COTY 2027 Q1 Earnings Call

Hello, everyone. This is Olga Levinzon, Coty's Senior Vice President of Investor Relations. Thank you for joining us today for the prepared remarks portion of Coty's first quarter fiscal 2027 earnings. On Thursday, November 5, 2026, at approximately 9:30 A.M. Eastern Time, or 3:30 P.M. Central European Time, we will hold a separate live Q&A session on our results, which you can access via our investor relations website. Joining me for our presentation are Markus Strobel, Coty's Executive Chairman of the Board and Interim Chief Executive Officer, and Soraya Benchikh, Coty's Chief Financial Officer. Before I hand the call over to Markus, 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 measure section of the company's release. With that, I will turn it over to our Chief Executive Officer, Markus.

Thank you, Olga. Hello, everyone, and thank you for joining us. I am pleased to be joined in this call by Soraya Benchikh, Coty's Chief Financial Officer, who has now been in the role for a little over two months, and she will share her initial impressions of the business and the progress we have been making. Q1 performance was ahead of our guidance and expectations, but we still have work to do. Fiscal 2027 remains a transition year, and the recovery won't be linear. With that context, let me walk you through the sales and sell-out trends for the quarter. Looking first at our sales performance, like-for-like sales declined 1.6% in Q1, compared with declines of 6% in the first half of fiscal 2026 and 4% in the second half. Q1 was better than the fiscal 2026 trends and remained broadly in line with Q4.

Our Q1 performance was ahead of our guidance for a low to mid-single-digit decline, supported by stronger trends in the U.S. and a milder-than-expected decline in the Middle East. Our priority in both divisions is to build consumer demand and align shipments with that demand while keeping our focus on improving sell-out. Our data suggests that overall sell-in and sell-out were broadly aligned. Several priority prestige brands showed encouraging early progress as we applied a more focused approach. While these trends are encouraging, there's still more to do to put the business on a more sustainable growth trajectory. Soraya will discuss these data points in more detail. While we execute our transformation, it is important to emphasize that externally, the beauty market continues to demonstrate resilience despite macroeconomic uncertainty. As this chart illustrates, U.S. prestige beauty sales have trended higher over recent years, even as economic sentiment has weakened.

This reinforces our confidence in beauty's long-term potential. For Coty, the priority is to capture that demand through stronger execution, compelling innovation, and consistent support behind our core brands. Both the prestige and mass beauty markets continue to grow in Q1. Prestige beauty market growth moderated to 3% in Q1, compared with 6% in the second half of fiscal 2026. Market growth in our core prestige fragrance category grew 5% in Q1, in line with the growth in the second half of fiscal 2026. Against that backdrop, our sell-out remained below the market, declining 2% in prestige. Importantly, though, our top six core prestige brands returned to sell-out growth, up 1% in Q1. This is an encouraging sign for our top six core prestige brands, but more work is necessary to translate improvements into division-wide sell-out growth and strengthened market share.

The mass beauty market grew 5% in Q1, while Coty's sell-out declined 3%. We are seeing narrower sell-out gaps in parts of the consumer beauty business, including in CoverGirl and Sally Hansen in the U.S. However, there's further work necessary to improve the competitiveness across the wider consumer beauty portfolio. Sell-out for our top four core consumer beauty brands was in line with the overall division. Our priority in both divisions is to translate more focused investment into stronger consumer demand, improved sell-out, and better market share performance. Before I hand the call over, I'd like to welcome Soraya. She brings deep financial expertise and valuable experience running businesses and leading transformations. We share a clear focus on disciplined investment, stronger cash generation, and consistent delivery, and I'm very pleased to have her on the team. Soraya, over to you. Thank you, Markus.

Let me start with a little about myself, but more importantly, what you can expect from me as CFO. I've spent more than two decades across finance and general management in a number of executive roles at BAT and Diageo, most recently as CFO of BAT. I've had the opportunity to lead businesses as well as finance departments, and that combination has shaped how I think about performance and value creation. I am passionate about transformative leadership. Throughout my career, I have led and executed significant business and finance transformations, and that experience has reinforced for me that successful transformation starts with clear priorities, empowered teams, and rigorous accountability for delivery. I am energized to join Coty at this important moment. There is clearly much to do, but also significant value to unlock.

Over the past two months, I have spent time in several of our largest markets, including the U.S. and Germany, and visited our fragrance manufacturing facility in Barcelona, one of the largest in the industry. I have been impressed by Coty's passionate people and teams, deep fragrance expertise, and strong end-to-end capabilities. At the same time, I see considerable opportunity to translate these strengths into stronger and more consistent financial performance. And importantly, there is meaningful work already underway to reshape the business. My initial view is that the direction of many of these actions is right. My focus will be on accelerating execution, bringing even greater discipline to where we invest, and ensuring that improvement translates into stronger financial returns and cash generation. As I look ahead, my priorities are very clear. First, quality growth. That starts with strengthening the core.

We need our key brands to win with consumers and gain market share, supported by focused investment behind the priorities that can generate the strongest returns. Second, productivity-funded reinvestment. For me, simplification is not simply about taking cost out. It is about right-sizing our cost base to the size and potential of the business while creating the capacity to selectively reinvest behind our highest return opportunities, particularly A&CP, with clear accountability for returns. And third, enhanced cash returns. We need to translate to stronger operating performance into consistent and sustainable cash generation, supported by disciplined capital allocation and a priority focus on deleveraging over time. The framework is simple. Strengthen the engine, create the fuel to reinvest, and convert stronger performance into sustainable cash generation. And underpinning all three is something I care deeply about, creating an organization with clarity on priorities, flexibility to execute, and accountability for outcomes.

Let me now turn to our first quarter results. I will begin with a snapshot of our key metrics, which will serve as our quarterly scorecard. We delivered results ahead of expectations, alongside a significant improvement in year-on-year cash generation. At the same time, I want to reiterate what Markus has said in recent quarters. We are not satisfied with our performance. Our focus is on putting the business on stronger and more sustainable sales, profitability, and cash trajectory over time. Q1 net revenue was $1.56 billion, down 1.6% on a like-for-like basis. Adjusted EBITDA was $274 million, down 7% year-on-year. Both revenue and adjusted EBITDA were ahead of consensus. Adjusted gross margin was 63.3%, and our adjusted EBITDA margin was 17.6%. Both are down 120 basis points. I will come back shortly to the drivers of the margin performance and the actions we are taking.

Free cash flow was $85 million, up $73 million year-on-year. We ended the quarter with net debt approximately at $2.6 billion, down $300 million since June. While the quarter showed some early signs of progress in several areas, it also reinforces my priorities and where we need to improve. Looking at our divisions, Prestige revenue was $1.06 billion, down 1% like-for-like, while Consumer Beauty revenue was approximately half a billion, down 3%. Q1 represented a sequential improvement in both divisions versus the first and second halves of FY 2026. Although performance across brands and markets remain mixed, with Prestige continuing to perform ahead of Consumer Beauty. We will share more detail on the drivers of Prestige and Consumer Beauty performance momentarily. At a regional level, performance remains uneven. In Prestige, Asia Pacific grew strongly, led by China and Southeast Asia, while the Americas and EMEA declined.

Within the Americas, our U.S. Prestige business returned to growth, supported by strong launches, including Marc Jacobs Makeup and Kylie Cosmetics Mood Stones fragrance collection. In Europe, most countries remained under pressure, reflecting softer market consumption and our own performance. In Consumer Beauty, all three regions remained under pressure. EMEA was the most pressured, reflecting lower net revenues across most European countries, as well as the impact of the Middle East conflict. This reinforces the need to be highly selective in where we deploy our resources, focusing behind brands, categories, and markets where we see the strongest opportunities and returns. Let me show you how the actions already underway are being applied across each division. As part of Coty.Curated framework and aligned with my priorities, our focus has been on returning the business to sustainable quality growth through more disciplined and concentrated investment.

In Prestige, we are beginning to see some early evidence of the potential of that approach. Over the past year, we have increasingly concentrated our A&CP investment behind our top six core brands. Together, these six brands represent 73% of Prestige sales. Reigniting growth across these brands is critical to returning the division to sustainable growth. The proportion of total A&CP investment behind our top six increased from 64% in the first half of last year to 68% in the second half of last year, and to 76% in this quarter. We are beginning to see evidence of stronger performance alongside this increased focus. Our six core brands moved from 6% like-for-like decline in the first half of FY 2026 to down just 1% in the second half, and to 5% growth in this quarter this year.

Importantly, Q1 growth was broad-based rather than dependent on a single brand or a single initiative, such as the rollout of Marc Jacobs Makeup, which contributed to a couple of percentage points to the growth. Five of the six core brands were growing in Q1. I do want to note that while Gucci is not included amongst these core brands, as the brand will exit the portfolio next year, we are continuing to invest behind the brand in line with our contractual commitments. For me, this is what quality growth looks like in practice, making clear choices, concentrating resources behind our biggest opportunities, and demanding stronger returns from our investment. There is more to do, but Q1 provides initial evidence that greater concentration behind our core brands can support stronger performance over time.