $575 on a set of 9 products, it means a lot in terms of how they trust the brand, how they trust what we are doing together on this brand. This is clearly something that we wanted to share with you. What I can tell you about the fiscal '23 guide is that it's not dependent on this launch. It's clearly a very broad base. And this is another item I would like to insist on a lot. It's really that my job and Laurent’s job and the job of all the people at Coty is to build a growth that's as balanced as possible in terms of geographies. You've seen that not being overexposed to China protected us recently. In terms of categories, we are working hard to make sure we have all categories in hand so that whatever happens in one category or the other, we can accelerate in one category versus another in terms of brands, not being dependent on any brand. Clearly, this is something that's a key element that is part of the way we are building the net revenues not only for fiscal '23 but also into our algorithm that we presented a few months ago. In terms of what the key building blocks for our fiscal '23 are, fragrance launches and category growth are clearly the biggest building blocks that we have embedded into this guidance.

The quick follow-up would just be, Laurent, you did note some buckets of gross margin in the prepared remarks. It was also noted that Coty is expecting modest gross margin expansion for the year. I wonder if you could maybe just frame the cadence of gross margin expansion over the course of the year, and then perhaps any of the key buckets that puts and takes as you see that?

Yes. First of all, let me remind, as you noted, we had gross margin expansion in fiscal '22 close to 400 basis points. So you can really see that all the actions, all the initiatives that we put in place delivered strong results. Now definitely, we continue the journey. We still have some initiatives that we are implementing to continue gross margin expansion, definitely not at the same rate as we had this year, and it confirms really, as I just shared, that we are very confident in moving to the mid-60s gross margin by '25. What are the ingredients? What are the buckets? Let me take the key elements. Number one is mix. Mix is a key driver of the gross margin. Again, we see concrete results of what we have achieved in fiscal '22, which is really the premiumization of fragrance either in segments and also makeup and the next phase indeed in skincare, but also in Consumer Beauty. Obviously, all the new innovations that we are launching are margin accretive. Sometimes we don't have the same level of proceeds. So we see that driver and we continue in fiscal '23, and it's part of the strategy and all the initiatives that we'll be having. Number two is definitely pricing, and I can elaborate a little on this because this is a key element. We implemented a low single-digit price increase at the beginning of calendar '22. We are currently, as we speak, implementing a mid-single-digit price increase, and this implementation is going very smoothly. So there is no impact on volume. Again, it's really quality of execution. We are also working on preparing a new round of price increase low single digit in the beginning of calendar '23. So we are definitely from a top line standpoint, doing very well. Then on cost of goods, definitely, there is a strong headwind due to inflation. It's about roughly slightly above 2% of net revenue. This is what we had in Q4, and we have the same assumption for fiscal '23. Okay? So it's 2%, and also cost of goods, we have strong intangible actions that will help the gross margin. Number one is we get the effect of the closure of the fragrance factory in Germany. As you know, we announced 18 months ago this decision. We executed perfectly without any disruption. And we are now getting the savings starting now. We are also working as of now on platforming of the value analysis, reviewing all the formulas, either Consumer Beauty or Prestige, and really with the objective to simply find the formula to standardize and also to have late differentiation. By doing this, we are making savings in procurement, but also in manufacturing. So these are really the elements of all the gross margin expansion. This is uncaptured in the all-in umbrella, and this will keep supporting gross margin expansion in '23. Again, same flywheel to keep fueling all the key initiatives that we have in the growth agenda.

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

Yes. Sue, maybe building on your comments earlier around balance across the portfolio. I guess I was hoping you could frame for us in a bit more detail, just base case expectations in terms of the contributions from Prestige versus Consumer Beauty within the '23 outlook? Given the macro comments you made earlier and current momentum, I'm guessing Prestige is going to, again, be an amplified driver of growth, but perhaps you could just talk through the magnitude and sensitivities there. Number one. Then separately on China, I guess just a little bit more specificity around your perspective on how that market is expected to grow in the year ahead, and just how dependent your own business is on resumed market growth in China at this point in its evolution.

Yes. Steve, thank you for your questions. So let's start with the first part, which is around how we are building such fiscal '23 growth. And I think part of the answer was in your question. As you can imagine, there is what we call at Coty’s fragrance index that's happening, which is clearly about this category clearly supporting the growth of the beauty category not only in the U.S. but globally. This category is 20% above the levels of 2019 globally here again. We see it continuing to premiumize and command higher pricing with a lot of innovations, either from our artisanal brands or more mainstream brands. So clearly, this is going to hold us clearly during fiscal 2023. We will continue to execute on our makeup strategy, Prestige makeup strategy. Again, the brands that we are having in this area are growing super fast and therefore, there are going to be key contributors even if the base is smaller. By definition, in absolute value, it's just a contributor, but still it's a key one. Last but not least, we are, for the first time, starting to operate a full skincare line in China. I'm thinking about Lancaster, but hopefully going to slowly but surely become a key contributor in our growth agenda. To see by nature because of the markets and because of the fact that we are adding categories is going to, in a way, be a key contributor to fiscal '23. I remind you that the Prestige business represents 60% of our net revenues, while Consumer Beauty is more or less 40%. But we are also quite bullish on Consumer Beauty because we have incredible launches. Some of them started at the end of the quarter, beginning of Q1. I'm thinking about Thrill Seeker that started in the U.K. behind the Rimmel brand, but having a fantastic start. It's the first product that has been co-created 100% with TikTok in mind, with TikTok creators as not only creating the products but also part of the campaigns, holding and facing the campaign in front of consumers. Also, in the U.S., CoverGirl, we are activating one of the most powerful franchises behind CoverGirl, which is Simply Ageless. Simply Ageless is one of a kind line in the U.S. It's really the only line that's so modern in terms of approach to the question around age. It's all about mixing beautiful skincare ingredients together with performing makeup ingredients. This line, every time we put money and investment behind, we see it growing super fast, and we are also still including recently in the most recent launches. Clearly, this is the way we described how we have built fiscal '22. Now when it comes to China, what we are seeing is that, of course, they have been lockdowns and pressure on consumption, including e-commerce. But what we are seeing now, two months into the first quarter of fiscal '23, at least for Coty, is that the spike in our sales is back to levels that are not the same as the ones we had at the beginning of calendar '22, but very, very strong double-digit level. This is clearly something that we will count on. Again, for us, think about something quite simple: China is so small for Coty that anything we do, just doing the right things is a potential upside for the whole business there and, therefore, for the company.

Our next question will come from Korinne Wolfmeyer with Piper Sandler.

Congrats on the quarter. So I'd like to first kind of push you a little bit more on what you're seeing in color cosmetics. Now could some of the recent strength be coming from reopening and the summer season, having lots of weddings and events? So is there any way to kind of parse out how much could be coming from the reopening and how much is more sustained strength going forward? And then just touching on the recent Ant partnership that was announced, we’re excited to hear that. But can you just expand a bit on what this partnership means for Coty? How can we help expect this to kind of help the China and Travel Retail parts of the business ramp faster? And then any financial implications here that you can share with us would be great.

Thank you for your questions. Let me start with the first part, which is around what we are seeing in color cosmetics and how much of this is driven by reopening versus something that's more sustainable, if I understood quite right, the question. What I can tell you is that what we are seeing is, on top of the strong categories that were booming during the lockdowns and post-pandemic, I think of anything that has to do with eye products, be it mascaras, growth products, lash growth serum, eyeshadows, etc. We are seeing the rest of the categories back to growth, including lip color. But not any kind of lip color, interestingly; the launches that are doing the best at Coty and specifically, I think about CoverGirl in the U.S. is seeing rebounds, rebounds that probably are mixing the right things that people are looking for, which is on one side a hint of color and, on the other side, a lot of care. This is for me a sustainable trend, if I may say. This is clearly going to be here to spend the test of time. There will be more and more consumers looking for more pigmented makeup, moments where they will look for less pigmented makeup. But whatever will happen, what I call skin side makeup or healthy makeup, whatever you like the name, this is the key trend behind the consumption of this category in the U.S., and we also see the same things more or less around the world in other regions. Now when it comes to the partnerships that you are referring to between Ant and Alibaba, what does it mean for Coty and for the traveling momentum? We are, of course, studying the consequences of this partnership. The only thing I can tell you is that there is something very strong is that we are all waiting for the Chinese consumers to be back to travel. Therefore, to add on to the Travel Retail huge figures, remember, I shared with you that Travel Retail is back to the levels pre-pandemic. This is still with a minus 20%, minus 30% fewer passengers, so having all these consumers back to this channel can only confirm the importance of Travel Retail. I can tell you that this partnership also means that Travel Retail and China are more or less telling us the same story and are extremely linked to each other.

Our next question will come from Mark Astrachan with Stifel.

Yes. I guess first, just on marketing spend and ad marketing spend. 20% of sales in fiscal '22, how do you think about where that goes in '23 and beyond? Is there any particular benchmark you're using? And then sort of more specifically, it was up 600 basis points as a percentage of sales year-on-year, obviously contributed to strong growth. But how do you think about the need to continue to increase that and the correlation to sales growth going forward?

Yes, Mark, as you observed in 2022, we significantly increased our level of advertising and consumer promotion, now in the high 20% range. We're clear that this high 20% is an accurate level for us and fits within our business model. This is also our focus for fiscal 2023. Staying in the high 20% is the approach we are taking. The details revolve around how we allocate our spending, emphasizing the quality of execution and the return on investment. The allocation of these funds is guided by ROI key performance indicators in both Prestige and Consumer Beauty. We're definitely aligning with the trends Sue mentioned, and we are also focusing on a well-balanced strategy, distributing investments across geographies, categories, and brands. We are actively managing initiatives based on ROI. Additionally, concerning our advertising and consumer promotion expenses, we have initiatives aimed at improving productivity and optimization. While media spending is highly visible, there are other less noticeable areas where we are optimizing resources, such as samples, textures, and marketing materials. We're committed to refining our operations to free up funds for effective media investments to support our business objectives.

Great. I wanted to ask about how to think about margin profiles across the Prestige businesses. Are there any significant differences in how we approach licensed versus wholly-owned brands and by category, such as makeup, skincare, and fragrance?

No. I mean, we don't answer this level of detail, but what I can tell you again is that, of course, Prestige gross margin, as you know, is higher than Consumer Beauty. So this is a fact. But again, as I shared several times, and the gross margin agenda is valid for both segments. To elaborate a little more within Consumer Beauty, definitely that all the initiatives that we are making, so Prestige Makeup, e-commerce, but also geography, we mentioned about China, all these initiatives are really driving gross margin accretion. So this is really the way we are taking the gross margin agenda.

Thank you, Laurent. Thank you, everyone. I want to express my gratitude to Mark as well. We are concluding the call now. I am very pleased to share these outstanding results, which we consider best-in-class, and we look forward to discussing what's on the horizon for Q1 soon. Thank you very much.

Thank you. Bye-bye.

Ladies and gentlemen, this does conclude today's call and webcast, and we appreciate your participation. You may disconnect at any time.