COTY - NYSE

Good morning and good afternoon, everyone. This is Olga Levinzon, Coty's Senior Vice President of Investor Relations. Thank you for joining us today for the prepared remarks portion of Coty's Fourth Quarter and Fiscal 2023 Earnings. Later this morning, at approximately 8:15 a.m. eastern time, 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.

Thank you, Olga. Welcome everyone. I am very happy to share that today's fiscal '23 results mark the third consecutive year of Coty delivering strong financial, operational and strategic performance. This is also the 12th consecutive quarter of the company reporting results inline to ahead of expectations. These accomplishments are the result of the focus and agility across the full Coty organization as we continue to amplify our strengths, adjust to evolving market conditions, and capture new opportunities. In fact, our Q4 and fiscal '23 results are again amongst the best in our competitive set, speaking to the power of the Coty business. Looking externally, beauty demand remains resilient across our key categories and geographies, in the midst of the current macroeconomic uncertainty, with no signs of trade-down, while the famous fragrance index we have been discussing for over a year shows no sign of slowing. In fact, the beauty category continues to be a standout in key markets like the U.S., as the only category to grow volumes in the last six months amongst all CPG and general merchandise categories, speaking to the beauty industry's ability to meet consumers' emotional needs. This fully reaffirms the message that we have been conveying for some time: that Coty and our peers have a key role to play in fueling consumer excitement and generating consumer demand by launching innovative and desirable products supported by meaningful storytelling as well as clean and sustainable formulations and packages. As a result, we continue to target growing our sales ahead of the beauty market, growing our profit ahead of sales, steadily deleveraging our balance sheet, and positioning Coty to continue to succeed as a beauty powerhouse with still significant untapped potential. Let me now summarize the key messages from our results. First, we once again delivered revenue growth ahead of both expectations and raised guidance, fueled by the strong beauty demand and successful key brand initiatives in both divisions. Our Q4 like-for-like revenues grew 17%, ahead of our updated guidance of 12% to 15% and outlook at the start of the quarter of 10%. We saw particularly strong sales momentum in Prestige coupled with double-digit growth in Consumer Beauty. Our full year revenues grew 12% on a core like-for-like basis, with double-digit growth in both divisions, marking the second consecutive year of double-digit growth for the company. Second, our fiscal '23 profits were ahead of guidance, with adjusted operating income growing 20% year-on-year and adjusted EBITDA growing 7%, despite strong reinvestments in our business and significant ForEx headwinds of over $70 million for the year. Third, we continued to execute and make progress across our strategic growth pillars. Finally, our fiscal '24 outlook is in line to ahead of our medium-term growth algorithm, as we are targeting like-for-like growth at the top end of our medium term 6% to 8% range, moderate gross and EBITDA margin expansion, and double-digit growth in our adjusted EPS. And 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, of course, our outlook. Starting now with our revenue performance. As you can see, our Q4 like-for-like revenues grew 17%, well ahead of raised guidance. This brings our fiscal year-to-date core like-for-like revenue growth to 12%, well ahead of our original 6% to 8% like-for-like growth guidance, and the second consecutive year of double-digit like-for-like growth for the company. In Q4, our core Prestige business grew 21% like-for-like, resulting in 13% core like-for-like growth in fiscal '23. The strong sales growth acceleration in Q4 reflected double-digit growth across Americas, EMEA and the Travel Retail channel, and a couple of points of benefit from the China low comparison last year. We are continuing to see robust fragrance demand across all key markets. At the same time, retailer inventories at the end of Q4 are at healthy levels, particularly as we are now entering the stronger seasonal demand period. In Consumer Beauty, core revenues grew 10% like-for-like, bringing fiscal '23 core like-for-like growth to 11%. Our Q4 Consumer Beauty growth came from solid growth in color cosmetics and continued strong momentum in our Brazilian brands. Geographically speaking, like-for-like revenues continued to grow in all regions for the quarter and for the year. Americas revenues grew 13% like-for-like in Q4 and 10% in fiscal '23, with double-digit growth in nearly every market and in regional Travel Retail. EMEA, core like-for-like sales grew 13% in both Q4 and fiscal '23. We saw double-digit growth across most markets and in Travel Retail. Asia Pacific revenues grew 40% like-for-like in Q4 and 13% in fiscal '23, with a robust rebound in China and Hainan, particularly given the depressed base period comparison, as well as strong momentum in broader Asia and local Travel Retail. A critical part of our strategy is our unwavering focus on driving balanced growth. Growth in Q4 and fiscal '23 was once again supported by volumes, price and mix. In Q4, we saw low single-digit core volume growth and mid-teens expansions from the combination of price and mix. For fiscal '23, core volumes also grew in the low single-digits, while price and mix grew approximately 10%. Our intent in the coming quarters and years is to continue to drive a balanced agenda, with our top-line growth supported by a combination of volumes, pricing and mix. I will now hand the call over to Laurent to take you through our financial results.

Thank you, Sue. I am pleased to say that we continued to deliver strong financial performance, with the Q4 results marking the 12th consecutive quarter of results in-line to ahead of expectations. Let's start with an update on how we are navigating the complexities of global supply and inflation. Building on the strong progress made last quarter in improving our Prestige service levels through expanded dual-sourcing, detailed supply and demand planning, and building of safety stock, we again improved in Q4, reaching a mid-90s service level exiting the quarter. We are confident that we'll be able to meet fiscal '24 demand, including during the peak holiday period. Turning to the inflationary backdrop. In the fourth quarter, COGS inflation was approximately 2.1% of sales. For the full year, COGS inflation was approximately 2% of revenues. Looking to fiscal '24, while cost inflation on certain commodities such as paper and energy are easing, costs on other materials and components are still growing in large part due to labor In the first half of fiscal '24, we continue to expect COGS inflation to remain elevated, driven by the combination of delayed inflation impact based on our procurement negotiations with suppliers, as well as the capitalization of the higher COGS we've incurred in recent months, which gets released to the P&L roughly four months later. As these two factors are more timing related and the underlying inflation drivers are clearly easing, we expect a significant moderation in COGS inflation in the second half of fiscal '24. Our execution on savings, strategic revenue management and pricing is helping us to balance this inflationary impact. We are currently in the process of another round of pricing in the first quarter of fiscal '24, as we continue our portfolio transition to cleaner and more sustainable products, which in turn also drives category value growth, while also closing pricing gaps versus our competition, particularly in Consumer Beauty. I will now provide an update on our All-in-to-Win program. In Q4, we delivered savings of approximately $50 million, bringing our fiscal year '23 savings to approximately $180 million, ahead of our target of approximately $170 million in fiscal year '23. Due to our strong project pipeline, we are increasing our fiscal year '24 savings estimate to over $100 million, up from our previous target of approximately $90 million. Savings in fiscal year '24 will be driven by material value analysis, platforming savings, and structural A&CP savings amongst other projects. We continue to target $75 million of savings in fiscal year '25, reaffirming the savings target announced in Q2. In sum, having delivered over $600 million of savings life-to-date, we continue to optimize all of our processes and expenditures, thereby positioning Coty to be both flexible and fully equipped to invest in our strategic priorities And importantly, we are now in phase two of our transformation, as we put in place more enablers for sustainable growth and business acceleration across the brands and markets, supplementing our savings initiatives, which fuel profit expansion and reinvestment. Moving to our gross margin performance. Q4 adjusted gross margin of 62.8% increased by 70 basis points from last year, bringing the year-to-date adjusted gross margin to 63.9%, which is up 20 basis points year-on-year and up by a very significant 390 basis points versus two years ago. Our Q4 gross margin increase was driven by: supply chain productivity; the positive benefits from mix; and additional price increases executed at the end of Q3. These benefits to gross margin were partially offset by COGS inflation of approximately 210 basis points of sales in Q4. Despite inflation that was prevalent this year, we delivered gross margin expansion in both Q4 and fiscal year '23. Going forward, we will continue executing on our multi-pronged, multi-year gross margin attack plan, as we drive our gross margins to the mid-60%-s and beyond. I'd like to take a moment to discuss our investments in research and development. As we have transformed our business over the last three years, steadily executing on our six pillar strategy, we have been steadily reinvesting in our organizational capabilities, including R&D. In fact, our R&D investment is close to 10% higher than it was two years ago, with investments behind skincare growing substantially above these levels. We expect to step change our R&D investments in the coming years, particularly behind skincare, as we pursue our ambition to double our skincare revenues in the next few years and position skincare as a key pillar of Coty's business model. Let me now walk you through our marketing investments. In Q4, A&CP investments represented approximately 28% of sales, stable with Q3 levels and with the prior year, as we continued to support our key initiatives. This brings the fiscal year '23 A&CP level to approximately 27%, in line with our expectations and relatively stable year-over-year. As with prior quarters, our marketing spend was concentrated behind key innovations in Prestige and Consumer Beauty, as well as whitespace opportunities. Moving to our profit delivery for the quarter. Our Q4 adjusted operating income grew 61% to $105 million, with our fiscal '23 operating income expanding a strong 20% year-on-year. This delivery was particularly impressive given strong ForEx headwinds, which negatively impacted our fiscal year '23 adjusted EBITDA by over $70 million. So, Prestige and Consumer Beauty segments delivered double-digit adjusted operating income growth in Q4 and fiscal '23, with margin improvement in both businesses. As a result, our Q4 adjusted operating margin grew 220 basis points year-over-year, with fiscal year '23 margin up strongly by 170 basis points to 13.3%. Importantly, we continue to expect strong income growth and margin expansion going forward. Our Q4 adjusted EBITDA grew 25% year-over year to $165 million, with 7% growth in fiscal year '23 to $973 million. As a result, our Q4 adjusted EBITDA margin increased 90 basis points year-over year, bringing our fiscal year '23 adjusted EBITDA margin to 17.5%, up 40 basis points versus last year. Now turning to our adjusted EPS, where we reported strong momentum in the quarter. Our Q4 diluted adjusted EPS was $0.01, up $0.02 year-over-year driven by a much stronger Q4 adjusted operating income, partially offset by higher tax and interest expense. Specifically, the Q4 interest expense stepped up sequentially vs. Q3, driven by a higher cost of debt in the rising interest rate environment, as well as a $5 million increase in ForEx costs. There was no material net impact from the mark-to-market on the equity swap in the quarter. Our fiscal year '23 diluted adjusted EPS was $0.53, up 89% year-over-year and includes a non-cash EPS benefit of $0.15 from the mark-to-market on the equity swap in the second and third quarters. Our fiscal year '23 operational EPS, excluding the swap, was $0.38, driven by net profit improvement, which reflects very substantial growth of 36% versus last year. Looking ahead to fiscal year '24, I would like to provide some additional details related to our current expectations for certain drivers of our adjusted EPS. First, we expect depreciation to be in the $230 million to $240 million range. Second, we anticipate net interest expense for the year to be in the mid $200 million. Third, we anticipate an adjusted effective tax rate for fiscal '24 in the mid to high 20%-s. Finally on fiscal '24 share count, we currently estimate 1% of dilution, though similar to fiscal '23, so quarterly share count will fluctuate based on GAAP anti-dilution provisions. Moving to our free cash flow. We generated free cash flow of $38 million in the quarter. For the year, we generated $403 million of free cash flow, which was in line with our expectations despite the inventory build required to increase safety stock and meet anticipated fragrance demand in the first half of fiscal year '24. In the coming years, we expect steady expansion in free cash flows. Our intent is to continue to use our strong free cash flow and opportunistic asset monetization to actively reduce our debt and advance our deleveraging agenda. Moving to our capital structure. We ended Q4 with net debt of approximately $4 billion. As a result, our leverage at the end of the quarter was around 4.1x, down from around 4.4x at the end of Q3 and consistent with our expectations. Factoring in our Wella stake, we ended the quarter with economic net debt of approximately $3 billion. We remain committed to divesting our Wella stake by calendar year '25 and as a first step in this objective, we recently entered into a binding letter of intent to sell 3.6% of our retained Wella stake for $150 million to IGF Wealth Management, subject to customary closing conditions including consent by KKR. The transaction would reflect a 4% premium to book value of Wella as of March 31. Additionally, as part of our active efforts to strengthen our balance sheet, we successfully issued $750 million of 2030 senior secured notes in July. We used the combination of these proceeds and our revolver to fully pay down our Term Loan B, resulting in approximately 85% of our total debt now being fixed rate, which is key in the current interest rate environment. Looking beyond fiscal '23, 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 currently rising interest rate environment. To sum up, we are confident in our next major leverage milestones, as we continue to target leverage towards 3x exiting calendar '23, approximately 2.5x exiting calendar year '24 and approximately 2x exiting calendar year '25. I will now hand it back to Sue to review our strategic progress in the quarter.

Thank you, Laurent. So, let me share some highlights from our continued execution on our six pillar strategy. Starting with our first strategic pillar, which is stabilizing and growing our Consumer Beauty business. In the quarter, both the mass beauty market and our Consumer Beauty business remained very dynamic. As I mentioned earlier, our Consumer Beauty revenues grew approximately 10% like-for-like in the quarter, with high single-digit to double-digit growth across our key categories of cosmetics, bodycare and mass fragrances. For fiscal '23, Consumer Beauty grew 11% on a core like-for-like basis, with most of our leading Consumer Beauty brands growing in the high single-digits to low double-digits like-for-like during this fiscal. The strength of our Consumer Beauty portfolio was further reinforced by our recently announced strengthened and long-standing partnership with adidas, which is perfectly positioned to capitalize on the new wellbeing and athleisure trend in beauty. As a key part of our strategy to win with Gen

Good morning, and good afternoon, everyone. My name is Leo, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's fourth quarter fiscal 2023 question-and-answer conference call. As a reminder, this conference call is being recorded today, August 22, 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 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 the lines for questions.

[Operator Instructions] We'll take our first question from Filippo Falorni of Citi. Your line is open.

Hey, good morning, everyone, and congrats on a strong fiscal '23 results. First question on kind of the assumptions embedded in your initial guidance for fiscal '24. I know, Sue, you mentioned, the category at the Prestige level, particularly in fragrances, remains strong. Just what have you assumed in your guidance? Are you assuming a continuation of the momentum? Are you assuming a little bit of a slowdown with the more uncertainty in the macro environment? Just any color on that would be helpful.

Good morning, Filippo. Let me give the mic to Laurent for this part and I can compliment.

Yeah, absolutely. Hello, Filippo. So, I mean, first of all, indeed, as you highlighted, what's important is really that we are positioning the fiscal '24 guidance, I mean, at the top of the mid-term guidance, and following as you highlighted, I mean, a very good landing of our fiscal '23. So, to make it short, I mean, really our assumptions is that the momentum is here to stay. Definitely, we are seeing the beauty categories are very resilient. And here, I'm talking about both categories, Prestige and Consumer Beauty. So, definitely, and this is what is confirmed also by our retailers that beauty is definitely the darling category of the retailers. So, definitely, both on Prestige and Consumer Beauty we keep this great momentum for fiscal '24. And this is amplified also by the strong initiatives that Coty is putting in place again on both divisions.

Great. And just a quick follow-up. On pricing, I know you guys are planning for an additional price increase in Q1. Is it mainly in Consumer Beauty? It seems like you mentioned closing the gap versus competition. And can you comment a bit on like responses from retailers, what you're seeing it in the market from the conversation that you're having? Thank you.

Yeah. So, indeed, I mean, pricing, as you know, we implemented, I mean, successfully pricing across fiscal '23. So, I mean -- and this was -- this went very smoothly with retailers, but also with consumers as there was definitely no elasticity impact. So, we shared that we continue in Q1 fiscal '24, we are implementing a mid-single-digit pricing, and this is on both divisions. This is really important in the case of Prestige division and also in Consumer Beauty. So, we are doing this, number one, because, yes, inflation is here to stay in H1 fiscal '24. So this is really part of our plan. Number two is also because we are seeing, as I said, very resilient categories. And also, we are making sure, as usual, and we keep the methodology that this price increase is done in a very granular manner, in a very disciplined manner. We have a pricing office, and we have a lot of data based on the last two years. So, we know exactly where we can increase price, again, without having any elasticity. Last element I want to highlight is also that we are making sure that this price increase is combined with value creation for retailers and also for consumers. And definitely, we are investing money in sustainability agenda. This is something which is really well received by retailers and consumers, and also is here also to helping to accept a price increase for this Q1 fiscal '24.

Your next question is from Javier Escalante of Evercore ISI.

Good morning, everyone, and also congrats on terrific results. I have a couple of questions. One on the consumer side and the other on Prestige. On the consumer side, you made comments on CoverGirl and it feels as if in your view, it's an issue of tapping digital marketing through TikTok. So, if you can comment on the situation more on the stores, right, whether your shelf space going into the fall? And also in Consumer Beauty, your plans in Brazil is a massive -- mass fragrance market. So, I would love to hear your views on that. And lastly, any update on the skincare launches in Asia will be awesome. Okay, thank you.

Of course. Good morning, Javier, thank you for the question. Indeed, you're right to mention these two elements, which I believe are the two next white space opportunities for our Consumer Beauty business. The first one is indeed makeup opportunity. We believe we have done, let's say, 70% of the job, if I may say. And if you look at CoverGirl, we've fixed the lip category. Today, our lip category under CoverGirl among the fastest growing in the market. We've done the same thing with the eye category. The two most recent launches from CoverGirl, which are: Yummy Gloss, which is this viral product that is today going to sell something like 6 or 7 times higher than what we have expected; and the upcoming launch, which started in July, which is Cleantopia mascara, that you saw the advertising during the earnings presentations. These are in a way going to consolidate this two-thirds of the work that we have done. Of course, we are doing all the necessary effort to really use the 70% to 75% of A&CP we are spending on this brand that are mainly digital A&CP towards Gen

We'll take your next question from Anna Lizzul of Bank of America.

Hi. Good morning, and thank you for the question. Yesterday, you announced the expansion of the Marc Jacobs license with the build-out of the beauty side. I was wondering how should we think about that build out versus your initiatives with owned brands in your portfolio like Infiniment Coty in fragrance and Lancaster in skincare. Thanks.

Yeah. Good morning, Anna. So in fact, this announcement we have made yesterday is, first of all, a continuity of a 20 years long-standing relation with Marc Jacobs Fragrances. We've been together -- married together since 20 years. And the outcome of this collaboration is, I have to say, fantastic. During fiscal '23, the second fastest-growing brand of Prestige at Coty was indeed Marc Jacobs, high double-digit growth. And this is really something that is the result of this long-standing collaboration. We've decided to extend this collaboration in the coming decades, but also we've decided to bring back the highly coveted and cult Marc Jacobs makeup. If you've seen the -- some of the titles of people who have already published around this new collaboration around makeup, there is a lot of cult following for this brand. And this brand is fantastically positioned to do makeup in the area of in the indie, [mid-couture] (ph), which is really where the market is heading to and where you can really find the biggest part of the growth of the market. If you talk about our own brands, it's a parallel story. This company is the go-to destination for licenses, very long-term licenses. In this case, we are adding a new category which has strengthened our portfolio of color cosmetics, specifically in Prestige, but all our other color cosmetics brands, especially in mass market, our own brands, again, think of CoverGirl, Max Factor, Bourjois or Rimmel to name the four most important ones. So this is really -- it's an end. You know how I love to work. I love to do and rather than either or rather. It's really this and this at the same time. So, Infiniment Coty is on track. The launch -- the PR launch is going to be in October and we'll hit the first stores, including a global DTC, in Jan 2024. And Lancaster, again, have made the comments around Lancaster. Last but not least, we are opening today the sales of what we do believe in skincare is probably one of the most potent serum of all time behind the Orveda skincare line. This serum is called OmniPotent Concentrate, and it's open to be sold to a longer queue of consumers waiting for this since May today at the end of the day.

Great. Thank you.

Your next question comes from Korinne Wolfmeyer of Piper Sandler.

Hey, good morning, team. Thanks for taking the question, and congrats on a great quarter. So first, I'd like to touch a little bit more on the guidance for next fiscal year and really the quarterly cadence that you alluded to, and it looks like there is a bit of a slowdown that's may be implied in the back half of the year, and I know you're coming up against some more challenging comps in the back half. But I was wondering if you could touch on if there's anything else that you're factoring into guidance for the year beyond that in regards to the cadence. Thank you.

Yeah, good morning, Korinne. So, I mean, first of all, indeed, the fiscal year '24 guidance, top-line, so is really at the top of our mid-term guidance, 6% to 8%. So, what we shared is that H1, we are positioning H1 from 8% to 10%. So, indeed -- and this is definitely based on the strong start on fiscal '24 that we are currently contemplating. So this is really giving us full confidence. And again, as I shared before because the categories -- both categories are really growing fast, and then Coty really brings some very successful initiatives on both divisions. So I mean, on top of what Sue has just explained, which are really the momentum of the initiative that we kicked off last year, such as skincare, Consumer Beauty restart. We have also some great initiatives in Prestige. Prestige fragrance I want to name, and you saw during the presentation on Burberry Goddess, which currently, I mean, what the data we received from retailers and consumers, I mean, are really stellar. So again, this is really giving a very strong start of the year. Consumer Beauty also, we are seeing very good momentum. Yummy Gloss that we launched recently, sales are 8 times higher than our initial forecast. So, you really need to see as a combination of very dynamic market growth, again, on Prestige and Consumer Beauty, and amplified by, definitely, all the initiatives and the work that Coty has implemented and has built over the last three years. So there is nothing structural implying slowing down in H2. And we have good visibility to the strong momentum in H1 at this stage. This is really what I can tell you.

Very helpful. Thanks for all the color. And then, if I could just touch a little bit on the segment margins. I believe there was a bit of a contraction in Consumer Beauty. Can you just touch on it as we think about going forward over the next couple of quarters and years on how to think about the proper run rate for margins for each of the segments? And where will we really see the most expansion from? Thank you.

So, definitely -- I just want to remind that when you look at the EBIT margin fiscal year for Consumer Beauty, I mean the EBIT grew 21% and by 70 basis points. So, it's growing. And definitely, all the work that we kicked-off three years ago, which really is a revamp of the brand, and Sue shared the example of CoverGirl. This is -- we are also doing this sort of work on gross margin. So, definitely, in our mid-term algorithm is really that gross margin expansion and EBIT margin expansion is definitely on both segments, Consumer Beauty and Prestige. What I can add to your question is that I would say Consumer Beauty was most -- was more impacted by COGS inflation during fiscal '23. And then that's why, we implemented some price increase, and we continue, as I said, in Q1 fiscal '24. And we are continuing definitely on our innovations. I can definitely tell you that the innovation that we are currently launching, and we launched even second half of last year, the gross margin, in some cases, which is equivalent for Prestige. So, we have really all the elements in our hands. We need to build sustainable, profitable growth for Prestige and also Consumer Beauty. And we have also some productivity actions on Consumer Beauty. One big one is we shared a few times with concrete example is about platforming. So it's really to have a standard platform on all our brands. And definitely this is going to create really some optimization. And of course, we will see some expansion in both businesses, Consumer Beauty, in the coming years.

Your next question is from Olivia Tong of Raymond James.

Great. Thanks. Good morning, and congrats on a very strong year. My first question is around the pricing actions in Consumer Beauty. If you could just elaborate a little bit on the range of price plans that you have, key categories where you see the biggest gaps, and then, whether it's coming with new product plans along with that?

Thank you, Olivia. So, pricing on CB, as I usually repeat, is very granular, okay? So, there is not a simple answer. It's really that we are reviewing brand-by-brand, segment-by-segment, market-by-market and really making sure that our pricing is really matching consumer needs and also what retailers are working on. What's very important, as you know, is that the price partition is quite extended on Consumer Beauty. We are starting from $4, $5, and we can go up to above $20. So this is also what we are reviewing in detail. So this is on the existing portfolio. What I want to add on top is, of course, is about innovation. We have a great pipeline of innovations, and we shared already some example as Yummy Gloss, mascara, Cleantopia, Lash Wow. And we are making sure that all these initiatives are really launched with a premium and definitely -- so we are taking opportunity of these innovations to increase price. So this is definitely a lever. But again, because these are high-quality products and this is amplified by the Gen

Great. Thank you. And then my follow-up question is just around the fragrances and the licenses, given that you've renewed a number of fragrances for your licenses of late. And in some cases, are you renewing earlier or are they all just kind of coming up for expiration or for renewal around the same time? And if you are renewing earlier, could you talk about terms, whether anything has changed in terms of length of partnership or terms around it? And if so, what's driving that? Thank you.

Yeah, let me take this part. So indeed, fragrance licenses, some of them are renewed before the renewal period, if I may say, and some of them are renewed earlier, which is a great sign of confidence towards Coty as the leading destination for this fashion brands that are willing to go into beauty, not just fragrances, but also makeup. We've seen this recently also with Marc Jacobs. So that's very important in terms of moat. And again, let me remind the audience that we've renewed and extended and sometimes enriched in terms of categories for contracts recently. This is really also something that I wanted to stress. Second, it's very important that everyone hears also the fact that there is a momentum today in terms of fashion companies reaching out to Coty to create beauty businesses together. And again, it's very important that we have this ability to make new brands, new territories, new visions of beauty, part of the Coty portfolio. That's something that's very important. There have not been any material changes in licensing terms, this is something I can confirm to you. And again, it's really a great occasion for me to say how much Coty is seen today as a partner of choice. And again, I welcome any fashion brand willing to enter the beauty industry to partner with Coty, because the ecosystem we're proposing is unparalleled, in fact, in terms of reach, in terms of R&D, in terms of ability to operate multiple categories and in terms of marketing. And this gives me the occasion to say a few words about one of the launches of the company. They are all important for me, but one is very dear to my heart, which is the one of Burberry Goddess. Burberry Goddess, for me, have a look at this launch, this is the best of Coty know-how in terms of creating, winning users. I've been talking about this since many, many quarters. We are there, finally. It takes time to put in place this kind of methodologies to craft the launch, that is a 5-star launch at this level. To execute it, we started to do this in Travel Retail in July. And now we are expanding globally. And what we are seeing is, in a way, giving a direction or a flavor of what could be the upcoming innovations from Coty in this area, and therefore, for our partners, when it comes to fashion houses. So, this is really something I want to stress during this earnings call.

Your next question is from Chris Carey of Wells Fargo Securities.

Hi, everyone.

Good morning, Chris.

So I realize it's been asked several times, but just a couple of quick follow-ups on pricing and impact. Number one, with the high end of the 6% to 8% sales outlook, is it reasonable to assume that your full year sales expectations are exclusively price-driven? And can you comment on what you expect for volumes this year? And the second question is with your pricing around in Q3 and Q1, I guess I'm a little surprised that gross margins would be down in the front half of the year, even with the inflation, which doesn't sound like it's getting worse. It's just lingering. And so, can you perhaps expand a bit more on what's driving the gross margin down year-over-year, despite the incremental pricing and inflation, which doesn't seem to be building? So thanks for those two, just on price-risk volume, I guess, for the full year and the gross margin question for the front half.

Yeah, sure, Chris. So let me take these two elements. I mean, I want to make it very clear that, I mean, volume is absolutely key and definitely. And this is what we are seeing already in the second half of fiscal '23 that the growth is driven by pricing, by mix, but also by volumes, okay? So it's -- and definitely, the model we are building for fiscal '24 and beyond is really a balanced-growth algorithm, which is really the combination of pricing, mix and volume. So, I'm really insisting on this. And we gave very concrete examples, just what we shared. I mean Burberry Goddess, all what we are doing in Consumer Beauty, Yummy Gloss sort of launches. So these are definitely volumes -- additional volumes in our equation. And volumes are also very important, because it's really showing penetration, increasing of market share. And of course, for our factories, our footprint, is also a positive way to absorb the fixed cost. So this is very, very clear in our model. On your second point, which is gross margin, so first of all, I really want to highlight, I mean, the great landing that we are doing on gross margin. We shared several times that there will be a modest gross margin expansion, fiscal year '23. And this is exactly where we are landing and even with a very good result in Q4. So you see that all the work we are doing on gross margin, despite inflation, has delivered strong results. So, we confirm also that for fiscal '24, there will be also modest gross margin expansion. So gross margin will keep growing. And we also confirm to be in the mid-60%-s by fiscal '25 exactly, as per our mid-term algorithm that we shared more than two years ago. Now to tell you, indeed, so we highlighted that there will be some phasing, H1 from H2, definitely H1, so big few elements. Number one is that we are expecting -- price inflation is here to stay in H1, as I said. And we have also some, I explained a few times, accounting treatment that inflation COGS are capitalized during four months. So between the moment that we have inflation and the moment it's released in the P&L, there is a lag effect of four months. So that's why we still see this inflation in H1, but there will be some easing in H2, okay? So that's number one. Number two, also, which is important for you to know, is that last year, due to service-level challenges and also component shortage, we had to make a decision really to reduce gift sets in Prestige. And as you know, I mean -- and this year, in H1, now that we have solved all supply chain issues and component shortage, now we are really back towards the normal share of gift sets in Q1 and Q2. And as you know, gift sets gross margin is a few points lower than the standard scale. So this is also something which is explaining the phasing. But it's absolutely in control. It's also supported by business decision and fully embedded in our fiscal year '24 algorithm and mid-term algorithm.

Your next question is from Andrea Teixeira of JPMorgan.

Thank you, everyone, and good morning. I wanted to just take this opportunity, Laurent, you mentioned, the phasing for gross margin. Can you talk about SG&A? Because you gave a 10 basis point to 30 basis point EBITDA margin expansion. How we should be thinking of your long-term algorithm? It seems to me that now would be the year where the inflation just – [you disclosed] (ph) inflation of 2%, you had price and mix up 10%. Isn't that -- right now, I understand all this puts and takes on the phasing of gross margin, but as we go into fiscal 2024, especially the second half, wouldn't you be able to trickle down more? Or you're just having the cost saves and all this gap between pricing and inflation be reinvested into greater SG&A or greater marketing investments, as Sue mentioned [indiscernible] and all the other influencers that you became more, I'd say, [avant-garde] (ph) of that? Is that the way or it's mostly the investment in Prestige and especially skincare into China?

Okay. So I mean, all your points, remarks, I mean, this is definitely the constant focus and work that we've been doing over the last three years. So it's really focusing on productivity, focusing on gross margin expansion, and then definitely allocating these resources, this money to support all the strategic initiatives. And you are currently, I mean, seeing that this model works with really the 17% growth in Q4 and also improving our margin and improving our profit. And again, as you see, we are improving our EBIT margin this year by 170 basis points, and we're improving our EBITDA margin by 40 basis points. So, the model is in place. Now looking forward, as I shared, I mean, definitely, the mid-term algorithm is fully in place. So it's really reaching the mid-60%-s gross margin by fiscal '25, and it is supported by all the actions I shared before in productivity. On SG&A, definitely, we have a strong focus, and it's fully included in our All-in-to-Win program. So, definitely here, we continue some productivity initiatives. But also, we are making sure that when we are talking about resource allocation, indeed, we are allocating in A&CP to support the strategic initiatives, to support also all the white space opportunities that we are seeing. And Sue shared a few, of course, we continue -- China plan is really mid-term strategic, very, very important plan. We talked about Brazil, so these are really fantastic opportunities. And we're also improving in our capabilities. We shared the example of R&D. So, we have a very strong footprint on R&D, but we keep investing. So we continue really to improve productivity, to allocate the resources, which create profitable growth. And at the same time, we continue to improve our margin. And we just -- our mid-term algorithm, which is a 6% to 8% net revenue growth, and EBITDA improvement, 9% to 11%, doesn't change. So your question is definitely is the daily work that we operating.

Your next question is from Linda Bolton of Davidson.

Yeah. So, I was wondering if the pressures in the Hainan region with still waiting to have more travelers return to that area, if that impacted your ability to get shelf space for the Lancaster launch? Could you have gotten more shelf space, but for the pressures in that region, is that affecting? And also, is that affecting Gucci and Burberry growth at all in the region? Thank you.

Yeah, good morning, Linda. Let me take this question. So in fact, what we are seeing in Hainan is that our shelf space for Lancaster has not at all been affected by all the pressures we are seeing. We are just doing the job step-by-step. In fact, we don't want to open a massive number of doors and -- while at the same time, creating the business model of success of this brand. So, we are doing this very carefully in terms of investment, be it capital investment, media investment, et cetera. And therefore, in Hainan and also in Mainland China, we are making the productivity of the doors that we have opened so far as high as possible before starting to expand the number of doors and the expansion of the shelf space. When it comes to the other brands that you have mentioned, which are Gucci and Burberry, there was no impact from what's happening in Hainan. Today, these two brands that were doing great on makeup, are recovering, thanks to the back of makeup consumption in the country. They were growing very fast on the makeup area. This has been, in a way, limited during the lockdowns and the fact that since the opening of the country beginning of calendar '23, it's chasing step-by-step in this area. But I wouldn't say that the -- what's happening behind, I guess, that you are referring to the [dilute] (ph), et cetera, et cetera, is affecting our brands, because we are not exposed to this kind of phenomenon, given our small size, but also given how much we are willing to pay a very strong attention to preserving the brand equity of the brands we have into Coty.

Your next question is from Mark Astrachan of Stifel.

Yeah, thanks. Good morning, everybody. I guess, just a follow-up on one of the prior questions back to price and volume assumptions. So, if we carry over the pricing in 4Q, and I know there was some incremental pricing in 4Q, it would certainly suggest that most, if not all, at least the first half, is pricing driven. So, I just wanted to, again, understand that. And if you could just give the specifics in terms of your underlying volume assumptions. And then maybe a bigger picture, how do you think about pricing and mix on a longer-term basis in terms of composition to overall sales growth within that 6% to 8% algorithm? And sort of related to kind of both of them, how do you think about the A&P spend? What's the optimal level for the business over time if gross margins sort of modestly increase relative to where we ended fiscal '23? Thank you.

Yes. Thank you, Mark. So, I mean, just to make it very clear, and again, so we are positioning our fiscal year '24 top-line at the top of the guidance and really is higher in H1, so it's 8% to 10%. And as I shared, it's absolutely confirmed by a strong start of fiscal '24. And this is built, yes, with the pricing carryover. We continue also mix improvement, and it also includes volume growth. And we shared, again, some very concrete example, Burberry Goddess is a very obvious case. So, this is really a part of it. Now looking ahead, and I said it is -- we are really making sure that starting H2 fiscal '24, definitely that our growth algorithm is really well balanced between pricing, mix and volume. So this is really the combination of three. So, once we are out of this really high inflation period with high pricing, we enter more a normalized model in terms of growth. And the second part of your question, our algorithm, our methodology doesn't change. So it's really definitely -- and as I shared, we continue this All-in-to-Win program. So, we announced that next year, we will deliver $100 million savings, and in fiscal '25, $75 million. So the objective of this productivity plan is we need to continue to improve our gross margin, to optimize our SG&A, and then to reinvest to support all our strategic initiatives. So concretely, what does it mean? It means that in terms of A&CP, we are -- now we are at the level of the high 20%-s, and this is really a level that we are going to keep and reallocate in a very perfect manner, always focusing on [AOI] (ph) on both divisions and on all the new initiatives that we are launching.

Your next question is from Ashley Helgans of Jefferies.

Hey, good morning. Thanks for taking our questions. So, just first on the pricing action. I'm just curious if you could talk a little bit about the key indicators you're using to gauge consumers' willingness to spend more on clean beauty. And then, maybe you can just give us a little bit more color on planned investments in the first half that's offsetting some of the pricing benefits? Thanks.

So definitely, on the key indicators, I mean, what I can -- I mean, we have a strong, powerful team, C&I team. So -- and again, when we say that over the last three years, we rebuild strong capabilities, of course, we talk about A&CP. We just talked also about R&D. But indeed, I can add that for the consumer research in terms of teams, we have very good teams, and we have also tools, okay? So, it's really that we can really capture data from consumers. And we have, thanks to CRM and so on, we are really expanding and we have very good understanding. And of course, also listening, always going on in social network and so on. And we get also some good indications and data from our retailers, which are very precious. So it means that, again, when we -- all the actions, all the work we are doing on clean beauty is really based on very -- and I would say, scientific data. But I also want to add that, in fact, these data, they don't come as a surprise. Sue was referring to CoverGirl. Clean beauty in CoverGirl is not something new. It started at the beginning when the brand was launched. So, it's also reigniting things, which are obvious for the brand. So again, this is -- and again, on this clean beauty, this is really well accepted, and this is the case on Consumer Beauty, and this is also the case on Prestige.

Laurent, if you allow me, clean beauty is the only area where consumers, in all the studies that are published by us, but also by any company studying consumers' mood, et cetera, is the only category where people -- clean and sustainable beauty, where people are ready to spend more money on. And that's very important, because they believe they are doing the right choice for the planet and for them and for their skin health, by the way. So, I think we can close the call after this question. If you allow me, Laurent, everyone, I would like to do some closing remarks. The first one is also to clarify again, if needed, how we see the white space opportunities phasing. It's very important that you see that the immediate white space opportunities for this company are female fragrances, ultra-premium fragrances, Prestige cosmetics, Travel Retail [indiscernible], Brazil, if you want. And then there are the mid-term opportunities, which are skincare and China. It's very important that this is, in a way, understood by all of us and all of you who are watching Coty. And last but not least, I wanted to say that we are very proud for the second year of double-digit growth. I have to say that this is really a great reason for -- pride for all Coty teams around the world. And we are very, very happy to see Q1 starting very strongly. Thank you very much.