Good morning, ladies and gentlemen. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's conference call announcing a strategic partnership with Kylie Jenner. As a reminder, this conference call is being recorded today, November 18th, 2019. On today's call is Pierre-André Terisse, 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 reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from those forward-looking statements. Except where noted, the discussion of our financial results and our expectations reflects certain adjustments, as specified in the non-GAAP financial measures section of our latest earnings release. I will now turn the call over to Mr. Terisse.
Thank you very much, Nicole, and welcome everybody to Coty's conference call announcing our partnership with Kylie Beauty. I'm turning to slide two immediately, and I'm actually very excited today to announce this strategic partnership, which is going to set the foundation for a global beauty business. The compelling part of this partnership is that we are each bringing complementary assets and capabilities, which will allow this business to grow and strengthen in the coming years. On one side, Kylie brings her incredibly strong brand equity as both a person and as a brand, with unparalleled social media reach among Generation Z consumers. This exposure to much younger consumers is something currently lacking in Coty's portfolio and of leading beauty brands. On the other side, we, as Coty, bring our extensive R&D, manufacturing, and distribution capabilities, as well as our expertise in core beauty categories across cosmetic, skincare, and fragrances.
Together, we expect the transaction to be a creative tool for top-line growth, capital line growth, and exceed our cost of capital by year three. Slide three, our partnership with Kylie marks the next step in Coty's transformation. As you recall, since joining Coty roughly a year ago, Pierre and I have taken a very deliberate and phased approach to strengthening Coty. After stabilizing some of the issues weighing on Coty at the time, phase I of our transformation centered on completing a bottom-up assessment of the Coty business and brands. Within the scope of our existing portfolio, we shared with you in July details for your roadmap to return Coty to revenue growth, expand operating margins to 14%-16%, and deliver to below four times. That was phase I.
Phase II included the beginning to activate the turnaround plan, and we shared with you some of the green shoots we are seeing after the first four months of deployment. At the same time, we have launched a strategic review of the professional beauty division, the associated hair brands, and our Brazil business. This decision was anchored in our intention to focus on our core fragrances, cosmetics, and skincare businesses, while at the same time increasing our financial flexibility. That brings us to phase III of our transformation, which is centered on amplifying the growth potential of our portfolio. Today's announcement step changes the growth profile of our core business by partnering with a high-growth, digitally native beauty brand. At the same time, Kylie Beauty will expand our presence in both premium cosmetics and skincare, two categories where we are currently under-indexed and are focused on growing.
Underpinning the success of Kylie Beauty, page four, is the incredible social media reach of Kylie Jenner herself. On social media, Kylie has over 270 million followers across her personal and brand social media channels. To put this into perspective, with a single post, she is able to reach more than double the number of people who watch the Super Bowl every year. She is the seventh most followed person on Instagram, and critically, three-quarters of her followers are between the ages of 18 and 34. Outside of Kylie as a celebrity, the Kylie Cosmetics brand has tremendous strength on the crucial Instagram platform. Amongst all the beauty brands, Kylie Cosmetics has the second-highest number of followers, and this number continues to grow by roughly 7,000 per day. The brand has the highest engagement amongst all beauty brands on Instagram.
This strong social media reach and engagement is translating into strong and growing earned media value. Kylie Cosmetics ranks number 15 calendar year to date with an EMV of around $121 million, which is an increase of 6% year -over- year. Let me provide you a quick overview of what this has been able to create, the Kylie Beauty business. Page five, Kylie Beauty generated approximately $177 million of revenue over the last 12 months. This would represent over 40% growth relative to calendar 2018. Clearly, it is a brand with strong momentum. From a channel perspective, while Kylie Cosmetics began as a purely direct-to-consumer e-commerce brand, the partnership with Ulta, which began in November 2018, is off to a very strong start.
As a result, Kylie Beauty's sales are now roughly evenly split between direct-to-consumer and retail, and importantly, the brand has been very profitable with over 25% EBITDA margin. Building off of the momentum in cosmetic, page six, Kylie Beauty has already established an impressive presence in skincare in a very short period of time. Kylie Skin launched in May 2019 on its dedicated website and sold out in 10 hours. The line launched at Ulta in September 2019 and is off to a strong start. Of note, the line is seeing over 50% repeat purchase among skincare customers. With only a few months since launch, Kylie Skin is on track to reach $25 million sales in calendar year 2019. Given the strength already achieved in cosmetic and skincare, we see strong potential to expand the brand to other core Coty categories.
In addition to Kylie Beauty category expansion opportunities, there is also very strong international expansion opportunities. Slide seven. Underpinning this potential is the fact that over half of Kylie Jenner followers are outside the U.S. The chart here shows the advertising value equivalency of Kylie online activity. While she is the strongest in the U.S., she clearly has strong resonance in countries such as the U.K., Germany, and Canada. As a result of her global brand appeal, several international retailers have already expressed strong interest in carrying a beauty line. The partnership with Coty, slide eight, will allow Kylie Beauty to capitalize on these international expansion opportunities. Given our global R&D, manufacturing, and distribution footprint, and you see that on the map, we are very well positioned to further build out this growing brand.
Having laid out the strategic rationale for the partnership, which is very obvious, let me spend now a few minutes on the financial slide nine before we go to Q&A. Coty is going to buy a 51% stake in Kylie Beauty business for $600 million in cash. Looking forward, we expect the deal to be accretive to revenue growth of our core fragrance, cosmetic, and skincare business by over one point in average per year. We expect the return on invested capital to exceed our cost of capital by year three. While the transaction should be EPS neutral in year one, we anticipate substantial EPS accretion by year three as soon as year two and by year three in particular.
This, again, shows not only to what extent this is a compelling financial question, but it also reflects the new step in the transformation that we have undertaken to make Coty a modern, growing, and profitable beauty player. That is what I wanted to tell you about this partnership today, and we will now move to Q&A. Thank you.
At this time, if you'd like to ask an audio question, you may do so by pressing star and the number one on your telephone keypad. We'll pause for just a moment. The first question will come from the line of Steph Wissink with Jefferies.
Thanks. Good morning, everyone. Congratulations on the announcement. We just had two clarifying questions. The first is, what percentage of the business today is international? I think you gave us the percentage of her follower base, but what percentage of the sales?
Yeah. The second question is?
The second question is just with respect to the rollout of the business into additional distribution in the U.S. and international, how should we think about your comments on accretion? Is that based on the step function of distribution, or is that based on some other mechanical ability to drive greater profit out of the existing business through your own sourcing and R&D infrastructure?
Okay. I'll get back to you on the exact percentage of the business being international, but clearly today, this is the minority of the business. The vast majority of the business is U.S.-based, as you can imagine. We'll come back to you with more precise numbers. With respect to margin, indeed, this is a deal which is accretive, and that's a factor of three things, fundamentally. One is the categories in which we, together with Kylie, are entering and plan to enter going forward with an element of positive mix. The second factor is simply the fact that the network of Coty is going to help providing more economic conditions in generating, manufacturing, and distributing the products. The last one is indeed the expansion and the economies of scale on that business.
Altogether, you're right to say that part of the return of the case is going to be coming from the expansion altogether, from increased sales and from a pace of growth which we see very high. At the same time, part of it comes from the fact that it's going to be accretive on margins.
Thank you.
Thank you.
The next question will come from the line of Faiza Alwy with Deutsche Bank.
Yes. Hi, good morning. I guess my first question is just around the sales trends for the makeup brand for Kylie. I think there were some press reports a few months ago that the Kylie brand sales had declined 14% through May in 2019. I know you told us that on a trailing 12-month basis, revenue growth was 40%, but I was wondering if you could share with us what year-to-date trends have been, specifically.
They are very much in line with what we have reported on the basis of two different categories. Cosmetics are up, and in addition to that, you have skincare, which is basically being launched, and therefore, which is coming on addition. Both the cosmetic and the skincare categories have been up year-to-date and continue to be up.
Okay. I guess my—I mean, the bottom line for me, just it feels like I don't know why you felt the need to pay such a high multiple of sales for a brand that may well be a fad. It feels like the makeup brand, at least, is not on trend with what we're seeing with the makeup category at the moment, and maybe the skincare just feels a little bit unproven right now. At a time when you've indicated that you want to sort of deliver and focus on sort of your existing brands, how do you know this is not unique 2.0?
I think there's a fundamental difference with the case you're mentioning. This is very much the core of the business of Coty because we are talking of cosmetics, we are talking of skincare, we probably are going to talk about fragrance as well. You remember that we have indicated that this was very much what we are aiming to develop. It's as well premium, and you remember as well that we have indicated that we wanted to have increasingly a premium portfolio. There may be a fad at some stage. I don't know. For the moment, we're just seeing exactly the opposite of what you describe, i.e., strong dynamics in cosmetics, strong dynamics in skincare, and this is only with a limited distribution, limited distribution in the U.S. and limited distribution internationally.
To us, there is a pretty obvious case that by combining our network, global network in many different functions and many different countries, with the power of a brand which has been able to expand at such a quick pace in the U.S., without the network we have, there's an obvious case for value creation. Actually, when we say that we expect the ROIC to exceed what by year three, when we say that we expect substantial EPS dilution, we don't get the impression that we are paying a high multiple, as you say, but on the contrary, that we are making a deal which, as opposed to some skincare deals which have been seen on the market, is very value creative for Coty and for our shareholders.
Yeah, I mean, to be seen, but for me, this is not only a very good strategic fit, both for Kylie and for Coty, by the way, but in addition to that, that's going to be a very meaningful value creation proposition.
Okay. Thank you. Good luck.
Thank you.
The next question is from the line of Joe Lachky with Wells Fargo.
Hi, thanks. Obviously, there's been a lot of growth for the brand from its increased distribution at Ulta. If you could break down the 40% growth that you cited over the last year, what was driven by distribution gains? Is there any way to kind of explain, break down the buckets of growth and maybe look at it on more of a like-for-like basis, excluding the distribution gains? Along those lines, what has growth been through digital channels? Has that slowed recently at all? If you could touch on that. Thanks.
Yeah. I'm sorry, but I'm not going to be able to give too much details on the performance. What I can tell you is that we don't see weaknesses. We see strength everywhere. I repeat, we see strength in cosmetic. We see strength in skincare, obviously, and we see strength in skincare, by the way, both in DTC and in the launch at Ulta. Obviously, the gain of distribution has been one of the elements, but it's far from being the only one. We see further possibilities to expand distribution just because there is a lot of appetite in the markets to take the product and to expand them. It is really a matter of having the infrastructure which is going to be allowing the growth to materialize.
Again, we do not really see any sign of weakness in the numbers we have shared and in what we have observed, sorry, on the market so far.
Okay. To follow- up on that, obviously, the makeup category growth has slowed. Has there been any impact of the slowing category on the cosmetics business for Kylie, or is it pretty well insulated from the category trends we're seeing? My final question, just on the timing of international expansion, how quickly can you blow out the business internationally, and are there any specific target markets you're thinking of with the first wave? Thanks.
Yeah. I mean, the answer to the first question is no, no specific sign of slowdown, impact of slowdown as has been reported by some others. I remind you, by the way, that when we talk about our own portfolio, we have seen rather some improvements, even though with a pace which is not yet the right one, but we've seen some improvements on our existing brands in the U.S. With respect to international expansion, as I said, that's one of the levers for expansion of the brands. We've just concluded this partnership. We'll need to prioritize together the way we want to address it, the many opportunities we have in front of us and the one we are going to take before the others.
The thing we have said, and I can repeat in the tech and in the press release, is that we expect this is going to be accretive to the growth profile of Coty ex-professional by more than one point. The more than one point remains to be quantified, but that's going to be meaningful, and it's really a matter of defining the priorities. I'm sorry, I can't be more precise at this stage.
The next question will come from the line of Lauren Lieberman with Barclays.
Great. Thanks. Good morning.
Hi, Lauren.
I was curious—hi. I was curious if in the process of your due diligence and getting to know the company and Kylie and her family business partners, there were things that you explored and discussed about why the brand decided to launch in brick- and- mortar when it did. Because obviously, the margin structure, while very attractive today, must have been even more attractive when it was a pure DTC business. I was just curious, again, in the due diligence, the conversations you had with Kylie on the company about why they went brick- and- mortar when they did, and sort of your thoughts on the mix of the distribution going forward, both domestically and internationally.
My understanding is that this is a way to expand faster the brands. Indeed, the mix of the different nature of the distribution drives different profitability. At the same time, if you really want to build the brand and to have a high reach, it's legitimate to go to brick- and- mortar and to have partnerships such as the one she has with Ulta to have a better reach and to reach more consumers. I don't think there is anything more complicated to read between that. Actually, what we are seeing today is that the combination of the two is actually powerful, and I think it's going to be increasingly powerful.
The next question will come from the line of Mark Astrachan with Stifel.
Thanks. Morning, everybody. I guess just one follow-up question maybe to start. We've all seen numbers out there about the brand growth or lack thereof. You said, obviously, what you're seeing is different. I guess what would be helpful maybe to me for sure, maybe to others as well, would be just trying to disaggregate the kind of growth. Somebody asked the question before, but maybe if you could just simplistically kind of put the equivalent of same-store growth versus contribution from skincare or from incremental sales into retail like Ulta, that would be helpful just basically to kind of alleviate some of the fear that the growth was slowing before she went into these other channels. The second question is, how do you keep her, keep family, I guess it's probably more her, incented in this business?
She's obviously uniquely related to the business and integral to the success of it. Is there a path to ownership from your standpoint? If there is, then how do you incent her to stick around? Are there targets that she's obligated to hit from a media standpoint, from a store visit standpoint? I mean, how do you kind of keep everything in check and on track to continue to grow in terms of what you've expected?
Okay. I'll take the first question first. Again, I'm not going to, as you said, disaggregate more the elements. What I can say is that if there is a fear that the brand is weaker with increased distribution, what we're seeing is a bit the opposite. Number one, because we are not seeing any weakness signal in the evolution of the brand. Number two, because if you adopt all the opportunities of increased distribution and expansion, whether you're talking of different categories—and she started in cosmetic with a success everybody knows—she started now in skincare, and we have very tangible elements to talk about the success of the brand, which you have on one of the slides of the presentation. We think that's basically just the beginning.
If you add to that the categories which are covered by Coty and that we have the ability to basically engineer, produce, distribute, sell, whether you're talking about nail or you're talking about fragrances, you can just expand the brand. The expansion of the brand is going to make the brand even more powerful. This, added to the digital power of the brand, can very quickly build a sizable business. This is just talking about national. I mean, as was said in part of the presentation, there is an international dimension.
If you combine the possibility to expand the distribution, the possibility to expand the categories, the possibility to expand the geographies, the ability of Kylie to communicate and to embark consumers and fans through the digital, the ability of the Coty network to distribute and sell in many markets, we believe we really have an opportunity to make this brand a very sizable brand and a unique success. We do not have that fear. Actually, we see a real, real, multiple-sized opportunity. That is with respect to the fears you express. With respect to the incentive, this is a partnership. In a partnership, everybody has responsibilities, everybody has contributions, and we clearly are complementary. I mean, we cannot bring what she brings, and she cannot bring what we bring. In a partnership as well, everybody gets the benefit from the partnership.
I think the main motivation for Coty is probably the main motivation for Kylie. It's seeing the baby grow, seeing the baby becoming something, and getting the financial reward for that. We think that this is basically the dynamics in which we enter this partnership and what's going to make Kylie and Coty stay on board of this wonderful adventure.
The next question is from the line of William Mango with Bank of America.
Hi. Sorry for that. Are you going to?
Morning.
Sorry. Are you going to put out a new revised leverage target? I guess, what will be the pace with which you try and achieve that?
I mean, we have put a new leverage target, or we have made public, shared what our intention was with respect to leverage when we have discussed the strategic review, which we have launched, saying that at the end of the strategic review, we expected that the net debt to EBITDA of Coty will be brought back to approximately three times net debt to EBITDA. That was true considering the strategic review. That is true as well, considering the partnership we just announced today.
Okay. Just wanted to make sure that nothing had changed based upon today's transaction, but those targets still remain in place.
Yes, they do. In fact, it's interesting. I mean, when you look at the sequence of things, it's very clear what we're trying to do now. We're trying, number one, with a turnaround plan to make the business we have more solid, to make them stop losing market share, start gaining market share, increasing the gross margin, allowing to have money to reinvest and to support the brands and to be back into positive dynamics with a better level of execution. We announce the strategic review, and we basically have two objectives, which are, on the one hand, we want to increase the focus we have, so to focus on a fewer number of categories behind which we can execute better. Today's deal is basically completely part of the categories we had announced when we talked about the strategic review.
On the other hand, it's getting back financial flexibility. The financial flexibility, obviously, is important per se or by itself, but it's also important because it's one of the elements which, as you see today, allows to progressively change the shape of the portfolio. At the end of the day, what we're trying to do is, once we've done the turnaround, now we need to progressively modify the shape of the portfolio so as to make it a portfolio which is, number one, allowing to deliver by being more focused, but number two, which is better exposed to the trends which are carrying growth worldwide. More premium, more skincare, more digital, more modern brands. Altogether, the quality of the portfolio of Coty at the end of these three steps is definitely better than it was at the beginning of these three steps.
The three times remains. That's an element of financial policy which brings flexibility and allows to do the kind of deals like the one we just announced.
Okay. I guess just as one follow-up, would you continue to add some of these more youthful brands to the mix, or do you feel like Kylie gives you sufficient exposure to some of these higher growth segments?
I won't comment on that further. We keep looking at opportunities as we always do. This being said, it's very clear that with the turnaround, the strategic review, and this really great opportunity which we opened today with this partnership, we have a lot of things to do now to transform the initiative we've been lining up into actual performance and delivering the growth we want. Our focus is really going to be in leveraging these three elements and, in particular, this partnership.
Okay. Thank you very much for the questions.
Thanks to you.
The next.
Shall we take a last question?
We have a question from the line of Javier Escalante with Evercore.
Hi. Good morning, everyone. My question has to do with a statement that you made on slide four. You said, "Kylie Jenner is not a fad." Essentially, that was part of your due diligence. Most of the statistics that you show here, it has to do with her celebrity status in digital. Have you done something more traditional, like what is the repeat rate of the purchases of Kylie's products, which is the hero kind of SQ? What exactly is something that Kylie Jenner has sustained power within makeup? If you can describe what exactly is she doing in skincare, that would be helpful. Thank you.
Yeah. I mean, about repeat, I don't have the precise information to give you about the cosmetic. I believe it's high, but you can see page six on the skincare that following the launch of skincare in 2019, it's pretty early days, but there is more than 50% repeat purchase amongst the skincare customers. Frankly, from what we've seen, we've not seen any sign that this will not be a sustainable beauty brand. Obviously, it's a brand which continues being built and which needs to be built. The fact that she's been able to move from cosmetic to skincare and to get such a success on skincare, just coming from cosmetic, for me, is already a proof that there is something. We intend showing that there can be further expansion going forward. Okay. I think we'll have to stop here.
I just want to thank you again for following us in this real important transformation of Coty, which is gradually becoming something else and gradually becoming a modern, growing, profitable company in the beauty business. We will see you on the road to continue this dialogue. Thank you all. Bye-bye.
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