Coty Inc. (COTY) Earnings Call Transcript & Summary

Great. Good morning, good afternoon. We're very excited to have Sue Nabi from Coty here. In our view, Javier and myself, believe that Coty is one of the most exciting stories that we cover. So getting into things -- and sorry for the technical issues before, there seems to be a dramatic sea change in terms of the consumer attitude to fragrances. And fragrances represent roughly 50% plus of Coty's business. Historically or more recently, fragrances was seen as maybe the poor or the slow sister among the beauty categories. That has changed dramatically. And so maybe to start things off, Sue, can you talk about how well positioned Coty is to play in fragrances, what you're doing to take advantage of those new opportunities and how well positioned you are for that, particularly in China, but also the rest of the world.

Thank you, Robert, for your question. That's indeed the, I would say, the big news. Clearly, the fact that Coty is the prestige fragrance leader worldwide is clearly making a huge difference. And we are seeing fragrance performance that has been very strong over the past 9 months. And primarily in key countries, such as U.S. and China, fragrance growth in both countries. As you can see it on the slide now, it's up compared to 2019 also. And last quarter, prestige fragrances were up double digits versus 2019 in the U.S. and in China markets. So for the first time in many years, fragrances are outperforming both prestige, skincare and prestige cosmetics in these 2 markets. So we try to understand why, in fact. And it's very interesting to see that there are deep regions and there are amplifiers. The amplifiers is clearly the digitalization of the fragrance business. This is, clearly for us, here to stay. And you have to remember that this used to be the most refractory category to digital. Things have happened that made it more and more friendly and digital friendly. It's also benefiting the digital boom on fragrances. It's also clearly the case for large countries, where people live less and less in cities or now prefer remote work like in the U.S. or countries where distances to find the right store are big, think about China, of course. So this is a second element that's also explained in the reason why we are seeing this, I would say, a boom of fragrances facilitated or amplified by the digital, I would say, new tools. The third thing that I would like to share with you when it comes to why digital is so interesting is that we feel that this is going to allow higher quality one-to-one interactions with perfumers, for example, live streaming sessions with those who have created the fragrance or are users of the fragrance, be it experts, consumers, influencers, et cetera, which is probably going to enrich, sometimes replace what we call the in-store sampling. And this, we feel that it's giving back its letters of nobility to the perfume industry with more storytelling, more perfumers' explanation, which is, in a way, repositioning fragrances in countries like China as a little luxury versus what it is and what it used to be in the past in the rest of the world as almost a commodity. The classical sampling experience is also evolving. In fact, what we felt is that the last years there has been a kind of oversimplification of the discovery experience because the brands were promoting what we call catchy juices, which usually are things that you smell quickly in store with a strong first impact, but with poor wear over time. And this, I feel, that it's coming to an end. We need to rediscover the way we are trying and selling fragrances because this created frustration among consumers who bought something they loved in-store but didn't love anymore when they were at home because it did not tell the same story. And at Coty, we've already been working our scents very differently versus years ago to answer that new need. So what I can tell you also is that in parallel of this, I would say, things that are happening online and in stores, what's happening also is that there are deep things happening on the consumer level. China and U.S. have come out from the crisis better in terms of fragrance consumption because of a new notion that we call, that fragrance houses call, and I found the name very interesting, extimacy, which is a contraction between external and intimacy in a way your intimacy has expanded a little bit. And this is clearly more developed in these 2 cultures, be it the American one or the Chinese one. As in China, you know it, smelling something very strong can be seen as a kind of goodness. And in the U.S., the successful, not since forever, has always been on the cleaner and fresh side of the market. We call it feel-good items versus seduction items. In America, it's quite easy to understand. People who use fragrances have been educated to scents by things like Bath & Body Works, so it has to be clean and fresh. And in China, again, it's all about smelling something that is just for yourself because people -- if they smell your own scent, it's a kind of rudeness. In this context of none exclusively social use, because in the 2 cases people use fragrances for different reasons. In the U.S. because it's all about feeling clean and fresh or refreshed. In China, there is a sentence that we spotted recently that I really love on social media listening. The influencers say, "I smell expensive." And this says a lot about what fragrances represent today in a market like China. The country in Europe, where perfume is still very social, it's around seduction with necessary diffusibility trail. There was, of course, the consequences that there was a little consumption because of this, including online. In the future, my gut feeling and the gut feeling of Coty is that the growth engines that U.S. and China are now representing for this category are there to stay because of this new concept of extimacy. At Coty, we've identified a category of notes that will be the ones consumers will be looking for in these 2 areas of the world in the coming years. And we've done this by profiling via AI social media verbatim analysis, the words that consumers are using to describe the scents that they are wishing to wear today, be it in China, they need to be just for me, but still very, very expensive in terms of feeling, but not over-diffusive. And in the U.S., the reinvention of clean, fresh scents into, what we call today, healthy scents that are also good in terms of health. So in these 2 regions, we are reinventing the way we create our fragrances. And we're working all the pipeline of innovation to invent these new categories. And by the way, there are chances that this trend that we are seeing of extimacy, both in the U.S. and in China, will coexist with a strong diffusing scents in Europe, too. So it's not one or the other one. It's a trend that are key and that are lifting the market in countries like China and the U.S., but trends that are emerging in areas of the world where the consumption of fragrances is more traditional. So that's what we strongly believe is going to help the growth of the category at a sustainable level above the historical mid-single-digit growth. And as for the economics of this business, this is something that's very important. Coty being the leading fragrance, prestige fragrance maker. Prestige fragrances, you have to know, continue to be highly profitable for Coty with margins that are multiple percentage points above our Consumer Beauty business.

That's fantastic. That's great, Sue. And so I think the key message for me is this is a secular change, not a fad. Now given that and given everything you're doing with CoverGirl, which we'll get to later, my question is, maybe cynically, is do you have too many initiatives going on at the same time, right? There's so much kind of low -- I wouldn't say low-hanging fruit, but so much opportunity. And why go into skincare -- premium prestige skin care, given that you have so much else going on? And do you really have a right to play there on the skincare side?

Yes, that's a very important question. You're totally right to ask it. I think we can move the slides to the right level. Yes, we are doing a lot, but Robert, I wouldn't say that we -- it's not too much. We are doing the right things, not too many things. We are focused in all of the right areas and the areas that anyone who is a leader in the industry ought to be focused on. We have targeted stabilizing our mass beauty brands, and we are in the process of doing this, as you know it. And we'll talk about CoverGirl later. Ofcourse, the focus is all about CoverGirl, But we are doing, of course, the same kind of work that's been done on CoverGirl on Rimmel in Europe, on Max Factor in Europe and soon, on a brand that has a huge potential that's really probably a future gem into Coty portfolio in terms of skincare, which is Adidas. Another promise is, of course, to accelerate our luxury portfolio growth and profitability. We just spoke about fragrances, and we all understand why Coty is ideally and probably better than anywhere else, positioned to take this new wind. That's a structural wind at the same time. Clearly, we will benefit -- this work we are doing on fragrances will benefit also to our makeup. Because as you know it, these 2 businesses are -- a lot sold on counters in countries like America or in China. And on-counter is so much easy for BA to sell the 2. And online, you can imagine that this is a great tool to enrich the size of the basket. Skincare absolutely makes sense for us. Sure, it's a small portion of the portfolio today, but it's not a new part of our portfolio. We are not starting from scratch like some people might think because people don't know, in fact, the history of Coty and the history of key Coty brands. We already have strong IP, strong R&D capabilities. They were just not utilized, in fact. And the key point to add is that we are not tackling all markets at once. We are really tactical and strategic at the same time, focusing on some key efforts depending on the region of the world. As you can imagine, heritage brands, et cetera, has big potential in areas such as China. And of course, in a country like America, it's all about directly connected brand. And you can think of course, of Kylie Skin and the future Kim Kardashian skin care launch that's happening in fiscal '22. There are also -- and I think it's important to share this with you. There are, of course, hundreds of millions of people that will enter this market the skincare world in the coming years, especially in the Asian world, through increased urbanization first, higher income second. This will continue to be a vast and growing market for many years to come. In addition to this, we have not said that we are trying to compete directly against Lancôme or Estée Lauder. We are starting in key areas where we feel we have traction and we have differentiation. The other thing I can tell you is that Lancaster is one of the jewels of the portfolio. And this brand, as you can see it on this slide, is -- has a very rich history when it comes to skincare. Lancaster, as you can see, from left to right, has invented the first retinol cream in 1976; the first, I would say, oxygen therapy cream in 1993; and in 2015, Lancaster has been introducing in the market something that has become the norm today, which we call regenerative skin repair based on the DNA repair, what we call genetics and epigenetics repair. So this is very important to know. And the reason why I really wanted to focus on taking the example of Lancaster to explain why we have the right to play in skincare is that one of the benefits of the brand having been a small brand in Coty portfolio up to now is that the R&D teams have been working in a very, very smart way. They -- this has allowed them, in fact, the fact that the brand was not huge, to really focus on innovations and areas that were what is going to make up the skincare of the future and now already shaping the skincare category. I can take the example as you see it on the light of light and environmental aging protection. As you can imagine, in a world that's going to be warmer, this is going to become the name of the game. And we do have very, very strong IPs in this area. If you think about the second area, which is the one under, which we call the vectorization of dermatological-grade actives, when you look online at what people are looking for, they're all looking for vitamin C, retinol, the newest ingredients coming from the dermatology world, and we do have a way to, in a way, deliver these actives to the right skin layer, the right way to avoid irritation, et cetera. So this, including technologies that are inspired by gene therapy vectors, that's been used recently to cure some diseases. So again, in addition, I think we have strong IP around regenerative skincare and repairing. And finally, we do have also strong technologies in areas such as long wear. Long wear and matte is, of course, naturally something that people think is key for makeup, because people want their lipstick, their foundation or their liner to last as long as possible. And this is clearly a trend where Coty is ideally positioned versus competition, mainly thanks to a lot of patents under CoverGirl. But also, and we are extending these patents from CoverGirl to take them to skincare because, again, wearing 5 or 6 layers of skin care in China when the weather is going to be warmer, is going to become a challenge. And these technologies are going to help us to do this. And last but not least, these technologies are also very strong in helping us probably mainly in areas like Europe, but maybe in China and in the U.S., to make the scent that we are creating long-lasting. I'm not talking about the diffusion. I'm talking about long-lastingness. You know how people judge that a fragrance is qualitative, they do this. They smell themselves. And if it's still there, it means it's a good product. If they don't smell themselves, a lot of people think it's not a good quality. And there, technology has a role to play. And Coty has 1 IP that's very strong, used a lot on -- boast, for example, fragrances. but allow people to smell themselves until the end of the day and keep this fresh scent feeling.

Great. Thank you very much. So moving on a more geographic basis, you kind of put out a goal of taking China from being about 3% of your sales now to 10% in 2025. Obviously, an enormous opportunity. Can you talk about both kind of the 3 drivers or so to get that growth as well as what do you need to do operationally, investment-wise supply chain to support that growth?

Yes, that's a key question, again, that we've been working on extensively recently. Again, for the overall China market, skincare will remain, again, the predominant driver, with makeup also catching up after having slowed, of course, due to COVID. But again, wearing fragrances in China is becoming in a way, a social act, in a way "I smell expensive" says a lot about how people see this category. And that's the reason why we are seeing a strong acceleration, both on and off-line with Gen Z clearly wanting to promote fragrances the same way they have been promoting handbags, expensive handbags, in the last years. As far as Coty is concerned, we will continue to benefit, first and foremost, from the fragrance boom. Gucci has been rising at ranks and is now the #7 fragrance brand, growing triple digits in China. Burberry that you can see on the same slide in the middle, similarly, is growing triple digits and is now in the top 10, top 15. Calvin Klein, which is not on the slide, has very, very strong momentum online and is now ranked the tenth brand in e-commerce, in global e-commerce in China. And our high-end fragrances, such as Gucci; the Alchemist's Garden, which is the most expensive part of the offer; or the other one, which is Chloé Atelier des Fleurs which comes from the artisanal fragrances side. They are resonating very strongly with new Chinese consumers who have -- who are looking for this kind of more sophisticated, expensive-quality luxury, I would say. On cosmetics right now, we have Gucci and Burberry, both of which are performing very well. On Gucci, you know that we launched it on Tmall earlier this year, and it's still the fourth biggest luxury beauty launch on the platform since 2018. In the past quarter, Gucci makeup has entered the top 20 prestige makeup brands in China, gaining 60 basis points of share. This is the latest news. And Burberry has likewise been expanding its share, up 20 basis points last quarter. For Chinese consumers, in fact, I would say that beauty products are more and more considered as luxury items. And if it's not considered as a luxury item, a natural expansion of the fashion brand, they are not going to buy them. And this clearly is changing the way brands should operate in China. You need to put on the market what I call pieces of arts. We have a lot -- we have -- that's the reason why we have put a lot of emphasis ensuring the packaging of Gucci, or Burberry, or Atelier des Fleurs really meets this criteria. And you feel -- even if you look at local brands such as [ Florazi ], which is a very, very successful local brand, it's on the mass side of the business, every product this brand is selling looks like a piece of art. And it's really challenging. The traditional, sometimes, I have to say, a bit boring kind of packaging that the luxury industry has been putting on the market up to now. So there is a kind of new game. And the good news is that we have the right brands, the right packaging to play into this new game. If I take the most recent example, which is the Gucci Beauty launch of the Rouge Brillant which is a new lipstick that we are launching at the right moment because people are starting to -- in a way, to wear lipstick back again, sorry. It's been delivering very strong performance both on and off-line. And on the first month on Tmall, it's already the fifth luxury lipstick on the platform. Off-line, this lipstick is today available in 25 doors. And in the doors where this lipstick is available, it's ranking #1 luxury lipstick in terms of productivity. And we've seen exactly the same kind, I would say, of evolution on Burberry, where we have seen very, very strong results with the recently launched of Burberry Cushion Foundation. Cushion foundation is this -- it's a sponge that you pour in foundation, not yourself, but this is sponge like this. And it becomes a portable liquid foundation. This is very, very popular in Asia and in China. And we've sold something like 17,000 units since the launch with 370 million impressions, in fact, in the country. So again, to give you also something that I wanted to share specifically and exclusively for this conference is what we've seen recently on the traction around Gucci in China. And the example comes from Shanghai. To support the launch of Gucci Rouge Brillant lipstick and to continue to elevate the brand with consumers, we have recently put in place a pop-up beauty counter in Shanghai. This was a 7 days event. We've invited 15 key opinion leaders that are big fans and lovers of Gucci Fashion and Gucci Beauty. And in just 7 days, we saw something like 3,000 -- sorry, people attending, confirming that there is a huge desirability of the brand in this country. And I think this video that we are going to share now speaks better than my words. [Presentation]

So I think these images speak by themselves. So nothing to add, honestly. The desirability of the brand, the potential while expanding the number of SKUs, remember, I said that we have around 200 SKUs, which is 3x less than the leaders of the market today, expanding, very selectively the doors and -- be it online or off-line, it's clearly going to give this brand a path for growth, particularly to be tremendous in China. So to conclude, on the second part of your question, Robert, on -- about supply chain in China and the investment required for this very unique market. On supply chain, we already have a good infrastructure in place to support both our off-line and online growth expansion. At the same time, we are strongly and actively strengthening our organization as we transition from a mainly wholesale model that used to be the case until recently to a retail model driven by -- on an off-line flagship stores because it's going to be all about flagships at the moment where online is clearly going to become the key, I would say, channel of sales. This will be supported by a strong simplification of our strategy. Again, the focus brands that I was mentioning when it comes to our fragrance strategy. We'll do the same thing, be it with fragrances, makeup or skincare in China would be focusing on something like 7 brands in this country. And this focused approach on key brands and the biggest opportunities is also, of course, supporting these biggest opportunities that are all profitable. They are strongly contributing to the valorization of the P&L, the Chinese P&L that's contributing to the overall Coty P&L. Both in Mainland China and Hainan, you have to know also that our growth margins are highly accretive to the Coty average. And this hopefully will help us not only to fuel the investments, but also to help us to continue the growth path that you have started to see in Q3 when it comes to the gross margin of the company. And of course, we'll be, again, applying the same strategy, optimizing investments by focusing on digital throughout the year and on large animations, pop-up activities like the one you have seen here. Again, this new equation of a lot of digital and key flagship places where you can invest, you can create huge events the way you've seen it right now is probably the new way to operate in China. So in total, we'll -- China will continue to be clearly a key and leading contributor to both accelerating our top line and, of course, driving profit expansion.

Great. So let's turn in a different direction. That's leaning in on a great brand that has a lot of momentum. CoverGirl has struggled over the past number of years. So very different job that needs to be done here, renovating that brand. You've seen and talked about some green shoots recently. Can you talk about why you think CoverGirl, the turnaround, is sustainable? And as we're kind of running out of time a little bit, I was going to also separately ask about Ulta, but maybe kind of bring those 2 together in terms of CoverGirl being sustainable turnaround and then how, in general, you can succeed in stores like Ulta with CoverGirl and the rest of your portfolio.

Yes. CoverGirl clearly is really one of the first focus that we've been working on since the end of last year. Again, we've been studying what went wrong. We've been understanding what are the strengths of the brand. And the great surprise, if I may say, it was not a surprise because I knew this brand from my L'Oréal years. Because, in fact, when I was on the other part for years and years, I was admiring the success of CoverGirl. So for me, it was a bit of a surprise to join Coty and to discover that CoverGirl was not the powerful biggest American brand of the makeup market in America. So what we've been doing is that we've been looking at what were the key areas that created the reputation of CoverGirl. And it happens that these key areas are on one side clean beauty. CoverGirl invented the first clean makeup in 1960, not 2 years ago, like most of the brands. And it's been building this business over the years and still the biggest business into CoverGirl. And CoverGirl also invented what we today all call in a very trendy way, the skinification of the makeup industry. In fact, CoverGirl did this with Simply Ageless 20 years ago. It created the first foundations that you can see as world of skincare that's included in side. So you can see it, of course, on the bottles. You can see it on the compact packaging, et cetera. And this is -- honestly, that's very unique. And the best rule in our business is to put your money where you have uniqueness, superiority and desirability. And desirability clearly comes from the fact that what people are talking all about prior to the pandemic, which has been accelerated built by this pandemic, is clean makeup and everything that's powered by skincare. So in fact, it was a kind of why look for something crazy or new to be invented? Why not coming back and investing behind these kind of things that are not only resonating with the history of CoverGirl, but resonating with the younger consumer, especially Gen Z and, especially, I would say, Hispanic consumers. For all these reasons, I think that CoverGirl have seen market share momentum over the past 2 months as now, 10 weeks in a row of market share growth. And you have to remember that this never happened even during the relaunching of the brand in 2018, where the money put on the market was much higher. We never had this kind of reaction. So to briefly maybe touch on the most recent Nielsen that was published yesterday, CoverGirl, again, the summary for us is that CoverGirl has had 10 straight weeks of share gains through the end of May -- first in many years again. The second thing is that the last week of May was particularly strong for CoverGirl, gaining 110 basis points of share, which is a lot, partially driven by the timing of certain promotions which we -- that were pulled forward by 1 week to coincide with the Memorial Day timing that happened this year. And as a result of this promo timing shift, there was minus 20 basis point share decline in the first week of June, particularly because at that time Revlon and Maybelline dropped some big coupons that precise week. So it's not about a trend that's changing. We are continuing to grow the market share for the first time in more than maybe 5 or 6 years, maybe since the merger, with the right products, with the right advertising with the right media behind it. And we are not overinvesting. Because these assets that CoverGirl has created, this first selfie shot with Niki Taylor in her garden, or before her Lili Reinhart in her garden in the middle of lockdown. It's very, very unique to CoverGirl. And we've got recently tests of this advertising that shows that it's really not something that happens at the moment. It's really a structural change that we're making in this brand. And therefore, the reversal in trend is not structural. In fact, on a rolling last 4-week basis, I can say that CoverGirl market share is still 40 basis points. So we strongly believe that this turnaround is the beginning of the brand being on a sustainable trajectory. I've shared with you the analysis about -- and this is important for me, I think, to insist a bit on this around why we strongly believe that it's a deep change and not just something of the moment. The analysis and the data that we are gathering supports the fact that the new CoverGirl positioning and the new CoverGirl media is resonating very strongly with American consumers, not only across, I would say, Gen Z, but also across all age groups. Clean franchise; first, with Clean Fresh makeup in calendar '20, more recently extended to Lash Blast Clean in February 2021. It's clearly over-indexing the 2 more interesting categories in terms of growth for companies like Walmart, but also for Ulta, which are Gen Z and Hispanic consumers. And the most recent, I would say, commercial that is Simply Ageless, where Niki Taylor is back after 20 years promoting in 20 years ago, clean makeup today, promoting Simply Ageless is clearly testing amongst the best for CoverGirl in many years But in fact, it's really breaking the norms of the industry because we compare to peers in this kind of testing with very strong consumer reactions over 35. But the great news is that it's also resonating with younger audiences, which clearly shows that the new COVERGIRL positioning is right on point in today's market. So again, as COVID restrictions are lifting in the U.S., Mobility is, of course, up. Masks are off, and we start to see also a strong catch-up on our lipstick business when it comes to COVERGIRL.

Great. Thank you, Sue. And apologies to everybody who sent in questions. We've actually been inundated with questions. And given the timing, we haven't been able to get through to those, but I'll try to get back to everybody whose questions didn't get answered. So just to wrap things up in the last couple of minutes, Sue, can you touch on, again, combining a couple of ideas how do you succeed in a specialty store like an Ulta, where you're competing against a lot of brands, many of which come from very deep pockets like in Estée Lauder, like a L'Oréal who can far outspend you? So how do you compete there? And how should we think about your marketing spend given the sort of competition that you're going up against?

Yes, that's a very important question because Ulta is clearly a key of our partners. Again, on the prestige side, I think with Kylie relaunch that's happening this summer, with Gucci, all our, I would say, beauty brands, I think there is no question about the ability of these brands to drive the growth and to attract the consumers Ulta and our brands are looking for. On the mass side, clearly, because clean, vegan and cruelty-free beauty, both through CoverGirl and Sally Hansen are really helping us to gain traction precisely at Ulta. Why? Because this attracts younger consumers that are really interested in both, clean on one side and cruelty-free on the other side. Vegan beauty is becoming also a key element for this generation. And with Ulta customer base skewing younger, these products that I've just mentioned on COVERGIRL, you know them now, but on Sally Hansen, we spoke sometimes about good.kind.pure, which happen to be the biggest cosmetic change in 2020. It's also the reinvention of the nail color category using clean and healthy ingredients. So these 2 brands are really helping us, in fact, to clearly win at Ulta. And I can give you a few results. In both April and May, CoverGirl sell-out at Ulta grew triple digits year-on-year and grew double digits versus 2019. Similarly, on Sally Hansen, The brand has grown triple digits year-on-year and grew double digits versus 2019. And the expansion of both brands versus 2019 is a great sign of, I would say, the perfect sync between Ulta consumers and this new generation of people who are buying our brands and looking for clean or skin-ified options.

Great. Well, that's a terrific way to end things. Thank you so much. And again, apologies to everybody whose questions we didn't get it to and the late start. Sue and team, thank you very much. Very much appreciate it.

Thank you so much for inviting me. I hope everything was clear and very happy to answer any questions after the meeting ends. Thank you very much.

Great. Thank you.