Coty Inc. (COTY)

COTY 
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Coty Inc. (COTY)

F2Q2014 Earnings Conference Call

February 14, 2014 09:30 AM ET

Executives

Kevin Monaco - IR

Michele Scannavini - CEO

Sergio Pedreiro - CFO

Analysts

Olivia Tong – Bank of America Merrill Lynch

Bill Schmitz - Deutsche Bank

John Faucher – JPMorgan

Chris Ferrara - Wells Fargo

Lauren Lieberman - Barclays

Neely Tamminga - Piper Jaffray

Presentation

Operator

Good morning. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2014 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. As a reminder, this conference is being recorded today, Friday February 14. Thank you.

I would now like to turn the call over to Kevin Monaco, Coty's Senior Vice President, Treasurer and Investor Relations. Mr. Monaco, please go ahead.

Kevin Monaco

Good morning. Thank you for joining us. On today's call are Michele Scannavini, Chief Executive Officer, and Sergio Pedreiro, former Chief Financial Officer. Before we begin, I would like to remind you that many of our comments may contain forward-looking statements. Please refer to our press release and our reports filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Except where noted, the discussion of our financial results and our expectations do not reflect certain non-recurring and other charges, and the discussion of our revenue growth is on a like-for-like basis, therefore constitute non-GAAP measures. You can find a reconciliation between GAAP and non-GAAP figures in our press release.

I will now turn the call over to Michele.

Michele Scannavini

Thank you, Kevin and good morning, everybody. Before I begin commenting on the business results, I want to take a minute to introduce the two new members of Equity Committee. Let’s start with Patrice de Talhouet, who joined Coty team last month as Chief Financial Officer. Patrice brings with him more than 25 years of finance experience, having served in senior finance roles for a number of global corporations. He most recently served as Chief Financial Officer, Europe for Mars Chocolate and Corporate Financial Officer Americas for Mars. In these roles he oversaw governance and compliance in the Americas and successfully led a multi-year program to transform the global finance fashion. Specifically Patrice has a strong track record of driving efficiencies in each organization he has led. We’re very excited to have Patrice on board and I believe that we will benefit from his expertise and drive to bring Coty to the next level of growth and profitability. Patrice couldn’t be with us today but will be with me from the next call on.

We are also excited to welcome to our executive committee Catia Cesari. Catia joins us as the Senior Vice President, Business Development, Mergers and Acquisition. She brings to Coty 20 years of successful experience in M&A at global companies such as General Electric, Gucci Group and LABELUX. I believe that Catia’s deep expertise and successful track record is scalping and executing highly strategic deals will be a strong asset in supporting Coty’s long-term strategy. And I also to take a moment to thank Sergio Pedreiro, as this is his last earnings call with Coty.

Sergio joined Coty in 2009, in the mid of the global financial crisis and quickly implemented a strategy that supported our group, reduced cost and increased management focus on earnings and margin expansion resulting in significant improvement. Sergio also strengthens governance and compliance, and was instrumental in guiding Coty through its successful public offering last June. On behalf of this Equity Committee and the all organization, we are grateful for his great contribution over the last five years and we wish him well in his next venture.

Now let’s talk of our quarterly results. The key market trends and business dynamics that impacted our first quarter results continued into the second quarter. This was largely anticipated and the quarter results came generally in line with our expectations. In the last few months we have seen a progressive cost structure slowdown in the fragrance market and further deceleration in the Mass cosmetic market, particularly in the nail category.

The fragrance market in the U.S. reported negative growth in the quarter, with a low single-digit decline in Prestige and high single-digit decline in the Mass channel. The holiday season has been generally softer than anticipated. [indiscernible] Trends [ph] announced the need to increase incentive and promotional activities to stimulate consumer purchases, and this had an impact on margins.

In Europe the fragrance market was generally flat versus last year though more promotional. The Mass color cosmetic market decelerated further in quarter two, particularly in the nail category. The U.S. nail category in the Mass channel declined 6% in the quarter following a 4% decline in Q1. As a reaction to this consumption slowdown, retailers have rapidly adjusted their inventory level. This destocking continued in quarter two, however to a lower extent than in quarter one.

Now, we believe that the big part of the inventory reduction should be over and we expect more marginal adjustment in the future in line with fluctuation in consumption. Against this backdrop, our second quarter revenues declined 4% on a like-for-like basis. This performance was a combination of positive 2% volume growth, more than offset by negative 6% price mix impact, reflecting the aggressive discount in the promotional activity we are facing in certain markets.

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