Coty Inc. (COTY) Earnings Call Transcript & Summary

We're really excited to have a lunch keynote here with Coty. I'm excited to host Stefano Curti, he's the Chief Brands Officer for the Consumer Beauty Group at Coty. At TD Cowen, we're very excited about Coty's abundant growth opportunities which leverage fragrance, distribution and innovation expertise. And we also are monitoring Coty as it continues to execute in Prestige skincare and cosmetics brands and grows double digit in China and travel retail. A quick introduction on Stefano. Stefano leads Coty's consumer beauty brands worldwide with a strong focus on strengthening brand equity, global positioning and innovation performance. He's a beauty and skin care expert having spent almost 30 years working in the beauty and health industry in the U.S., Europe in Latin America. And from his time at Markwins Beauty Brands and Johnson & Johnson, Stefano has built a deep expertise in brand building and channel expansion. So Stefano, it's a pleasure to have you here. I'll have you join me.

Good afternoon, everyone.

Stefano, just to start, for those who are less familiar about Coty's beauty brands, could you talk about key brands under the portfolio and the competitive strength of your brands in the mass beauty category?

Great. I brought a couple of slides to help us in the conversation. Now [ I'd love ] to talk about Coty, especially in the recent years because this is one of the greatest American comebacks and Americans like to come back. These are the key numbers for Coty. The most recent almost $6 billion in revenue. We're distributing in over 120 countries. We have a manufacturing plant. So we are fully integrated with manufacturing internally approximately 80% of our products. We have 11,000 employees. And we have -- we enjoyed some very strong positions in the marketplace. So we are #1 in fragrance globally, #2 or #3 on color cosmetics and one of the fastest growing ones in skincare. This year, we are actually celebrating 120 years of history. We were founded -- the company was founded in 1904, in Paris. Today, we are one of the few companies that are dual listed in Paris and in New York. And to celebrate 120 years, we have -- we are launching a new collection of fragrances called Infiniment Coty Paris that is going to be a super premium amazing collection of 14 fragrances. So this is Coty at a high level. We have two divisions, Prestige and Consumer Beauty. I'm the President, I lead, the Consumer Beauty division. In Prestige, we have from the top more expensive brands or Orveda, Infiniment Coty, Gucci, Chloe. So as you can see, this is a history of acquisitions as well as a lot of licensing and partnerships. And on the other side, Consumer Beauty. We have big brands in order of probably size, CoverGirl is one of the top leaders in color cosmetics in the U.S. and Canada. Rimmel is market leader in the U.K. and across Europe. Adidas so we partner with Adidas to bring the beauty products and many other Max Factor is another one. And then we worked with Vera Wang, the fashion designer, David Beckham, these days quite popular, thanks to the Miami Football club. So that's Coty in a nutshell.

Stefano, you've done a really spectacular job innovating and staying culturally relevant across a lot of these brands. Could you talk to some of the changes you've made? How have you been able to reposition some of these major brands what are some milestones as well?

Very, very good. So yes, remarkable growth. We have been growing the consumer business at 9% CAGR in the last 3 years. We've been gaining market share. The company had gone through some transformation. So the new executive committee has been in place now for 3.5 years and parts of that. And we brought a lot of transformation. Probably the biggest transformation that we brought has been the repositioning of some of our brands. Because Coty is a company of legacy brands. Brands have been around up to 140, 150 years. And so the biggest challenge in life for us is how you keep relevant, it's the cool factor basically, i.e., wake up every morning thinking of the cool factor. These are some of the largest brands. So what we do -- what we did 5 years ago, 3 years ago was to relook at our brand positionings. I like to say that we look back to move forward. So when we looked at what the brand stood for, and we try to make -- to bring those values back. It's always more economically attractive actually, to build on existing memory structures or consumer rather than inventing in new ones. So for instance, we looked at CoverGirl, CoverGirl was the first brand to introduce a healthy foundations, healthy makeup decades ago. And we brought it back as the clean, healthy alternative to regular makeup. Rimmel was created in the undergrounds of London. So it's more punk than pink and we brought the edginess back, Max Factor that is very popular in Europe is actually not in the United States anymore, although it was born in Hollywood has been for decades, the makeup or makeup artists. So we looked at the brand positionings. We built new campaigns. We test all the campaigns. So I'm not going to bore you, but we have executed campaigns that are 3x more effective than the campaigns that were produced in the past. And it's easier when you reconnect with existing memory structures. Gen Z is another obsession. So I mentioned the healthy makeup, but I'll think clean today is a way to connect well with Gen Z. So we brought this positioning of clean and healthy across a number of our brands. You can see the clean color for CoverGirl there. Yummy Gloss is one of our most viral brand. Actually, it's edible. It's an edible product. You can have a couple of them here. It's this one here and you can actually eat it. It is so clean, you could eat it. We brought clean products...

How many calories are in that?

What's that?

Is it sugar-free? Have you really tried that before? Have you eaten that? Why did you need to make it eatable -- edible?

Because -- well, it's vegan by the way. So for all religions and all cultures, it's acceptable, you can actually ingest it but being ingestible is a torture test for cleanliness. And clean, it's really a big value for Gen Z, for everyone, but for Gen Z especially.

It's been a hot topic clean in general. How do you speak to it? How do you define it? And consumers could be confused about what clean really means.

Absolutely. There is not actually a legal definition of clean and that's one of the challenges. So it's -- we act based on purpose, based on our purpose of what we think is the right thing to do that we create policy guidelines, and we follow that. We also try to understand that the guidelines for clean of major retailers like Sephora and Ulta, and we navigated through that. And then we brought clean to other brands. The third picture is a Rimmel Kind & Free. It was the largest actually launch that I've personally done across Europe, and we brought also in Sally Hansen in Nail Polish. And what else? No. That's it. That's it.

Another question we had. Innovation and beauty has been vital to growth. As you know, speed is so important and the consumer is changing quickly. What's your innovation cycle like what percentage are from new products? And what should we understand about timing?

Okay. First, we brought a lot of rigorous testing to new product development, both in terms of conceptually as well as products, product performance because in the end, a brand is nothing with other products without being obsessed with the product itself. So a lot of regular and rigorous testing and that increases your chances of success, basically. We have, over time, to your question, we have actually doubled in the last 3 years, the consumption of brands coming from new products. The participation of new products 3 years ago used to be in the high single-digit percentages and now we are in the mid-double digits. And my objective is really between 20% and 25% because innovation is not just for revenues, as you know, it impacts your brand equity, your brand development. So it's a very important signal to consumers. Speed of development. In my life, at parity regulatory level, I worked in an organization that took 36 months to develop a product down to organization that spent 6 months in developing products. When I started at Coty, our average time was between 18 to 24 months. And today, we are down to 6 months in some cases. So we can develop a big disruptive technology and it takes a longer time or reactive products and take 6 months. Also, the other thing that we brought was guidelines in product development to Engineer Virality. Engineer Virality is the dream of everyone. It's a hit and miss sometimes. But we now understand some of the elements that leaves you better chances of virality. I remember a decade ago, it was about a white cream in a jar and it was 10 years back, and that was the claim. And today, it's not like that. So we have a guidelines that we embed in the product development like social listening, for instance. Everything that you want to know, you don't need to run a usage and had to do study anymore. It's out there just depends on how you read it. Social listening is important. We started developing our products with influencers. In fact, I might start writing the name of some of them on the back of the pack to make them even more personal. We need striking claims, we need striking package we need visual transformation, visual transformation before and after, very important because all of these elements embedded in the product development actually will create advocacy and will create storytelling for the influencers and creators. I'll give you a couple of examples of our major innovation just in the last literally 6 weeks. Wonder Bond that is the Rimmel Mascara, I have got everything on me, by the way. This is Wonder Bond. You're familiar with the bonding technology that is very famous in hair care with a brand that ends in Plex. So we are the first Rimmel is the first one, Cotys, the first one to bring the bonding technology to Mascara. Customers are super, super excited. The products that you were holding before, we launched this, this is a CoverGirl Skin Perfector Essence. 70% water. It's actually super, super cool yes I'll show you how it works. It's basically -- can you see the beads -- so it beads in Jelly. It's hydration and foundation at the same time. So you apply like these beads come out and then transform on your scale. And the transformation is very important. This is at the heart of the story telling. I brought you one...

And part of this is that visual efficacy is so important.

The visual efficacy is so important. Exactly. So we try to engineer virality from the very beginning of the product development. This is Queen Latifah, you remember Queen Latifah with Coty with CoverGirl years and years ago. She says that she knows more about CoverGirl than I do. Her opinion. And we brought her back to bring this product to life. [Presentation]

So this is an example of this visual transformation that makes the product even more viral.

Yes, related to your comments, marketing strategy. So what's the current level of marketing as a percentage of sales? Where do you see this trending? A big topic here is 10-year-old customers, too. What about younger customers what's happening there?

So numbers first. At Coty, we invest approximately 25% to 26% of our top line of our net revenues in consumer and advertising -- consumer promotion and advertising. So we invest approximately. In terms of where it's going, I don't think it's going to go above 30%. But what's really changed is the composition of this 26% the world, I don't have to tell you, but it's moved from a communication of one to many into managing billions of one-to-one conversations. So the shift -- remember a decade ago, it was about producing a 15-second commercial, 30-second commercial, single page and double page and that was it, and you would hit the 350 million people. And today is about managing these billions of one-to-one conversation make them genuine, authentic, et cetera. So we're moving more investment from traditional to social, digital and advocacy today is the big buzzword.

Another important topic is authenticity and being human. What does that mean the heritage brands and how you're thinking about authenticity?

In a number of ways, we mentioned influencers and content creators. So I cannot do business anymore with just Queen Latifah, for instance. You have to hit a number of different formats, different conversation. Community management is very important. You have to answer 100% of the comments and questions. Just putting a smile under a comment. We'll give you more trust and we'll communicate more trust and more genuinity with the people that are following you. Claims very important. People are becoming skeptical. A lot of consumers know more about skin care, about skincare ingredients than our brand managers because they do a lot of research. We actually call it [ triple O ]. It starts online research off-line, you go and purchase and maybe you reconnect online. So it's a multichannel with multiple way of communicating.

Yes, rethinking and it's very much conversational in terms of...

Very much conversation -- and -- but the story is also very important. After COVID today, the story is more important than ever. So in the last 3 years, we have refreshed all our merchandising material, merchandising walls. And we continue -- this is really an investment an investment. It's not about display, it's about experience.

We're excited about the [ TikTokification ] of retail. In many ways, short-form video is very important. Is that important to your business? What role do you see that playing over time?

TikTok, as you know, has really disrupted the industry has had a major impact on beauty. The way we are -- we have approached TikTok, we're doing organic, and we are doing a lot of partnerships. I remember, when I started with Coty, we used to send out approximately 300, 400 PR kit to content creators, every launch. Today, we are at 5,000. So you have to learn how to scale this one-to-one conversation and 5,000, my aspiration is probably like 10,000 globally for a new product launch. We have created the TikTok content development studios within our offices. We have 2 in the United States, 1 in New York, 1 in Miami so that we can connect better with the Hispanic community. We allow them to use our facilities. We have 1 in London 1 in Paris, so on and so forth. We allow them to use our facility also for their other customers providing that they're not competitive. So if they also endorse fashion, for instance, we like them to use our facility, our equipment, again, for this genuinity to build this relationship.

Stefano, incoming questions about e-commerce. The trends have been stellar. But what are drivers here? What percentage of sales?

Let me skip to e-commerce.

Yes. Would love your thoughts on penetration over time, how this may trend? And also, what about the margins? It's a different cost structure, e-commerce in terms of fulfillment and marketing costs, too.

So yes, it's -- our growth on e-commerce has been spectacular in the last 3 years, above our growth in-store actually. Today, 1/3 of the growth contribution is -- comes from our e-commerce business. We are growing at almost 30% in the last few months. We have now achieved 11% of penetration. So 11% of our Consumer Beauty business is in -- through e-commerce, and that is 1.5 point above what it was just a year ago. I think what it's going to go probably is the mid the teens, 15% is probably my objective, and we continue to gain share. We gained share primarily with the mass fragrances, so consumers are actually starting shopping fragrances online, which was something that 5 years ago, it was unheard of. You have to test and try, et cetera. And today is not necessary. So they do replenishment but also, again, through content creator, I make you -- I can make you fall in love with the fragrance even if you haven't even smelted it by -- through the storytelling. So we have also increased our penetration on Amazon. Amazon tends to be, to your point, a little bit less profitable. So I think our U.S. e-commerce customers are less profitable than our European e-commerce customers, but you have to be there. So you have to find a way to shop where -- to offer with the consumer shop.

Amazon has been a key topic today. How do we storytell on Amazon? What are some general parameters you're looking at to communicate the logic and magic?

Well, one of the biggest reasons for the growth actually is that we have improved our experience online. We call it [ Cars ]. It's a way of -- for us to track the specialness, the quality of our execution online that from the number of assets of pictures, the search engine optimization, the description of the product, the videos. So we are trying to recreate the experience of the brand online. Actually, I do believe that we've been more successful in creating these experience for consumers online that we are in store. So you have to create this little microcosm within Amazon or within Notino in Europe, et cetera, to be able to speak to consumers.

What about Brazil? It's been an important growth driver. What's happening in this market? How might your market shares trend? And what are some key drivers of what makes Brazil different from other markets?

So Coty Brazil is very important within our portfolio within my portfolio, a number of reasons. You can see there in terms of market size for beauty, first of all, Brazil is the fourth largest beauty market in the world after U.S., China and Japan. It's also the fastest growing. Brazilians are obsessed with beauty. And it's not just face, it's face and body in some protection and color cosmetics nail very important. Of this market in Brazil, approximately 30% is door-to-door. It's what you see there with Natura, Avon and Boticário. We did the non door-to-door. We are the third largest company. We are the fastest-growing company in Brazil. In terms of the branded portfolio, we have a very interesting brand portfolio that is almost for Brazil only because these are all native Brazilian brands and they connect very well with the Brazilian community. For instance, Risque, our nail polish brand, market leader in Brazil. We have a couple of other brands, Monange and Paixao. Paixao means in Brazilian in Portugues, means a passion. This is a very sensorial brand that starts with oil and goes across the whole body and face. Monange is a more functional brand. We have achieved the #1 position in body oil, #2 position in body lotion. So -- and we have the #1 penetration as -- any company in Brazil. However, and one more minute on Brazil. Brazil is way more important than business for us. We have launched a year ago, a center of excellence for melanin rich skin in Brazil. So Brazil is probably one of the most diverse country in the world, you have all shades of color. It's also an environment that is very humid. We have created therefore a center of excellence in research and development for melanin rich skin and one for climate change. And through that, we are looking at improving product offering [ tailorization ] for the next decade. Remember that in 2 or 3 decades, there will be more darker skin tones in the world than Caucasians. So for us, Brazil is that [ avamposto ] to the future of for society.

Climate change has been an interesting topic, also sun protection and Coty has unique patents with vectorization of molecules. What should we know about what's happening there and how you're thinking about innovation? What's going on?

So climate change is impacting consumer industry. We are developing technologies. I can't disclose too much, but we are developing technologies today, they will minimize sweat that will lengthen the stay of a moisturizer that will lengthen the stay of a foundation. And this is going to be long wear in the western world as important as in the emerging markets. But in the emerging markets in the southern markets, this will become an absolute need. Some protection, there is the debate between chemical and physical filters. We are developing technology more and more in the camp of physical filters to be able to offer to consumers what they want, which is to move away as much as possible for chemical. So we are looking at holistically a climate change and see how we can offer products that we believe will hit the majority of humanity in the next 2 decades.

Another topic, Coty has performed much better than competitors in China. What do you see happening in China? And what are some key dynamics that you're following?

Look, so we're growing very fast in China, but we are very small, which has been a blessing in disguise. Other companies to other of our friend companies that were more exposed to China. They have suffered a lot during the COVID time and the closure and this is the slow recovery. So from that perspective, we really have benefit from our small size. But China is very important. China is very important in terms of absolute value of consumption. It's one of the two significant ultra-premium, ultra Prestige market in the world together with the U.S., everywhere else is very small, very small in Italy, very small in France. So we have two approach in China, one through our portfolio of Prestige fragrances and Prestige skin care. We just launched Orveda, our ultra-premium skin care brand, biotech, a French biotech in China and relaunched Lancaster. And in mass market, it's all about Adidas. We're actually #1 in body cleansing among male and athletes. And Max Factor is also very important. So again, small rapid, very rapid growth, a major focus for us.

As we zoom out a bit and for the investors in the room of Coty stock, what's most underappreciated and/or misunderstood?

Yes. No, I love this I find myself speaking about color cosmetics all the time and have become a big beauty adviser actually, beyond being a business person. But two categories that we hardly speak about. One is nail and the other one is fragrance. In nail, Coty is actually the market leader in mail. We have over 20% of global market share to a portfolio of 5 to 6 brands, including Sally Hansen and Sally Hansen in this country has 45% market share, the #2 in the market has less than half of that share. Rimmel is market leader in the U.K. Risque the market leader in Brazil and then Bourjois in Max Factor. And we also cover all needs because it used to be all about nail polish and now it's -- the market is fragmented and nail at the new phase. So now is we compete in nail polish. We compete in nail care treatments, et cetera, super important, artificial nails, jewelry stones, et cetera. So nail is a very important category for us and also financially it supports investments in Color Cosmetics. The other one is Scenting. Coty is the #1 company in fragrances in Prestige. So our mass market retailers appreciate very much the insights, the technology the all factor territories that we bring from Prestige into mass market that we like to say luxury experiences at affordable prices. I'm going to flip through some of our brands in fragrances like we are -- this is Adidas, one of our largest fragrance brand globally. Nautica, you will know it's a license. It brings the inspiration of the ocean of the water to the world of fragrance. Vera Wang a very close friend and brings these elegance and edginess to us. David Beckham semi-naked here, used to be less relevant. And then through the Miami Football Club and Messi, et cetera, has become incredibly popular. We can't keep it in stock in the last year. Jovan is a very old brand that we are reviving. Jovan used to be the way people used to meet and attract other people before the dating sites and we're bringing that sort of dating and attraction attitudes back to the market. We don't speak about Bruno Banani but Bruno Banani is -- Bruno Banani is a major -- is actually the market leader in Germany in fragrances. And outside of Germany, very few people know it. Bruno Banani starts with underwear. It's basically the Calvin Klein of Germany. And we're taking that Calvin Klein underwear equity into fragrance, another nice brand is mix. So all in all, nail and fragrances are two things that we are less known for and actually incredibly important from a market position perspective, and how financially they contribute to the portfolio.

Yes, Very powerful this whole portfolio that's very compellingly diversified as well. So we're asking every attendee this, a few lightning rounds. What do you think about the health of your consumer on a scale of 1 to 10?

I think the beauty consumer has never been so involved in beauty as they are today, and I believe there will be even more tomorrow. I think COVID has helped moving the brands or the love for brands that are most trusted, people are experimenting, but they are going back to the brands that they trust and love. I think self-care has been a very important outcome of COVID, mental health has been another very important. So I'll give an example, fragrance, for instance, has accelerated since COVID and it's a moment of self reward, self-care. It's also a moment to fill part of the world. So not everyone can afford $4,000 Gucci suit, but most people can afford to be part of the Gucci world spending $120 on a fragrance. So I think the beauty consumer has never been so sophisticated as today, and it will be even more sophisticating more involved tomorrow.

What number on a scale 1 to 10?

I think today is 10 of relatively to today and tomorrow will be 10 and it will be 10, but there will be different things.

And related to this question, very exciting comments. What are a couple of major growth drivers you're focused on for the industry?

I was said also by the previous speaker, I think innovation remains at the heart of what we do. I believe beauty is not an industry of demand. It's an industry of offering. What I mean with that, our companies are all full of business intelligence, CMI, market research or looking in the rare view mirror. And I believe we have to move our focus in this drafting. So you actually create the demand. You don't try -- we are stopping looking at forecasting the future and rather refocusing resources, money and human capital on disruptions.

Spirit and essence of innovation and creating new kinds of categories, too. Last question, what are brands that you like that aren't your own? I can probably answer this for you because I kind of know.

I like an old brand of mine, and it's -- now I'm going to do some advertising. But do you know RoC? RoC is the skin care brand. I bought it actually when I was at Johnson & Johnson in 1995, which is going to help update me a bit. And it's the only skin care brand that I actually buy in spite of everything that I received for free. And because it's about efficacy. And we are applying this efficacy mentality to Orveda and to our skin care equities as well. I do believe in skin care, people are looking for efficacy first and foremost. And the bar of efficacy continues to go up.

Yes, this theme of transparency and luxury intertwined with efficacy and performance as well as purpose and storytelling is constant. Stefano, thanks for taking us on a journey around the world and also throughout your portfolio, which has many, many exciting things happening.

Great. I appreciate it. Thank you very much.