Earnings Call Transcript
Coty Inc. (COTY)
Earnings Call Transcript - COTY Q3 2024
Olga Levinzon, Senior Vice President of Investor Relations
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 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. Thank you. I will now turn it over to our CEO, Sue Nabi.
Sue Nabi, CEO
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-like 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-like revenues grew 10% in Q3 and grew 13% year-to-date, trending above our guidance of plus 9% to 11% like-for-like for the current fiscal ‘24. In Q3, we continued to deliver on our balanced growth agenda, with strong like-for-like 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. 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-like 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, CFO
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 and obsolescence in first-half ‘24, we see these headwinds moderating in H2 ‘24 and into 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 to our 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 and obsolescence expenses, the trend has continued to improve over the course of the year. With the strong Q3 gross margin expansion, our fiscal year-to-date gross margins grew by 20 basis points to 64.4%. And with further gross margin expansion expected in Q4, even if more moderate than in Q3, we continue to expect modest gross margin expansion in fiscal year '24. We remain focused on executing on our multi-part, multi-year gross margin attack plan, as we drive our gross margins to the mid to high-60s in the next few years. Let me now walk you through our marketing investments. In Q3, A&CP investments represented approximately 28% of sales, increasing approximately 1 percentage point from the prior year. We are continuing to both support core icons and invest behind new launches like Infiniment Coty Paris, Marc Jacobs Daisy Wild and Cosmic Kylie Jenner for Prestige, and CoverGirl Simply Ageless Essence and Rimmel Wonder Bond Mascara for Consumer Beauty. We continue to expect A&CP to be in the high-20s percentage level of sales in full-year fiscal ‘24 and beyond. Moving to our profit delivery for the quarter. Our Q3 adjusted operating income grew a strong 17%, driving 90 basis points of margin expansion. Our Q3 adjusted EBITDA grew 10% year-over-year to $200 million, with the Q3 adjusted EBITDA margin increasing 30 basis points to 14.4%. Our year-to-date adjusted operating income grew 19%, resulting in an 80 basis point increase in year-to-date adjusted operating margin. And adjusted EBITDA totaled $927 million, growing 15% from the prior year, with the adjusted EBITDA margin up 30 basis points, at the upper end of our full-year guidance. We continue to expect strong income growth and margin expansion going forward. And, that brings me to our adjusted EPS. Excluding the impact from the equity swap, our Q3 adjusted EPS totaled $0.06. Our headline diluted adjusted EPS of $0.05 included an EPS hit of $0.01 from the mark-to-market on the equity swap due to the stock price decrease in Q3. Fiscal year-to-date, our adjusted EPS excluding the swap totaled $0.041 and grew by 8% year-over-year. Our headline fiscal year-to-date EPS included a $0.02 per share negative impact from the mark to market on the equity swap. Looking ahead to fiscal year ‘24, I would like to outline certain drivers of our adjusted EPS. First, we continue to expect depreciation to be in the $230 million to $240 million range. Second, we continue to anticipate net interest expense for the year to be in the mid $200 million. Third, we anticipate the adjusted effective tax rate for fiscal 2024 to be in the high-20s, including some potential discreet tax benefits in Q4, which we expect to balance the discreet tax impacts we incurred in Q1. Finally, on fiscal 2024 share count, we executed the first tranche of our equity swap agreement of 27 million shares on February 22 at the very attractive price of $7.40, which partially benefited Q3 and will fully benefit Q4 share count. We expect to exit Q4 with a diluted share count of 875 million. Moving to our free cash flow, Q3 is our seasonally weaker cash flow period, with an outflow of $234 million this year. This compares to an outflow of approximately $180 million in the prior year. The year-on-year decline in free cash flow in Q3 and fiscal year-to-date reflected two key drivers. First, the payment of income taxes for prior years, which totaled over $50 million year-to-date; and second, the timing of working capital payments, pretax, which should reverse in Q4. Looking to the full year, we expect our free cash flow to be solid and broadly consistent with fiscal '23 at approximately $400 million, as the strong profit expansion is balanced by a step-up in cash tax payments related to prior year balances as well as higher working capital particularly as we’ve built up inventory to support our business in the current dynamic environment. In FY ‘25, free cash flow is expected to grow, on stronger profit and lower cash tax payments. Moving to our capital structure. We ended Q3 with net debt of approximately $3.7 billion. As a result, our leverage at the end of the quarter was around 3.4 times, up from around 3.1 times at the end of Q2 due to the seasonally low Q3 cash flow coupled with the impact of the share buyback at a cash cost of $200 million. Factoring in our Wella stake, we ended the quarter with economic net debt of approximately $2.6 billion. We remain committed to reaching an investment grade profile, targeting leverage towards approximately 2.5 times exiting calendar ‘24 and towards approximately 2 times exiting calendar ‘25, which we believe we can reach through our organic free cash flow generation and EBITDA expansion. At the same time, we also continue to target divesting our Wella stake by the end of calendar ‘25. Looking ahead, our strong continued progress on deleveraging and debt paydown supports our expectation for our interest expense to steadily decline in the coming years. I will now hand it back to Sue to review our strategic progress in the quarter.
Sue Nabi, CEO
Thank you, Laurent. I would like to take a few minutes to highlight the advancements we have made on our six strategic pillars. Starting with our first pillar, growing our Consumer Beauty business, we saw Consumer Beauty revenues increase by 6% like-for-like in Q3 and 7% like-for-like for the fiscal year to date. The global mass beauty market has been growing at a mid-single-digit rate in Q3, and our Consumer Beauty business is keeping pace with that growth. We have benefited from the diversification of our Consumer Beauty portfolio across different regions and categories. Despite the market growth stabilizing, we achieved solid growth in mass color cosmetics, and our diversified portfolio allowed us to tap into strong growth in mass fragrances, skin care, and body care. This resulted in double-digit growth for several of our brands, such as Beckham, BrunBanani, Monange, Bozzan, and Paixao. In the e-commerce channel, we continue to outperform and gain market share, with our Consumer Beauty e-commerce revenues growing around 30% like-for-like in Q3. In brick and mortar, Coty's global shelf space has remained stable following the resets from Spring 2024, and initial signs indicate stability will continue into Fall 2024. We have been focusing on enhancing our social media reach to drive brand engagement and activate strong community involvement through innovative campaigns, which are already yielding positive results. CoverGirl has risen to the third rank in earned media value among its peers in the U.S., a significant jump from its previous positions. The year-over-year earned media value for CoverGirl increased by nearly 1.5 times in Q3, the highest growth in its competitive set. This success highlights the impact of CoverGirl's innovative products and Coty's effective activation strategy, supported by a network of influencers. As a result, Essence has become a leading foundation on Amazon and the top in Canada. With its strong brand equity, innovative offerings, and social media advocacy, CoverGirl is outpacing established cosmetics brands in U.S. mass retail and e-commerce. Additionally, Rimmel, our leading European brand, has climbed to the fourth spot in earned media value in the U.K., with a year-over-year growth of over 75% in Q3. We are committed to outperforming the mass market through innovation and advocacy across all Consumer Beauty brands. Moving to our second pillar, we are focused on accelerating our luxury fragrance business and solidifying Coty's presence in prestige makeup. The fragrance category has shown impressive growth, reaching the mid-teens percentage growth in Q3, thanks to robust global volume growth and ongoing premiumization. Coty's prestige fragrance segment is thriving, with market share gains in both mature and emerging markets. Our prestige fragrance revenues grew by 12% like-for-like in Q3 and 18% for the fiscal year to date, aided by successful existing brands and impactful new launches, including Burberry Goddess and Cosmic Kylie Jenner. Most of our key fragrance brands experienced double-digit revenue growth for the year to date, indicating momentum across our portfolio and a positive trend in the global fragrance market. New launches like Burberry Goddess Eau de Parfum have set impressive milestones, with significant successes in various markets. Additionally, our launches, including Marc Jacobs Daisy Wild and Cosmic Kylie Jenner, have ranked at the top of fragrance launches in the U.S. this year. These successful launches reaffirm Coty's expertise in fragrance development and marketing. In our third strategic pillar, we are expanding our skincare portfolio, driven by our prestige brands, and capturing opportunities in a promising market. Our skin care strategy targets discerning consumers focusing on photo aging prevention and repair, biotech-driven longevity, and dermatological solutions. This quarter, we saw notable growth in our Lancaster brand and positive developments for Orveda, alongside increasing social media presence for philosophy. Lancaster reported over 25% growth like-for-like in Q3 and a strong year-to-date performance. Philosophy continues to successfully reestablish its brand, while Orveda is gaining traction despite a selective distribution strategy. Now, transitioning to our fourth pillar on enhancing organizational growth capabilities, including digital and R&D, both divisions have performed well in e-commerce sales. Prestigious products saw double-digit growth, primarily from new product launches and effective social media campaigns. Consumer Beauty revenues grew by approximately 30%, with robust growth across various regions. Overall e-commerce revenue grew by about 20% year-over-year, leading to nearly 20% e-commerce penetration. Both our Prestige fragrances and Consumer Beauty businesses rank second in the e-commerce channel, thanks to our effective launches and digital strategies. Shifting to our fifth pillar regarding expansion in Travel Retail and growth engine markets, we have seen significant revenue growth in these areas, with an increase of over 20% this quarter. Key markets like Brazil, Southeast Asia, and Africa experienced strong double-digit growth. In China, our Prestige segment grew double digits, even amidst a decline in Consumer Beauty sales. Travel Retail sales have also exceeded 20% growth like-for-like, aided by distribution expansion and exclusive launches. Lastly, our sixth pillar is becoming a sustainability leader, which underpins our long-term strategy. We have reached several ESG milestones, including eight carbon-neutral sites and expanded solar panel usage. Our initiatives include refillable product formats and groundbreaking uses of carbon-captured ethanol in our fragrances. Furthermore, we continue to enhance our ESG scores across various rating platforms. In terms of outlook for fiscal '24, we anticipate continued strength in category demand. However, we foresee some headwinds due to difficult comparisons from last year and inventory restocking. In Q4, we expect like-for-like revenue growth to be in the low-to-mid single digits, with a forecasted FX headwind affecting revenues. For the full fiscal year, we foresee high-end revenue growth between 9% to 11%. We also expect to achieve a modest increase in gross margin year-on-year and bolster our adjusted EBITDA margin. In conclusion, we recognize a strong beauty market, and with our diverse portfolio and execution, we are well-positioned to continue our outperformance. We celebrate our legacy as we approach the 120th anniversary while remaining excited about the future opportunities. Thank you for participating in today's Prepared Remarks call. A separate Q&A session will be held on Tuesday, May 7, at 8:15 a.m. Eastern Time.
Operator, Operator
Thank you for joining our Prepared Remarks call today. As a reminder, we'll be hosting a separate Q&A session on Tuesday, May 7 at 8:15 a.m. Eastern Time or 2:15 p.m. Central European Time.