Hello, my name is Katie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Coty third quarter fiscal 2022 question and answer conference call. As a reminder, this conference call is being recorded today, May 9, 2022. Please note that earlier this morning, Coty issued a press release and prepared remarks, which can be found on our investor relations website. On today's call is 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 those 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. Thank you. Our first question today will come from Andrea Teixeira with JPMorgan. Please go ahead. Hi, good morning. Hi, good morning, everyone. I just wanted to Sue, if you can, kind of elaborate a little bit more what is implied in your assumptions for the fiscal fourth quarter, I would guess, in light of the commentary that you made on the press release and prepared remarks. How do you see that evolving, particularly your prestige, on your prestige side, how you feel comfortable with that as you exit the quarter for the Q4, how are you feeling comfortable on that? Then, related to that, the fourth quarter top line also in consumer beauty, how do you see yourself stacking up in terms of innovation and market share trends as you exit the quarter? Thank you. Hello, Andrea. This is Sue Nabi speaking. Thank you for your question. Again, as you've rightly mentioned, as you know, the Q3 results implied a very strong growth in our prestige division and a very good growth also on the consumer beauty division, which is only 25% on prestige, plus 10% on consumer beauty. For the fourth quarter, we do believe that the momentum we are seeing behind our prestige brands is going to continue. Specifically, that we are going to have a much more balanced, I would say, media investment behind the two divisions during Q4, while Q3 was heavily behind consumer beauty and Q2 was heavily behind prestige. You can imagine the momentum we are seeing for the prestige business hopefully is going to be kept and hopefully accelerated if possible, specifically if the lockdowns are stopping in China, which is one of the key countries for the prestige division. Voilà, this is the way I see it. The guide that we have given you excludes, as you know, Russia, and assumes, of course, limited, maybe not at all recovery in China. We may have some upsides potentially if China is doing better. The trend for the month that just finished, which is the April one, is in line with our outlook. That's helpful. Sorry, I was just about to to finish on the second part, which is consumer beauty. Again, there, you've seen that, specifically in the U.S. and specifically behind C, we have this issue in terms of supply behind our best-selling mascara line, and hopefully we feel that this could be getting better in a couple of months. We'll see if this can help us. We do believe that we will be back to, I would say, almost normal supply behind COVERGIRL around June, July. Thank you. On the exit of the quarter, right, you had an impact in China in March, and I'm assuming travel retail as well. Are you assuming that in the fourth quarter, the lockdowns will. Obviously they're still going on in particular in Shanghai and Beijing getting worse, I would say. What are you expecting? What are you embedding that there is no recovery and then you're embedding all the impact of what you saw in the third quarter? Some of the other companies, some of your peers have quoted how much impact they had in China in March. If you can let us know how much was down and how much the rest of the world performed in the fiscal third quarter ex China. Again, the way we build the fourth quarter is, having in mind that we will have a very, very limited recovery in China, which is, I would say, cautious in terms of way of seeing things and at the same time could be also a reality. This is the way we've been built this. Again, the good news during the third quarter, if I may say, is that even with these lockdowns in Mainland China, we've seen our travel retail in Hainan, including in the middle of all the constraints, you know, compensating for the losses we had in terms of net revenue because of the lockdowns in the biggest cities of China Mainland. We will think that this is going to help us to mitigate, if I may say, this impact on our sales in Mainland China. Again, what we saw during Q3 is that we are slightly positive or quite positive, in fact, during the Q3, thanks to high-end sales that made up for the losses of the China ones. Travel retail is doing the job of compensating the financial. Thank you. Our next question comes from Steph Wissink with Jefferies. Hi, good morning, everyone. We'd like to focus in on growth margins, if we could. If you could talk a little bit about where some of that upside came from, whether it was mix or some of your internal strategies to unlock value. Related, as you reinvested into A&CP, any areas that were particularly productive in the quarter that you'll be emphasizing further going forward? Thank you. Hello, Steph. On gross margin, indeed, and you noticed, I mean, outstanding performance this quarter. With 240 basis points better than last year, and on a year to date, roughly 450 basis points higher. This is really the output, you know, of all the work, you know, and the all-in twin initiatives we shared several times. It's really combination of, on the one hand, the focus we are putting really on cost reduction. It's really the focus with supply chain, with procurement. You know, we gave several times the example of E&O that we are reducing drastically thanks to better forecast accuracy. We continue this journey, so definitely we keep the focus on, you know, reducing the cost. This is definitely the focus number one. At the same time, definitely what we are amplifying is what I'm calling, you know, the value part of the gross margin. This is really, number one, the mix, and what Sue has shared several times, and I explain again is that all the strategic initiatives, they are gross margin accretive. It's really e-commerce, it's really all, you know, China, prestige makeup, you know, the premiumization of the portfolio, and same also within consumer beauty. You remember we shared several times that the new initiatives we are doing in consumer beauty have in some cases, you know, gross margin, which is even equivalent to prestige. It means that, you know, this mix work that we are doing, is continuing. It will continue really to fuel the gross margin. Second, I mean, of course, on top of this, we are doing pricing definitely to mitigate cost inflation, but also because now we are gaining pricing power. This is really, again, thanks to the premiumization, new innovation, we are really pushing this pricing and of course it's accretive for the gross margin. All this in the context of revenue management, where we have very tight control on our trade terms. You see all the ingredients, really cost and value, we need to keep fueling and to keep building the lead. This is, you know, the gross margin and you see the confirmation in Q3 that we can invest even on ROI. Sue can give you some concrete examples. Clearly, we are going to continue to invest during the quarter, Q4. As you've seen, it's been very productive with the same story. Again, it's always the same story of the flywheel, you know, net revenue growing, gross margin better. This allow us to, at the same time, deleverage the company, and reinvest behind the brand while continuing our cost savings program. Productivity we have seen and we are going to accelerate. The V-neck brand is going to have three, that's doing fantastically well. You've seen the results. This is representing high single digits of the net revenues of most of the countries, sometimes much more than this. We are going to continue to invest behind this brand because we are seeing the strong momentum everywhere we put money behind it. COVERGIRL Exhibitionist is doing fantastically well, and the signature of KZ for the brand is by definition going to help us again to regain more. On our leading fragrances, as you can imagine, Gucci Flora Gorgeous Gardenia, fantastic success. Burberry Hero, fantastic success. Hugo Boss, the same thing. Last but not least, behind prestige makeup, you've seen the momentum we are having in Tingat, we intend to accelerate. Very helpful as always. Thank you. Sure. Once again, as a reminder, if you'd like to ask a question, please press star one. Our next question will come from Robert Ottenstein with Evercore. Great. Thank you very much. Wondering if you could drill down a little bit more into the U.S. makeup market, how that's developing into April. You know, obviously, there's increased mobility, but any new trends? Then, you know, taking it further into CoverGirl specifically, and I know there's lots of give and takes there, puts and takes on CoverGirl with supply issues, etc. But maybe kinda tell us, you know, the signs that you are seeing, that the brand is on a positive— Hi, Robert. Thank you so much for your question. Again, what we are seeing on the U.S. market is clearly, you know, mainly high pandemic. We are seeing categories such as face on one side and lips on the other side back to visibility on the figures. It started already some quarters in the past, you know, specifically the lip one. So clearly we are, I would say, back to what I could call normality. Therefore CoverGirl, it's very good news because again, the brand has been very strongly investing behind eye makeup. And again, you've seen the momentum we had last year behind Lash Blast clean and the overall Lash Blast franchise. We have Simply Ageless that we have reactivated last spring that's continuing to gain share quarter after quarter, and we'll have new news arriving behind this line very, very soon. We have also now we are activating, I would say, the second level of the CoverGirl rebirth. Remember when I told you the story of COVERGIRL one year and a half ago, it was about bringing back the crown clean makeup and clean beauty in general. This, I would say, is continuing, of course, and we are launching a lot of new things behind the COVERGIRL rebirth, is what we call cool or indie brands. Very confident that with these new faces we are adding recently behind Exhibitionist mascara, but also Exhibitionist lip color, we do have this second leg or second muscle to really boost COVERGIRL and the category overall. Because I do believe that the two growth drivers of the makeup category in America are on one side, clean, healthy beauty and cool trendy beauty. These are the two areas that we are pushing behind COVERGIRL. I can give you just a hint of something we just saw recently. We just launched, which probably could be in the two categories, a new lip balm, clean, fresh lip balm behind Cover Girl, and it became very quickly the number one lip balm, I think, in the U.S. Thanks to being clean on one side and probably a category that Gen Z's are looking for today, between color and care. This kind of product gives you an idea to the areas where the brand is going to invest, continuing the clean story while pushing strongly on the cool beauty. Last but not least, we just made the announcement that we have, you know, a new face. That's not a new face. That's a face that was part of Cover Girl years ago. Queen Latifah, she was one of the most iconic Cover Girl faces for years, the same way on Cover Girl. This is clearly going to help us to continue to activate that Cover Girl is made of today. Thank you. Our next question will come from Nick Modi with RBC Capital Markets. Yes, thank you. Good morning, everyone. Two questions. How do you see some of the changes in the consumer behavior, just with inflation, with mobility? I'm just curious on your kind of global landscape. You know, is Europe getting impacted by the amount of inflation? 'Cause it's certainly worse than it is here in the U.S. That was just the first question. Just more specifically, any clarity on the Kim launch, you know, number of products we can assume at the launch, timing, initial geographies. Any perspective would be helpful. Yes, thank you for your question, Nick. Again, on behaviors, there is quite some resilience and consumers continuing to spend when it comes to prestige categories. Again, the momentum we've seen in the quarter is continuing through Q3. Is starting to happen also during the quarter, during Q3. It happened very new. Again, remember, Europe was far under 2019 levels. This is, I would say, the biggest category. As you know it, fragrance, prestige fragrance is the biggest category of all fragrance business, of all prestige business in Europe. In China, of course, this was one of the impacts of COVID. Let's see what's going to happen once the lockdowns will be lifted. Clearly we do see good resilience of consumers who are shopping at the highest end, and we feel these consumers are going to continue to see. Again, I think it's important to keep in mind that for a lot of consumers, despite what is happening today in terms of inflation, etc. Of the second step of anything that's sold on the market, this is the first summer, 2.5 years almost today. It's the first summer where there is no restrictions except in China. Are going to come back to life. We've seen a lot of articles published about the fact that people. There is a hunger for life that probably is, you know, elevating the beauty consumption. There are some categories that may slow down. If that's because of this inflation of the prices, the good news at Coty is that we do have a division that's strongest than ever, which is our Consumer Beauty division. Our brands are coolest than ever. They are doing the right things. They are launching the right products that are much more profitable than versus the past. Some of them have profitability levels equivalent to those. That whatever is going to happen, we will be able, in a way, to adapt with our both divisions. Any clarity on the key launch, again, set to happen during Q4, and you'll see fantastic things and very exciting things coming during this launch. Great. Thank you. Thank you. Our next question comes from Wendy Nicholson with Citi. Hi. My first question just has to do with the target of $900 million in adjusted EBITDA. I know you talked that down just a little bit and on the prepared comments, I think you made the point that that was primarily a function of exiting Russia. Can you talk about any other moving pieces in terms of the revision to that target? I know it's early, obviously, to talk about fiscal 2023, but just in terms of your confidence of continuing gross margin progression, EBITDA margin progression, given the headwinds that everyone is facing. Thanks. Sure. Hello, Wendy. First of all, I mean, we made very clear that Russia exit, in fact, has you know very limited impact in Q4 from net revenue and the EBITDA standpoint. That's why we are confirming you know the $900 million adjusted EBITDA on the total year. Definitely, I mean, there are some headwinds. I mean, to name them, I mean, definitely we see a you know amplification of inflation. Again, we are very clear that inflation is not something new. I mean, something you know that started more than a year ago. We have a pricing office you know which has been working constantly on again price increase implementation. It will be just this year. Again, combined, you know, with all the ingredients I shared before on the mix and so on. So this gives us, you know, the fuel definitely that we keep investing in Q4 what's prestige consumer beauty. So continuous, you know, amplification on the expansion of gross margin, definitely fueling A&CP and our EBITDA. So this is definitely. Now, I mean, moving forward, definitely indeed, on the Russia impact has a more impact on H1 next year. But from an algorithm standpoint, it means that, from a baseline, you know, excluding Russia, the algorithm doesn't change, okay? Either in terms of top line or EBITDA. Wendy, just to add on Laurent's comment, we are reinvesting to drive net revenue momentum. Again, what's happening in terms of momentum behind our brands is continue to fight like crazy to reinvest behind our brands. This gives us, I would say, the ability to continue to invest behind the brands in terms of A&CP. Fantastic. If I can, I just had a sec. Given some of the comments from some of the other beauty players in the group, huge pressures on the China marketplace. Can you just take a step back and comment on your take on the China beauty market generally? Is the pressure we're seeing really just a function of the lockdowns and supplying changing underlying with the Chinese consumer in terms of their preference for Western brands or versus local brands? Any potential for the China market? Thank you so much. This, I think, is clearly a question that we are focusing on a daily basis. How is this market reacting to that, despite the lockdowns, you know, you've seen that Coty has continued to have outstanding figures over there. Our business is very, very premiumizing, if I may say. We were a fragrance company just like brands like Gucci or Burberry do have half of their business is made between fragrances and prestige makeup, which is really new growth engine, both in China but also in APAC travel retail and overall travel retail. We are having more than 10% of these brands fragrance sales coming from ultra premium fragrances. This is totally changing not only our, I would say PNL equation, getting much more profitable over there, but also it's a very strong confirmation that Chinese consumers are all about an obsession of premiumization, shopping most expensive items from this highly desired brand. For me, I don't see any change in terms of confidence for this market to become probably the biggest prestige or luxury market in the world in the coming years. I'm, I would say, more confident than ever than when you look at the portfolio of brands we do have, and that's probably what explains the fact that we've been fastest growing beauty company in China, among the top 10 beauty companies over there with a sellout that's been 14% during the last quarter, which is far above market. All these elements, not with this ability to continue to grow in this market, but I would say in the fact that Chinese are going to continue to be the most passionate, the most expert, and the most obsessed with trading up themselves in terms of beauty in this market. Terrific. Sounds great. Thank you so much. Thank you, Wendy. Thank you. Our next question will come from Steve Powers with Yes. Hey, good morning. Thank you. Maybe with Wendy and previously with Nick, you know, it seems like the story this morning is really one of continuity as you look forward, pretty much, you know, it seems essentially unchanged. I guess I just wanna just play that back a little bit and think about it in terms of the six priorities that you unveiled essentially a year ago, and the way you described those priorities back in November. You know, to the extent that the consumer does get weaker in the U.S. than in Europe, and we see continued volatility in the emerging markets. Does the way you employ those six strategic priorities change at all to get to that algorithm? Is it the strategy meant to be sort of economic cycle independent? Thank you, Steve, for the question. Again, you know, I think what's nice, and I would say the beauty of this six pillar strategy is that it's a balanced strategy. It's a true strategy that in a way is not betting on one division more than the other, not betting on or betting on a specific kind of pricing or price categories. It's really a strategy that will allow us whatever is going to happen to have means to take the, I would say, the here and there, or to mitigate the, you know, anything that could prevent us from executing the strategy. I would say that, in fact, consumer being about growing consumer beauty, we've seen that we had now five months of market beauty. Same thing for color cosmetics, consumer color cosmetics worldwide. This is clearly a very good, I would say, element in case some consumers that would be on the prestige side of the businesses in prestige would maybe love to come back have not only the clean beauty but the cool beauty that these consumers might be looking for. When it comes to prestige, clearly the fragrance momentum we have seen, we do believe is going to continue. Even if there is some lockdowns in China that are preventing this market, too, you can see that Europe and travel retail are back to very, very strong growth and that globally today, more than ever before, all levels are above 2020, 2019. Three, our size, whatever is the slowdown or the acceleration in this category, new SKUs and opening new doors, we have ability to continue to grow. Last but not least, on skincare, clearly a focus of the company is to be skincare brands. These are going to be pure players. As you can imagine, it's much easier to hit high targets with pure players in skincare. For example, we made the comment about CoverGirl launching skincare in the middle of the makeup, hair, et cetera. That is going to take time. We have always done since one year and a half to implement, correct, et cetera. On the prestige that our pure players skincare brands are going to help us to accelerate the agenda. Overall, I don't see anything that would change the algorithm that we have shared with. Again, this algorithmic beauty is made of a kind of balance between divisions, categories, which will hopefully allow us to mitigate any headwinds we would have. Thank you. Our next question will come from Olivia Tong. Olivia, your line is open. Please make sure your phone is not on mute. Great. Thank you. Good morning. I was wondering if you could first quantify how much of an impact the supply chain is. Whether the constraint in supply makes you potentially reconsider how much inventory you should be holding. Because unlike others, your inventory balance hasn't increased versus recent quarters. You know, the environment and you're hearing a lot of different views on how the environment's evolving and the consumer may or may not be mixed. I'm curious how you think about your ability to continue to drive growth and your ability to continue to drive price mix. Thanks. Hello, Olivia. I will take the first part. Definitely, I mean, when you're seeing in the whole industry some global supply constraints in supply chain procurement, we navigate quite well in this environment, as we said, and service level in the low 90s, which is the best performance. Indeed, as we flagged and can create here a few issues, the different pieces are implemented and actions are really put in place that we are solving and service level. We remain very agile. We keep what we explained several times, we have this dual sourcing approach so that we can absorb some potential issues. We have weekly reviews between commercial and supply chain. Need to adapt, where and how we allocate the products. Definitely we keep this focus, and keeping a good monitoring and supply chain. Inventory, yeah, you're absolutely right, and this is what you are managing the cash. Pragmatic and agile. That where we need indeed to build some inventory on some of it is resources. This is what we are managing, but always in a frame that doesn't change our cash trajectory. That's why our net leverage and Olivia, to complement Laurent's answer on the second part. Before moving to the second, et cetera, please keep in mind that on CoverGirl, which is I know a brand that everyone is looking at, the supply chain issues we had had nothing to do with what's happening in terms of shortage we are seeing for components. In fact, these were not made prior to the pandemic. Decisions that should have been done somewhere around 2019, but were not done, that delayed the availability of some key things that were part of that we are mastering. It's not something that we are hoping is going to improve. That's point number one. This finishes the inventory and supply part that Lauren was commenting. When it comes to the second part, however I do believe that helping prestige products. Specifically knowing that we have done the job are very granular, very specific to each and every brand on key items where we felt there was between the former price and the new pricing is not going to be big enough for $40. I do believe that the impact, at least for Coty Prestige, because of the granularity ability to price up for prestige, we won't see any kind of impact. When it comes to consumer beauty, if you take the example of CoverGirl, again that everyone knows in the U.S., CoverGirl has one of the best-selling foundation under $8, and it has some of the best-selling new foundations between $15 and $20. There we have the ability to direct, if I may say like this, consumers either for something that between $15. Still very, very affordable compared to, I would say other categories coming from prestige. That's what gives me, at least for Coty, a good confidence that whatever are going to be the behaviors, depending on the different tiers of consumers, we will be able to adapt and therefore to invest where people are going to shop. Thank you. Our next question will come from Chris Carey with Wells Fargo. Hi, good morning. I just wanted to have a follow-up that have been discussed this morning. First, just on consumer beauty, you know, I appreciate there was investing, anticipating a more balanced Q4 profit standpoint, but can you unpack perhaps some of the drivers of the margin in the quarter between the spending, supply chain, inflation, anything else that might be able to give us a bit of context on the underlying here? Then just secondly, as it pertains to China, you know, clearly there is a strategy in place to take this market to a certain size by fiscal 2025. That's a long time out. Is anything going on in the market right now going to delay you achieving those targets? Would you view the business as on track with the initiatives that you laid out? Thanks so much. Hi, Chris. I will take the first part. What I can tell you is that, you know, drivers of the margin of consumer beauty, you know. It's the same, you know, as a global Coty equation. I will start first, you know, with gross margin. What I'm explaining on, you know, the gross margin expansion journey that we implementing in Coty, this is, you know, absolutely valid for consumer beauty. Definitely we are working on improving the mix, and we gave a lot of examples. Again, all the new innovations that we are launching in consumer beauty. I take the example of kind and free. All these initiatives are very accretive in the equation. This is definitely, you know, giving us some levers, the headroom in terms of gross margin expansion. This is of course, say on pricing, we also, you know, with the pricing team working at a very granular level, very specific level, how, you know, to drive pricing in consumer beauty. Third element, revenue management, you know, tight control on trade terms, promotion, and all this in the context of value creation. This is again, you know, this flywheels is, you know, the virtuous cycle we are building is absolutely valid for consumer beauty. This is what we continue increasing the gross margin, keeping discipline on supply chain, on fixed costs and fueling A&CP. What you have explained, indeed, you know, we made significant investment in Q3 because we have great initiative and this is really to kick off the machine and of course in Q4 will be more balanced. On the second part, which is around China, is there anything that's going to jeopardize our fiscal 25 target? Again, what we are trying to do in China is to do what we have done, you know, one year and a half ago when we were in the middle of the pandemic and we were, you know, trying to fix everything that needed to be fixed, if I may say, waiting for the rebound post-pandemic. We're doing more or less the same thing in China, which is to make sure we are continuing to up the ante in terms of expertise, in terms of capabilities, in terms of the brands that we are intending to launch. At the moment, I don't see anything from a Coty point of view and Coty ability to implement the things we are working on, that will jeopardize our ambitious fiscal 2025 target. Thank you. Our last question comes from Mark Astrachan with Stifel. Yeah, thanks and hello, everyone. I guess I wanted to start with fragrances in China. Thinking about a bit more longer term. Could you remind us what the category share is today as a percent of total beauty spend? How does that compare to some other markets? It would seem, you talked before about it being lower at this point, but obviously growing faster. Maybe more importantly, how do you think about competition stepping up, given that they presumably, I think, have directionally talked about seeing kind of similar trends and development of the fragrances category? How do you think about your relative positioning in anticipation of them kind of going at you a bit more there? Thank you. Yes. Hi, Mark. Let me try to answer the different pieces of the question. First, in China. China today, in the country, you have only 2% of people using fragrances on a daily basis. You can imagine moving just this 2% to 10% on the number of people who are able to buy and use fragrances would be huge, I would say, a huge jump in terms of fragrance consumption, specifically with the Gen Z who are going to drive this, I would say, newly. The fragrance category in a country like China is around 15, 20%, if I'm not wrong, which is far under the 70% of skincare and the remainder is prestige makeup. Clearly it's the lion's share is skincare and then makeup and then fragrances. Fragrances is the fastest growing category in China. Again, 2% only use fragrances on a daily basis. This to be compared to Europe, where fragrances is the biggest category, and the U.S., where fragrances is, I think, the smallest category, of the country. This gives us, I would say, an upside potential that's probably very, very, very strong. How is competition stepping up in China? Honestly, we are not seeing anything in the competition today that's telling us that there are things that we are missing in Coty's portfolio, if I may say. Again, you know how we like to think. We love to think in terms of what are the trends, what are the criteria people are shopping, what are the categories people are looking for. Clearly, we do see that with our Gucci, Burberry, Chloé, Hugo Boss, Tom Ford fragrance brand, or Tiffany to name another one, we do have brands that have the ability to respond for the mainstream consumption. Now, again, I said that 10% of the sales of these brands is already made by e-commerce premium fragrances. We are present in this category, while just one year and a half ago, this was almost nothing in our turnover. We are clearly feeling that we do have the right brands, the right price tiers to clearly answer this surge in consumption that we are seeing behind Gen Z's on the Chinese market. At the end of the day, if competition is investing, that's fine, because at the end of the day, we need to be all together investing on this very, very promising market to grow the market, and this will benefit all of us. Voilà, that's what I would say. This was my conclusion. Thank you very much for your questions, and thank you very much for this. You know, I'm going to say thank you to the whole team at Coty for this seventh quarter of very, very good results. We hope to continue to do the same thing in the near future. Thank you very much. Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.