Good morning ladies and gentlemen. My name is Brittany and I will be your conference operator today. At this time, I would like to welcome everyone to Coty’s Second Quarter Fiscal 2022 Results Conference Call. As a reminder, this conference call is being recorded today, February 8, 2022. On today’s call are Sue Nabi, Chief Executive Officer and Laurent Mercier, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty’s earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty’s financial results and Coty’s expectations reflect certain adjustments, as specified in the non-GAAP financial measures section of the company’s release.

Ladies and gentlemen, with the completion of the first half of fiscal 2022, it's clear that we are delivering on our short-term objectives, while simultaneously strengthening the foundations to achieve the medium term objectives we outlined during our November Investor Day. As you recall, our objective is to make Coty into a true duty powerhouse which includes sustainably growing ourselves ahead of the beauty market, growing our profit ahead of sales, and steadily deleveraging our balance sheet. The results of the last six months has confirmed that we are well on track with these ambitions as we enter the virtuous cycle where strong revenue growth combined with gross margin and cost initiatives simultaneously fuel profit expansion and strategic reinvestments, which in turn drive future growth momentum. There are a few takeaways I want you to live with. First, our first half fiscal 2022 revenues and sell-out both grew in the mid-teens, consistent with our expectations. We had flagged last quarter that our focus in Q2 was on driving sell-out as revenue trends in Q1 and Q2 were impacted by the timing of launch pipe sale [ph] and this is exactly what has played out. Importantly, the growth we've achieved in the past six months were fully supported by strong growth in consumer beauty as we saw clear signs of turnaround in our key mass cosmetics brands. Second, we had great performance on profit and cash. We saw exceptional growth in our gross margin this quarter with close to 600 basis points of growth year-on-year, another 100 basis points of growth versus the first quarter. Achieving this against an increasingly difficult inflationary backdrop speaks to the strength of our business model and the many levers we have at our disposal to steadily drive our gross margin higher in the coming years.…

Thank you, Sue. I am very pleased with our second quarter results, which continued our strong pace of profit delivery with EBITDA coming in nicely ahead of our guidance. This quarter again demonstrates the virtuous circle we set out to create. Starting with gross margin. Our Q2 adjusted gross margin of 64.6% increased by nearly 600 basis points from last year and 120 basis points from last quarter. This marks our fourth consecutive quarter of gross margin above 60%. Our gross margin performance was driven by margin improvement in both the Prestige and Consumer Beauty businesses, which were supported by favorable mix, pricing and revenue management, productivity and E&O improvements and higher absorption on the increased sales volume. As we have previously detailed, we continue to be very focused on further driving gross margin expansion both this year and in the years to come. However, please note that we do not expect to experience a similar level of gross margin expansion in the back half of the year as we did in the first half for a number of reasons. First, seasonally, the second half is a lower gross margin period given the lower Prestige sales volumes as compared to the first half. Second, in the H2, we will be lapping onetime gross margin benefits of over 100 basis points that we don't expect to repeat this year. And finally, as indicated before, we expect inflation impact to step up in the back half of the year. Despite this, our multi-pronged, multi-year gross margin attack plan is in place, while we also expect further benefits from positive channel, category and regional mix shifts. Gross margin expansion remains key towards driving the virtuous cycle we have created. I would like to now give a brief update on the topics of inflation…

Thank you, Laurent. We continue to make strong tangible progress across our six strategic pillars in Q2 with many additional initiatives in the works. Let's start with our first strategic pillar, stabilizing and growing our Consumer Beauty brands. I think the charts on this slide perfectly encapsulates the lightning speed with which we are turning around this business, something that few would have anticipated a year ago. For the first time in five years, which is as far as our internal data goes, but likely much longer, the Coty Consumer Beauty business has not only stabilized share, but is gaining market share on a global basis. This is underpinned by strong momentum in our color cosmetics brands, which together account for roughly two-thirds of our Consumer Beauty business. While the global mass cosmetics category grew in the low to mid-single digits, our sell-out grew over 10% in mass cosmetics and high single digits in the mass beauty overall. As a result, over the past three months, we have gained roughly 60 basis points of share in the mass color cosmetics category globally and close to 100 basis points of share in November and December. At the same time, our Brazil business maintained momentum with double digit sell-out growth, supported by key new innovations behind mono [ph] body care and risky nail color. While the path to sustain consumer beauty expansion may not be linear, these exceptional results confirm that our consumer beauty brands are as relevant as ever and with the right products, communication strategy, in-store execution and the right teams, we can truly excel. Drilling a bit deeper into the momentum we are seeing in mass color cosmetics. While we began our Consumer Beauty turnaround with our biggest brand, CoverGirl, I am proud to say that our four biggest…

I want to emphasize that we protested [ph] the CoverGirl skincare lineup, communication and campaign extensively and have seen exceptional results on our tests. We are excited about this new initiative for CoverGirl, and we look forward to updating you on the initial results at the next earnings call in May. Turning to our fourth strategic pillar, building our e-commerce and direct-to-consumer expertise. Focusing on our e-com results, we continue to make strong progress with e-com sales in the first half up 16%, including particularly strong growth in Consumer Beauty. As a result, our e-com penetration for the first half reached high teens, including mid-20s penetration in Prestige and approximately 10% penetration in Consumer Beauty. However, as you heard from Jean-Denis, our Chief Digital Officer, in November, our digital transformation encapsulates so much more than just e-com, and we've made many strides across multiple areas over the last few months. As part of our partnership with Perfect Corp, today, we announced an advanced virtual trial tool for Sally Hansen, allowing consumers to see hundreds of Sally Hansen shades on a live moving image of their own hands before making their purchase. We have also been doubling down on beauty adviser life streaming across our key markets, training our BAs to engage with our client base through digital storytelling and brand building. And this is driving real results. For example, in the US, we have successfully participated in a program by Amazon, the Amazon Holiday Gift Guide live stream with CoverGirl and Sally Hansen resulting in 1.6 million views and 3 million impressions. Similarly, our very strong sales results on Tmall in December were in part fueled by our BAs, whose live streams contributed to a double-digit percentage of our Tmall sales, up from single-digits in previous months and recruited thousands…

[Operator Instructions] And we will take our first question from Olivia Tang -- I'm sorry, Olivia Tong with Raymond James. Your line is now open.

Great. Thanks, good morning. I wanted to just dig deeper into EBITDA, both this quarter and your expectations for the remainder of the year. Obviously, came in nicely ahead of our expectations and your first half expectations with gross profit obviously meaningfully better. So can you talk a little bit about what came in better than you expected and what you expect to continue into the second half? You mentioned, obviously, more tempered expectations in the second half, but I assume you still expect gross margin expansion in the second half, just not at the same magnitude as in the first half, so if you could clarify that. And then on EBITDA, I'm just curious how you expect investors to read the unchanged guide. I mean I realize the upper end of EBITDA is now – is open ended. But to the extent that you have gross margin upside, how do you think about whether you choose to keep brand support levels at that -- potentially at that 30% level in fiscal Q2, your view on how much flex you want to leave to invest at higher rates if you choose and the flexibility in case other things happened? Thanks so much. Appreciate it.

Thank you, Olivia. So I will start indeed with the first part on – on Q2, indeed, why -- I mean what came in and better than expected. So definitely, I will give you a few -- the key drivers. Number one is growth. So it's definitely -- and you remember during Investor Day, when we explained really how we are igniting the flywheel. So definitely that's starting with growth. And how do we fuel the growth is really with the gross margin expansion. And at the same time, we keep strong discipline on fixed costs. So these are definitely -- I mean, the two engines, gross margin. So as I explained, so it's what's driving this gross margin expansion. So it's mix all and we explained also in Q1. So we continue, mix all the drivers with Prestige, Prestige Makeup, China, e-commerce, skincare. So all what we are building is really accretive for the mix. I want also to comment, which is super important, is that it's not only category mix, it's also within the category, and I want to mention on Consumer Beauty, innovation that we are kicking off in Consumer Beauty, they are very accretive in terms of gross margin. So it's really combination of all these initiatives expanding gross margin, combined with pricing and revenue management, we started already last year. We continue. We even amplify it to contain also inflation. And third is we keep working, of course, on productivity on all initiatives as part of the All-In To Win initiatives. So gross margin is really a key component, key element of our equation, fixed costs as we started last year and we continue, minus 5% fixed cost in the Q2. And then fueling A&CP, as I shared, I mean, we are actually at the…

And we will take our next question from Steph Wissink with Jefferies. Your line is now open.

Thank you. Good morning, everyone. Sue, I have a question for you and this is really more contextual, but I'm curious how your conversations with your retail partners are evolving as you outperform the category. Are you finding that they're coming to you for new opportunities for shelf space or promotional events? So maybe just give us some context of how those conversations are changing and evolving. And then, Laurent, one for you is just on the A&CP. In response to Olivia's question, you talked a little bit about the dollars and the percent changing in the back half. But can you talk about that in relation to your accelerated sales growth targets? Are you finding more efficiency out of your A&CP, so you feel like you can pull back a little bit as a percentage of sales, but you can still see acceleration in the overall sales performance? Thank you.

Hi, Steph. Good morning, everyone. So this is Sue speaking now. So yes, that's a very interesting question. That's true that we see very, I would say, a strong change in the discussions we're having with retailers since now, I would say, a year and it's accelerating, if I may say it like this. We see a lot of incredible opportunities given our way of creating innovation. Again, the idea is not to launch just another mascara or another moisturizer. Coty vision is to build categories hand-in-hand with retailers. And this is precisely what we have been doing on Consumer Beauty, and this gives me the opportunity to again insist again on why CoverGirl is regaining traction and visibility and market share gains in the US since now 26 weeks among the last 40 weeks because we decided that we will category cap them in a way the Clean Beauty category, and we are doing now the Clean skincare launch in mass environment, which is another step into this direction of owning hand-in-hand with our partners in retail category. We're doing exactly the same thing. If I take the example of Gucci makeup. Gucci makeup, a lot of retailers see it as what's missing in their portfolio of brands. They say that they have on one side the heritage couture brands and the more younger ingenious brands. And they think that Gucci has both at the same time, which makes the brand very unique and which makes us suddenly a partner with our retailers in terms of creating new categories that are going to bring new consumers to their stores. Last but not least, I have to say that this crystallizes even stronger online, specifically for Consumer Beauty. When it comes to retailers such as Amazon, where they are really helping us to build the Clean Beauty category online and the results here again of CoverGirl or also that we are seeing in the rest of the -- in Europe with Kind & Free, the latest launch from Rimmel, are exactly a great illustration of this vision that we are working on hand-in-hand with retailers. So it gives us a lot of opportunity. And to conclude on this, the rebirth of Max Factor, to take this example, is also opening a lot of opportunities. This brand, that's a European-centric brand, a lot of countries around the world are now seeing the relaunch very, very successful, gaining market share in a lot of countries, very, very strong image. The only, I would say, mass business brand that has a prestige look and feel with makeup artistry at its heart, and this is clearly, I would say, a destination that a lot of retailers around the world are willing to have in their stores. So for the second part, for Laurent, I'll let Laurent jump in.

Hello, Steph. So on A&CP, so what's important first is really to remind that our level of A&CP in Q2 was at 30%, and this 30% drove very strong sellout. What Sue explained is really this is a peak season. And we have, again, with the equation, with gross margin fixes, we were able really to fuel Consumer Beauty initiatives and Prestige initiatives. So that's why we are starting Q3 with January with very [Technical Difficulty]

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Okay. Okay. Sorry. I will do it again. I will do it again. That's fine. So yes, Steph, on your question on A&CP. So starting first, indeed, A&CP in Q2 was at the level of 30%. And again, so with a significant increase. And thanks to this high level of A&CP, we could drive very strong sellout in Q2, as Sue explained, and this translates into a very strong reorder and sales growth in Q3. And that's why we are starting January in a very good shape, and we'll amplify in Q3 and Q4. That's the key reason why now we share that we will be at the high end of our guidance. So low to mid-teens on fiscal year 2022. So ROI is really our daily obsession. So with Sue, we are reviewing all the initiatives. We are testing the copies. As you know, we have very disciplined tools to trackers. So we are making sure that any initiative is built on strong analysis and ROI. If some tests are not at the level expected, then we simply rework or stop so that we make sure that any dollar we are investing, there is a very, very strong ROI. So this is a work we started last year. We see the results. We continue and will amplify even this discipline in H2, both on Prestige and Consumer Beauty. And that's why so this disciplined ROI combined with a level of A&CP, which will remain in the high 20s in H2 and all these elements, I mean, are driving strong sellout in both Prestige and Consumer Beauty….

And we will take our next question from Andrea Teixeira with JPMorgan. Your line is now open.

Hi, good morning. Thank you. And Sue, I was hoping if you can unpack your like-for-like guidance, not to take away the merits of it, but you raised in light of your two-year stack deceleration in Q2. And I appreciate that, obviously, the sell-out and sell-in dynamics are not a straight line. But you guided also that January like-for-like was 13%. So your new guide implies mid-teens for the full fiscal year. So -- and you're facing a much tougher comps in Q4. So what gives you confidence? And I know throughout this call, you have given a lot of evidence for new launches and all of that. So -- but if you can please unpack those dynamics in terms of sell-in and sell-out in order to make your two-year stack reaccelerate in the last five months of the fiscal. Thank you.

Good morning, Andrea. So yes, you're right. We -- again, this gives me the occasion, in fact, to quickly come back on the very robust results we got during the second quarter on all metrics. And also, of course, you spoke about this, the significant momentum beginning of quarter three with Jan being an acceleration of our sales versus Q2. That's quite clear. What we see is that the sellout of the second quarter has been very, very strong. It is exactly the story that we've told you when we reported the first quarter results. Q1 was a tight, I would say, quarter. Q2 was a sell-out quarter. And there, we have outstanding, I would say, results, be it in Prestige in the 20% growth, and in mass market, where there has been a very, very strong acceleration of our sell-in and sell-out. And you've seen the reason why, because of CoverGirl continuing to gain market share and now something new, Max Factor and Rimmel next to Sally Hansen gaining also market share. So this, I would say, optimism that we have because of this acceleration of sales when it comes to Consumer Beauty, this is precisely translated into what you are seeing in the plus 13% in Jan. And we are clearly very confident that the second half will be in line with the fiscal year mid-teens outlook that we have shared with you during -- that we shared with you during -- on the press earnings release. So the confidence comes from, again, our Prestige business since the -- since, let's say, maybe two or three quarters is growing at a very high pace. Prestige fragrances are booming worldwide. Coty is doing very well on this area. We have the new engine of Prestige makeup. And there between…

And we will take our next question from Rob Ottenstein with Evercore. Your line is now open.

Great. Thank you very much. I'd like to focus on the US consumer in Consumer Beauty and just trying to get your sense of the state of the consumer given Omicron, given food inflation, what their appetite is for new brands. Clearly, you're doing very well, but just trying to get a little more granularity on how you see the consumer and how you're positioned for the consumer with these sorts of inflationary pressures. And then secondly, if you could talk a little bit more about CoverGirl skincare, the kind of shelf space that you're getting, maybe initial reactions. I know it's really early, but your initial reactions of how big that brand could be. Thank you.

Good morning, Robert. Thank you for your question. So yes, what we are seeing, which is not just US based, I have to say, but this is globally something we are seeing across many regions is that consumers are more than ever looking for new ways to consume beauty, more online sales, but brick and mortar is quite -- back quite strong, I have to say, which is great news for everyone, I have to say. But also on the consumer way of buying products, you clearly see that what I call healthy, some people call it clean beauty, some people call it skinny side cosmetics or beauty, this is what people are shopping more and more. They got used to wear different ways of wearing makeup. They could choose to wear more skincare. And therefore, when they are back to makeup consumption, which is the big part of our business in the US, they are really favoring what I call clean or skinny side option. And that's clearly explaining the back to growth in market share of CoverGirl on one side with clean fresh skin tints with Lash Blast Clean Mascara, but also on the other side with Simply Ageless, which has been one of our most successful, I would say, growth engine for CoverGirl in America. We do see a reconsumption in lip color, mainly focused on non-transfer, long-lasting lip color. We've seen, for example, that next to Clean Makeup and Simply Ageless on CoverGirl, Outlast franchise for lips is doing very well without any kind of advertising, which means that when people are buying back color, specifically for the lip area, they are shopping into long and non-transfer products, And we are seeing more or less the same trend on another of our Prestige brands, which is…

And we will take our next question from Lauren Lieberman with Barclays. Your line is now open.

Hey, thanks. Good morning. I had two questions. One was, Laurent, I know you gave some color on productivity and cost savings from here, but I still was just curious a little bit more detail on why there isn't more productivity slated for the back half. I fully understand, I mean, you were able to reach your targets earlier in the year, which is great. But typically, I think about company's programs are a bit more rolling in nature. So I just was looking for any additional color there was to offer on that point. And then secondly, there's been management change since the Investor Day, Andrew leaving for clearly a great opportunity to be CEO of a public company. But I was just curious if you could offer anything on the thought process behind how you've replaced his seat and any time line delays that might lead to with some of the activity with the Kardashian brand. Thanks.

So maybe Laurent can start with the first part, which is around savings, and I'll take the second part, if you're okay.

Sure. Sure. I will take it. Good morning, Lauren. So on savings, so basically, it's really that most of the initiatives, indeed, so we delivered in H1. And we have a new pipe of key initiatives which will really kick in beginning of fiscal 2023. So to give you some concrete examples, we have now a specific program, which is really a full review of material value analysis, and this will translate into concrete savings in fiscal 2023, combined with some procurement savings were here so the team now built a very, very stronger program. On top of this, with the supply chain, we have also programmed on automation, which will bring additional savings in 2023. And also even talking about manufacturing, as you know, we made a decision to close a factory on fragrance. I mean the plan is fully in place. And this will -- we will see also the benefit in fiscal 2023 Other elements for you to have in mind is that we will also benefit from lower depreciation. So in the strong H1 and then we have really very strong initiatives. So that's why we are confirming the $600 million net savings planned by fiscal 2023 and on terms of $75 million we announced for fiscal 2024.

So – and quickly to complement on Laurent's answer on this first part of the question. We are continuing to do productivity gains during the second half, which are going to be used hand-in-hand with pricing to offset inflation for the second half. And so it's not opposed. It's really that it's going to be used to offset inflation for the second half of this fiscal. So to answer your question around management changes. So first, it's a great opportunity for Andrew. So this, everyone can understand it. And it's a great opportunity for Coty, I have to say. This is clearly giving us the opportunity to take the next generation of leaders to the highest level of the company. You know that the US business is run today by our former Canadian General Manager. Debbie Erickson has been with Coty for years and years. She is an outstanding leader, and she's running today the number one country for Coty around the world. And she's a woman, which is, I think, something very, very strong at Coty, something we committed on earlier. Same thing in Canada. It's another women part of the management that's becoming the General Manager of Canada. And last, but not least, Anna von Bayern has become the CEO of the Joint Ventures, and Anna is with Coty and myself since 1.5 years, and the relationship that Anna and myself are having with the Kardashians in New York is clearly a big, big assets into accelerating, in fact, the relationship. And I have to say that when you say is this going to delay things, in fact, it's exactly the opposite that may happen since we have separated the role of taking care of the biggest country of Coty around the world and take account of joint venture so that today, Anna, Vanessa and other teams around the world can focus fully to continue the huge potential we have behind Kylie and the upcoming Kim Kardashian skincare launch at the end of the fiscal year.

So thank you very much. So if there are any concluding remarks, Laurent, on your side, maybe that's the right moment. For me, I have to say that I'm super, super proud of this sixth quarter of improvements across all metrics. This is really, really, I think, something that makes the teams at Coty super, super proud. We are very, very excited to be into the second half of the year, and we are more even excited to start to prepare the skincare area as I called it, which is fiscal 2023. Thank you very much for your questions, and hope to talk to you soon. Bye-bye.

Thank you. Bye-bye.