Coty Inc. (COTY)

COTY 
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Coty (COTY)

Q3 2014 Earnings Call

May 14, 2014 9:30 am ET

Executives

Kevin Monaco - Head of Investor Relations, Senior Vice President and Treasurer

Michele Scannavini - Chief Executive Officer and Director

Patrice de Talhouët - Chief Financial Officer

Analysts

William Schmitz - Deutsche Bank AG, Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

Christopher Ferrara - Wells Fargo Securities, LLC, Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division

Linda Bolton-Weiser - B. Riley Caris, Research Division

Presentation

Operator

Good morning. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's Third Quarter Fiscal 2014 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, May 14.

Thank you. I will now 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 Patrice de Talhouët, 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 nonrecurring and other charges, and the discussion of our revenue growth is on a like-for-like basis and, 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 my comments regarding our business results, I wanted to take a moment to welcome Patrice on his first quarterly call with Coty. Patrice has now been with Coty for several months and will be reviewing the financials during his prepared remarks.

Let's turn now to our quarterly results. On the last call, we outlined several Coty initiatives, which gave us confidence that we would return to revenue growth in the second half. Specifically, we discussed our new structures and investment in emerging markets, increased support behind our power brands and some key launches and product initiatives.

Today, I'm pleased to say that we have started reaping the benefits of our efforts. And in Q3, we delivered against all 3 strategic objectives. Our emerging market revenues increased 15% in the quarter. Most of our power brands saw growth, and the launches we outlined for Q3 are performing in line or ahead of expectations. As a result, overall revenues grew 2% like-for-like in the third quarter, with positive results in both Fragrances and Skin & Body Care, and solid growth in EMEA and Asia-Pacific.

Looking at the market dynamics in the quarter, beauty consumption in the developed markets remained overall flat in the product segments where we compete. Western Europe witnessed some improvements across several product categories, including color cosmetics, deodorants and shower gels. At the same time, the fragrance market remained flat to slightly positive after adjusting for Easter shift.

In the U.S., the market environment remains challenging, particularly in the mass channel. The fragrance market, adjusting for the calendar effect, was flat in prestige and declining in mass. The U.S. mass color market decelerated again in Q3, recording a 2% decline. We saw even stronger decline in the nail category, with 12% consumption decrease compared to a 12% increase in Q3 of last year. This represents a further deceleration versus the mid-single-digit decline in the first half.

Lower consumption was driven by lower traffic in store, high inventory in consumers' houses and the contraction of the special effects makeup category. On a positive note, we saw moderate destocking across our mass retail customers in the U.S. as inventory positions are now, by and large, reflecting the underlying category demand trends.

At this stage, we have no visibility on when the U.S. mass channel market will improve in color, particularly in nail. However, we have reason to be optimistic about our business in the second part of the calendar year due to a stronger innovation calendar, including Sally Hansen robust launch planned for June. Also, the comparison versus the prior year is going to ease up as in the second half of calendar 2013, the nail category shifted to a mid-single-digit decline.

Against this backdrop, our third quarter revenues grew 2% on a like-for-like basis. Our prestige portfolio saw strong growth in the quarter, also aided by the easier comparison to the prior year, where prestige fragrances declined 1%. Our mass portfolio was overall flat in the quarter, rebounding from the pressure we saw in the first part of the year.

Let's now look more closely at our performance in each of our segments. In Fragrances, our revenues increased 6% on a like-for-like basis. During the quarter, we saw growth in both our prestige and mass fragrances. On the prestige side, growth was driven by strong performance in our power brands: Calvin Klein, Marc Jacobs and Davidoff. Leveraging its strong brand recognition worldwide, Calvin Klein recorded significant revenue growth in emerging markets such as the Middle East, Australia, Eastern Europe, China and Travel Retail. Calvin Klein launches in Q3 are off to a good start. The launch of Endless Euphoria in the U.S. propelled double-digit growth on the total Euphoria franchise, with gains in ranking and market share.

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