Coty Inc. (COTY) Q1 2024 Earnings Report, Transcript and Summary

Good morning and good afternoon, everyone. My name is Todd, and I will be your conference Operator today. At this time, I would like to welcome everyone to Cody’s First Quarter Fiscal 2024 Question-And-Answer Conference Call. As a reminder, this conference call is being recorded today, November 8th 2023, at 7:30 AM Eastern Time, or 1:30 PM Central European PM time. Please note that on November 7th at approximately 4:30 pm Eastern Time, or 10:30 pm Central European Time, Cody issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. 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 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.

With that, we will now open the line for questions. [Operator Instructions] Our first question will come from Nik Modi with RBC Capital Markets. Please go ahead. your line is open.

I actually had a bigger picture question. Sue, when we recently met in person a few weeks ago, you were very excited about the innovation program at Coty. And I wanted to ask a more broader question about skin care and how you think about skin care holistically in the sense that topicals is one thing, but what about injectables and I’m just curious on philosophically how you think about the category going forward?

Hi Nik thank you for your question. Indeed, as you say, the bigger and the broader picture. I think what we have shared with all you guys several times is that the skincare market, and by the way, the beauty market, generally speaking, going in the direction of the medicated beauty, and this is something that we see very, very strongly. That is the reason why we have decided to reposition some of our brands quite strongly on this area. If you allow me, may I remind everyone that we just did the launch behind Orveda skincare of the first serum that uses technologies inspired by the medical world that we call phenolytics, which is the first time a skin care brand is using this kind technologies in a topical cream as you say it. On Lancaster the story that is re-reasonating very well is the story of using these vectors, liposomes that penetrate deep inside the skin and this is really what is making the brand resonate with the Chinese consumers. And also on philosophy in the U.S., we have decided that the brand will stand for the brand that is going to bring a bit of wisdom in the craze around dermatologic ingredients. So as you hear it from my words, it is all about a kind of medicated beauty. In the beauty world, we are using ingredients and formulations that are acting on the upper layer of the skin, and we are not allowed to go lower. So if you think about injectables, you clearly see this booming with other companies selling products that are going to release the muscles without quoting any brand, products that are all about injecting galacturonic acid inside the skin, vitamins or sometimes medical devices are lowering a faster penetration of the active. So you are right, this is the direction that the overall market is going into, but we have some limitations when it comes to selling skincare from a beauty brand that does not require any kind of long time testing like a medication or a drug would require. But that is more or less the direction we are seeing. Ingestibles, I mean, ingestibles is like nail skincare. It has been a kind of everyone says this is the year of ingestibles and the year after, nothing has happened. So again, there, my gut feeling is that this category needs a bit of strong R&D because a lot of people believe that what you are going to ingest is going to be digested by your stomach enzymes. And at the end of the day, what is the difference between eating good food and having ingestibles. So that is also something we hear from consumers, that ingestibles need to demonstrate their ability to bring to the right place, the right ingredient, knowing that they come into your digestive system. So that is the whole, the big picture I could share with you. I hope I’m answering part of your question.

Our next question will come from Oliver Chen with TD Cowen. Please go ahead. your line is open.

Hi, Sue and Laurent. You made a lot of great progress with your digital marketing and the studio we toured was remarkable. What is ahead in terms of how you are thinking about a digital center of excellence and key principles and platform occasion as you will continue to build this capability across your portfolio? Also as we look forward, what are your thoughts on pricing and the environment? We are seeing a lot of crosscurrents in the consumer in many regions. However, you have been on a really good pace with all the fragrance momentum?

Hi Oliver, thank you for your question. So again, on digital centers of excellence. You are totally right. We started since 2020 to really create a center of excellence that is based in Paris, that is the global center of excellence. Really in a kind of catch up sales because the company was a bit behind its competitors in this area three years ago and this, we made it happen in Paris. And now it is exactly the right time to have these centers of excellence benefiting from the global knowhow being created in key regions around the world, namely the U.S. or China, to take two examples where the digitalization of the beauty world it is quite advanced and fast paced. So this is exactly where we are standing now. On consumer beauty, you know that we are also accelerating in our ability to create locally in the different countries because this can only be local because you need to fit with the culture, you need to fit with the language, you need to fit with the local trend. So we are creating studios, let’s call them like this. In the U.S, in UK and elsewhere. I think we created something like 15 studios which are TikTok or YouTube, call them the way you want studios where we are creating together or co-creating with influencers’ content, and we are also beeping the machine. Just to give you an idea, until recently, we were working with a few dozens of influencers behind the key launches of the consumer beautymaker brands. And then recently, we moved to 100, and we saw the results immediately. If I think the example of UK where we moved from nowhere in terms of EMV and EIT to top five, top six brands, sometimes ahead of best-in-class brands that have been doing this for years and years and now the objective is to multiply this number by three to get above the threshold of the 1000 influencers reached by our brands. So this is exactly what is happening in terms of centers of excellence, first build globally in Paris, and now going into different countries in New York, in London, and in Shanghai where we are today talking to you, Frank. Laurent, maybe you can take the second part of the price.

Yes. Absolutely. On pricing, indeed, I mean, first of all, just to remind that, indeed we implemented several price increase over the last two years at the level of mid single-digit. And this price increase went very smoothly and we are very successful. The clear demonstration is what you are seeing is that, our volumes keep growing and definitely that you are seeing in Q1, our volumes are growing. So this was really a very important in our strategy, to make sure that there is no elasticity on volumes and this was the case. So now looking ahead, of course, we are very conscious that the reason especially on COGS inflation is starting to softening. So what differently, we are really focusing on mix management. This is definitely a number one driver to continue to improve our gross margin and mix management. You are seeing some concrete examples, innovations that we are launching, all of these innovations are really mix accretive, so are really driving the average price up. Number two, we are opening and we shared also last time big stream of SRM, which is strategic revenue management. And it is really an approach where now we have a dedicated teams is really to open the value analysis of all the product and really making sure, where we can extract some value. So pleased really to review in-depth all the promotion policy, the trade terms. In some cases, it can be also about the format. And again, this is really a way for us to improve the average unit price. And last but not least, we will continue definitely to implement some very targeted price increase. I would say more at a level of a low single-digit. But definitely, we have this pricing team, pricing it very expert, and really, we are very granular, and I repeat every time. So we will continue in a very, very targeted manner.

Thanks. The innovation sounds quite exciting. Best regards.

So innovation, of course, is part of the game. So it is definitely part of the mix management. And of course, we are making sure again, and you have very concrete example in this Q1 that, high-quality of the innovations, also as you know, there is a shift to higher concentration on prestige fragrance mostly. And this is again a way for us to look to drive the average unit price, absolutely.

And on Consumer Beauty, Oliver, you have also the same thing. What is really driving the market is premium innovation, not entry pricing, and that is very important for everyone to hear. And this is the area where we are going to accelerate the pace of innovation. It used to be high single-digit levels required in terms of innovation. And we are more today targeting high teens level of innovation in terms of percentage of the network. It is accelerating. The premium innovation in the market.

Our next question will come from Rob Ottenstein with Evercore. Please go ahead. your line is open.

Sue, given that you were in China, I would be remiss to not ask you what you are seeing on the ground in China and in Henan if you are there, both in terms of how the consumer is and the beauty market is recovering if it is recovering. And then maybe additional details on your execution, what is going particularly well?

So again, you are right, we are in Shanghai. We have been here since a few days and we’ll be here until the end of the week. And indeed, it is very interesting to see how the market is evolving quite fast I have to say, specifically on the fragrance category. Again, we shared with you that a few years, months ago, maybe a year ago, we shared with you that we to see Chinese getting very, very interested in this category. And this is accelerating at an incredible pace. Even the tastes accelerating to give you a few ideas. We launched Burberry Goddess in this country a little bit after the rest of countries, because we thought that the scent of this innovation was really a bold scent, etcetera, and the reception has been outstanding. But the line is already a number six line at Sephora, which is a ranking that we never achieved in this country with any of our fragrances. So it is really this fragrance category that is by the way growing, and it is growing by 6%. And Coty in the country, this is beauty research latest results. It is growing more than two times faster than this level of the market. And Burberry Goddess is just starting in this country, and we believe it is going to be a game changer. The other element we are seeing is the premiumization of the market, and I would even say the bigger part of niche fragrances. These fragrances represent almost a quarter of the market today in China. This is 2.5 times bigger than what you see in the rest of the world. So this premiumization going in the direction of more niche brands, really selling in freestanding stores. And when you enter the boutique, you don’t have the impression you are in a store that is selling fragrances. You have the impression that you are visiting a concept or sometimes in museums. So this is something that is going very, very quickly. That is the reason why I have been sharing with you, how much we are eager to develop this kind of expertise inside the company to understand, of course, how to create winning niche brands, but also to understand the world of retail when you are operating a freestanding. We also did the CIIE inauguration two days ago. It was a fantastic moment, especially for Infiniment Coty Paris that was not fully disclosed to the Chinese audience. We did a teaser and what was incredible is to see all these young men and young women entering this booth where they had giant flowers that they could put their nose in and smell the fragrances and try to guess the name of the fragrance, how well does the bottle look like, et cetera. And the way they welcome this was absolutely outstanding. So we are very, very confident about this line that is going to meet the Chinese consumers. The other market that is doing very well in China today is makeup. Makeup is growing by 10% and there we are growing faster than the makeup market. Mainly thanks to Gucci makeup and Burberry makeup. There, it is all about face makeup because again, the makeup category is skinifying, and anything but a good mix between pigment and skin benefits is clearly what people are looking for. On top of the fact that everything has to be long wear. Last but not least, skincare market, which is the immense majority of the sales. This market is slightly negative in the recent, most recent period. I think it is not that Chinese are using less skincare. They are probably shifting from some brands to other brands. Maybe the level of promotionality that this market reached in the last 1,000 years is a kind of maximum and then there is a kind of they are looking for what are the new brands that can speak to their needs without being too promotional, without being too much into this world or where you buy only if there is a promotion. And there, our brands are doing well, specifically, Lancaster, which is the main brand that we have in this country, specifically online. The brand is continuing to see momentum because it is growing month after month. We have started, as you remember, with the Ligne Princiere, and now we are adding next to Ligne Princiere a focus on sun care because this brand is really seen as the epitome of what this high end sun care protection is, and we are also adding new innovations that are about to land in the market in Jan 2024. So that is a bit long, but that is what we saw since a week now in Shanghai. Hainan, we did not go there. I have to say, not this time. But our progression a day. You have heard it and you have seen it during the script and the earning release. It is very, very strong, in fact, specifically behind Lancaster but also behind brands light fluid.

Our next question will come from Filippo Falorni with Citi. Please go ahead. your line is open.

So clearly, very strong start to the fiscal year with 18% like for like sales growth. So maybe, Sue, can you comment on like what drove the upside relative to the guidance you provided in September? You mentioned a lot of drivers in your prepared remarks, but maybe you can rank them in terms of category growth, innovation, contribution? And then thinking ahead of your guidance for the first half, it does imply a bit of a slowdown in fiscal Q2 to 4% to 8% like for like sales growth. So maybe what is the driver? Was there any pull forward of shipments in Q1 versus Q2? Any color there would be helpful.

Good morning, Filippo. So in fact, what drove this upgrade of the guidance during the quarter is the fact that the, number one, the continues to be very, very strong. 10% of growth of the fragrance market. This is really a fantastic figure. On top of 10% in Q1 fiscal 2023. So again, when we discussed it several times since the beginning of this fragrance index phenomenon, we really try to explain as much as we could that this is everything but something that is a onetime event, and everything has to do with a very profound shift in terms of who are the people who are buying, what they are buying, how they are premiumizing and how social media in a way is holding this consumption globally in the different regions around the world. So the market continues to be very good, very strong and very dynamic. And the best way to see it is also in the performance of the company. So on the market that was 10%, Prestige fragrances grew by 25%. So two times and half the growth of the market. Of course, there is a lot of pipeline of new innovations, but these innovations they are all delivering very strongly. Of course, there is everything we told you about Burberry Goddess that has become a Top six fragrance in the U.S. I said it recently published in China. In many markets, it is inside the Top 10, and this is for sure the number one innovation in all the markets around the world. But it is not the only one. In fact, you have to know that we don’t have one brand growing in the high 20s, not two, not three, not four, we have seven brands inside that are growing in the high 20s, some of them with innovation and some of them without innovation. So this is also -- I’m sorry to say it, but I am not sorry, I am proud to say it, this is the good work we are doing at Coty, at creating incredible, exciting, the highly-performing innovations in this area of the fragrance world. So that is what it really explains the upgrade of the guidance. We knew that, Goddess would be big, but the jury was debating, is it going be big, very big or extraordinary big. So this is what we are seeing is that, this is going to be quite big, if I have to say. So second element is the question around how Q2 will land. So you have to know that Q1 is typically a spike in cost. What we piped the Burberry Goddess, we have been piping also a Gucci -- innovation and also a bus eviction innovation. Q2 is really a quarter of sales, as you know, and the picture that is implied means that, we are going to continue to have a very good performance, probably inline with the market or slightly above of the market. So that is more or less what we believe is going to be. Hopefully, we have a good surprise. But so far, it does not mean there is a deceleration, it just means that, we are all about sell out versus selling to sell out in the first quarter.

Our next question will come from Korinne Wolfmeyer with Piper Sandler. Please go ahead. your line is open.

Good morning and thanks for taking the question. Congrats on the quarter. So I would like to piggyback off of the China Hainan question. I would like to better understand, what are seeing with selling versus sellout for both China and Asia Travel Retail, and if it is not normalized yet, when do you think that should normalize? Also any early reads from 1/11 pre-sales. And then lastly, I would like see if there is any commentary you can share on any potential pressure with some of the Middle East tensions that we are seeing? Thank you.

So, when it comes to Hainan, today, our inventory levels are okay. There is not any kind of slack to be done in terms of having inventories going up. Of course, we are in front of a easy comparative, if I may say. But still, the growth of the fragrance business we are having there and our skincare also business is very high. It is a triple-digit growth. So that is quite good in a way. When it comes to China inventory levels, there are healthy also on the Prestige side. The only part that is in fact, by the way, during the script and the earning, even if this is very, very small portion of our business is around CB. It is not to do with the market or anything like this. This has to do with moving from one line to another line at retailers. We revamped the Adidas sugar gear lines and we changed it from one factory to another, so we had to build a bit of stock that was pushed to the trade. And then because of the slowdown of the market, this trade went up and this delayed the arrival of the renovation of the shareholders. So this is the only thing we flagged in all the communications we have done regarding an increase of inventory. But again, this is a very, very small part of our business given that cookie China business is, what, 90% Prestige and 10% CB more or less. So this is number one. What do we see on 11/11? The dynamism of the fragrance category is confirmed. This is really something that is confirming month after month. Specifically, as I said it before, on the high end part. And more than ever, people exploring scents or juices that are unexpected for a market like China, which is a great, great, I would say, news because this means that the ability to create full lines for the Chinese consumers. It is crystallizing now versus what used to be the case just two or 3 years ago, which means that you could launch only two or 3 flower iterations and you are done with the Chinese market. So there is the diversity that you see everywhere else around the world in terms of taste that is starting in the country. And on the last part of your question regarding what is happening in the Middle East, this business is a mid-single-digit business expertise. So far, we are not seeing any negative impact on our business, but that is the situation. But honestly, I have to say that on a personal level, as you know it, I’m very saddened by the violence, and we continue to hope for the peace and an end of the suffering. That was an important point to make after your question.

Our next question will come from Anna Lizzul with Bank of America. Please go ahead. your line is open.

I wanted to ask on the quarter, you had a good deal of operational leverage to help drive the adjusted EBITDA beat. And I was wondering if you could elaborate on the drivers of this and how you see it progressing through the year?

Yes. Absolutely. Indeed, I mean, we continue definitely our strategy is really making sure this flywheel, definitely top-line growth, focus on productivity and then making sure that we are allocating resources to support our strategic initiative and we keep growing our EBITDA. So this is definitely what the equation you saw in Q1 and indeed is driving us to deliver an EBITDA, which is higher than expectation. So now when looking ahead, what are the components? Number one, of course, we continue this top line agenda. So this is, we are raising the top-line guidance. Number two, gross margin. Definitely, we are seeing, I mean, Q2 where our gross margin should be flattish and then expansion gross margin expansion in our H2, which will be the combination of the mix management, as I just shared productivity that we continue targeted pricing. And also, we are starting to see some softening on cost of goods inflation and also transportation inflation, so then we will continue, of course to inject some of this gross margin expansion into the strategic initiatives, the innovations, investment in the capabilities, as we say about digital also about R&D and definitely keeping improving our EBITDA margin as we confirm our EBITDA margin full year growing from 10 to 30 basis points. So the flywheel is fully in motion. And of course, with high discipline on the cost and really making sure that it is fully, fully consistent with the strategic imperative.

Our next question will come from Olivia Tong with Raymond James. Please go ahead. your line is open.

My first question is around your view on margin contribution by segment this year and whether you think one division is expected to show more and then the other. Are you expecting both divisions to grow margins in light of Q1 trends? Prestige margin, obviously, increasing, but consumer beauty is still down on a year-over-year basis. And then just broadly in terms of your plans to raise price, another around in early calendar 2024. If you could just talk about elasticity and your view on the volume trajectory for this year as you implement that next for enterprise pricing?

Yes. Thank you, Olivia. So just to give you a few elements as you shared indeed. So I mean, prestige is showing strong, strong improvement on profitability and CB starting at lower pace. What is driving this is that we have in the 10% top line growth in consumer beauty, we have strong performance on body care, which is weighing down the gross margin. So again, it is very positive in absolute value, but definitely, there is some impact on gross margin. But at the same time, I can tell you that there is a very strong work and huge work to improve the gross margin in consumer beauty. And when I was referring to body care, it is definitely Brazil is driving this growth and we have significant gross margin expansion in this category and in this market. So definitely, you will see that gross margin in consumer beauty will improve quarter after quarter. And this here again with combined with the strong productivity plan that we are putting in place in consumer beauty. Big one is being platforming. We are really making sure that now innovation that we are launching across the different brands, in fact, have the same technology and it brings significant savings. So it is going to contribute significantly in the coming quarters. We keep working, as I shared before, on the strategy for the new management. So we have really a deep review, detailed review on all the value analysis of consumer beauty and we are really identifying significant value. So definitely strong focus and there is a clear trajectory to improve our consumer beauty profitability definitely in the coming quarters and in the coming years. So then your second question was definitely on pricing. As I shared at the beginning, we have a strong pricing of it working on this stream. So they are very precise, very granular and it went very smoothly over the last quarters. So now we will do very targeted price increase. So when I’m saying very targeted price increase, that is exactly the answer to your question. It is really then when we have all the elements, all the elements, all the analysis that we do this, and it has no impact on the volume. So what are the drivers is really when we know that it is about products, where there is high demand, there is high success. And definitely, we know that, or there is a gap between, channels or between competition. And definitely, we have room to increase price and again without impacting volumes. And we made very clear, and I repeat, and you saw it in Q1, we are making sure that, our growth is well-balanced between volume, mix and price.

Our next question will come from Andrea Teixeira with JPMorgan. Please go ahead.

Thank you for taking my question and good night there in China. So just on the, I mean, again, congrats on the top-line delivery. But on the Consumer Beauty, Laurent, you are just mentioning some of the efforts. And we saw some improvement in market share. Should we expect some velocity? And so I think you mentioned when we saw each other recently in terms of like how you are seeing the shelf space looking ahead and the spring resets in particular in the U.S. and the UK? So how should we be thinking as we see Consumer Beauty recovering there and in particular in those key countries? Where we are seeing more like velocity and then as retailers see that improvement, they would decide on shelf space in probably calendar 2025. And then on the investment side, if you can help us, like, of course, there is so much reinvestment that I think investors appreciate, the overhead in SG&A total dollars in the shorter months has been around $740 million per quarter. And then you obviously ramp-up to around $800 million. Is that the way and the level of dollars that we should be working with? And sorry, lastly, on the clarification on deciding to sell or to postpone the sale, it seems that you have not reached an agreement on the pricing, I think, and I understand that. But just to think about how we should be thinking that becomes a puts into KKR in calendar 2025 and how that negotiation is that a valuation that you are looking to do or is that something that should be negotiated by the time we cross that bridge? Thank you.

Andrea, I am going to let Laurent answer on the two last questions, which have short answers. And then I will take the question on CB, which is a little bit longer in terms of hands.

Absolutely. Hello, Andrea. So indeed, on Wella, yes, it is important. I give a full picture. So what are the elements? Number one is, definitely, that we are seeing in a very strong cash flow trajectory, in the first half fiscal 2024 and the full fiscal 2024. So definitely, this first element is giving us full confidence, to reach our leverage ratio. Number two, as you know, we implemented our dual listing end of September, and we made an offering, which was very successful. And again, this is a second element, which is accelerating our deleveraging. So definitely. And number three, just to be very clear, the point is not about pricing. I can tell you the due diligence, which was made on Wella, fully confirm the great value of the company and the pricing. There was just, I mean, if I make it, small misalignments indeed, on minority rights. And this thing happened. But again, based on the first two elements, we came to the decision that, okay, was better to stop the transaction. But be very clear that it doesn’t change our agenda that we are targeting really the full divestiture of Wella by end of calendar 2025. The value of Wella is absolutely confirmed and you saw it in our books. And the relation with skincare is excellent and Wella is a very good business. So yes, there was your question on SG&A. I mean, the key element is definitely that we are investing, but still growing our SG&A. So we are growing our SG&A below sales growth, but it is important also that you keep in mind that in SG&A, we are making sure that we are investing on our digital capability, we are investing in our R&D capabilities. So we are making sure also that within the SG&A, we have productivity on cost well, we don’t see value for the business, but we are also investing on SG&A capabilities, which are creating value for the business. So that is the way we are driving also our SG&A question. So now on the consumer beauty question, regarding what is the trajectory of the division in terms of growth. Two things. The first one is that we are diversifying our sources of growth in consumer beauty. The majority of our sales are coming today from color cosmetics, and I will say a few words about this in a few minutes. But we are also building the machine to make consumer beauty a maker of mass fragrances. Here in China, we just had a meeting, and what we see is that there is potential all around the world. In every country, people are craving for fragrances from the lowest price possible to the highest price possible. So this is an area that is very important for the division is to diversify the sources of growth and to diversify ideally in categories that are highly relative. And fragrances are highly relative to the gross margin of the consumer beauty division negative quite high also in the 60s, it is not higher. And this area, what we are doing, as I said it several times, is that we are accelerating the pace of innovation, specifically what I call premiumized innovation. So you have seen recently some innovation coming under CoverGirl and now platform quite instantly, I have to say, because this is coming 6 months after, 8 months after, now under email, we are platforming this premiumized innovation, and this is going to help us a lot to drive the profitability higher, but also to attract this younger generation. So what we have done so far, if I take example of CoverGirl is that we have solidified the foundations of the company of the brand, sorry, towards, I would say, millennials and genics and boomers, this is something that is not seen in other indie brands. They have mainly a Gen Z business. The one we have is big and now we are going to build on top of this a more younger Gen Z, mainly digital influencer an advocacy driven business behind this innovation. So the things I can share with you and which will take me to the shelf space is that CoverGirl is closing the gap versus the market. We are closing the gap while growing quite strongly. It happens that someone is growing much stronger, but the reality is that we are part of those who are still growing but closing the gap versus the market. In brick and mortar, the gap was of 8 points in the last nine-months and it is 6 points in the last three-months, and now it is less than 3 points. On Amazon, the brand is driving the growth of the category. The gap was 1.4 for CoverGirl above the category at Amazon in the last nine-months. In the last three-months, CoverGirl is 20 points above the category at Amazon. And in the last month, it is still 20, 18, 19 points above the category. So it is clearly there that it is happening. It is see there that the advocacy influence our marketing plans signs, and we hope to see this translating also on the brick-and-mortar side of the market. Given regarding the shelf space, we believe that the shelf place resets of spring, the shelf place of our brands will be stable. Hopefully, it will grow in 2025 as you are suggesting it, thanks to our very, very strong plan of innovation, more innovation quicker, beat by a strong influencer and advocacy teams around the world, which hopefully will give us the ability to start to increase our shelf space again. But keep in mind that it is expected to be stable.

Our next question will come from Charles Louis Scotti with Kepler. Please go ahead. your line is open.

I have three actually. The first one, I was pretty impressed by your performance in Asia Pacific. What was behind the trends of your business there unlike most of your competitors? And more specifically, in the travel retail channel, it was apparently very strong everywhere for you and also if you could give us an idea of the breakdown of the travel retail business by geography? Second question on inventories, one of your Paris listed competitors said that retailers have now rebuilt their inventory with the supply chain tensions easing, do you have any view on the level of inventories in the trade in Europe and in the U.S.? And is the expected deceleration of the growth in Q2 related to potential destocking impact? And finally, just a follow-up question on the question of one of my peers. Your H1 guidance suggests 5% to 8% organic growth in Q2. I guess you may have been cautious again, but so why will growth deteriorate so much going forward? And do you have already some indication on the sellout in October and early November pointing to a deterioration?

Yes. Hi Charles. This is Sue speaking. So again, regarding the performance that you are referring to in APAC, and indeed, the travel retail part has been very, very strong. To answer in smaller specifically in travel retail this company was mainly an entry prestige fragrance seller two or 3 years ago. And we have decided that we are going to play on the full scope of what fragrance market is about and free prestige fragrances where the company has always been very strong, and this is continuing to grow very, very fast. One of our fastest growing brand in this channel is Calvin Klein, which is an entry prestige brand that is doing very, very well. We have added on top of these premium brands like recently Burberry Goddess, Chloe, etcetera, and we added also niche offering on top of this. Next to this, I would say, full lineup of brands occupying all the different five tiers, of the fragrance market. We have also three makeup brands. We have Kylie Cosmetics, Gucci makeup, Burberry makeup, and these are doing very, very well. So this is a second leg of growth engine. We have added to this channel. Number three, last but not least, it is also about skincare. And there we have Lancaster that is quite doing very well in the area, I said to you that the brand is having double-digit growth, for example, in Hainan, but we are also starting in, mainly in domestic market in the southeast part of the Asian continents with philosophy skincare. That is a brand that is present in a Sephora environment, which we believe has a role to play in the skincare market. So that is more or less what explains this over performance. We did a year fiscal 2023 at plus 30% in Travel Retail. We are continuing to grow at plus 20% in this channel. And this, again, despite the fact that we are still far under the level of travelers in Europe, specifically Chinese traveler, we believe that only 30% of the levels of Chinese traveler pre-pandemic are now back outside of China. So there is still some room over there, if this happens one day. Now when it comes to the questions around the trade, Q2, but also inventories.

Yes. So maybe to start on your second part is on data. We are not seeing any slowdown in categories offset in October. So these are definitely one element and this is what we are focusing on. Then number two on trade inventory. The inventory is very healthy. This is what I can tell you. The only element I will add and which will enter this phasing Q1, Q2 is up of course, as Sue mentioned at the beginning, is that, our Q1 was very strong on innovation. And there is a natural pipe fill from our retailers on the great innovation that we are launching. And with very, very strong results, which is Burberry Goddess, Hugo Boss here, and we have also Gucci Manual. So there is really a mechanical effect of pipe fill for retailer, but which will translate in very strong sellout in Q2. So this is really the way you need to model the equation. It is between selling by fill and Q2 is always a quarter of strong sellout, especially for Prestige.

Our next question will come from Chris Carey with Wells Fargo. Please go ahead.

Hi, everyone. So just a few quick follow-ups, hopefully. So just on the mix line, relative to pricing. Laurent, I was in the impression pricing would be something like mid single-digit incremental in February and March. I think you said low single-digit earlier in the call. I may have missed heard you. But is there, an expectation for less pricing because you are getting such strong performance on mix, and also that inflation is decelerating maybe you are seeing what you need to price for, or if it is possible, I may just misheard you. And then on the, it is a small question, but just on the obsolescence. Was that just you had built-up so much inventory because you wanted to be ready for the sell-in and it was just a little bit less than you were expecting. And you had to take that in on the gross margin in the quarter. And so maybe just any perspective on that, of course, in the context of strong delivery, if you want. Thanks.

Of course. So let me clarify the first point. I mean, we never say that we will do mid-single-digit in February, so I want to make it very clear. So now indeed, we are seeing low-single-digit, but then you made the point is that it. We are really monitoring in a very targeted manner and granular manner. Indeed, because of so, we have a favorable effect from the mix. And the favorable positive effect from the mix is also driven by the accretive innovations we are putting in place. So in a way, it is really where you put the frontier between pricing or mix. And of course, we are putting it the accretion from the innovation in the mix part. But of course, at the end of the day, the objective is that all these initiatives, mix, it targeted pricing and also strategic revenue management are here really to increase the average unit price. And this is really what we put under this an umbrella of strategic revenue management. And second element, yes, we are seeing inflation starting to ease, especially in COGS and transportation. So we are making sure also that we are adapting our growth equation in assortment. But I want to be very clear that we keep focusing on value creation and really implementing all the levers that we have in our hands. So yes, your second question was on E&O. No, just to be very clear, I mean, the demand this year. There is just some pure mechanical, and I will say, accounting effect that indeed last year due to service level issued, inventory was pretty low. We rebuilt inventory. This is a strategic decision we are making really to have a service level, which is a good service level. Now we are 96% to service level, which is a great achievement. And also to make sure that it the sellout, which is strong, is really successful and we observe the product. So it is again mechanical accounting treatment, but no concern at all in terms of inventory. And that is why now I’m telling you that we are seeing a flattish gross margin in Q2. And there will be some acceleration of gross margin in H2 fiscal 2024.

Our next question will come from Ashley Helgans with Jefferies. Please go ahead.

Hi this is [Sydney] (Ph) on for Ashley. It was just wondering if you could give kind of any color into what you are seeing or expecting for the promotional environment heading into holiday?

Harf do you want to take this question?

Yes. I mean, but overall and I can confirm you and what you see that the sellout is very strong and the sellout is very strong with premiumization. This is what we are a thing both in prestige and consumer beauty. And again, the clear demonstration is that the innovation that we are launching, which are with higher value, higher price. Definitely, we are seeing very high demand. So no, we are not seeing any increase in promotional. Maybe to give more specific item. I mean, last year, due to the service level issues, a shortage of components. We reduced drastically or defect, defect is usually in the mid-teens ratio last year it much lower. So this year, we are bringing back to a normal level of defect, but this is a normal way of animating the category, it is it healthy. But okay, this question that we are not seeing indeed overall promotional increase of promotional activity in our categories and in our categories and in our activities.

So as this was the last question, please allow me for some closing remarks. So first of all, thank you, everyone, for joining us. To sum up, I would say a few things, few important things. Number one, we are very pleased with the strong Q1 results, which really sets us a great trajectory for the fiscal 2024, and we are very excited by the many opportunities that are still ahead for the company. We are also, I have to say extremely grateful for the continuous confidence and support from all our analysts and investors as the recently published institutional investor results again position Coty as one amongst midcap companies in our sector. So thank you very much. Thank you again for your trust, and we look forward to speaking with you all very soon.

Thank you. This does conclude today’s call. We appreciate your participation. You may disconnect at any time.