COTY - NYSE

Good morning and good afternoon, ladies and gentlemen. 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 First Quarter Fiscal 2023 Earnings. Later this morning at approximately 8:15 a.m. Eastern, we will hold a separate live Q&A session on today's results, which you can access via our Investor Relations website. Joining me this morning 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.

Ladies and gentlemen, the Q1 results that we have reported this morning once again reaffirm the strength and resilience of Coty's brands, teams, strategy and operating model. In the midst of a complex and dynamic external environment, Coty has delivered the ninth consecutive quarter of results in-line to ahead of expectations. At the same time, dynamics of the beauty market, in which we are a key player, remain largely unchanged since our last earnings. Beauty as a category remains resilient, at the sweet spot of being a staple in consumers' beauty routines, and a category of offer, where the innovative products and communications we bring to market directly drive demand. Coty has certainly benefited from a beauty category that has remained resilient, particularly from what we refer to as the fragrance index, as consumers turn to the mood-boosting and affordable luxury of fragrances. At the same time, we are particularly pleased that our balanced growth strategy remains in full force. We delivered like-for-like growth across each of our regions, each of our key categories including fragrances, cosmetics, skincare and body care, and across both divisions. This has allowed us to again report sales growth well above the underlying beauty market and among the best in our competitive set. As a result, even in the midst of the macro uncertainty, we continue to target growing our sales ahead of the beauty market, growing our profit ahead of sales, and steadily deleveraging our balance sheet, positioning Coty to become a true beauty powerhouse. There are a several key points from our results that I would like to highlight today. First, fueled by the strong beauty demand and key brand initiatives, we once again delivered revenue growth ahead of expectations and ahead of guidance. Our Q1 like-for-like revenues grew 9%, despite a 200 basis point negative impact from our Russia business exit. Adjusting for Russia, our core business grew 11% like-for-like, ahead of our raised guidance of 8% to 9% like-for-like. Second, we delivered another quarter of strong gross margin growth, strong profit expansion, and net debt reduction. Despite the various inflationary headwinds, our Q1 adjusted gross margins increased 70 basis points year-on-year. As a result, Q1 adjusted operating income grew 24% year-on-year, our net debt declined to $4.2 billion, and our net leverage ended at below 4.5x, putting us well on track to drive leverage towards 4x exiting calendar 2022 and towards 3x exiting calendar 2023. Third, we continue to execute and make progress across each of our six strategic growth pillars. In fact, we have a number of ESG milestones to share with you today and more to come in the coming days. Finally, the strong delivery in Q1 reinforces our confidence in our fiscal 2023 guidance. We continue to see the fiscal 2023 growth trajectory developing inline with our medium term targets, with the core business adjusting for the impact of the Russia exit, growing sales 6% to 8% like-for-like, and an overall adjusted EBITDA of approximately $955 million to $965 million based on current FOREX rates. While demand signals across most markets remain robust, we remain vigilant in monitoring the external environment and have in place the necessary resilience plans to react should the demand backdrop weaken. In the meantime, we will continue to execute with discipline, premiumizing our portfolio, driving our balanced growth agenda, reinvesting behind our key brands and capabilities, and advancing our profitability and deleveraging agenda. 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 and sell-out performance. This quarter we saw diverging trends between sell-in and sell-out due to a number of factors at play in our like-for-like revenue growth. From a sell-out perspective, which truly reflects consumer demand, our Prestige business continued to outperform, fueled by the strong demand for prestige fragrances and the continued consumer desire for more premium beauty products. As a result, our Prestige sell-out grew in the low teens, while Consumer Beauty sell-out also remained solid with mid-to-high single digit growth. However, these growth trends were reversed at the revenue level. Prestige revenues grew 7% like-for-like, well below the sell-out, as this sell-in growth was impacted by: one, 300 basis points of headwinds from the Russia exit; two, industry-wide shortages in certain fragrance components, which Laurent will discuss in more details; and three, difficult comparisons in the prior year, where our Prestige business reported 34% like-for-like growth on the back of strong launch pipefill. Consumer Beauty revenues grew 12% like-for-like, surpassing the sell-out, and with no material impact from the Russia exit. While revenue growth in our cosmetics and mass fragrances businesses was broadly inline to ahead of sell-out, the Consumer Beauty sales performance was boosted by a strong launch pipeline and brand initiatives in our body care business, including adidas' Skin & Mind premium and sustainable new body care range, Monange's silicone-free deodorant, and Bozzano's clinical range in Brazil. As a result, our overall like-for-like revenue growth was broadly inline with our total sell-out. Geographically, I'm very pleased to say that the like-for-like revenues grew in all regions. Revenues in the Americas grew 5% like-for-like, as we saw strong momentum in Brazil and Latin America, while the continued strength in U.S. consumer demand was counterbalanced by supply constraints, particularly in prestige fragrances. EMEA region sales grew 11% like-for-like fueled by significant Travel Retail momentum and double-digit growth across most markets. Asia Pacific revenues grew 12% like-for-like, with strong momentum in Asia excluding China and Travel Retail, while China returned to growth despite the intermittent lockdowns. I will now hand the call over to Laurent to take you through our financial results.

Thank you, Sue. As many of you know, the external environment during Q1 became increasingly complex, with highly volatile FOREX rates and further uncertainty regarding the future interest rate environment globally. Despite this dynamic backdrop, I am pleased to share our results, as we continued to show solid progress across key financial KPIs including gross margin, profit, and deleveraging. The virtuous cycle is fully in motion, and delivering the results we set out to achieve. I am also very encouraged by the interactions and engagement we have had with many of you in the investment community, during the quarter. The progress we have made is increasingly being recognized, particularly as long-only institutions now account for a significant majority of Coty's public ownership, and there is a heightened awareness of Coty being an attractive and sustainable investment. Let’s start with our gross margin performance in the quarter. Q1 adjusted gross margin of 64.1% increased 70 basis points from last year. Gross margin performance in the quarter was driven primarily by strong price improvement in both Prestige and Consumer Beauty, as well as improvements in trade spend. While we see mix as one of the positive building blocks in our gross margin expansion going forward, this quarter the mix benefit was limited based on the growth dynamics in both divisions and the outsized contribution from body care, which Sue alluded to earlier. The positive drivers more than offset the heightened level of COGS inflation, which were approximately 200 basis points of revenues, similar to what we experienced in Q4. Given the significant volatility in FOREX rates more recently, and particularly the Euro and Pound, I want to briefly discuss the natural hedge in our business model. The deterioration in both of these currencies has had a material impact on our reported sales, with a 7% negative FOREX impact at the top-line. However, the majority of our manufacturing and sourcing takes place in Europe, including some in the UK. This creates some natural hedge in our business, limiting the FOREX exposure on our gross margin. Going forward, we will continue to execute on our multi-pronged, multi-year gross margin attack plan, and we remain well-positioned to benefit from positive mix shifts in the business. Now let’s touch on the global supply and inflationary backdrop, and how we are navigating through this challenging environment. As Sue alluded to earlier, global supply chain complexities coupled with ongoing robust demand for fragrances, which was not fully anticipated by the supply chain, is driving industry-wide supply constraints in key fragrance components. Several of our peers have discussed the shortages in key components like glass bottles, and to a lesser extent, caps and pumps. As a result, with fragrance volumes ramping up seasonally in Q1, our service levels remained in the low 90s for Consumer Beauty, but slipped below 80% for Prestige. The feedback we have received from our retailers suggests that our peer set is experiencing similar dynamics. And with seasonally stronger fragrance demand in Q2, we are expecting similar constraints for this coming quarter. The issue ultimately traces back to the general elevated lead-times and raw material constraints across the global supply chain, which is impacting the supply to our own suppliers, and exacerbated further by a fragrance market which shows no sign of slowing, which has depleted the safety stock in the supply chain. As a company, we are preparing ourselves for this economy of scarcity, building crucial inventory when available and shifting support behind lines where stock is available. Ultimately, this supply/demand imbalance is a good problem to have in the current environment, and only reinforces our pricing power as we look to take an additional round of mid single-digit pricing in late winter, following the mid single-digit pricing we executed this past quarter. It is also important to stress that despite these component constraints, we delivered Q1 revenues ahead of guidance and strong gross margin expansion in the quarter. We’re also cognizant of investor concerns about energy supply in Europe and our manufacturing base there. Here, we have developed business continuity plans and dual sourcing initiatives, to protect our inputs. At the same time, due to the low energy usage in our own manufacturing plants, we see limited risk of an energy-related business disruption. And finally, on inflation, our gross margin outlook remains unchanged as we continue to estimate COGS inflation of approximately 2% of revenues in FY 2023, to be offset by pricing, mix benefits, and savings. Let me now provide an update on our All-in-to-Win program. In Q1, we delivered savings of over $20 million, driven by a combination of fixed cost and gross margin initiatives. And based on the clear stream of projects ramping up over the course of the year, we continue to expect total FY 2023 savings of $170 million. The projects that we expect to ramp up and contribute more significantly in Q2 through Q4 include: material value analysis, as we continue to streamline sourcing and variability in non-value-added components. Optimization in trade spend and A&CP. Improvement in excess & obsolescence charges, as we continue to improve our forecasting and planning processes. Now moving to a recap of our marketing investments. During Q1, A&CP investments represented over 24% of sales, which is down slightly from last year. Importantly, our working media at constant currency grew year-on-year and was relatively stable as a percentage of sales. We targeted our media investments behind our most recent and successful innovations including the new Burberry Hero EDP, Gucci Flora Gorgeous Jasmine, Hugo Boss Bottled Parfum in Prestige as well as CoverGirl Simply Ageless innovation bundle and Rimmel Thrillseeker mascara in Consumer Beauty. We also continued investment behind our whitespace areas of Prestige makeup and skincare. Now, with Q2 underway, we expect a meaningful ramp-up in our A&CP spending during this critical sell-out period. And for the full fiscal 2023, we continue to expect our A&CP investments to be in the high-20% level of sales. Now moving to our profit delivery for the quarter. Our Q1 adjusted operating income grew a robust 24% to $250 million, driving a 340 basis point improvement in our adjusted operating margin to 18%. Importantly, both divisions delivered over 300 basis points of operating margin Improvement. On adjusted EBITDA, we delivered 11% growth to $308 million. As a result, our adjusted EBITDA margin was 22.2%, or up 190 basis points versus last year. Our profit improvement in the quarter was driven by our solid revenue growth, gross margin expansion, fixed cost leverage, as well as the slight decline in A&CP. Now moving to our adjusted EPS, which includes the following drivers. Adjusted EBITDA in Q1 of $308 million, depreciation of $58 million, net interest of $66 million, income tax of $44 million, representing an adjusted effective tax rate of 29.6%; and diluted share count of 859 million. As a result, our Q1 diluted adjusted EPS was $0.11, an improvement of $0.03 versus last year. It is important to highlight that this adjusted EPS of $0.11 included a negative impact of $0.04 from the equity swap. Recall, we previously entered into a total return swap transaction with several bank counterparties, effectively locking in an attractive share price below $7.50 for a targeted $200 million share buyback program during calendar 2024. Beginning in Q1, the non-cash, mechanical mark-to-market on this total return swap has to be included in our adjusted net income and EPS calculation, flowing into the other income line. These mark-to-market EPS impacts will continue to factor into our net income and EPS calculations moving forward. Looking ahead to Q2 and FY 2023, let me provide some additional details related to our current expectations for certain drivers of our adjusted EPS. First, we continue to expect depreciation to be in the mid $200 million. Second, we continue to expect net interest for the year to also be in the mid $200 million, reflecting the fact that the majority of our debt is fixed and we have hedging in place on most of the remainder. Third, we continue to expect an adjusted effective tax rate for fiscal 2023 in the high 20%, assuming no significant changes in tax regulations; and finally on FY 2023 share count, based on the GAAP accounting provisions around anti-dilution, we now expect diluted shares consistent with Q1 at $860 million to $870 million. Moving to our free cash flow. We generated $88 million of free cash flow in the quarter, consistent with our expectations. The quarterly results reflected the timing of certain CapEx and working capital payments, as well as the increase in inventory as we build stock in certain components as part of our efforts to mitigate the global component shortages we discussed earlier. For the full year, we continue to expect strong free cash flow generation, though as we indicated on the last call, we would expect the cash flow to be a little lower than FY 2022 due to one-time working capital benefits which helped FY 2022 and won’t repeat in FY 2023. Our intent is to continue to use our strong free cash flow to steadily reduce our debt and advance our deleveraging agenda. Moving to our capital structure. We ended Q1 with net debt of just under $4.2 billion, an improvement of roughly $100 million from Q4, driven by our free cash flow. As a result, our leverage at the end of the quarter was below 4.5 times, down from 4.7 times at the end of Q4. And with Q2 as our seasonally strongest free cash flow quarter, we remain fully on-track to bring our leverage down towards four times by the end of calendar 2022. In the quarter, the book value of our 26% stake in Wella increased to approximately $1billion, reflecting Wella’s acquisition of a high-growth haircare brand. Factoring in our Wella stake, we ended the quarter with economic net debt of approximately $3.2 billion. I would also like to take a minute to address the rising, and seemingly uncertain, interest rate environment and Coty’s sensitivity to this. Approximately two third of our debt is fixed rate notes, and for the remaining variable debt, we have hedging in place, such that 90% of our debt is fixed, supporting our unchanged expectation for fiscal 2023 interest expense in the mid $200. Looking beyond fiscal 2023, our strong continued progress on deleveraging and debt paydown support our expectation for our interest expense to steadily decline in the coming years, despite the rising interest rate environment. I will now hand it back to Sue to review our strategic progress in the quarter.

Thank you Laurent. As we have continued to update you quarter after quarter, in Q1 we made further progress on our six strategic pillars. Starting with our first strategic pillar, stabilizing and growing our Consumer Beauty business. Over the past quarter, the global mass beauty market grew in the low single digits year-on-year, broadly in line with historical trends. Against this backdrop, our successful repositioning of many of our key brands has allowed us to continue to outperform the market, with Coty’s sell-out growing in the mid-to-high single digits. In total, this marks the tenth consecutive month of market share gains for our Consumer Beauty business, both in color cosmetics and overall mass beauty. Our goal is to continue to drive market share momentum, even as we start lapping some of these improvements. We’ve seen particularly strong market share momentum globally in Max Factor and in Rimmel. In fact for Rimmel, the recent TikTok-driven launch of its Thrillseeker mascara – whose ad campaign you can see here – has quickly become the number 2 mascara in the UK market, based on the latest market data, and even more impressively, the biggest mascara launch ever for the Rimmel brand. While our deliberately sequenced relaunch calendar for our Consumer Beauty brands began with our cosmetics brands, we have now begun the relaunch of our Top 5 Consumer Beauty brand, adidas. In keeping with the fashion brand’s focus on uniting premium athletics and sustainability, and Coty’s focus on leading the skinification trend, we have launched a new premium bodycare range for adidas called Active Skin & Mind. This skinified bodycare range includes clean and vegan formulas, packed in bottles that are 100% recycled, recyclable, and refillable, representing a true leap forward in our sustainability agenda. Also, as part of our bodycare portfolio, our leading Brazilian brand Monange has also brought market-leading innovation. During Q1, Monange launched the first-to-market, patent-pending non-silicone deodorant, which is already seeing great success in the market. Our second key Brazilian bodycare brand, Bozzano, was also fueling momentum with the launch of a long-lasting, clinical deodorant line. As a result of these strong brand launches and supporting media activation, our overall bodycare like-for-like sales in Q1 grew over 25%. While our bodycare business, including these premium launches, carry gross margins below the corporate average, we are very pleased with both the revenue growth and strong profit contribution that this business is bringing, particularly as we continue to invest behind key strategic initiatives such as skincare. Let’s take a look now at the new brand campaign for adidas. [Video Presentation] Turning now to our second pillar, focused on accelerating our luxury booming fragrance business. What is quite clear is that the global prestige fragrance market shows continues to boom, as we continue to see the “fragrance index” in full effect. After lapping growth of over 20% in fiscal 2022, and even as the macro backdrop remains difficult, the market data confirms that demand for prestige fragrances continues to grow in the high single digits. This represents over 25% growth versus 2019 and in markets like the U.S., the prestige fragrance market is over 40% higher than pre-COVID levels, supported by the structural drivers that we have been discussing for some time, including increased usage by Gen

Good morning, ladies and gentlemen. My name is Gretchen, and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's First Quarter Fiscal 2023 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, November 8, 2022. Please note that earlier this morning, to Coty has 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 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. With that we will now open for questions.

[Operator Instructions] And we'll take our first question from Ashley Helgans from Jefferies.

Hi, good morning and thanks for taking our questions and congrats on the quarter. So to start, it was nice to see China return to growth. Can you just talk about some of the drivers in the region and your expectations for recovery for the balance of the fiscal year? Thanks.

Yes, good morning, Ashley. This is Sue speaking. So, yes, China is slightly positive, which is in a way a good news for us, even if this region of the world and this country is only 4% of our net revenue. So in a way, we are protected against all these lockdowns that we've been seeing since a few months now that are continuing and that we do not see improving in the coming quarter and probably quarters, if I may. But at the same time, starting from a small base, Coty is seeing a lot of potential upside in this country. Of course, with the fragrance business, again, I'd love to remind everyone that this business in this country is only 3% penetration. And our brands, if you think about Chloe, that's the number one niche brand at Sephora, Gucci, Burberry, Calvin Klein, Hugo Boss, all these brands that are doing fabulously well globally are growth engines for the near future and, I would say, far future for the company, of course, as you can imagine. On makeup, again, we started with the Gucci makeup and Burberry makeup, and both brands had a fantastic start before lockdowns. And this is the category, I would say, that the most impacted by the recent series of lockdowns. And last but not least, skin care, 70% of the Chinese market of beauty, huge, huge potential for the company as you can imagine. And there we are starting with the first brand, which is Lancaster. As you see it during the presentation, Lancaster in Hainan, so its sales multiplied by five year-on-year, which is a great demonstration of the desirability for the brand towards the most demanding Chinese consumers. This is one. Second, Lancaster, which is at Sephora as a niche exclusive brand until recently is the number one niche skin care brand at Sephora in China. And this gives us a great confidence specifically after the Investors Day that we've done one month and a half ago to start with this brand as the first, I would say, foray into the big, huge skin care market in China. So this is the way I would describe the situation in terms of how we are in a way doing quite okay in China despite all these very difficult environments.

Great. Thanks and if I could just throw in one more. We're starting to hear about some trade down in some beauty categories. We're curious if you've seen any of these trends within your consumer division, and overall expectations for the consumer division, if we do go into a recession.

Yes, that's a good question that we hear a lot, and honestly, we don't see any kind of trade down or slow down, by the way. No trade down at all. If you see our prestige division, in a way, we are running after supply because the market is booming. This is what we love to call the fragrance index. Because our innovations are doing fantastically well, and we see it also in the way retailers are ordering from us, including sometimes ordering in advance during Q1 for the Q2 season. So on this part, we don't see this. And the second element is that our consumer beauty business, as you've seen in the figures, plus 12% like-for-like is doing also fantastically well. And this is thanks to the great work that the teams at Coty have done behind the different brands, making sure to take these brands from large heritage brand that people trust into still the same qualities. But on top of this, what we call cool brands, and I'd love to talk about smart shopping also. A lot of consumers are also shopping there saying this brand is a cool brand and it proposes products that are the quality of other products that are more expensive. And therefore, you can see that in both divisions, the premiumized beauty, be it the desirable one from luxury or the cool smart purchase in consumer beauty. These two premiumized parts of the business are doing great, and this is what explains in a way the results that you see across both divisions.

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

Hi, good morning and thank you so much for the question. On the mass beauty side, some of your competitors are gaining shelf-space at key retailers domestically such as Walmart and Target and the drug stores. Just as you're continuing to stabilize and gain market share, can you talk a bit about your distribution of brands such as CoverGirl, and are you happy with the current shelf-space of the brand? And also, is there any opportunity to gain shelf-space from struggling brands such as Revlon? Thanks.

Yes. Hi, Anna. Good morning. So thank you for your question. Again, when it comes to the shelf resets for the consumer beauty division, I would say that for spring 2023, which is the next, I would say, slot, we expect to maintain a stable chat space for our consumer beauty business globally. We also expect at the same time pockets on incremental shelf-space gains particularly in the UK, driven by the outstanding success behind Rimmel, Kind & Free, new vegan and sustainable line of makeup and mascaras and powders. Also behind Sally Hansen that's seen in many, many markets, as you know, the undisputed leader of the nail business. And therefore, many countries are now giving more space to Sally Hansen. And last but not least, Bourjois, which we have very successfully repositioned recently. Remember, Bourjois has the number one selling mascara in a very competitive country like France. And Bourjois is reentering several markets including recently UK, where the brand is exclusive to Superdrug and doing very, very well over there. We also expect incremental gains for CoverGirl in a mix of tracked and non-tracked channels. So this is, I would say, the overall picture that I can share with you when it comes to the shelf-space future movements.

Thanks very much.

Our next question comes from Nik Modi from RBC Capital.

Yes, hi. Good morning everyone.

Good morning, Nik.

Two questions. One is just more of a housekeeping item. I'm trying to understand what's actually happening with glass. I mean if you can just provide what's actually the derivation of the supply shortages? And then the bigger picture question, Sue, I love your kind of big picture thoughts on this is it looks like the fragrance category is shifting away from gifting and more towards kind of self consumption, at least from what we can see. I'm just curious how – is that certainly – do you agree with that statement, number one; and how does that change your strategy as you move forward to kind of keep the momentum going?

Yes, Nik, thank you so much, these are two indeed very important questions that we are asking ourselves on a daily basis. And let me share with you the way we see it at Coty. On glass, this is quite factual. In fact, it's really about the reduced number of suppliers doing quality glass and they are not a lot and mainly European-based. So this is what explains, in fact, the tension that we are seeing today. And this tension in fact is exacerbated by the fragrance index, in fact. So – and for Coty by the big success behind our innovations from 2021. This is, I would say, very simply said, the overall picture, small number of suppliers, booming category worldwide and booming innovations at Coty far above our best expectations from last year. So this is what explains this, I would say, tension around glass. When it comes to the fragrance business and shifting away from gifting to self consumption, this is absolutely true, and this is great in a way for our business because as you can imagine our self consumption of fragrances is much more dilutive for us than gift sets, which are dilutive in general. So that's a great, I would say, sign of a category whose penetration is increasing. So we are less into I would say the classical consumption of gifting, which people do automatically year-over-year. And we are more into I’m buying something for me, I’m buying something if I am a young Gen

Our next question comes from Andrea Teixeira from JPMorgan.

This is Savanna from speaking on behalf of Andrea. I was wondering with about like low single-digit pricing in the beginning of calendar year 2022 mid single pricing across the portfolio and like late summer and another round of like planned low single-digit price increases for fiscal quarter three, are you assuming volumes will be declining in the current guidance? Thank you.

Absolutely. So I mean, it’s important to remind that we anticipated, and this is something that we built more than a year ago, we built a pricing office exactly to be able, indeed, to implement price increase. And this was, of course, absolutely needed to mitigate to offset inflation. And you’ve seen tangible results as we are growing gross margin by 70 basis points. So indeed, we did low – mid-single digit recently, and we continue. We are not seeing any volume decline. And definitely, when we are doing this price increase, we do it at a very – in a very granular manner. And we are taking opportunity also of the great momentum that we’re having on our brands and the support that we are putting on our brands and also great innovations. So it’s really part of all these equations that we are doing. And the tangible result is that our volumes, fragrance are growing and volumes in Consumer Beauty are growing.

Thank you.

Your next question comes from Olivia Tong from Raymond James.

Good morning. Thank you. Wanted to talk a little bit about the shortage hitting fragrance and where you stand relative to the past in terms of the glass quality and what have you. And to what extent you think it could impact holiday, your ability to supply gift sets during what is obviously an important period continue. Thanks.

Hi Olivia. Definitely. So, we confirm our guidance, 6% to 8%. So, you see that there is no change on our guidance either for H1, 6% to 8%, excluding Russia, of full year. We confirm the 6% to 8% growth, excluding Russia. So and this is following a strong Q1, as you – we just published. The demand is very strong. At the same time, we are monitoring very closely all the tensions that we are facing on components. Fragrance of, yes, is the number one tension that we are seeing, but we are seeing also as all our peers also tension on caps and to some extent, on tension [ph]. So, we are monitoring tightly. But despite this tension on components, we are confirming our guidance H1 this year.

Got it. Thank you. Can you give any color into what you think the impact of the glass shortage had on the results this quarter? And then broadly, just in terms of SG&A, I mean, this is the best performance, the lowest SG&A we’ve seen in several years, even prior to COVID. So, can you just talk about the SG&A opportunity in front of you, what’s driving that improvement this quarter, particularly against what’s arguably a bit more of a challenging comp for you guys? The comps obviously get a fair bit easier as the year progresses. So just if you could talk a little bit about the SG&A opportunity in front of you, that would be fantastic. Thank you so much.

Yes, good morning Olivia, I’m going to take the first part, which is around the impact of the shortages on the results in Q1. Again, our mass service level is in the low 90s, which is quite good compared to what we are seeing around us. On Prestige, it’s roughly under 80%, which is not good, if I may say, but in the same level of our peer set, so we’re not worse than the others, but we’re not better than the others. But I can just give you how much the potential of our prestige quarter would have been if we didn’t face this kind of, I would say, limitations. The sellout for Prestige in the quarter was in the low teens. And the performance of the division was 7% like-for-like, excluding Russia. This gives you an idea of how strong is our fragrance business at the moment.

So Olivia, on your second question on SG&A, there is one specific element we are willing to consider, which is Forex. As I highlighted during my presentation and a few times, we have, of course, a very significant Forex headwind on top line, and we say it’s about 6% to 8%. But on the P&L side, I share also that we have a natural hedging in Coty because we have cost of goods, which are sitting in Europe. We have factories in Europe, but it’s also the case on A&CP and SG&A because we have teams in Europe. So to be more specific on SG&A. We have HQ in Amsterdam. We have also a team in Paris and we have also a sizable team in UK. So there is a mechanical effect of currency, which is lowering SG&A in reporting numbers dollar. Having said that. We are – we keep working, of course, on SG&A reduction. This is completely part of our all-in to win agenda. So, we keep this work. We continue. And definitely, we amplify and we have some additional initiatives, especially on support function to continue how to have nimble organization within Coty and to manage our equation.

Our next question comes from Steve Powers from Deutsche Bank.

Yes. Hey, good morning. Thank you. Just on the full year reaffirmation of guidance, it sounds like you’ve assumed more or less current consumer demand conditions remain intact. I guess within that, I’m wondering if you have any allowances embedded for even modest demand slowing or allowances for retailers to potentially pull back in inventory. If they foresee potential slowing or alternatively, what levers you have at your disposable should those conditions arise? Thank you.

Hi, Steve. So indeed, we confirm our full year guidance supplying 6% to 8% and the EBITDA guidance $955 million to $965 million, and obviously we confirm our roadmap towards four times leverage ratio by end of calendar 2022. So indeed, we are, as Sue shared and mentioned, and you see confirmation the numbers. We are not seeing any slowdown in the demand and even in Q1 as we just shared, I mean, the demand and the sell out is even stronger. So definitely this is – there is good momentum on Consumer Beauty and Prestige. We are not seeing any slowdown and all the plans that we have in place that give us full confidence about this momentum and this dynamic. At the same time, definitely, we are – I am monitoring, we are monitoring really all the actions that we have been order to win giving us also some munitions to manage and to mitigate the equation. So this is really the way we monitor. And also to – on your specific question about retailers destocking and so on. What we are seeing, definitely we are not seeing any destocking. I mean, even in a context of supply chain tension, we are seeing more, okay, some need really to fulfill and really to push for selling. This is what we are seeing in Q1 and we see currently.

Okay. That’s very helpful. And then if I could, I have to ask on Gucci because while you and Karen [ph] at this point have both acknowledged that license has a number of years left remaining. Karen, as I’m sure, continues to talk pretty openly about work they’re doing to potentially take that license, that business back in-house over time, even if years down the road. And I guess I’m just wondering if there’s anything you can additionally offer on the current spanning of that relationship, whether renewal ultimately is at your discretion or Karen’s and if it’s at theirs, the question I keep getting from investors is how that impacts your willingness to continually invest in a franchise that has been central to your ambitions, especially in Prestige makeup, et cetera. With the risk that portfolio may one day revert back to the original brand owner. Just how you’re thinking about that? Thank you.

Yes, thank you, Steve, for this question. Again, first of all, again, what we have heard is that Beauty is a very attractive category, and this we see it of course even more today. Given what’s happening around us, and specifically the fragrance index. And it makes sense that others would do some initial work on that space. What we have heard has nothing to do with Gucci, if I’m not wrong. We hold the license for the long term as confirmed by carrying themselves, and there is also no mechanism for an early exit. The other thing I want to share with you is that this is one of the growth and genes of the company. It’s certainly not the only one. I can tell you that the success we are seeing behind our Prestige division is clearly widespread across the different brands and every quarter we have a new brand thanks to the work we are doing. That’s joining the pack of growth drivers into the company without even talking about skincare. That’s the biggest upside potential for the company, I would say in the coming – in coming years. Last but not least, I can tell you that the relationship between us and Gucci is fantastic. I have to tell you the results we got behind Gucci Flora Gorgeous Gardenia last year and Gorgeous Jasmine this year are unprecedented, as you’ve seen it during the presentation today. And I was last week in Singapore and together with Marco Bizzari, and we made the opening of a beautiful, fantastic new boutique in the middle of Singapore.

Our next question comes from Rob Ottenstein from Evercore.

Great. Thank you very much. And apologies if you covered this morning. But can – you say you’re not really seeing any weakness. Can you kind of bear that down into Europe? Given, everything we hear right about increasingly strained consumer maybe touch on a little bit more on Max Factor in Rimmel, what you’re seeing there? And then also if you can touch on travel retail, your initiatives in travel retail, everywhere I travel, I do absolutely see more and more of your brands. So maybe talk a little bit about that? And how they see the December quarter outside of Hainan in terms of increased traveling and the impact on your business. Thanks.

Yes, good morning, Rob. Thank you for your question again. I confirmed that we are not seeing any weakness including in EMEA. You’ve seen that EMEA is growing double digits. Part of it is of course travel retail that’s doing fantastically well. And I come back on this part later in my answer. But on the fragrance part, Europe is doing also very well. Our brands are doing very well. Recently, we even sold France that used to be an entry prestige market, mainly moving towards premium, ultra-premium/luxury fragrances, which is a first and says a lot about where consumers are going, including in the biggest country in Europe, which is France. When it comes to our Consumer Beauty business you’re right to point out that Max Factor in Rimmel, these are the two brands that are in a way strongly taking our market share up. Rimmel, again, we’ve presented to you the plan of Rimmel, which was first to lead on clean beauty, which is done fantastically well, thanks to Kind & Free, which is today representing more or less 10% of the net revenues of the brand, and a big success in many, many parts around the world, opening the brand to the younger generation in a massive way I have to say. And remember I spoke to you about how we are learning quickly how to create products that can become TikTok sensations and Thrillseeker the latest mascara from Rimmel is exactly the embodiment of all of this. It was created with TikTok in mind by TikTokers that we have in-house and with TikToker in part of the TV commercial, as you’ve seen it a few minutes ago. And the result is that Thrill Seeker is the second mascara of the UK market and the biggest mascara launch for Rimmel since many, many years. On Max Factor, the brand is gaining market share consistently and globally. And this is thanks to a strategy that’s very well developed between base business and new innovation. And this brand once it has been repositioned towards late millennials and Gen

Your next question comes from Chris Carey from Wells Fargo.

Hi, good morning. Can you just expand on what you mean by modest gross margin expansion in Q2 and for the full year? And on just some of the puts and takes that we should be thinking about as far as tailwinds and headwinds?

Hi Chris, I mean, first of all, I mean, as we are very proud of the results we delivered in Q1 with 70 basis point gross margin expansion. And this is definitely a testament to all the actions that we have implemented. So let me give you a little more color, and this is what you’re calling tailwinds and the headwinds. So definitely, the headwind is inflation. It’s about two points net revenue. It’s in line with what we shared last quarter. So there are some positive and negative but all in all, this is quite in line. So how we mitigate and we more than offset this inflation. We continue the work on cost reduction, cost of goods reduction. A clear example is we announced more than a year ago, the closure of factory, the Prestige factory in Germany. This is now implemented, and this is a way to increase utilization rate of fragrance. And this is definitely helping for fixed cost absorption and helping gross margin. We are working also on market value analysis, so it’s really to reduce to simplify components, platforming of our products. And this is a powerful way also to reduce costs and to improve efficiency. So this is really on the cost side. There is a big, big element, which is mix. We continue. This is what we kicked off two years ago and all the initiatives, all the work we are doing is always focused on mix and the gross margin accretive. This is valid for Prestige. This is also valid within consumer beauty. All the new initiatives that we are launching. Sometimes some of these initiatives are even gross margin equivalent to Prestige. And number three, which is absolutely key is pricing. We did a low single-digit beginning calendar 2022. We just implemented a mid-single-digit price increase during summer September. And we are implementing a new price increase mid-single digit also beginning calendar 2023. So you see that all these elements, thanks to all these elements, we are able to confirm modest gross margin expansion within fiscal 2023.

Our next question comes from Lauren Lieberman from Barclays.

Great. Thanks. Good morning. I know in the press release you’d mentioned that, I think the 100th month for market share gains for CoverGirl. But I was hoping we can get a little bit of an update on performance there, some additional thoughts on skin care launch, how that’s progressing or really how you’ll look to migrate that to kind of even stronger performance in 2023. So a lot of the prepared remarks to focus on some of the other brands. Thanks.

Good morning, Lauren. Thank you for your question around On CoverGirl, so on CoverGirl it’s interesting to give you, I would say, the overall picture and the way I see it. Remember, when we started to talk about the brand, it was somewhere around September 2020. We were – we’re listing the difficulties this brand has been facing for years and years and years. And the work that we have done at Coty since September 2020 until very recently was to reposition the brand to reinforce the brand equity, to make this brand the undisputed leading brand when it comes to selling clean, sustainable, healthy beauty to American people. And this has been delivering fantastic results, as you’ve seen it until recently. And then we got into the constraint – supply constraints when it comes to the Lash Blast line, which is big, big, big net revenue maker into CoverGirl, which we went out, let’s say, recently, just at the end of the summer and recently, we are back in stock with CoverGirl – with the Lash Blast, sorry. In the meantime, what we’ve done is, of course, we’ve continued to invest behind the brand, and we invested behind a younger line called Exhibitionist mascara, which is doing fantastically well, by the way, strong market share, et cetera. But this line is not having the same halo effect on the overall CoverGirl market share as Lash Blast used to have. So what we are doing now is now that we solve the supply constraints, we still have a few little ones here and there. But let’s say that overall, these are behind us. We are fine-tuning the media mix behind CoverGirl, which is very, very specific. And there, it’s really test, learn, we test, learn, implement. And we understood what needs to be done. So hopefully by Q3 and already starting a little bit now, we are playing the playbook of Thrill Seeker, leveraging the power of TikTok behind Lash Blast line. But the reason, I would say, come back of Lash Blast into media will happen somewhere around the next quarter. So that’s overall, the big picture I can share with you around CoverGirl. The big news and the good news is that all the fundamentals such as the demand, the penetration among Gen

And our last question comes from Carla Casella from JPMorgan.

Hi, I had a question on the debt structure. You’ve got a lot of debt maturing in 2025 and 2026, so I know it’s not imminent that you need to do anything. And the rate markets are not great. But any sense for how far in advance the maturities you feel, you would need to address or lengthen your debt structure?

So first of all, as you rightly say, the Carla is we made the right things over the last two years is to extend debt maturity to 2025 and 2026. So we have many years to go. And we will continue to pay down our debt. And the clear confirmation is that our deleveraging agenda is perfectly on track, delivering $400 million free cash flow at a minimum earlier until 2025. And on top of this, we have, as you know, the Wella stake with a value, which is $1 billion at a minimum. So all these elements, with all these elements, I mean we are in full confidence in our deleveraging agenda with debt maturity 2025, 2026 we are in a very good place.

Yes, I'm sorry, Carla, please go.

I’ve just one business follow-up. You’re doing so well in the Prestige cosmetics, you called out Gucci and Burberry and Kylie. What percentage of sales are those today?

This part of the business is in the low single digits. And so it’s still a small portion of our business, growing good, but its small portion of the business.

Okay, great. Thank you.

Thank you, Carla. Thank you, Laurent. So thank you, everyone. I would like to close this Q&A session with some closing remarks, if you allow me. The first one is that again, we have shown how much we are all about consistency since nine quarters in a row now, which is a very important element for us and for you, of course. The second thing is that we will start – you will start to hear us talking about the leverage that’s going towards three times by the end of next calendar year. This is a big step change for Coty as a company. And the third element as a closing remark is the one of ESG. You’ve seen recently because we’ve been questioned a lot by a lot of you around this element. You’ve seen that the company has been rated by Sustainalytics in the top quartile of personal products company, which is great news, but this is just the beginning of what this company is doing around the sustainability and ESG topic. So I do believe that again and again, this is the best and the right moment to enter Coty’s investor base. Thank you very much for your attention.