Good morning, and good afternoon, everyone. My name is Gretchen, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2023 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, February 08, 2023. 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 now 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 where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in non-GAAP financial measures section of the company's release. With that, we would now open the line for questions.

Hi, good morning, everyone. I guess two questions. First on just the glass and the fragrance situation. How is this impacting the innovation agenda in terms of the pipeline and the launch calendar, if you could just provide any context? And I apologize, I missed some of the earlier remarks. I had some other company's reporting. Did you provide a timeline in the prepared commentary on when you feel like you'll be fully back to normal from a component standpoint? And then, the second question is just would love your thoughts on what you're seeing on the ground in China currently? You suggested an improvement. I just was curious on some details behind some of those comments.

Yes. Good morning. This is Sue speaking. Thank you again for the question. When it comes to the first part of the question, which is around the fragrance shortages specifically focused on the glass components, this is, indeed, the part of the components that has been the most affected, and this is, I would say, an industry-wide issue and not just at Coty. And this is improving already at the moment we are talking. Hence, the communication around the sequential acceleration of our sales entering in January. And this is clearly something that's very, very good news, coupled, as you can imagine, with the robust beauty demand, specifically on the fragrance side. So, I would say these two elements together give us a lot of confidence that we'll have these shortages slowly, but surely, fixed into the industry widely and at Coty. But I would say the way I would describe the story, did it impact the innovation pipeline? The answer is no. If you look at the way our innovations have been performing in the markets, the results have been, I have to say, outstanding, particularly on the Burberry. I can start with this brand, because what's happened, for example, in a market like the U.S. behind Burberry is unprecedented. We launched the Burberry Eau de Toilette last year, and then, we continued this year in September of calendar 2022 with the Burberry Eau de Parfum. The Eau de Parfum, for the first time, surpassed Eau de Toilette sales, which says a lot about the premiumization of this market. Traditionally, any innovation that's a line extension moving from Eau de Toilette to Eau de Parfum is performing 20% to 30% versus Eau de Toilette. In this case, it's bigger, which is a really big sign. This one is doing fantastically well. Burberry Her in the U.S. is climbing the rankings incredibly, which allowed the brand to become a top 10 fragrance brand in the competitive U.S. market, which is a jump of 9 ranks. If you think about what we've seen behind Hugo Boss in the rest of the world, the brand is not as big in the U.S., but in Europe and the rest of the world, Hugo Boss' success behind fashion and now translating into the fragrance business allows us to have a top two fragrance launch with Boss Bottled Parfum. If you think about Gucci again with Flora Gorgeous Jasmine, that's the continuity of last year's Gorgeous Gardenia. Again, it's a top two to top five innovation. So, in a way, the shortages didn't prevent us from pursuing substantial innovations during calendar '22, our key launches. Last but not least, Chloe, specifically the line Atelier des Fleurs, is really booming in all the premium markets. If you think about the Asian ones, the Chinese ones, hopefully, that is restarting now. This is clearly another leg of growth for us. So, no impact on innovation from what we have seen. Last but not least, again, regarding China, we read, like all of you, the headlines of January being better than expected for the economy in general in this country. We've also seen some pictures that we posted during this earnings call today where we see consumers back in stores, which is fantastic news for the beauty industry and for our businesses. So, there is confirmation. It's not a strengthening/acceleration of two things we have seen since the post-lockdowns of last year, including some recent studies, because we continue to study the consumers' mindset in the country almost on a monthly basis. We see the premiumization trend accelerating and becoming more radical, building into all categories on one side, and we see on the other side, the healthification trend stronger than ever, which is great for both our business as we premiumize and become more skincare focused in the country. And last but not least, something very important we are seeing in the country is that the shift from heritage brands towards new brands active in the Chinese market is stronger than ever. The highest-end consumers are now more open than ever to try new brands and innovations versus the traditional loyalty we have seen in the past.

Hi. This is Sydney on for Ashley. My first question is just on China. So, I'm curious if you guys are seeing or expect any category mix rebalancing in China, just following that reopening and a return to socialization?

That’s a great question, Sydney. Thank you, and it's nice to meet you. Regarding the categories of premiumization, healthification, and new brands and offerings, we anticipate a rebalancing that will enable all categories to grow. Skincare remains the fastest-growing and largest category. However, fragrances and makeup are also gaining traction as people start socializing more, leaving their homes, returning to stores, and traveling to Hainan. Travel to Hainan has increased compared to last January, which is encouraging for us at Coty. It signifies that we can effectively promote our three focus areas in China: fragrance, makeup, and skincare, particularly with the upcoming launch of Lancaster Ligne Princiere in March.

Thank you. And then, just one more on the comment on the dupes. So, you called out CoverGirl and Rimmel has seen a little bit of a benefit from consumers trading down from the Prestige. Is that something that we should understand as evidence of trade down? Is that something that you're seeing more broadly? Or is it a bit more brand specific?

Sydney, it's not a trade down from Prestige at all. In fact, this has existed for many years. It's been accelerating recently, of course, as you can imagine, because we have more and more consumers, specifically Gen Zs, shopping on TikTok and all these kinds of social media, where influencers make their opinions before shopping online. I would say that consumers are looking for high-quality at an affordable price, which is the reason why we are really working all our brands to become cool, efficient, and clean, because this is what people are looking for, still at an affordable price versus what's happening in the rest of the industry. When it comes to Prestige, we don't see any sign of slowdown in the fragrance business, as you can imagine. The importance of the brand name in fragrances is very, very important. People are shopping for brand names, and this makes the fragrance category probably the most immune when it comes to any kind of trade down or dupe phenomenon. And of course, in makeup and skincare, I would say the growth of these businesses is big enough to allow anyone to continue to thrive.

Hi. Thank you so much for the question. Just curious with the momentum you saw in Prestige fragrance in fiscal Q2, we're seeing a nice acceleration in volumes in the Nielsen data since the quarter ended. I was wondering if you can comment on the momentum you're seeing post the quarter and to what extent the supply constraints are affecting this as well? Thank you.

I haven't heard, sorry, Anna, your second part of the question.

Just wondering if you can comment on the momentum that you're seeing post the quarter with acceleration in volume, and then to what extent the supply constraints are affecting it?

Yes, I got it. Thank you so much for the question. Again, the momentum in Prestige fragrances in Q2 is, in a way, explainable first by the very healthy beauty demand for this category. What we'd love to call 'the fragrance index' is in full effect again, whatever the region, despite the shortages that all the industry has been facing. The innovation that we've been putting in the market, again, I was quoting Burberry or Hugo Boss, are clearly having a role in this momentum we are seeing in the company, the premiumization of the market. Again, I'd love to give the example of Burberry Eau de Parfum that's selling higher than Burberry Eau de Toilette, which is the first in the history of line extensions, if I may say, which says a lot about the upgrading and not downtrading of this market. So, this is, I would say, my explanation of what's happening. This is, again, as you can imagine, during the quarter, without having any upside coming from the Chinese market where the penetration is very low and is expected to grow in the coming quarters and years. When it comes to the momentum that we started to see in January, I would really link it to three elements. The first one is, of course, improving service levels, and we are improving this element quite fast and we will continue to improve in the coming quarters. The continued strong beauty demand is driving this sequential growth acceleration that we have seen. There is also a phenomenon of significant innovations trending at the moment, specifically talking about CoverGirl in the U.S. market. Again, we referred to this during the presentation. The continuity of the Clean lines with Yummy gloss, Clean Fresh serums, and Clean eyeshadow. And last but not least, there has been a very strong improvement in CoverGirl sell-out in the U.S. market with the latest four weeks that show a 17% growth of sales, which is the best performance in a year for this brand. So, if you put all these together with a little bit of restocking from our retailers, remember, our sales in Q2 were in line with the sell-outs, meaning that we started the year with very lean inventories, and therefore, there is a bit of restocking. This, I would say, is the bundle of elements that explain the start of the year that's accelerating sequentially.

Great. Following up on some of the previous questions, there is clearly significant demand for fragrances and supply chain issues. Is there any way to estimate how much those supply chain issues affected sales in the quarter?

Good morning, Rob. Laurent is going to take the question.

Yes. Hi, Robert. It's very difficult to estimate. I mean, two major points are very clear that indeed, we have component shortages. But definitely, immediately, we have been working tightly with procurement and are ready to adjust. So, concretely, what Sue was explaining is that, in fact, we are ending Q2 with lean inventory. Now, as we are improving service levels, combined with great demand and great initiatives, we are seeing some rebuilding of the inventory and restocking in Q3.

That's a no way. Okay. But clearly, enough to call out as material?

No, I would not consider it material. We managed and monitored the situation carefully and it was understandable. We ensured that we protected our clean innovations and our two pillars, which are the foundations of our business, to maintain consistency in our strategy. It’s not material, and we are actually seeing some acceleration at the beginning of Q3.

Yes, thank you. Good morning. Two questions if I could. The first one is just around the price increase that's planned for the end of Q3. Just any further commentary you could offer in terms of where that's targeted? How widespread versus how nuanced the implementation of that pricing will be? Number one. And number two, you mentioned a couple of times this morning just the notion that this year's launch pipeline, specifically in Prestige fragrances, was primarily composed of brand extensions. And I'm just curious as we look out to fiscal '24, an early peak into the innovation pipeline, if that is expected to continue, or if next year will be more of an innovation year that has more kind of Hero products, bigger innovations, that sort of thing? Thank you very much.

Sure. Okay. Hi, Steve. So, on the price increase, let me remind that indeed, when we implemented a mid-single digit price increase in the summer of calendar '22, it went down smoothly. As I explained several times, we did have dedicated pricing for this, which started to work two years ago. So, we worked in a very granular manner in this calendar to really make sure we combined this with media support, also strategic initiatives. So, it went very smoothly. It confirms the strength of the brand and the professional work we are doing. And this was absolutely needed, as you said, because it was really the way to mitigate inflation in gross margin, and this is definitely a key driver of our gross margin expansion in Q1 and Q2. Indeed, we shared that we are implementing a new price increase in Q3 fiscal '23. This quarter, again, this is what we announced. The same approach is granular, and again, always focusing that we are matching consumer needs and expectations.

Yes. And Steve, good morning. This is Sue. On the second part of the question, which is around the launch pipeline that was mainly brand extensions, thank you, first of all, for reminding everyone about this. The performance of our Prestige business is indeed in comparison with the big launches we made last year. It was Burberry Hero, it was Gucci Flora, and of course, Calvin Klein's CK Defy. So, this year, of course, it was a line extension. This is traditional in our business. But again, for the first time, line extensions that are towards more premium offerings, Eau de Parfum Burberry is 30% above Eau de Toilette has made, in a way, this second year a year of continued growth. But you're right, the question is how about fiscal '24, and hopefully, we'll be back to blockbusters.

Hey, good morning all and thanks for taking the question. So, first from my end, can you just touch a little bit about how you're thinking about China growth for the rest of the year? And how much improvement are you baking into guidance? And then, as we look into 2024, how are you thinking about expectations for China there? Thanks.

Hi, Korinne. We are confirming our guidance, which is 6% to 8%. Our H1 results show that we are on track. China was a challenge in Q2 due to lockdowns, but we expect an acceleration in Q3 and Q4. This is reflected in our algorithm of 6% to 8%, supported by strong initiatives explained by Sue. These initiatives will accelerate in '24, making China a contributor to growth in fiscal '24. All of this is incorporated in our midterm algorithm of 6% to 12%.

Very helpful. Thank you. And then, can you just touch a bit on the broader fragrance market? I mean, it's been growing really well the past couple of years, and then the fragrance segment for Coty has been growing even better. Can you just touch on how sustainable you think this market growth is? Do you think you will come up against some tough comps at some point? And then, as we think about the segment for Coty, how sustainable do you think that strength is? Thank you.

Yes. Thank you, Korinne. This is Sue speaking. I'm going to take the second part. So, again, when it comes to the fragrance market/the fragrance index, indeed, the fragrance market is 20% to 30% higher than the levels of 2019. In markets like the U.S., again, and you may know this, the Prestige fragrance market is over 60% higher than compared to pre-COVID levels. Again, it's hard to see how this would just be driven to some one-time factors, I have to say. Historically, this has been a big distinct category, but what we are now seeing is consumers using fragrance as part of their daily routine. I mean, this business has become really a health business, mental health business, I would say. Fragrances are being seen as huge boosters, allowing people to feel better in their day-to-day lives. In particular, during the last couple of years, we have seen increased usage by new categories where the penetration has increased structurally. I'm thinking about Gen Z, I'm thinking about men, and I'm thinking about Hispanic consumers, if you focus on the American market. We are also seeing, at the same time, the rise of fragrance influencers in social media, specifically TikTok, but also on YouTube, which is also helping to drive sustainable growth for this category. They are driving discovery of different fragrances and providing authentic ways for consumers to engage with the product virtually instead of purchasing, which is really a new kind of sampling, if I may say, virtual sampling. We are also noticing particularly with the younger consumers that they are using fragrances more and more. So, the penetration in the U.S., to conclude, is in the high 20% levels, which is still well below that of Europe, which is closer to 50%. Not speaking about the Chinese penetration, which is around 3%. So, this gives you a zoom out of what is coming soon with this fragrance category globally.

Great. Thanks. Good morning. First, I wanted to talk about China and the reopening. And now that reopening is happening, what can go into place that wasn't possible over the last couple of years? And could you talk a little bit about how much opportunity there is for you to grow shelf space and the conversations that you're having with your folks on the ground or with retailers, particularly in Travel Retail? Thank you.

Yes. Good morning, Olivia. Thank you for this question, which is indeed very important. Again, just to refer to our daily life meeting last week in Amsterdam, we had people from all around the world, spending a week for the first time since many months and quarters altogether, including the Chinese general managers, the APAC general managers. Everyone was in the same room, in the same place, spending five days discovering all the new innovations for fiscal '24 and beyond. I can tell you that the level of confidence I have seen on the faces of specifically the Chinese general managers and teams was a very, very strong sign of how they see Coty in this market where the opportunities are almost endless for a company like ours. What do we do better? If I may say, I love to give this image of sometimes, destiny needs to help you, in a way. We had two and a half years to strengthen our fragrance business, to strengthen our makeup business, specifically on the Prestige side, to put ideas and intelligence behind the brand like Adidas or Max Factor that are two big brands in the Chinese market, and last but not least, to fully prepare for our first skincare launch in China, which is happening next month. This is what's different. It's absolutely not the same Coty doing beauty business in China in March compared to two years ago.

Thank you for taking my question. I was hoping to get some insight into the Prestige side regarding skincare. I know Lancaster was a significant launch for fragrances, which are the main driver of that segment. However, I was curious about the end of the quarter, where we noticed a deceleration, and in Russia, performance is likely below expectations, considering the supply chain challenges. Could you help us understand how skincare is performing in relation to fragrances at the end of the quarter? Thank you.

Yes. Good morning, Andrea. Thank you for the question. If I understood correctly, you were referring to the end-of-quarter deceleration in fragrances. Again, I believe that this is not the way you should read the figures, if I may say. Again, I'll reframe the story around our Q2 saying that this performance, given the shortages, the boom of the demand, and the unprecedented pipeline of innovation last year, is a very strong performance. So, that's really the way I see it. I view skincare, specifically in the Chinese market, as an additional layer and not something that's supposed to compensate anything else. Skincare is really for us an additional growth driver and a new journey for the company that's very, very important as we want to become a beauty giant in Asia. So, really, continuous performance on our fragrance business, strong performance on our Prestige business, specifically in the U.S. without China, as you can imagine, that was under lockdown during the full quarter. And last but not least, adding a new leg, which is the skincare leg starting with Lancaster, and I would not refer to it, but again, you gave me the opportunity to refer to the upcoming launch that is going to happen also in the coming months.

Hi, good morning.

Good morning, Chris.

Good morning, Chris.

So, just a follow-up on Andrea's question regarding individual category growth. I appreciate last quarter the body care launch had some favorable impact. I think if I heard you correctly in the prepared remarks, you said that growth was more balanced across your categories between fragrance and body care and makeup. Can you maybe just contextualize how category delivery was for you in the quarter on a like-for-like sales basis? And maybe what your expectations are for the full year, in the context of your full year like-for-like sales guidance? Thanks so much.

Yes, indeed, Chris. What you're highlighting is definitely a strength for Coty. We have a balanced portfolio, and indeed, we are in both divisions. Now we have, I would say, subcategories which are performing very well. Just on Prestige, I want to emphasize that, of course, we have fragrance, but now we are seeing Prestige makeup and skincare accelerate and become strong growth drivers. In Consumer Beauty, the same trend is occurring. We see strong acceleration in body care, definitely. So, Adidas successful innovations in Q2 have contributed to this. It's really a high mix in terms of high value for the consumers, and we are seeing some great traction. It's coming on top of color cosmetics and mass fragrances. So, indeed, this is leading to great acceleration. I want to highlight also that we have also very strong performance in Brazil, where body care has shown strong results. We can also create some cost synergies with the rest of the business. This is definitely a strength for the company, and indeed, to conclude on skincare, this will definitely accelerate in H2 and beyond, of course, in fiscal '24 and fiscal '25.

Yes, hi. Good morning. I was curious, as you increase your spending on advertising and promotion over time, can you talk about where you're seeing the best ROIs? And as you spend more, are your ROIs actually improving over time? Thanks.

Yes. Good morning, Linda. That's a very important question. What you are highlighting here is now fully part of our all-including umbrella. So, very clearly, we started to focus on fixed costs, then on cost of goods. Now, we are really addressing all the agencies we are investing in. We are building methodology, and of course, this is combined with marketing teams, digital teams, and commercial teams. We are getting fully equipped to measure and optimize ROI. So, this is the number one focus, and we are improving because, as we shared just before, we are now also growing in different categories. The way you spend money in skincare is different from the way you spend money in fragrance. These are capabilities that we have built, and consumers want to see that. Over the last two years, we've built these capabilities. ROI is the key word, certainly making sure that each dollar we are spending on either innovations or base business is decided based on ROI and reviewed by Sue and myself, along with the team in recurring sessions. That's absolutely critical to ensure we are making the best use of our money and achieving better ROI in the coming quarters.

Thanks, and good morning, good afternoon, everyone. Two questions for me. One, just first on Consumer Beauty. So, still gaining share there. The rate of increase narrowed a little bit in the quarter. I guess, what would be your expectations going forward for that? And then, maybe sort of related to that, curious about your views on the length of the current beauty cycle, which has obviously been a couple of years now coming out of the peak of the pandemic, mask wearing, etc. Fragrance and makeup have been drivers of the beauty category. Is it reasonable that this continues? What would be your expectations for the length of the current cycle? Thank you.

Yes, good morning, Mark. Thank you for these two questions. Sue speaking. So, again, when it comes to Consumer Beauty, you're right to point out that the Consumer Beauty division is entering a new cycle. The first cycle that started around January '21 was really to reinvent brand equity, sometimes returning to historical brand equities, strengthening this, modernizing this, and creating great advertising with the highest ROI, as Laurent just mentioned. This was really what explains the market share gains that have occurred over the full year. This is the first time since 2016 that this division has been gaining market share for a full year. This was Stage 1. Stage 2, in a way, I would say, Stage 1 was fixing the surface, and now Stage 2 is really getting deeper as we start to see real disruptive, best-in-class efficacy in the market innovation. This takes time. It takes 1.5 years to create fantastic mascara or foundation or long-lasting lip color. So, this is now the moment for this. You can imagine that Consumer Beauty businesses, specifically in makeup, are going to continue to put big innovations into the market, supported by excellent advertising and achieving some of the best ROIs in the company. We've talked about the Adidas brand last quarter. We started in Eastern Europe with very, very strong results, specifically on high-end shower gels. Now we are implementing this innovation in the Western world. This brand has significant potential in China as it's cooler than ever and is already the Number One shower gel brand among Chinese men. So, you can envision us building this brand into a high-end wellbeing brand in Europe, in China, and hopefully, in the rest of the world. Regarding the second part of your question on the beauty cycle, I believe that what has changed in recent years is what I call the healthification of the beauty industry. This industry is about things that make people look better or feel better. This becomes a non-negotiable for consumers, and our limits are only about our ability to innovate, tell new stories, and bring new brands and new technologies to continue to captivate consumer interest in our category because this is now a need to meet rather than something nice to have.

Hi. Thank you. You talked about Prestige high single-digit growth, in mass, mid-single digit. Can you talk about how much of that was new doors? Or is that mostly just pure sell-through of the new products you've been talking about?

Yes. Hi. So, basically, the model we are using for Prestige and Consumer Beauty is primarily organic growth. In both Prestige and Consumer Beauty, we are seeing our success of innovation accelerating rotation, combining all these elements step by step to regain traction first with consumers and retailers. This gives us all the ammunition necessary to gain shelf space. This is done in a healthy way, always emphasizing discipline with the marketing teams in both Consumer Beauty and Prestige. We are really focusing on productivity progress. Once we optimize productivity progress, of course, we work on new doors, but with selective criteria that we only enter new doors if we have guarantees that productivity is really at target level.

And we've reached our allotted time for the question-and-answer session. I will now turn the program back over to our speakers for any additional or closing remarks.

Yes. Thank you, everyone, for your questions. If you allow me a few closing remarks, the first one is about the category, beauty is and will continue to be the darling category of consumers around the world for all the regions we have mentioned during this earnings call. Please see Coty in its reinvention Stage 2 phase, entering real innovation, fantastic ROI behind advertising, new white spaces in terms of regions and categories, including skincare, and targeting leverage by about three times at the end of this calendar. Last but not least, I would say that even Coty is not in its maturity stage. As you can imagine, we will continue to grow given all the white spaces that we are having. And the last remark is that it's very important that the long-term vision and view is really the one that is at play at Coty, and we are building this company for the coming decades to become a true beauty powerhouse. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.