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  Title	Coty : Second Quarter 2025 Prepared Remarks Transcript
  ID	6766923
  External ID	7539896601
  Author	Unknown
  Published Date	Feb. 10, 2025, 4:44 p.m.
  Summary	February 10, 2025 at 05:39 pm EST 2Q25 Earnings Script February 10, 2025 Sue Nabi, Chief Executive Officer Slide 1 Welcome everyone Slide 2 As we are now midway through our fiscal year, it is
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  Content ID	4206242
  Key	259cdd98-4492-4720-8b1b-8fb4b3fcfcba
  Content	February 10, 2025 at 05:39 pm EST 2Q25 Earnings Script February 10, 2025 Sue Nabi, Chief Executive Officer Slide 1 Welcome everyone Slide 2 As we are now midway through our fiscal year, it is clear that fiscal 25 is shaping up to be a pivotal year for Coty On the one hand, the global beauty market continues to grow at a healthy pace, even if growth has moderated off of the elevated levels of the last few years, which benefited from more material pricing increases And in this backdrop, fragrances of all price points continue to outperform most other beauty categories, which strongly benefits Coty's business as fragrances account for over 60% of our revenues and an even bigger portion of our profits On the other hand, pressure in pockets of our business which we discussed at length on the last earnings call, namely in China, Travel Retail Asia, Australia and in Consumer Beauty U.S., cumulatively impacted us even more significantly in Q2 And in our core markets, despite a seemingly strong holiday period where beauty performed strongly and consumers engaged with the category, this did not translate into improved replenishment orders for Coty, as retailers managed their inventory very tightly As a result of these factors, our Q2 LFL sales trends were below our expectations While we are prudently assuming these patterns will continue into the second half as well, the strong sell-out growth of our fragrance brands gives us confidence that these headwinds are temporary, and we should return to improved sales growth as we enter FY26 Against this uncertain backdrop, our teams acted with agility, activating strong savings initiatives, maintaining promotional discipline, and protecting our cash flow The results of these efforts can be seen in our Q2 financial performance In the quarter, our adjusted gross margin expanded by 170 basis points year on year, we maintained strong marketing support, EBITDA expanded by 7%, and our EPS excluding the equity swap impact grew 16% And we reached a key milestone exiting calendar 24: for the first time in over 8 years, our leverage was below 3 times While the complex backdrop may weigh on trends in the near term, we are confident in our ability to continue to deliver strong margin expansion And with exciting brand initiatives and distribution opportunities on track for fiscal 26 and beyond, we remain confident in Coty's ability to accelerate sales growth and outperform the beauty industry over the coming years, while steadily expanding margins and cash flow, and significantly growing EPS, which will fuel our Total Shareholder Return Slide 3 Let me summarize the 4 key messages we want to leave you with today First, beauty market growth remains broadly healthy, with outperformance in Prestige, particularly the fragrance category Second, fiscal 25 is shaping up to be a transition year for Coty as despite healthy demand for our brands, we are impacted by pressure in select markets in combination with retailers in many parts of the world tightly managing their orders Third, despite these top-line challenges coupled with more elevated FX headwinds on sales, we are delivering strong profit growth, EPS growth and margin expansion And finally, we remained laser focused on our cash generation, reaching leverage of below 3x exiting calendar 24, our lowest leverage in over 8 years and on track for further reduction in calendar 25 Slide 4 Let me provide some context on the trends we are seeing in our markets In Prestige fragrances, consumer demand remained strong through the holidays We had some incremental slowing in the category, but growth remained robust at a high-single-digit level And our estimated sell-out for prestige fragrances remained strong and in line with the market, growing at a high-single-digit percentage in the first half Slide 5 On the Consumer Beauty side, we have seen continued slowing in the global mass beauty market Following the high-single-digit market growth in fiscal 24, which included a sizeable contribution from pricing, the market slowed to mid-single-digit growth in Q1 and further slowed to low-single-digit growth in Q2 Sell-out for our Consumer Beauty business was somewhat below the market and down low-single-digits in Q2, weighed down by our outsized presence in mass color cosmetics which was the weakest performing category Slide 6 Last quarter, we discussed at length the pockets of our business which together account for roughly 20% of our sales but have had a disproportionate impact on our short-term growth, namely China, Travel Retail Asia, Australia and U.S. Consumer Beauty At the time we provided guidance, our assumption was that trends in these areas would remain broadly consistent into Q2 Instead, trends worsened in Q2, with the combination of China, Travel Retail Asia and Australia negatively impacting our Prestige business by roughly 3% on a LFL basis And adding Consumer Beauty U.S., the negative impact on total Coty LFL sales in Q2 was also approximately 3% As a reminder, China and Asia Travel Retail continue to be pressured as market demand remains sluggish, retailers are adjusting orders further, and new regulations were enacted in the Asia Travel Retail corridor In Australia, which also accounts for a low-single-digit percentage of our sales, our Prestige business shipments were impacted by substantial working capital reduction at a key retailer In our U.S. Consumer Beauty business, retailers have been actively managing their orders and inventory, exacerbated by the significant channel shifts in the market At the time of our Q1 call, we anticipated that the strong start to holiday sales we were seeing at retail would drive solid re-orders from our major prestige retailers in the U.S. and Europe, which would somewhat offset the pressure in these pockets of the business While our brands, particularly in Prestige fragrance, saw strong sell-out growth in Q2, we did not see replenishment orders at the pace we were expecting Slide 7 Looking at our revenue performance by segment and region In Prestige, we reported 4% LFL growth in the first half and 1% LFL growth in Q2, with higher growth in Q1 reflecting earlier shipments of fragrance giftsets This 4% LFL growth in the first half is particularly noteworthy as we are lapping extremely high growth last year when our prestige business grew 18% LFL In Prestige, our total global sell-out grew by a mid-single-digit percentage in the first half, with our sell-out for fragrances growing even stronger at a high-single-digit level, confirming that our brands continue to resonate strongly with consumers In Consumer Beauty, our sales declined 2% in the first half and declined 4% LFL in Q2 The more significant pullback in Q2 was driven by further mass beauty market deceleration and a couple of points gap between sell in and sell out, driven by pressures at mass retailers due to ongoing channel shifts and tight inventory management, and higher trade investments Importantly, our mass cosmetics brands continued to outperform most legacy brands By region, in Q2 and the first half, EMEA continued to grow LFL, Americas grew in the first half but declined in Q2, and APAC was pressured in both periods by declines in China, Asia Travel Retail and Australia In both periods, the Americas region included a 3% contribution from Argentina, which experienced hyperinflation Slide 8 Looking at the picture by volume, price and mix While volumes declined moderately on a total company basis driven by color cosmetics, our fragrance volumes grew in both Prestige and Consumer Beauty in the first half This is a critical element, as fragrances account for less than a quarter of our volumes but over 60% of our revenues, given the higher relative price points Estimated pricing contributed a low to mid-single-digit benefit primarily due to carryover from last year And estimated mix & other was neutral for the quarter Slide 9 While our sales trends this quarter were below expectations, it's important to put this in the context of our delivery over the last 4 years In 9 out of the last 14 quarters, we have grown ahead of leading global beauty peers Slide 10 Our LFL sales this quarter are also shaping up to be in the middle of our peer group With that, let me turn it over to Laurent Laurent Mercier, CFO Slide 11 Thank you, Sue Fiscal 2025 is indeed a transition year for beauty and for Coty Category growth is moderating in tandem with lower pricing benefits, and pressure in certain pockets of the beauty market is exacerbated by retailers tightly managing orders and inventory While this is impacting our sales trends in the near term, our financial equation is now stronger than it has been in the last 4 years, and we will see outsized benefit from our healthier debt levels and cash generation With our EBITDA margin for the year on track to reach around 19% even as we maintain strong investment behind our brands, and our lower debt is now translating to steady declines in interest expense, we expect our FY25 EPS to grow in the low double digits after adjusting for the discrete tax benefit last year This coupled with our leverage now below 3x, confirms that Coty is on significantly healthier footing, which should fuel double digit EPS growth and strong TSR in the coming years, particularly once sales growth begins to accelerate Slide 12 Our first half net revenues grew 2% LFL While we expected some phasing impacts due to earlier shipments of fragrance giftsets from Q2 to Q1, our Q2 LFL sales of -1% were lower than anticipated as the combined impact from China, Asia Travel Retail, Australia and Consumer Beauty U.S. worsened sequentially to a 3% impact on our sales At the same time, the 2% LFL growth in first half 25 was achieved despite quite elevated comparisons in the prior year of 14% LFL growth Slide 13 While we saw sales headwinds this quarter, we remained focused on fueling healthy gross margin expansion In Q2, we delivered very strong adjusted gross margin expansion of 170 basis points, following the 200 basis points of expansion generated in Q1 The significant margin expansion was fueled by strong supply chain savings including procurement savings and productivity gains, coupled with improvement in excess & obsolescence, and a net benefit from pricing It's also worth noting that the strong gross margin expansion also reflected our efforts to maintain discipline this holiday season, in the face of quite significant discounting from many of our peers In total, our first half gross margins reached 66.1% While we expect absolute gross margins in the second half to be seasonally lower than the first half, based on usual business seasonality, our strong delivery in the first half should support another year of steady gross margin expansion in FY25 Slide 14 As part of our focus on maintaining a healthy business equation and supporting our strategy over the short and long term, we continue to invest behind our brands and initiatives We maintained a high 20s A&CP percentage in Q2, up year on year Slide 15 The combination of strong gross margin expansion, sustained marketing support, short term cost initiatives and very tight fixed cost control, fueled 7% growth in our Q2 EBITDA As a result, we delivered 220 basis points of EBITDA margin expansion in Q2, with margin expansion in both divisions For the first half, our EBITDA expanded 3%, resulting in an EBITDA margin of 22.5%, which was up a strong 90 basis points year over year Slide 16 While some of the strong EBITDA growth despite moderately lower reported sales was a result of shorter-term cost controls, a sizeable portion also came from cost reductions as part of our All In To Win program In Q2, we delivered savings of approximately $35M, up from approximately $20M in Q1, with most of the savings in gross margin related areas We continue to expect these savings to further step up in the second half In total, we continue to target savings of over $120M in FY25 And the plans we are putting in place should support strong savings delivery in FY26 and beyond, as we are evaluating the organization and new optimization opportunities Slide 17 Last quarter we detailed some of the workstreams supporting the $120M savings target These include: First, establishing centers of excellence for key processes, including an AI- powered demand planning solution and the consolidation of demand planning into 1 hub Second, adapting our commercial organization to the increasingly omnichannel world, with the assessments underway Third, accelerating our speed to market Fourth, maximizing the benefits of emerging tech and AI, including our successful migration to S4Hana over the summer And finally, regional footprint redesign as we focus on re-allocating resources from the least to the most attractive opportunities All of these are supplemented by our ongoing productivity efforts which were key contributors this quarter, including in manufacturing and warehousing, and high levels of material savings through material value analysis and commercial negotiation Let me also take a minute to address the tariff topic, which we know is top of mind As is evident in the last few weeks, the global geopolitical and tariff situation remains quite fluid, further adding to the broader uncertainty Having said that, our teams have been planning for several different scenarios with action plans to minimize the potential impact on Coty For context, our sourcing from China, Canada and Mexico into the U.S. is fairly minimal As we contemplate a potential 10% tariff on finished goods shipped from Europe into the U.S., or potential retaliatory tariffs in North America, together this could represent a few points of impact to our annualized EBITDA In the meantime, we are already making adjustments in our product flows and sourcing, including having some extra inventory on hand in the U.S. and shifting more of our mass fragrance production to our North Carolina plant And of course, pricing remains an additional lever, particularly in the relatively price inelastic prestige beauty market Slide 18 The strong progress we have made in significantly reducing our debt by over $4.5B since FY20, including the $300M debt repayment in Q2, is now also bearing fruit In the first half of fiscal 25, our interest expense declined by $14M year on year to $116M, reflecting the lower debt balance and a lower cost of debt We expect our interest expense to decrease further in the second half to below $100M In total, we expect interest expense to decrease by over $40M in FY25 to approximately $210M, fueling about 8% of EPS accretion in this year alone And based on the trajectory of our deleveraging and the current interest rate backdrop, we expect interest expense to decline further in FY26, driving further EPS accretion Slide 19 The combination of our operating income growth, lower interest expense, and a lower tax rate resulted in strong EPS growth Our Q2 EPS, excluding the equity swap, grew 16% to 22 cents and our first half EPS grew 21% to 41 cents Our first half EPS growth benefitted from a discrete tax hurt in the prior year totaling 3 cents, which did not repeat this year Slide 20 While tight order and cash flow management by retailers weighed on our FCF in the first half, we did deliver very strong free cash flow in Q2 of $419M, an increase of $56M over the prior year Our teams have remained nimble in this uncertain environment, which has allowed us to lower inventory levels and improve our working capital performance in Q2 This resulted in solid free cash flow generation in the first half of $411M And based on our expectations for free cash flow in the second half to be roughly neutral, we expect FY25 free cash flow of roughly $400M Slide 21 Our disciplined approach to profit expansion, cash generation and debt paydown have fueled the steady reduction in our leverage over the past 4 years We ended CY24 with leverage of 2.9x, consistent with recent guidance to end CY24 with leverage below 3x This reflects a reduction in our leverage ratio of 0.4 turns from the end of fiscal 24 and 0.2 turns year-on-year Slide 22 Let me now share some context on our outlook Attachments Original document Permalink Disclaimer Coty Inc. published this content on February 10, 2025 , and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on February 10, 2025 at
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