Coty Inc. (COTY) Earnings Call Transcript & Summary

I'll have Olga introduce herself, and then we can dive into some of the Q&A.

Sure. Thank you, Deepti. And thank you, everyone, for having us here. Really great to participate in this event and for a great cause and obviously, get the Coty message out there as well. So I'm Olga Levinzon. I have been at Coty for the last 10 years, so it's been quite a while through a very exciting journey for the company. So for those of you who don't know, Coty, we are a pure-play beauty company, about $5.5 billion in revenues, and we have a portfolio of beautiful brands starting at the very high end from brands like Burberry Beauty, Gucci, Chloé, Marc Jacobs, to more [ cosmetic ] -oriented brands like CoverGirl and Sally Hansen, philosophy. So really across categories, across channels, across markets, very broad-based. I lead Investor Relations at Coty. And prior to that, I was actually on Wall Street, equity research, covering a completely different sector. So very niche parts of tech. So I would say beauty is much more fun, much more tangible, and I love the products.

That's awesome. Thank you. And although if you wouldn't mind, just to set the stage a bit to just provide a little bit more on the history of Coty. I was surprised, like Coty has been around longer than Walmart. So it'd be great to just get a little bit of a snapshot and then we can go into some further questions.

Sure. So in fact, next year, we're going to be celebrating our 120th anniversary. So Coty was actually started by François Coty in Paris, France, and he basically revolutionized the fragrance industry. So up until this point -- up until that point, fragrances were really custom-made, very expensive, sold in pharmacies, and he basically brought it more to the masses and department stores with these custom scents and beautiful bottles. And really, that's the heritage of Coty. It's really in our DNA. Prestige fragrances are still over 50% of our sales. So it's something that we do incredibly well and are the experts in the industry. But just to give a sense of where we play and kind of some of the brands, and I mentioned some of that. So we are a pure-play beauty company. If you look globally, beauty is a $400 billion industry and historically has grown kind of 4% to 5%, so really attractive. And it's an industry that's pretty recession-resilient. So nothing is proof -- recession-proof, but it really withstands the test of different economic cycles, because at the end of the day, it's a really emotional category. Consumers want to use beauty products. It's an affordable luxury. It's something that plays into their well-being. So it's very psychological in that sense. And so it's a great space to play in, and to compete in. If we look at kind of our portfolio, a little over half of our business is Prestige fragrances, and I mentioned some of the brands like Burberry, Hugo Boss, Calvin Klein, Gucci, Marc Jacobs. About 25% of our portfolio is in color cosmetics brands. So the brands that many people know, CoverGirl, Sally Hansen, Rimmel. We have also some skin care brands, which is a small part of our portfolio, but a really great growth opportunity for us, so for brands like Lancaster and philosophy. And as part of all of it, we've continued to premiumize our portfolio. So I think if you look back pre-COVID levels, we -- our Prestige business was a little over 50% of our business, but we've been steadily expanding that. We see it as a really great opportunity both in terms of what consumers want. It's obviously very profitable as well. And so the trend towards premiumization is continuing, and we're benefiting from that. We're also a very geographically-diverse business. So obviously, we're here in New York, so everyone knows our U.S. presence, but the U.S. is about 1/3 of our business. And Europe is about 1/4 of our business, and then we have a big presence in kind of Middle East, Africa, which we're building up. We have a big -- a presence in Latin America, really great business in Brazil with a lot of local brands that are very well-known to Brazilian consumers, not yet very well known globally, but it's a great business. And we're also growing in Asia and in China, which is another great growth opportunity for us. And then I think maybe just to summarize in terms of the financials, not to go too much into details into the numbers, but it is important in assessing the stock, but we've had a great momentum over the last few years. We've grown our sales by 13%, 14% on average. We've grown our margins by 400 basis points, so by 4%. We've -- our EPS has grown by 8x in that time frame. And our commitment and what we are targeting is continued growth across sales, across margins, across profits and the across cash flow. So...

Awesome. Well, as Olga said, Coty is one of the few like pure-play beauty companies and one of the big differentiators is the end-to-end supply chain capabilities. And so could you comment a little bit about that and how it really helps you compete in the market?

Yes. And I think that's going back to the fact that we -- our roots go back 120 years. We've really developed these end-to-end capabilities. And I think that's kind of a key differentiator versus some of the upstart brands that you hear about as some of them rise and then they fall. And some of that comes back to what are their core capabilities and how do they withstand the test of time and really continue to get the brand out there, connect with consumers. So at Coty, we have -- we do things end to end. So we have great R&D capabilities across fragrances, cosmetics, skin care, a great portfolio of patents around that and technologies that we continue to develop. We have great consumer insights, so really doing that market research and working with the likes of [ Carey ], who was just talking with many other -- to really understand what consumers in different regions want, what are they looking for, what kind of products we should develop, what sort of features, what sort of technology. So really that consumer and market insight is very key. We have 8 manufacturing plants around the world. We produce the vast majority of our products in-house, so we're not outsourcing. So we're really responsible for the quality of the products, the quality assurance, being able to get things to -- on shelf on time, obviously very key. We distribute our products. We basically produce over 0.5 million orders annually. We supply over 120 different markets around the world. We're in 100,000 doors globally. So really the scale of our distribution, of our manufacturing is really top notch. In fact, speaking kind of the root of our company, which is really fragrances, we have the largest fragrance manufacturing plant in the world. We have a plant in Barcelona where we produce over 1 billion units annually. So really kind of phenomenal end-to-end scale capabilities.

So as I look at your portfolio, it's fairly -- it's very diverse across categories but also across price points, right? You have prestige products, mass products. And when you think about cosmetics, you had said it's relatively resilient category. There's -- obviously, there's this lipstick index that has been coined as you look at previous macroeconomic cycles, but are you starting to see any sort of like shift in, like, consumer sentiment? Are you seeing trade down? How would you describe the pulse of the consumer today?

I mean it's interesting. I think if you kind of look at the overall consumer landscape and different consumer products, in many cases, there's been pressure, there's been talks of trade down, of consumer savings. I think the interesting part of beauty and it goes to kind of this emotional connection that beauty has and the emotional investment that consumers have with beauty is that they're not trading down. So we continue to see our Prestige business, which I mentioned is over 60% of our business, that continues to grow significantly quicker than our mass business. Within Prestige, we continue to see consumers trading up. So fragrances have been on fire for the last 3 years. We don't really see that slowing. But within that, consumers are actually wanting the more premium products. They want the fragrances that last. And so they're going from eau de toilettes to eau de parfums to elixirs, so in fact, there's kind of a trade up instead of a trade down. And same point on when we look at the data around mass cosmetics as well. So consumers are seeing products trending on their TikTok feeds, and they want those products that offer new benefits and in fact, it's causing them to trade up. So when we look at the data across all geographic markets, we really see that the upper price points are actually the ones growing the fastest. So I think within this category, it speaks to when you introduce a compelling product and a compelling design, and it's something -- it's an object of desire, and it's cool, consumers want to buy it and they're willing to pay for it.

Awesome. Now let's talk a little bit about like the younger Gen Z millennial consumer. I think that within cosmetics in particular, oftentimes like that consumer can be a little bit more fickle. A lot of that is driven by just a surge of new entrants in the space, the barriers to entry, and cosmetics are lower than they were a decade ago, right? You can use contract manufacturers, you can directly distribute. You can also like advertise on social media. So although what do you -- like how are you seeing loyalty amongst that younger demographic? And also like what is your strategy in social media? Has it evolved? How are you using TikTok?

Yes. So I would say, maybe starting with the first part of the question around new brands, loyalty has proliferated more. I would say if you've seen barriers -- to some extent, barriers to entry in cosmetics have come down because, yes, you can use a third-party manufacturer. You can kind of bypass traditional retail, go immediately. On e-commerce, we've got viral products going. But what we often see is many of those brands fizzle. So they have a product that works. There's kind of a big pop, and then it's hard to really maintain that momentum, again, because they don't have like those end-to-end capabilities. And also, I think if you were kind of the whole D2C model where you're just online, it's becoming more and more difficult and more expensive to sustain. So traditional retail being present in the Ultas and the Walmarts and the Targets, Macy's, Bloomingdale's, that's -- Sephora, that's very critical and you need to be able to afford that. And so I think for a company like Coty, that's become a key differentiator versus many of these brands, and it's just incumbent upon us to maintain the relevancy of the brands. And that kind of takes us to the second part of your question around the influencer strategy. So clearly, consumers, younger consumers, but increasingly, older consumers, they're on social media, TikTok. To a lesser extent, Instagram is a way where they're brands, where they're engaging with content. This is how they learn about new techniques, new products, where they learn about the ingredients, best way to apply things. It's a source of inspiration. And this is definitely the area that we are leaning into across our portfolio, but including in our cosmetics brands. So in the last year, we have significantly scaled how we engage with influencers. In fact, we've started opening up influencer studios in our own offices. We have our U.S. headquarters are in the Empire State Building. We've actually opened up an influencer studio there where we invite up-and-coming influencers. They have access to top-notch cameras, video, they can edit their content, they can learn about the product so they can post and talk about our brands in an authentic way. And so we're scaling that across different countries. We're collaborating with them on actually co-creating products. So we just started that with our Rimmel brand, which is smaller here, but it's much bigger in Europe. It's a top-selling -- the biggest cosmetics -- mass cosmetics brand in the U.K., for example. And literally, we have a Rimmel creator crew where they're -- we've kind of identified them, and they're co-creating products with us and inspiring ideas around what we should launch next. So this is definitely the area that we're really leaning into. And also for any new launches really kind of significantly scaling how we reach out to influencers. So if a year ago, maybe when we were launching a product under CoverGirl, for example, we would engage with 100 influencers to kind of send them product, get them to try it out. We have a new exciting launch coming out under CoverGirl in early calendar '24, we're engaging with over 5,000 influencers around that. So that's really the way to connect with consumers and to really get authentic content from big influencers and from micro influencers really across the gamut.

Awesome. And the other shift is just like really in the consumer or the end consumer. And they're just -- there are certain things that like -- it's a much more demanding consumer today, right, in terms of ingredients, radical transparency, efficacy of products. And so to what extent has like the end consumer helped like drive shift within the organization as a relative formulation or innovation?

Yes. So kind of a focus on clean, on sustainability is a very key one. It's one of our key strategic pillars. So I would say we're really tackling it in a number of different ways. If we start with clean, this is an area that we were very clear that this is going to be kind of a key trend within beauty and particularly within cosmetics. And so many people don't know, but for CoverGirl, it was actually -- we actually have a line under it for decades called clean. It just meant something different like a decade or two ago. It just meant like breathable formulas. But this is an area that we own, that we really started, and so we've been ramping that up with a lot of new launches with kind of a subline called Clean Fresh. So the story is we were very clear that this is going to be a key trend with consumers, starting with younger consumers, but now across the board. So we've been launching more and more products under this kind of clean umbrella across different brands. So we started with CoverGirl, but we've extended that to Rimmel, to Max Factor, to Bourjois, to Sally Hansen. So really across our -- kind of the plethora of our cosmetics brands. And that's the area -- those sub lines are the ones that are growing the quickest. I mean I think our clean line under CoverGirl is growing like 30% for the past year because this is what consumers want. But I think increasingly, they want that without compromising quality. I think that's really the key. And so for us, having -- developing these formulas internally, having our own R&D., this is where we're able to have more cleaner formulations, but making sure that you have a mascara that works and you have a foundation that works and you're not making a compromise on the product benefits just because you have a cleaner formula. And something kind of -- on kind of a similar vein is around our fragrance portfolio. So in the view around, again, moving more towards sustainability, how do we like lessen the environmental impact? We basically worked with a start-up called LanzaTech. And if you think about fragrances, actually, the biggest component by volume, within fragrances is ethanol, so alcohol that you mix the juice, the fragrance ingredients into. And what we've done is a couple of years ago, we basically worked with this start-up, who takes carbon emissions from factories and converts it into ethanol. And we've worked with them to get the ethanol to such a high degree that we can actually use it for our luxury fragrances. And we've been increasingly integrating this carbon-captured ethanol across our fragrance product line, and the volumes keep increasing around that. So clearly, like moving -- taking different approaches across our business, but really moving in that direction.

Awesome. Well, can you comment a bit about just your channel strategy? So obviously, the brands are in mass, there are brands that are in specialty retailers like for Ulta. But more broadly, can you comment a bit about e-commerce and your strategy penetration there as well as Travel Retail, which there's some noise around as it relates to some of your competitors?

Yes. So on e-commerce, that's obviously a big factor for everyone. This is something that we're very focused on. So our e-commerce business is now close to 20% of our overall sales, growing very quickly. So in the quarter that we just reported, our e-commerce sales were up 25%, and that was the case in both our Prestige business and in our mass business. So this is a key focus for us. And there, we really work with retail.com. So if you think about ordering products on ulta.com or sephora.com or Macy's or walmart.com, but also pure play e-retailers, whether that's Amazon, that's a key one that we work with across different markets, not just in the U.S. And then even Chinese players like JD.com, Tmall, we've been increasingly doing. So a big focus on really building out that strategy. And then somewhat smaller for us, but we're focusing on ramping that up, is also the D2C presence. So for many of the beauty users out there, you've probably -- one of our brands is actually Kylie Cosmetics or Kylie Beauty. So obviously, the D2C part of that is huge. She has been kind of big all over social media, so that's a great way to get the brand awareness, to have new product launches. So that's a big focus for us as well. On Travel Retail, great channel. If you think about particularly consumers who wherever they are, they may not have stores around them where we can -- where they can access the products, but they go to -- they want to travel, they go to an airport, and it's an amazing -- and you're there for 2 hours because you're waiting for your flight. It's a great way to engage and discover brands and try out products, learn about the brand, learn about what it's about, what are the core SKUs. So it's a great channel for us. It's a little less than 10% of our business growing incredibly quickly. We've now surpassed where it was pre-COVID. And a lot more to come because for us, pre-COVID, a lot of our Travel Retail business was really fragrances. And now we've expanded the assortment to now include cosmetics and some skincare, ultra-premium fragrances. So really great momentum in recent years, but a lot more to go.

Now let's like shift gears a little bit and talk a bit about Sue. I mean Sue Nabi is one of the few public company CEOs, female, very diverse. And so can you comment a little bit about the shift that you've seen within the organization? You've been there for 10 years, under her leadership, her values, how it has -- the impact she's had over -- on the company as a whole.

Yes. Exactly. I think it's been a tremendous shift within Coty since Sue came onboard. So having been with the company for the last 10 years, actually, we IPO-ed about 10 years ago, so I joined right after we IPO-ed. And for a long period of time, a lot of our company executives, including our CEOs, they came -- tremendous business leaders, but really came from consumer-oriented companies but did not have that beauty background. And I think beauty, it shares a lot of commonality with different consumer categories, but there's so much unique about beauty, so many complexities. So Sue was our first CEO in the last 10 years that had this tremendous background in beauty. She spent several decades at L'Oreal, leading some of their biggest brands, L'Oreal Paris, Lancome. She left L'Oreal and started up her own ultra-premium skincare brand called Orveda. And then she joined Coty, has brought this tremendous expertise. So now if you look at our executive committee, our senior leaders, I mean, the common thread is everybody comes with a very extensive beauty background from the leading beauty companies, and I think it shows. And so we set a very clear strategy around what we want to do around how we accelerate the business. And we've been consistently delivering on that strategy or surpassing what we've promised. And it really starts at the top, kind of that's been infused. And I think it energizes the organization as well, because there's clarity of what we want to do, how we're going to achieve it. And you see the results quarter after quarter, year after year.

Awesome. Well last question on my end is just around, what's on the horizon? And what do you think are white spaces within the organization? What are you seeing as the key growth levers?

Yes. And I think that's the really exciting part for Coty, is that we're very well established in certain areas like prestige fragrances like mass cosmetics, but there's so much white space opportunity within our portfolio. We have these great skin care brands, but it's still only like 5%, 6% of our business. So much upside potential as we invest behind brands like philosophy and Orveda. And Lancaster, tons of opportunity in ultra-premium fragrances. So really think about these niche, very sophisticated fragrances. And we've started taking some of our brands there, whether that's Chloé Atelier des Fleurs or Gucci Alchemist's Garden and a lot more to come. In fact, in conjunction with our 120th anniversary next year, we're launching a new brand that we developed in-house called, Infiniment Coty Paris, which goes back to François Coty starting fragrances 120 years ago. So that's really kind of coming full circle, but in a completely new, elevated way. So look out for that, more to come. There's tons of white space opportunity in Latin America because as I mentioned, we have some really amazing local brands there, really great scale, but there's so much potential to take some of our existing brands that are more global and bring them to Brazil and Latin America. So more to come there. We're building out our presence in China, where, obviously, brands like Gucci and Burberry and Hugo Boss really resonate, but we are still quite small relative to our peers. That's all upside for us as well. And then looking in the medium term to some of the other emerging markets, whether that's India, parts of the Middle East. So again, that's the really exciting part about our portfolio, is that we have great capabilities, great brands, but so much untapped potential.

Awesome. I don't know if you any questions from the audience?

Yes. Sure.

Well, I think we have a little bit of time if there's any questions in the audience.

I think a trend today is just offering a piece of career advice for those of us in the rear, do you have anything you'd like to share?

Career advice. I mean I think it's -- I think one of the things that I learned, I wasn't -- at the time when I started in Wall Street in equity research, I think there was -- for some reason, there was a view that there's like a path that you follow and you go from this, from this to this. I think being open to new opportunities, even when I was on -- on the sell side, I kind of wasn't sure like -- even though I worked a lot with Investor Relations for the companies that I covered, I was like, I'm not sure if that's really a career for me. This opportunity came along and ended up joining right after the company IPO'd, and I loved it. So I think kind of that openness to try new things. I mean, obviously, doing your research before you jump into it, but I think that's kind of -- I think probably a theme that you've heard across the board, just being open to something you may have never considered. But then the more you learn about it, the more interesting it becomes.

Awesome. Well, thank you so much, everyone.

Thank you.