Coty Inc. (COTY) Earnings Call Transcript & Summary

Welcoming Coty to the conference with a portfolio of 50 brands sold in 125 countries, Coty is a world leader in fragrance, color cosmetics, skin and body care with ambitious growth aspirations, especially in the Prestige area. The company is also a sustainability pioneer producing the first carbon positive fragrance in the world with ethanol made from carbon captured emissions and has achieved important DE&I milestones like closing their gender pay gap and gender-based Board -- and a gender-balanced Board and Executive Committee. You should have received their gift bag in your room yesterday evening, for which we're all appreciative. And joining us today from Coty are CEO, Sue Nabi; and CFO, Laurent Mercier, who together have ushered in a tremendous share price recovery since taking over in late 2020. To tell us why that's only the beginning, let me turn it over now to Sue.

Thank you, Sue. Good morning, good afternoon, everyone, welcome. We are very honored and excited as you can imagine to be presenting at CAGNY for the first time in Coty's history. This marks a particularly exciting time for Coty's transformation. It's been 2.5 years into my tenure as Coty's CEO, along with my team. We made tremendous progress, already setting a clear strategy, executing on our growth pillars, and of course, significantly improving the financial standing of the company. The key message, and it's quite simple that I want to convey to you today is Coty is a beauty powerhouse with a significant untapped potential. So we're going to start today with an overview of who Coty is for those who do not know the company. I'll then focus on our strategy, the progress we've made so far and the significant white space opportunities in front of us. Then Laurent will review our strong financial progress over the past 2 years, and finally, our attractive growth algorithm. Let me start by sharing with you an overview of Coty. We are not only an established player in beauty but also increasingly a beauty powerhouse. This video gives a great introduction into Coty's rich history and our beautiful brand portfolio. Let's take a look now. [Presentation]

So as you can see, Coty is a well-established player in beauty. Last year, we reported $5.3 billion in revenues, over $900 million in EBITDA, generated over $500 million in free cash flow. We operate in over 125 countries, have roughly 11,000 employees, and we have 8 manufacturing plants. Key differentiator of Coty today versus the Coty several years ago, as you can see it on this slide, is this company is led by a team of seasoned beauty executives. Most members of the ECS LT team have 20 to 25 years of experience in this beauty industry. I spent myself 2 decades at L'Oreal and then started my own skin care brand. Our portfolio is diversified across categories. In the last year, Prestige fragrances accounted for over 50% of the revenues. Mass cosmetics is the second largest category at 25% of the mix. Skin Care and Prestige cosmetics are still fairly small with each at a mid-single-digit percentage of the mix. And these are the areas where we plan to meaningfully grow in the coming years. Body Care and Mass Fragrances are each high single digits. We are also diversified geographically, as you can see. North America is roughly 1/3 of the revenues. Western Europe is less than 1/3. And we are still small in China, in Asia Pacific, Latin America. But we see, of course, a lot of opportunity to grow meaningfully in each of these markets, especially in China. Travel Retail is 7% of sales in fiscal '22, continuing to grow fiscal to date. We are one of the few companies operating 2 divisions that reach consumers across price points. This is a critical element in our business diversification strategy. Our Prestige division accounts for about 60% of the sales, nicely profitable with EBITDA margins over 20%. Our Consumer Beauty division accounts for 40% of sales. Also here again, solid EBITDA margin of 12%. You can see here our beautiful portfolio of brands and how they truly reach consumers across all price points, starting with mass brands like CoverGirl and Rimmel with many products priced at under $10, all the way up to the ultra-premium part of the market with brands like Orveda Skincare, Chloe Atelier des Fleurs, our niche brand and soon Lancaster's Ligne Princière priced at between $150 and $450. Coty is also a company with very strong expertise, know-how and IP in each of our core categories. As you can see on this slide, our R&D organization is organized in category-led R&D centers of excellence; Fragrance Center of Excellence in Switzerland, Cosmetic Center of Excellence in North America, Skincare Center of Excellence in Monaco and in China; and Bodycare Center of Excellence in Brazil. Let me now take a few minutes to discuss Coty's incredible expertise and technology across our key categories, fragrances, cosmetics and skin care, starting with fragrances. Coty has been reinventing modern perfumery for the last 180 years, starting with Rimmel. First perfume in the 1800s and Francois Coty La Rose Jaqueminot in the early 1900s. We have close to 130 scientists and industry experts working on fragrances. And we have over 80 patents and patent applications in this space. As you can see here, at Coty, we leverage fragrance and technology to bring disruptive [ effective ] innovation. With biomimicry, we sampled the molecules released by the plant to masterfully reproduce the Chypre scent. We also have industry-leading IP around Cyclodextrins and sugar derivative molecules. Both of these technologies adjust the volatility of fragrance molecules, allowing the release of specific fragrance nodes over the course of the day. They also enable us to create unique new [ sad ] profiles difficult to copy. We've integrated these proprietary technologies into most of our fragrances as a key point of differentiation in the coming years. We're also coupling our fragrance know-how with growing research in the emotional benefits of fragrance and neuroscience research. In the last 10 years, we've partnered on research in key areas like fragrance and sleep or fragrance impact on spot performance to name a few, led by a brand like Adidas. Shifting to our deep expertise in Color Cosmetics. We have over 160 years of expertise in this category, over 100 scientists and industry experts. And we continue to be active in our research and patent activity with 7 patent applications under review across the key categories of this business. One of the key areas in cosmetics were Coty truly excels and leads the industry is mascara. Our brand had been at the forefront of the biggest mascara innovations. In fact, Rimmel invented the first mascara, and CoverGirl invented the modern molded mascara 15 years ago, and we are currently celebrating the anniversary of this innovation with in-store animations behind Lash Blast Clean [indiscernible]. And true to our leadership in mascara, we have the next-gen innovation in mascara under CoverGirl coming soon. While our skin care business is still small, it's important to highlight that we have been leading skin care science and technology for half a century. We have over 50 leading skin care patents, over 80 published skin care scientific studies, over 120 dedicated skin care scientists and experts and a robust innovation pipeline for the coming quarters and years. On this slide, you can see that Coty and specifically our Lancaster brand have been bringing leading-edge skin care technology to the market since 1948. Lancaster was indeed the first to patent Retinol in the '70s, the first to introduce DNA repair technologies. Retinal vectorization, oxygen delivery to the cells and full light protection, which is still the only patent in this area in the beauty industry at Coty. With that overview of who Coty is, let me now share the great progress we've made in executing on our strategy and the significant white space opportunities still in front of us. Starting with our 6-pillar strategy, which include growing our Consumer Beauty business; number two, accelerating our luxury fragrance business and establishing Coty in Prestige makeup; number three, building our skin care portfolio; number four, building our e-comm and direct-to-consumer capabilities; number five, expanding in China and Travel Retail; and number six, becoming a leader in sustainability. Starting with Consumer Beauty, where we are able to capture the value-conscious consumer with high-quality and cool beauty products at an affordable price. Overall, we expect the global mass beauty market to grow in the mid-single digits in the coming years. Importantly, this growth is coming across the categories we are precisely playing in; cosmetics, body care and mass fragrances. Against this healthy market backdrop, let's take a look at our beautiful portfolio of Consumer Beauty brands. [Presentation]

As you saw in the video, our brands are beautiful, iconic and with very distinct brand equities. CoverGirl is America's healthy makeup authority and the inventor of clean makeup in 1960. Rimmel stands for deliberating for your individuality, sorry. Max Factor allows you to reveal your extraordinary, and Sally Hansen offers salon expertise at home. Our Consumer Beauty brands are becoming the destination for key consumer demographics. For GenX, the largest cohort with the largest disposable income, our brands are leading the trend of skinification of makeup in the mass channel. This includes CoverGirl iconic simply ageless line. The recently launched CoverGirl color correcting serum and primers and Max Factor Miracle Pure skin improving foundation to quote a few examples. Our brands are also the destination for Gen Z consumers by leading the Clean makeup trend in mass. This includes CoverGirl's just launched Clean eyeshadow palettes and Clean Yummy Gloss, which is already going viral on TikTok, Rimmel Kind & Free vegan and cruelty-free makeup brand, which was the #1 consumer beauty launch in fiscal '22. And again, I'm very, very pleased, incredibly pleased. I have to say that our successful brand repositionings and market-leading launches have turned around the Consumer Beauty division in record time. After years of sales declines and market share losses, our Consumer Beauty sales have been growing strongly quarter-after-quarter, and we have now gained market share globally for over a year. Importantly, we see significant white space opportunities ahead for our Consumer Beauty business. We are still mastering our making of cosmetics brand go viral in TikTok and other social media. And we start to be more active on Gen Z specific subcategories other than mascara or traditional liquid foundations. We have made many successful examples already, but we are continuing to step up our efforts on this, including hiring TikTok influencers in-house. Our brands still have a fairly small footprint in emerging markets, so we see significant opportunity such as the Middle East, Latin America, Africa and Southeast Asia. Number three, we expect the global well-being trend to continue, and we see significant opportunity for our body care brands like Adidas or Monange in Brazil. And number four, even in developed markets, we see room for distribution expansion in new channels, whether it's social commerce platform or entry Prestige department stores. Turning now to our Prestige business. With our Prestige fragrance and makeup brands, we're able to capture the luxury consumer. As many of you have seen, the Prestige fragrance category has been on fire over the last 2 years. This is not a function of post-COVID recovery. They are very concrete structural drivers for this acceleration, which we expect to fuel continued robust growth. Number one, consumers in U.S. and China are increasingly gravitating towards fragrances as mood boosters and affordable luxury items. Number two, fragrance consumption is being fueled, both in-store and online. Number three, across all markets, consumers are premiumizing in their fragrance purchases. And number four, social media is a key platform for fragrance discovery and storytelling. Here, you see the latest results of our latest consumer studies. Fragrance consumption in the U.S. is over 50% higher than 2019. And here, you can see the drivers behind this. Amongst women, they have been a significant 5% uptick in users of ultra-premium fragrances in the last 2 years. Amongst men, fragrance penetration has increased by 2%, a significant market expansion. And among both men and women, there have been a significant uptick in heavy users of fragrances. So big picture, we are seeing more fragrance users, using fragrances more often and purchasing more premium products. We're also seeing a structural change in the drivers for fragrance purchasing. Whereas fragrances were historically a gifting-driven category, the latest data shows that consumers are increasingly buying fragrances for themselves rather than for others. In the last year, the fragrance market in U.S. and Europe grew a very strong 14%. And in that period, fragrance juices or single bottles increased by 1% to 3% as a percent of the total across key markets, while gift sets declined by 1% to 3% of the mix. This has clear positive implications, not only for overall fragrance penetration, as you can imagine, but also for the profitability of the market as juices have much higher margins. Our studies show there are 4 clear drivers for the increasing fragrance usage: number one, fragrances used as confidence boosters; number two, they provide a feel good factor; number three, they are strong social connectors; and number four, they are source of escapism. You can see here some quotes directly from consumers describing why they wear fragrances. For young consumers, fragrances are a source of confidence. They are a key part of their wardrobe when they go out and a natural conversation starter. And in a world that has been confined for several years, fragrances allow consumers to mentally escape to exotic destinations. So what's the opportunity for Coty? If we assume that fragrance penetration amongst U.S. consumers, which is currently in the 20s percentages reaches that of Europe, this represents a $1.4 billion opportunity for Coty. And in China, where fragrance penetration is still modest at 4%, just assuming that the penetration reaches only 15% in the medium term, represents close to $300 million of additional sales for us. So a total opportunity of $1.6 billion for Coty from Prestige fragrances alone. As for the brands that consumers are gravitating to, we see 2 key trends. Designer brands still dominate the fragrance market at 75% and are still growing ahead of the overall fragrance market. This shows the importance for our leading designer fragrance brands such as Hugo Boss, Burberry, Chloé, Marc Jacobs or Gucci. At the same time, niche pure-player fragrance brands are still very small, but growing extremely quickly at more than 3x the market growth rate, and this is an area where we intend to build our presence in the coming years. On this slide, you can see the tremendous success of our fragrance innovations launched this year, which have been predominantly brand extensions; Boss Bottled Eau de Parfum, Burberry Her Eau de Parfum, Gucci Flora Gorgeous Jasmine and Burberry Her Elixir have all ranked amongst the top innovations in the key markets. Looking ahead, while we cannot share too many details yet, we will have a major female fragrance launch and a major male fragrance launch soon. And at the same time, this May, we will also reveal a new niche Coty-owned fragrance brand, which we launch next year, playing in the rapidly growing ultra-premium niche part of the market. As we continue to win in the fragrance market, our fragrance portfolio is structured for long-term success. Our top 6 fragrance brands account for over 80% of our Prestige fragrance business. Importantly, none of these licenses are up for renewal in the next 6 years. In fact, the average remaining duration of these licenses is 10 years, and there are no early exit options. And our licenses allow us to take the brands into multiple beauty categories. Complementing our strong position in Prestige fragrances is our growing presence in Prestige makeup. It's important to highlight the underlying trends in the Prestige makeup market. In the last 5 years, the 2 parts of the Prestige makeup market that are continuing to gain share are couture makeup brands on one side and [ Indie ] brands on the other side. And these trends are expected to continue in the coming years as well. The growth of couture makeup brands clearly confirms the potential for our Prestige beauty brands, Burberry and Gucci. Similarly, the growing penetration of [ Indie ] makeup brands confirms the potential for Kylie makeup. We've been ramping up our presence in Prestige makeup in record time, as you can see it on the slide, where we were not present in this category just 2.5 years ago, in 2019. By fiscal '22, Prestige makeup accounted already for 4% of our sales, led by Gucci, Burberry and Kylie Cosmetics. And we continue to target growing this segment to approximately 10% of our sales in fiscal '26. Not only does Prestige makeup represent a sizable white space opportunity for Coty, there are also a lot of synergies, as you can imagine, with our Prestige fragrances business. Adding a makeup offering to our counters for Gucci or Burberry increases the productivity of our counters by over 30% through cross-selling. This is clearly a key positive for our broader Prestige division. And now I'd like to focus on skin care, which we believe represents the biggest and most profitable white space opportunity for the company. And very importantly, we intend to capitalize on the skin care opportunity through Coty's superior skin care technology and IP and strong and differentiated brands. As I discussed earlier during this presentation, Lancaster has been at the forefront of the biggest skin care innovations over the past 70 years. Again, the first retinal patent, first DNA technologies into a cream, skin oxygenation, vectorization of active ingredients that's becoming the name of the game today and full light protection. Importantly, our patents behind these critical technologies extend for many years to come, ranging from 2027 to 2032, with additional patent applications in the works. As we shared at our Skincare Investor Day last September, our ambition is to double our skin care business to over $500 million in the coming years. As you can see here, we have a robust brand portfolio covering the full range of price points and subsegments, from Monange and Paixão at the entry level in Brazil to philosophy at the entry premium level, to Lancaster at the Prestige level and soon Premium Plus and Orveda at the ultra-premium side of the market. In addition to covering all price points, all consumer psychologies, our Prestige skincare brands also have distinct brand positionings and sense of purpose. Lancaster will be the brand that will harness the skin self-healing power with repair as the brand's DNA. Orveda works with the skin, not against it, bringing forth your natural youth glow. Philosophy offers efficacious products without irritating the skin. Kylie Skin offers Gen Z consumers a skincare toolbox, and SKKN BY KIM brings dermatological efficacy to a large number of people. As we entered calendar '23, we are about to kick off many exciting initiatives in our skincare business. The most exciting of which is the launch of Lancaster Premium Plus Skincare line called Ligne Princière bringing to the forefront Lancaster Heritage as the exclusive brand of the Monaco Royal Family and of Princess Grace. This revolutionary line will launch next month in Mainland China, Hainan and select Travel Retail locations. Formulations of Ligne Princière in large-scale tests in China beat the 2 best-selling serums of the market. The launch will be fully omnichannel, as we will be opening new counters and new stores while also launching Ligne Princière on Tmall followed quickly by [indiscernible]. Let's take a look at the new brand video, which will begin airing very soon. [Presentation]

So as important as the brand communication is the brand merchandising as we bring the brand to life for consumers for the first time in China. Let's take a look at the video of one of the beautiful store locations we will be opening shortly in the country. [Presentation]

So turning now to our ultra-premium skincare brand, Orveda. The brand was conceived from the very beginning by me and the Co-Founder of the company to be clean vegan sustainable and [ odorless ] from scratch, leverage the power of biotech and biofermentation to create formulas that had up to 15 times more active ingredients than average skincare without harming the skin barriers. Orveda was one of the first brands to focus on the skin microbiome. We see tremendous opportunity for this brand in key markets like China, the U.S. and Travel Retail. And importantly, the brand was designed from the very beginning with the Chinese consumer in mind, assuring that the formulas and textures would work well in this critical market. You have to know that, despite its very young age, it's a brand that's been on the market for 2 years maximum. Orveda already won multiple Prix d'Excellence awards, consider it to be the Oscars of the beauty industry. This very young skincare brand is already Coty's most awarded skincare brand globally. The third key brand and the biggest in size is our skincare portfolio is Philosophy. Philosophy was created over 20 years ago by Cristina Carlino and was a leading niche skincare brand in the early 2000s. While the brand eventually drifted towards body care, there are 2 important points to stress. Number one, our data shows that philosophy continues to have a large and devoted community of users who love the brand with the highest advocacy level online. Number two, Philosophy's Hero products like the purity cleanser and the macro delivery Exfoliator remain the top rated and some of the best-selling on the market. We will, therefore, be reigniting this beloved U.S. skincare brand in the coming quarters, launching a new transversal serum, rebranding the star products and introducing new assets and new website and a new merchandising expression. Turning now to China and Travel Retail, the 2 areas, which represent the next legs of outsized growth for the company. Starting with China. With the market now reopening after a prolonged COVID lockdowns, it's important to remind about the structural growth drivers, which will drive outsized beauty growth in China for many years to come. Number one, China's per capita beauty consumption is still less than half of mature markets like the U.S., Europe, Japan or Korea. Number two, whilst China beauty market continues to be dominated by skincare, demand for Prestige fragrances has increased by over 60% versus 3 years ago, growing 1.5x faster than the overall beauty market. And number three, fragrances are now over 10% of China's beauty market. And Chinese consumers continue to gravitate towards the most premium fragrances even more than Western consumers. So the fragrance opportunity in China is, as you see it, immense. Against this attractive market backdrop, our business in China is still relatively small at 4% of our revenues. However, we've been scaling our China business quickly and building out our footprint in the market. You can see in this video, our futuristic garden team booth at China recent International Import Expo. In fact, Coty is already the #5 Prestige fragrance player in this country. Our business here -- there is roughly 80% Prestige and therefore, very profitable with gross margins roughly 70%. And with our highly desirable brand portfolio, we see significant opportunity ahead for Coty in China. Our ambition is, therefore, to more than double our China sales to over $600 million. Shifting to the second big market opportunity for the company, Travel Retail. While Global Travel Retail have been rapidly rebounding over the past year, as countries removed COVID restrictions, international traffic is still over 20% lower than 2019, particularly in Asia. Against this backdrop, Coty's Travel Retail business is now back to 8% of our overall sales or a teens percentage of our Prestige business on par with pre-COVID levels. This speaks to our focus on this key channel over the past few years, growing our market share through: number one, expanding our category presence; and number two, increasing distribution. And of course, this expansion of our Travel Retail business is also nicely accretive with gross margins of roughly 70% again. The critical piece of our market share growth in Travel Retail in the coming years is our category expansion. Pre-COVID Coty was predominantly a fragrance player in this channel. As we ramped up our footprint in Prestige makeup last year, 1/5 of our Travel Retail sales came from Prestige makeup. And based on our plans for the coming years, we see skincare reaching close to 10% of our Travel Retail sales by calendar '26 on top of almost 20% from Prestige makeup. Ultra-premium niche fragrances will reach over 10% by calendar '26 here again. We look for the Travel Retail channel to continue to rebound in the coming years as more consumers return to travel, and we continue to expect outsized growth in our Travel Retail business as we broaden our portfolio presence. Combined, our ambition is to grow our Travel Retail sales by roughly 50% in the next 3 years to over $600 million. Finally, we are continuing our journey to become a leader in ESG. In the past year, we've had a number of critical milestones and industry firsts. We announced a new carbon targets formally approved by the Science Based Targets Initiative. We pioneered in our industry gender-pay equity and gender natural parental leave, and we launched the world's first carbon positive fragrance. We also received a top quartile ESG ranking in our sector by Sustainalytics. We pioneered the use of carbon captured ethanol in luxury fragrances, and we continue to improve the carbon footprint of our facilities with 3 of our production sites now carbon neutral. To summarize, we've made tremendous progress across our strategic pillars. With that, let me turn it over to Laurent. Laurent, the floor is yours.

Thank you, Sue. And in hand with the strategic progress Sue has just described, Coty has also made very substantial financial progress in the last 2.5 years. We significantly improved our P&L and our balance sheet. Let me start with the P&L. We've grown our core revenues at a CAGR of 10% to 11% on a like-for-like basis. This is, of course, excluding ForEx and is also adjusted from the Russia exit. We've grown EBITDA at a CAGR of 12% to 13% in the last 2 years. And this is despite significant ForEx headwinds to profit this year. And adjusted EPS has increased 7x in the last 2 years. So strong profit growth was fueled by very strong margin expansion. Gross margins have increased by roughly 400 basis points in the last 2 years. We are on track to end fiscal year '23 with gross margin of roughly 64%. On adjusted operating margin, we are also on track to increase by roughly 400 basis points, and we expect to end fiscal year '23 with adjusted operating margin of approximately 13%. At the same time, we significantly improved the health of our balance sheet. We lowered our leverage by 2.7x in the last 2.5 years. We ended calendar year '22 with leverage at around 4x, and we are well on track to end calendar year '23 with leverage towards 3x. This leveraging has been enabled by both tactical asset monetization and strong free cash flow generation. In fact, we generated over $500 million free cash flow last year, and we are on track to generate over $400 million free cash flow this fiscal year. We have been delivering this strong gross margin and profit growth, despite accelerated inflation. For fiscal '23, we continue to expect COGS inflation at about 2%. And we have been able to offset this pressure through key areas with: Number one, pricing, we have taken single-digit pricing in Q1. We are implementing a new round of price increase mid-single digit right now in Q3. And we are evaluating another potential price increase in early fiscal '24. Number 2 is mix. While the growth of Consumer Beauty in the last 6 months maintained incrementally negative mix equation, all the strategic growth pillars that Sue has just discussed are margin accretive. And of course, the continuing premiumization of the portfolio, both in Consumer Beauty and in Prestige, we will continue to improve the mix. Number three is savings. We've been able to generate strong savings to fuel our agenda. We've delivered $500 million savings to date. And we are targeting another $265 million of savings in the next 2.5 years. On earnings call a couple of weeks ago, we raised savings targets for the next 2 fiscal years to $165 million combined. This is roughly 60% coming in gross margin, and the rest is in fixed cost and [ A&CP ]. A lot of work streams underpinning these planned savings, rolling out strategic revenue management program to key markets, continued work on material value analysis, optimize processes on marketing materials ordering and continuous productivity in supply chain and distribution. Enabling the simplification of the business and strong margin expansion has also been our strong focus on productivity. At our Investor Day in November '21, we highlighted that one of the drivers behind our targeted gross margin expansion is reducing the tail of our portfolio. Nonproductive SKUs that account for roughly 1/3 of the SKUs but a single digit of percentage of revenue. Over the last 2 years, we made very strong progress on this front. In Consumer Beauty, we cut SKU by almost 1/3, whilst the revenue per SKU more than offset this increasing over 50%. In Prestige, which is a less complex portfolio, we reduced SKUs by 16% in the last 2 years, while revenue per SKU is also up around 50%, in part due to our continued premiumization. This has been one of the critical parts of the 400 basis point improvement in our gross margin. We are also maintaining strong focus on organic and inorganic cash generation. We have 10 different work streams and there's a [indiscernible] umbrella to support this, all key areas of working capital and opportunistic monetization in real estate, tax and brands. Recent examples include divesting Lacoste license back to the fashion house, payment in several tranches with first tranche of $55 million received in Q2. Strong improvement in DSO to 25 days and reducing onetime cash cost by 70% last year -- versus last year to below $50 million. The strong deleveraging momentum and significant financial and operational progress is being recognized by our key stakeholders, including the rating agencies. Last week, both Standard & Poor's and Moody's upgraded Coty by 1 notch, confirming our strong momentum. Let's move now to our attractive growth algorithm with a strong financial improvement in the last 2 years, let me turn to the path ahead. In light to the strong and resilient beauty market and the significant untapped growth potential for Coty that Sue has just described, we continue to expect a very attractive growth algorithm for the company. Touching briefly on Q3. When we reported our Q2 results 1.5 weeks ago, we indicated that in light of our improving service levels and ongoing strong beauty demand, we were seeing a sequential acceleration in core like-for-like sales growth in January. With another couple of weeks under our belt, we now expect sequential growth acceleration for the total Q3 for the core business. This also translates into improved trends on a reported sales growth basis, given the ForEx and the Russia exit headwinds moderate in Q3 and even more in Q4. At the same time, we are maintaining adjusted EBITDA and EPS outlook for the year, as any incremental profit will be reinvested in our critical skincare initiatives. Looking out over the next 3 years, we continue to expect a 6% to 8% like-for-like revenue CAGR, consistent with what we shared 1.5 years ago. Based on the momentum in our categories and progress we've made, we now expect to be at the upper end of that growth outlook. This will be fueled by strong momentum in our largest segment, Prestige fragrance, and outsized growth in the areas where we are still small, Skincare and Prestige cosmetics. Consistent with what we've shared, our focus is on driving a balanced growth agenda. Based on our targeted growth algorithm, we expect skin care to reach roughly 10% of sales from 5% currently. Prestige cosmetics to reach roughly also 10% of sales from 4% currently and negligible in fiscal year '19. Prestige fragrance to still be the largest category of below 50% of the total. Similarly, from a regional standpoint, we remain confident in the solid potential -- in the solid growth potential of the U.S., Asia Pacific and the Rest of the World. However, the outsized growth will be coming from China, where we expect to more than double and Travel Retail. Based on the regional growth algorithm, we expect further diversification in our regional sales footprint. Specifically, we expect both China and Travel Retail to reach roughly 10% of sales each by fiscal '26 or roughly 20% combined from roughly 10% currently. Turning to the P&L growth algorithm. Our outlook remains largely consistent with the algorithm we shared in November 2021. We continue to see like-for-like sales CAGR growth of 6% to 8% in the next 3 years, though we now anticipate to be in the upper end of this range. We continue to expect gross margin in the mid-60s, 9% to 11% EBITDA CAGR and mid-20s EPS CAGR, supported by the lower interest expense as we deliver and lower share count. From a free cash flow standpoint, all of this translates into strong cash generation and steady deleveraging. We continue to expect free cash flow over $400 million per year this year, driving our leverage towards 3x exiting calendar year '23. By fiscal '26, we expect adjusted EBITDA in the $1.2 billion to $1.3 billion range, free cash flow over $500 million, leverage of around 2x exiting calendar year '25. Finally, this brings me to the framework for our capital structure and anticipated capital returns. First, we exited calendar year '22 with net debt below $3.9 billion and leverage of around 4x. Over the next 3 years, we expect to generate a minimum of $400 million free cash flow annually or over $1.2 billion cumulatively. We also continue to target divestiture of our Wella stake by calendar year '25 with proceeds of over $1 billion. Together, this brings cash inflow of over $2.2 billion in the next 3 years. Assuming 3 quarters to deleveraging and a quarter to capital returns, this should drive a very attractive capital structure in calendar year '25, including net debt below $2.5 billion, leverage around 2x, capital returns of around $500 million, including the $400 million share buyback we have announced via equity swaps with the banks. With this, let me hand over now to Sue for a few words of conclusion.

Thank you, Laurent. So 30 seconds of conclusion. So I think you are now convinced that we are a beauty powerhouse with a unique, diversified business model. We have made significant strategic and financial progress in the last few years under the new leadership team. And number three, we have significant untapped potential ahead of us across markets, categories, price tiers. We have the people, the know-how and the brands. Thank you very much.

Thank you, Sue. Thank you, Laurent. Thank you, Coty. Let's go right to break out next door. Thanks.