Coty Inc. (COTY) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. We're very pleased to have Coty with us here today, including Stefano Curti, Chief Brands Officer of Consumer Beauty and Alexis Vaganay, the CEO of Consumer. And also, just before we start, a quick disclosure, please see the Morgan Stanley research website at morganstanley.com for our research disclosures. And with that, Stefano and Alexis, thank you for being here today.

Maybe just first, help us frame a bit the Consumer Beauty business for the audience, size, category exposure, geographic presence, it's obviously one piece of overall Coty. So just help us give a little bit of background, and I'll tease the second question, which is, maybe, just talk about how this business has really evolved the last few years under a new management team with this great turnaround we've seen at the corporate end.

Well, thank you very much for giving us the opportunity to introduce the Consumer Beauty division to what have been -- obviously, we are addressing the value-conscious consumers with this division. And it's been a great division of ours. We've managed to post in fiscal '22 plus 8% growth. We grew another 11% in fiscal '23 like-for-like. And in Q1, we posted another 10% growth, right, in the past quarter. So I think it's evidencing the fact that we have a great portfolio of brands, renowned and a great footprint geographically. So if I get into the categories now, we primarily have a [ Coty ] Cosmetics business, which accounts the 2/3 of our net revenues. It's made of brands such as CoverGirl, Rimmel, Max Factor, Sally Hansen. We have also a portfolio of body care, which accounts for 20% of our total business. And here, we have brands such as adidas, but also local Brazilian brands called Monange, Bozzano. And we have a mass scenting portfolio, which accounts for 15% of our sales. And that's made of brands such as Vera Wang or Nautica, just to name a few, okay. From a geographic standpoint, we look at the countries, 1/3 is made in Europe, again, with brands like Rimmel, Max Factor, adidas, another 1/3 is made in the U.S., CoverGirl, Sally Hansen, and 20% is made in Latin America, primarily thanks to our Brazilian portfolio, where we also have a big footprint, which means that the rest of the world is 15%, and that leads me to highlighting the immense opportunity that we have. Because the rest of the world, outside of Lat Am, North America and Europe, is still kind of a white space for us, countries like Africa, China, and I'd be happy to expand later on maybe.

Sure.

You asked about the evolution of the business and the recent turnaround. Thank you for that. Yes, I think the phase of the turnaround starting in 2020. And it started with the new management team, as you mentioned, Sue Nabi, under the leadership of Sue Nabi, Alexis -- I mean, I joined 3.5 years ago, the Executive Committee was installed there, and Alexis became also the Chief Commercial Officer for the division. Prior to that time, Coty was under significant pressure. Coty had been losing market share, profit and sales came down. And also, there was a reset of the space on shelf. So that's where we are coming from. When we were appointed in 2020, we focused on a couple of things. The first one was an assessment of our key brands, key equity, the strengths and the values where they're coming from. And then we relaunched them systematically one after the other. The first one was CoverGirl in the beginning of 2021, then followed by Rimmel, Bourjois. And when I say we launch, I mean, we looked -- we often say we looked back to move forward. So we looked at the values of the brands, and we decided to build on them, but refresh them in terms of visual identity, in terms of messaging, innovation and advertising. The results, as you mentioned, it's been a turnaround. So we have either maintained or incrementally grown shelf space. The revenue growth was strong as Alexis mentioned, plus 8%, plus 11% in 2 consecutive years and then the last quarter plus 10%. We grew our retail sales either in line with the market or faster than the market and probably the fastest place where we have grown is e-commerce, where just last quarter, we grew CoverGirl by 25%. And we have expanded our adjusted operating market margin. Now we are focused on share gains and strengthening the share gains. So we are focusing on innovation for the future. We are focusing also on pivoting our marketing model to more advocacy and more digital. Maybe we'll touch upon a bit later in a new consumer engagement way.

Okay. Well, that's a great segue for delving into social media. Obviously, in this sort of core color cosmetics category, there's really been a shift to using social media advocacy-driven brand building over the last few years here. You guys have made a lot of progress. Can you talk about what you've done in the specific area? What inning you're in when it comes to sort of embracing this new strategy of engaging with consumers? And where do you think you stand today just in terms of executing relative to peers? And again, the evolution over the last few years here?

Well, you're right. It's been a recent development for Coty, which also means it's a huge opportunity for us ahead of us. Over the past year, we have moved progressively our attention, our focus, our investments from traditional media into advocacy, digital, et cetera. And we continue to shift. What we've also introduced for 2 years in a row is a marketing mix modeling. So we are looking at ROI, comparing everything in the mix from BAs, Beauty Advisers, to television, to audio, to digital, social, et cetera. So we are looking at different ROIs to help us make those decisions. Now we are focusing on engineering virility through advocacy. Everyone wants to become viral. And the way we are making the first steps. One, we have increased our focus on influencers and digital creators. Last, in like 12 months ago, we used to work with approximately 100 influencers for each of our new product launch. The next product launch on the country that one is coming in January, we're going to be working with 5,200 digital creators. So from approximately 100 to 5,200. That's one example. Another example, we have been opening TikTok Studios in multiple countries. Just in this country, we have a TikTok studio in New York, for instance, and a TikTok studio in Miami because Miami is a platform for us to get more insights and more in touch with the Hispanic community, it also serves for the Latin America creators. And we invite them in our space because we have good equipment. Sometimes they don't have space, especially in New York or access to good equipment. Also, we allow them to, perhaps if they also they are influencers in fashion to use our facilities. So we are strengthening. We are growing with the small, we are growing with them. Other things that we are doing, we are doing co-development. We started doing co-development. For Rimmel, for instance, we have created a Rimmel Squad of 9 global influencers, and we are working with them to develop, in fact -- to develop new products. In fact, the first new product co-developed with influencers would be a Rimmel eye product that is about to be launched. We're also co-developing collections, the collection with -- of CoverGirl with Kelsea Ballerini, a collection of eye shadow just launched for the holidays and the collection of Max Factor to -- with Priyanka Chopra Jonas, that is our ambassador. And we are seeing the first results. So in the U.K., for instance -- and this is only early stages. In the U.K., now Max Factor, Rimmel are among the top 10 in EMV and VIT, earned media value and VAT, visibility impact and trust. So we become top 10. We have 3 multimedia, the EMV just compared to last year on Rimmel. And on CoverGirl, where we have started a bit later just in the last period that we have posted, 4.5x EMV compared to previous months. So again, just the beginning, a lot is happening, and therefore, we have tons of opportunities ahead of us.

Great. That's helpful. And one of the things that you really need to drive that social media aspect is innovation. So can you talk a little bit about how you're approaching innovation in Consumer Beauty in general? What areas are you prioritizing? How important is that in building brand equity and also maybe just forward contribution relative to recent history? And maybe both in this division and just broader organization, you guys can talk a little bit about how you've reinvigorated the innovation process at Coty the last few years.

Super important. The of innovation is actually increasing. In the past, there was -- customers were in the camp of fewer and bigger, and today is more and bigger. What we've done, we have followed some key innovation principles. First, we have identified the areas where we want to win big. CoverGirl, for instance, is a market leader in clean beauty, and CoverGirl is market leader in the skinification of color cosmetics. Another principle is designing product for advocacy. What does it mean? Now the world has moved to visual claims. So we have our products that need to become more visually appealing so they can be relevant on channels like TikTok, for instance, specific features of a curved brush or a 2-in-1 mechanism, et cetera. So things that can create a storytelling on TikTok. And then we have also followed another principle that is identifying white space opportunities. And I'll give us some example of that. Another thing is about the time line of new product development. So we are accelerating. When we took over, Alexis and I, product time line for new products was around 18 to 24 months. Today, we are down to 8. So we can develop products and launch products within 8 months, and we are targeting 13 weeks for some key categories. Some examples of what is -- what we have done, CoverGirl, I mentioned, undisputed leader in clean beauty, and some example has been the recent launch of Cleantopia, a 100% natural fibers that deliver 300% more volumes. We have launched Clean Fresh Yummy Gloss. Yummy Gloss actually is a product that has gone really viral on TikTok and other social platforms and we have relaunched the cleaning visible powders. So we continue to anchor ourselves in clean. The clean portfolio in fact of CoverGirl has been grown by 20% just in the last quarter. We are continuing to skinify CoverGirl with skin beauty. Remember, CoverGirl sells the #1 antiaging foundation in America, number one. It's called Simply Ageless. And we have just new Simply Ageless product coming up in January. It's going to transform again the skinification journey of makeup. We have also -- in terms of designing for advocacy, for instance, we have launched Max Factor Lash Wow mascara, which is a 2-in-1 mascara. Basically, for volume and for length. If you want to lengthen, you use it in the first position, if you want to give more volumes, you twist it. So it's kind of the first 2-in-1 mascara on the market, and it's really designed for advocacy. Another thing that we designed for advocacy is [ Dunes ]. The [ Dunes ] phenomenon is big, especially on TikTok. So we target some luxury products there, and we aim to match their performance. And this is, for example, the Simply Ageless product that is about to coming up in January. And finally, filling white space opportunity, which we still plenty. An example is Sally Hansen. Sally Hansen is the market leader in this country in nail polish with over 43% market share. Our second competitor has half off of our share. But we've always competed in nail polish or nail care. And recently, we have launched artificial nails, which is a booming category where we're already taking share. So some -- these are some of the guiding principles and some examples of how we evolved our innovation model.

Great. That's helpful. So Alexis, you're here in the U.S., and we love our data. So we tend to look at U.S. scanner data quite a bit. And the question is really on the CoverGirl brand and the trajectory of that brand. I think scanner data doesn't necessarily tell the full story. So maybe just give us overview of that brand's trajectory, a little bit of sort of overall flavor for the brand, how it's performing across channels, and maybe how the untracked channels are a little different from some of the tracked channel data? And obviously, you've seen a nice turnaround in that brand over the last few years. As you think about the underlying drivers behind that, how sustainable are they going forward? We touched a little bit on innovation, right? But what are the key drivers there and how sustainable are they going forward?

I'm glad you asked because CoverGirl is the #1 brand. So it's primarily based in the U.S., but it's still our biggest brand. So making sure that we groom it the right way, in a relevant way for consumers is absolutely critical. So on the back of all the relaunch that Stefano just described, we managed to post a plus 10% growth on CoverGirl in fiscal '23. We're still enjoying a pretty sustainable momentum in the beginning of this year in Q1. So it's -- we've got momentum behind the brand, clearly. And that's thanks to, not only the good work done from an equity standpoint, but also from a shelf standpoint. We managed to expand our distribution in the U.S., not necessarily in channels that are tracked by Nielsen, but we grew during the spring reset. And the space looks good as well. In the full '23 and looking forward to '24, we're also confident in terms of shelf space. So that's a great story for now between the rejuvenation of the equity, but also the shelf space, okay? Now something that I cannot insist enough on is the fact that Nielsen as you -- most of you really cover is brick-and-mortar. So in brick-and-mortar, the gap versus the category -- between category and cargo is shrinking down. So we're still lagging slightly behind, but it's more than offset by our gains in e-commerce. And that's strategically really important for us because even if it's not tracked by Nielsen, we want to overdrive e-commerce because this is where our shopper, especially Gen Zers shop. So if you look at e-commerce performance of CoverGirl, it's exceptional, double digits. It's accretive. Our margins are really strong there. And it's driven by traffic. We saw an increase of 10% on e-commerce. It's driven by conversion. We managed to gain 1 full point of conversion online and mix because we premiumize as well and our innovations are doing extremely well in e-commerce. So clearly, this is how, if you paid attention to the last share, which was delivered in September, we managed to gain share by 20 basis points in this country when you aggregate brick-and-mortar and e-commerce together, okay? So great momentum, and we're happy to see CoverGirl flourishing in this country.

Right. And do you think is that momentum generally extendable as you think about is this brand back to consistent growth, is it a share gainer in the U.S. internationally? How do you sort of think about it conceptually going forward?

Yes. Absolutely. We believe that CoverGirl has got what it takes to really win the hearts, not only of its legacy consumer, but also the newcomers, the new joiners, Gen Z. And with the work that we -- Stefano highlighted in terms of pivoting or support model towards more advocacy, we even start thinking of Gen Alpha now.

Okay. Great. And Sally Hansen is another core part of the U.S. business, a little different than some of the other brands like CoverGirl, obviously, in terms of where it's focused. Can you just talk about how that brand is performing? What the big opportunities are from here as you look out over the next few years? You obviously touched a little bit on innovation, but talk about the growth drivers for that brand going forward.

Yes. Sally Hansen is one of our largest brands, one of the top 3 brands within Consumer Beauty. It's an American-based brand, and we have continued to strengthen our market share. The last read was 43% market share, absolute market leader, continue to strengthen actually a little by little. And as I said before, our second competitor has half of our share. So a very, very big gap. The internationalization of the brand has been so far successful. So 1.5 years ago, we've launched Sally Hansen in the U.K. And just in less than 2 years, has become the #2 nail polish brand in the U.K. By the way, the #1 is Rimmel, so it's another one of ours. So we say nail in general as a category that is going to be a big driver, and there is already a big driver for Consumer Beauty, both in terms of revenue as well as in terms of margin because it's a highly accretive category in terms of margin. And then we have plenty of space to grow because we are primarily nail polish, nail care, but then there is another world that is skyrocketing at the moment, including artificial nails, including strips, stickers, including nail art. And this is the next frontier for the brand, just entered with artificial nails, but we have nail art and more coming up. So we feel very strongly and it's a big contributor, as I said, of margin to the division.

Great. Well, maybe let's move from nail to fragrance. Can you talk a little bit about the mass fragrance portfolio? What's sort of the role within Consumer Beauty in general? And what are the key focus points, key drivers of that business as you look going forward?

So fragrance is approximately 15% of our Consumer Beauty business. And we do believe it's actually our current and next priority for the division. And we believe we have the right to win in this category. As you know, Coty is the #1 market leader. It's the absolute market leader in fragrance in the world. So we have strong capabilities. We have strong R&D capabilities. We have a large R&D center in Switzerland. We have a big manufacturing capabilities. We, in fact, have the largest manufacturing plant for fragrance across all company based in Spain. And obviously, larger distribution capabilities in mass market. So that's why we believe that with the portfolio of brands such as David Beckham, Nautica, Vera Wang, adidas, Bruno Banani, Bourjois, Mexx and Jovan, and more to come, we have the right to win also in mass. Because what we need to do really in mass is not just building market share, it's actually building the category. The category is quite underdeveloped in mass, and it's a big opportunity. So we have the opportunity to create this new world of scenting experiences that provides surprisingly affordable, attainable, everyday luxury, but we're not compromise. In other words, we have to continue to delivers that prestige feeling, but an accessible price point and accessible channel. The channel doesn't exist, for instance, in Latin America, and we're just starting creating it. For instance, in Latin America, there is a channel of stores and a channel door-to-door, nothing in direct stores, and that's what we have entered with our portfolio brand recently. We're doing this in the rest of Lat Am as well. So it's not just the market share, it's a category creation, and we believe we have the right to win. Highly accretive from a category perspective in terms of margins. So it's very important financially for us to grow that category.

Okay. And building on that, we've obviously seen a broader acceleration in the fragrance category over the last few years. That's true, just not on the Consumer Beauty side, but on the Prestige side, so I'll cheat a little bit and bring in Prestige. But just would be great to hear your perspective on what's driven this rebound in the fragrance category? How sustainable it is as you look going forward more from sort of a holistic beauty standpoint?

Fragrance across Prestige and mass has really been an excellent, buoyant category especially during COVID and after COVID. What we are seeing is increased penetration and more frequent users of the category. And if -- and we know that it's because the attitude towards fragrance has changed. It's now connected to health. It's now connected to self-reward. It's connected to the fact that you can have a little piece of luxury without spending an arm and a leg. I mean when we have some of the fashion -- biggest fashion brands in the world, and today to afford that new Gucci suit, for instance, you have to spend $4,000, $5,000. Not everyone has $5,000. But most people can be part of the Gucci or the Burberry world by spending $150 on a fragrance. So we call it the Fragrance Index. There was the Lipstick Index. So there is a Fragrance Index. And the Fragrance Index, we believe is -- remains in full effect. We expect near double-digit growth to continue the high single-digit growth of the category in Prestige, mid-single-digit growth in mass, driven by more Gen Z approaching the category, more men approaching the category and the category being used more often. Actually, if people use the fragrance as much as I do, then the market would be 10x as big.

We'll hope for that. So we started out really on top line, Alexis, maybe we'll shift a little bit the margins and the financial profile of Consumer Beauty. In the past couple of years, we've obviously seen a lot of progress in terms of operating profit dollars as well as margins. Margins are still below the company average. Talk about some of the key drivers and the margin progression from here. And maybe also how much pricing ties into that AC&P (sic) [ A&CP ] investment, how you think about that? But again, margin drivers in general and sort of tie in the pricing and advertising side.

So the Consumer Beauty division, to your point, is delivering an EBITDA that's slightly below the corporate average. We've made great progress in the past 2 years. We've managed to boost our margins by more than 100 basis points. But of course, we focused on delivering way more than that. And for that, we have a clear road map, which is based on several levers that are pretty clear. The first one is working on our cost of goods. We have a great procurement department helping us, and we've seen tremendous results in the past few months coming out of that cost of goods efforts. We've got also a program to really strip out all the nonvalue-add components that we have in our products. I'll give you an example. We spoke about fragrances where we've lowered slightly the quality of the glass. That's not even noticeable by consumers. We've tested that, but that's delivering savings, for instance. And there are many plans that are working in that vein. We have of course, worked on our mix towards much more elevated innovations and more accretive categories. So that's what we call internally strategic revenue management, where we work really in details into the product mix, category mix to really make sure that we optimize our margin. And last, but not least, of course, we have still our innovation streams, that is always margin accretive. And we make sure that we don't launch anything that's at least 1 full point accretive in terms of our margin versus average. So you see that we have a road map, and we're very confident in our ability to deliver several percentage points of margin improvements in the next couple of years. And it's really critical because in the meantime, we -- our goal is to maintain our level of investments in terms of advertising and promotions. These are key. The Consumer Beauty division, they're all about stimulating demand, pivoting our model towards more efficiencies when it comes to advocacy, this to also fuel the amazing white space opportunities that we have in terms of categories, but also in terms of geographies, okay? So yes.

Great. That's helpful. And just looking at geographic opportunities, obviously, a lot of the investor base is in the U.S. and Europe, but you guys have a very vibrant business down in Brazil and a nice infrastructure down there. So take us through that business a little bit and the opportunities to grow that business over time and what you guys are thinking on that front.

So as I was mentioning in the beginning when we introduced the Consumer Beauty division, our footprint is primarily North American and Western Europe, right? So which in turns makes the rest of the world extremely interesting for us because we have a lot of leeway for growth. That's our growth with [indiscernible] and especially mass -- the Consumer Beauty division and mass fragrance, for instance, have a greater runway for growth in these geographies. I'd like to take the example of Brazil, where you rightly pointed out the fact that we're very strong today with a Brazilian portfolio of brands. But actually, we have a great opportunity to also launch our mass fragrances there. So Stefano alluded to the fact that we're now introducing our brands into the new channel, the direct store channel. If you know the Brazilian market, it's the biggest fragrance market per capita in the world, $4 billion. But today's door-to-door, managed by the reps of O Boticario or Natura. What we have started to do is to introduce our mass fragrance portfolio into the direct store channel to turn our brands and make them available physically into one of the most granular channel that we have in this country. And we've identified the opportunity to launch in 15,000 doors. So currently, we've launched in 4,000 successfully, amazing response from consumers and retailers. We see driving on -- working and focusing on driving more productivity per door through the advocacy model. And then we can leapfrog and launch in the 15,000 doors. The other example I can take is, of course, China, where the same could happen. So we have plans now to launch our mass scenting portfolio in China. And we also have plans -- I mean we actually already started in India, where we've launched our new light affiliate. We have boots on the ground, and we're now going direct with our mass sensing portfolio in India. That's one example or one category just to illustrate the immense opportunity that we have to leverage our brands in other geographies and just North America and Western Europe.

Great. And maybe turning back to the U.S. Just your perspective around category growth and perhaps some of the subcategories that offer the most growth opportunity. You obviously talked about momentum on cosmetics, nail, fragrance, right, they're pieces of the portfolio where you're doing very well. We obviously saw malaise during COVID for obvious reasons, but we've seen a pretty nice recovery in recent quarters. So I'd just love a general perspective on sort of health of the category in the U.S., maybe some of the subcategories that are most attractive, more from a category growth perspective than the work that you guys have been doing internally at Coty and just any perspective there will be helpful.

So on -- so the U.S., first of all, the category -- the Beauty category is super-resilient, as I said. It's a great category to be in. And in the past 3 months, for instance, it grew 8% in the U.S. We see similar trends across the world in developed countries, high single digits in developing countries, double-digit growth, right? So fantastic business to be in, extremely resilient, and we're above pre-COVID levels to start with. The second thing which is important is to highlight the fact that it's still a category that grew volumes. I know it's a lot our -- a lot is talked about around CPGs and FMCGs and categories. But the Beauty category still grows volumes in this country and that's where -- and that's really important. It's not just driven by price and the -- so it's really a category that is, what I like to call, crisis-resilient company -- category, right? Beauty is really not -- yes, that's really what I wanted to say. So great momentum, category-wise.

Okay. That's helpful. And then look, we talked about the category growth being attractive. We talked about a lot of the work that you guys have done behind some of the individual subcategories and brands. Just in terms of thinking about shelf space and sort of how that translates given you've really been able to revitalize a lot of these brands over the last few years. Do you guys see shelf space opportunity for the business from here? And part of the context is, there are obviously a lot of smaller companies that have done pretty well, particularly in the U.S., right, where they've gained a lot of share. In theory, they're gaining shelf space as they move off of relatively low levels. So for business with a little more scale, I'm sort of curious about your momentum and the momentum of some of the smaller players, how do you think that sort of comes together in shelf space over the next couple of years, understanding some of the subcategories are probably different, but holistically?

I see where you're going. So in the U.S. specifically, again, we grew our shelf space back in spring, for instance, not necessarily in channels that are covered by Nielsen, but we expanded the number of doors in this country on CoverGirl, Sally Hansen and were out to do and repeat that with some of our mass scenting brands, right? So clearly, the same is true in Europe. If you look at our brands have either maintained or grown share of shelf. But the biggest opportunity again lies in developing countries, where we can really develop our shelf space in a big way, as I described in Lat Am or Brazil, but even in China and India. So Europe countries either maintain or grow shelf space, developing countries, we can explore our footprint.

Great. That's very helpful. Well, with that, we're just about out of time, so I'm going to end things there, but I really appreciate both of you gentlemen being here today. It was great to hear about the business.

Thank you for the opportunity.

Thank you very much.

Thank you, everyone. Thank you.