Coty Inc. (NYSE:COTY) Q2 2023 Earnings Call Transcript

Coty Inc. (NYSE:COTY) Q2 2023 Earnings Call Transcript February 8, 2023

Operator: 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.

Operator: And our first question comes from Nik Modi from RBC Capital Markets.

Nik Modi: 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 kind of 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.

Sue Nabi: 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, again, this is indeed the parts of the components that has been the most affected, and this is, I would say, an industry-wide issue and not just at Coty, of course. And this is improving already at the moment where we are talking. Hence, the communication around the sequential acceleration of our sales entering in Jan. And this is clearly something that’s a 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 altogether give us a lot of confidence that we’ll have these shortages slowly, but surely, fixed into the industry widely and at Coty, of course.

So — 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 on the markets, the results have been, I have to say, outstanding, be it 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’ve done last year the launch of the Burberry Eau de Toilette. And then, we continued this year, I mean, in September of calendar 2022 with the Burberry Eau de Parfum. And the Eau de Parfum, for the first time, surpassed Eau de Toilette sales, which, by the way, 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 really big, big sign. So, 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 very 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, because the brand is not as big as it is in the rest of the world in the U.S., so if you think about Europe, the rest of the world, Hugo Boss success behind fashion and now translating into the fragrance business allow 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 pursing biggest innovations during calendar ’22, our key launches. Last but not the least, Chloe, specifically the line Atelier des Fleurs, Atelier des Fleurs is really booming in all the premiumized markets. If you think about the Asian ones, the Chinese one, 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, going to China, we read, again, like all of you the headlines of Jan. being better than expected for the economy in general in this country. We’ve also seen some pictures that we posted during earnings call today where we see consumers back to stores, which is really a fantastic news for the beauty industry and for our businesses, as you can imagine, having the most important white spaces of the whole industry in terms of companies in this country.

So, there is a confirmation. It’s not, I would say, a strengthening/acceleration of two things we have seen since, I would say, the post lockdowns of last year and including some recent studies, because we continue to study the consumers’ mindset in the country almost on a monthly basis. And we see the premiumization trend accelerating and becoming more radical, if I may say, and 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 premiumizing and becoming more and more skincare in the country. And last but not least, something very important we are seeing in the country too is that the shift from, I would say, 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, new innovation, versus the traditional, I would say, loyalty that we have seen in the past towards more classical and traditional brands.

Operator: Our next question comes from Ashley Helgans from Jefferies.

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Q&A Session

Sydney Wagner: 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?

Sue Nabi: Yes, that’s a very good question, Ashley. Thank you — no. It is Sydney, correct? Sorry.

Sydney Wagner: Yes.

Sue Nabi: And by the way, nice to meet you for the first time. So, in a way what I can tell you is that, again, concerning what I just commented on in terms of categories, premiumization, healthification, moving towards new brands, new offering a kind of speed in terms of transformation of how the Chinese market is looking more and more in terms of brands, I can tell you that there is rebalancing probably that will allow all categories to grow. In a way, skincare is the most traditionally fastest-growing category, the biggest category by far. But fragrances on one side and makeup on the other side — of course, as you mentioned, because there is more socialization, people are getting outside their homes, going back to stores, traveling to Hainan.

By the way, the travel to Hainan has been higher than last Jan, if you compare between Jan this year and Jan last year. So, we start to see this, which is really a great, I would say, information for us as Coty as a company, because it would mean that we will be able to really run on our three legs in China, of course, fragrance, makeup and skincare with the upcoming launch of Lancaster Ligne Princiere in March.

Sydney Wagner: 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?

Sue Nabi: Sydney, it’s not a trade down from Prestige at all. In fact, this has existed since many years. It’s been accelerating recently, of course, as you can imagine, because we have more and more consumers, specifically the Gen Zs shopping on TikTok and all these kind of social media artists making their opinions there before shopping online. And this, I would say, consumers in a way what they are looking for is high-quality at an affordable price, which is the reason why we are really working all our brands to become cool, efficient, clean because this is what people are looking for, still at an affordable price versus what is happening in the rest of the industry. When it comes to Prestige, we don’t see any sign of slowdown on the fragrance business as you can imagine.

The importance in fragrances of the brand name is very, very important. People are also shopping a brand name and this is, in a way, makes the fragrance category probably the most immune when it comes to any kind of trade down or dupe phenomenon. And of course, on makeup and on skincare, I would say the growth of these businesses is big enough to allow anyone to continue to thrive.

Operator: Our next question comes from Anna Lizzul from Bank of America.

Anna Lizzul: 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.

Sue Nabi: I haven’t heard, sorry, Anna, your second part of the question.

Anna Lizzul: 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?

Sue Nabi: Yes, I got it. Thank you so much for the question. Again, the momentum — sorry, in Prestige in fragrances in Q2, again, it’s, in a way, explainable first by the very healthy beauty demand for this category. What we’d love to call “the fragrance index” is at full effect again, whatever the region again, and this despite, again, we have shortages that all the industry had 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 that we are seeing in the company, the premiumization of the market. Again, I’d love to give again and again 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 the down trading of this market.

So, this is, I would say, for me, a kind of explanation of what’s happening. And 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 as you can imagine. When it comes to the momentum that we started to see in Jan., if I may say, this I would really link it to three elements. The first one is, of course, improving of service levels and we are improving with this element quite fast and we will continue to improve on this element in the coming quarters. And of course, the continued strong beauty demand, which is driving this sequential growth acceleration that we have seen. There is also a phenomenon of big innovations that are (ph), at the moment we are speaking about CoverGirl in the U.S. market.

Again, we referred to this during the presentation. The continuity of the Clean lines with Yummy gloss, with the Clean serums — Clean Fresh serums, Clean eyeshadow. And last but not least, and I guess this will be a question at a moment on another, the latest improvement that’s a very strong improvement in CoverGirl sell-out in the U.S. markets with the latest four weeks that show a 17% growth of the sales, which is the best performance since a year behind 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 start the year with very lean inventories, and therefore, there is a bit of restocking. So, this, I would say, is the bundle of element that explains the start of the year that’s accelerating sequentially.

Operator: Our next question comes from Rob Ottenstein from Evercore ISI.