Coty : Third Quarter 2024 Prepared Remarks Transcript

Coty's 3Q24 Script

May 6, 2024

Sue Nabi, Chief Executive Officer

Slide 1

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

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Slide 2

• Let me summarize the key messages from our results
• First, we saw continued double-digit LFL 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 LFL revenues grew 10% in Q3 and grew 13% year-to-date, trending above our guidance of +9-11% LFL for fiscal 24
• In Q3, we continued to deliver on our balanced growth agenda, with strong LFL 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
  o We expect FY24 LFL revenues to grow at the upper end of the previously announced +9-11% range, which is clearly ahead of our mid-term target growth of +6-8%
  o We continue to expect modest gross margin expansion in fiscal '24
  o And, we are raising our FY24 adjusted EBITDA margin expansion to the upper end of the 10-30 basis points guidance range

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1. At the same time, we expect fiscal 24 adjusted EBITDA to be consistent with our previously guided range of $1,080-1,090 million as EBITDA margin at the upper end

of the guidance range is partially balanced by FX headwinds expected in Q4

1. We now expect adjusted EPS, excluding the equity swap, to be at the high end of prior guidance range of 44 to 47 cents, implying strong year-over-year growth at the upper end of 16-25%

Slide 3

• 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

Slide 4

• Starting with our revenue performance
• In the third quarter, LFL revenues grew 10%, which is trending ahead of our 2H24 revenue guidance of +6-8% LFL growth
• Fiscal year-to-date, our revenues grew 13% LFL, coming in ahead of our full year fiscal 2024 guidance of 9 to 11%
• Our Prestige business grew 13% LFL in Q3 and 17% LFL fiscal year-to-date
• The continued strong LFL sales growth in Prestige was well balanced across regions and categories, including:
  o Robust growth across all regions, and outperformance in APAC, EMEA and the Travel Retail channel
  o 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

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• 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% LFL in Q3 and 7% LFL 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

Slide 5

• Geographically, all regions contributed to the strong LFL growth of 10% in the quarter
• In Americas, LFL 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, LFL revenues grew 9% in Q3 and 12% fiscal year-to-date supported by growth in most markets and the regional Travel Retail channel
• In Asia Pacific, LFL revenues grew 11% in Q3 and 16% fiscal year-to-date fueled by strong growth across many markets and the regional Travel Retail channel

Slide 6

• 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-midsingle-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

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• 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

Slide 7

• I will now hand the call over to Laurent to take you through our financial results

Laurent Mercier, Chief Financial Officer

Slide 7

• Thank you, Sue
• In the current macroeconomic environment, I am pleased to share that we continued to deliver strong financial performance, ahead of our targets

Slide 8

• Let's begin with an update on how we're managing the global supply chain, as well as our visibility into the inflationary environment
• In Q3, Prestige and Consumer Beauty service levels remained very strong at approximately 94%
• As anticipated, inflation has eased significantly versus first half 24. In Q3 inflation had a negligible impact on COGS, and we expect this minimal impact to continue in Q4
• It's important to note that with the significant moderation in inflation, we will be very targeted on any future price increases

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• Regarding the conflict in the Red Sea and the Baltimore port closure, it's 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 & obsolescence in first half '24, we see these headwinds moderating in 2H24 and into FY25

Slide 9

• 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-$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

Slide 10

• 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:

1. Ongoing premiumization of the portfolio coupled with the benefit from carryover pricing

1. The positive impact of easing inflation

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• 1. And continuous supply chain productivity
• While Q3 gross margin was negatively impacted by excess & 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 FY24
• 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

Slide 11

• 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

Slide 12

• 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

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• 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

Slide 13

• And, that brings me to our adjusted EPS
• Excluding the impact from the equity swap, our Q3 adjusted EPS totaled 6 cents
• Our headline diluted adjusted EPS of 5 cents included an EPS hurt of 1 cent 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 41 cents and grew by 8% year-over-year
• Our headline fiscal year-to-date EPS included a 2 cents per share negative impact from the mark to market on the equity swap
• Looking ahead to FY24, I would like to outline certain drivers of our adjusted EPS

1. First, we continue to expect depreciation to be in the $230 to 240 million range

1. Second, we continue to anticipate net interest expense for the year to be in the mid

$200 millions

1. 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 discrete tax hurts we incurred in Q1

1. Finally on fiscal 2024 share count, we executed the first tranche of our equity swap agreement of 27 million shares on February 22nd 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

Slide 14

• Moving to our free cash flow
• Q3 is our seasonally weaker cash flow period, with outflow of $234 million this year

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• This compared to outflow of approximately $180 million prior year
• The year-on-year decline in free cash flow in Q3 and fiscal year-to-date reflected two key drivers
  o First, the payment of income taxes for prior years which totaled over $50 million year-to-date
  o 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 FY25, free cash flow is expected to grow, on stronger profit and lower cash tax payments

Slide 15

• 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 3.4x, up from around 3.1x 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 2.5x exiting calendar '24 and towards approximately 2x 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 end of calendar 25

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• Looking ahead, our strong continued progress on deleveraging and debt paydown support 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, Chief Executive Officer

Slide 16

• Thank you, Laurent
• Let me take a few minutes to discuss the progress we continue to make on our six strategic pillars

Slide 17

• Beginning with our first strategic pillar, growing our Consumer Beauty business
• Consumer Beauty revenues grew 6% LFL in Q3 and 7% LFL fiscal year-to-date
• Importantly, the global mass beauty market continued to grow by a mid-single-digit percentage in Q3, while our Consumer Beauty business continued to grow in line with the mass market
• We once again benefitted from the geographic and category diversification of our Consumer Beauty portfolio
• We delivered solid growth in mass color cosmetics even as the market growth has normalized toward historical levels and the industry saw softness in the U.S. mass cosmetics category
• At the same time, our diversified portfolio allowed us to benefit from strong category growth in mass fragrances, mass skin care and body care, which drove double-digit percentage growth in many of our brands, including brands Beckham, Bruno Banani, Monange, Bozzano and Paixao
• Channel-wise,we continue to outperform in the critical e-commerce channel, once again gaining market share

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