Coty (Class A) (COTY) Q1 2022 Earnings Call Transcript

Coty (Class A) (COTY -2.39%)
Q1 2022 Earnings Call
Nov 08, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Britney, and I will be your -- at this time, I would like to welcome everyone to Coty's first quarter fiscal 2022 results conference call. As a reminder, this conference call is being recorded today, November 8, 2021. On today's call are 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 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 measures section of the company's release. I will now turn the call over to Ms.

Nabi.

Sue Nabi -- Chief Executive Officer

Ladies and gentlemen, with our Q1 now complete, I'm very encouraged by the success we are having, further building on the strong foundation we put in place last year. The results we have delivered this quarter truly exemplified the virtuous circle that we have set out to create. In essence, it's a simple one where strong revenue growth, combined with gross margin and cost initiatives, simultaneously fuel profit expansion and strategic investments, which in turn drive future growth momentum. There are some key takeaways that I would like to first highlight.

First, our Q1 revenue growth surpassed our expectations and guidance, with growth coming from both our prestige and consumer beauty segments. We continued to see very strong demand for prestige products, particularly fragrances in the US and China, with an impressive rebound in travel retail. This was further supported by our exceptional lineup of fragrance launches. Meanwhile, we continued to see a recovery and improvement in Consumer Beauty, with particularly strong trends at both COVERGIRL and Max Factor.

This resulted in like-for-like revenue growth of 21%, above our guidance of high-teens growth. Second, we reported very strong profit growth during the quarter. This was fueled by a significant gross margin expansion of nearly 500 basis points, as well as further cost reductions. The substantial gross margin expansion we have seen is a true testament to the strength of our business model as we double down on accretive innovation and continue to premiumize our portfolio.

Importantly, we continue to step up our investments in marketing. In fact, our work in media doubled versus last year. Despite this, our adjusted EBITDA increased almost 70%, equating to 550 basis points of margin expansion, evidence that our virtuous circle is now in motion. Third, we continue to execute and make progress across our strategic growth pillars.

I would, of course, be sharing some milestones with you today. However, I'm even more so excited for our investor day next week when I will be joined by additional members of the Coty leadership team to provide a more in-depth update on the progress we have made on our strategic pillars, as well as our medium-term trajectory. Fourth, we see the momentum continuing into the year. We are on track for a great fiscal '22.

Our growing confidence in the momentum drives our increased sales guidance for the year, supported in particular by our initiatives across fragrance and cosmetics. I will now take a few moments to cover our revenue trends during the quarter before Laurent takes you through our financials. Then I will finish with an update on our strategic progress and our outlook. Our Q1 revenues increased 21% like-for-like.

The prestige segment grew 34% on a like-for-like basis, even as we continued to reduce sales in low-quality channels, which represented a low single-digit negative impact in the quarter. We continued to experience very robust prestigefragrance trends, particularly in the US, China and travel retail, with nearly all brands exhibiting strong growth in the quarter. Our growth was further aided by our very strong launch calendar in the first quarter. This included Gucci Flora Gorgeous Gardenia, Burberry Hero, Calvin Klein Defy, and the relaunch of Kylie Cosmetics.

Meanwhile, our prestige cosmetics sales more than doubled in the quarter. Our consumer beauty segment increased 3% like-for-like as the global mass beauty category returned to growth, and we are seeing stabilization in our market share. Q1 growth was led by COVERGIRL and Max Factor as both brands continue to benefit from the new brand positionings. Moving to sales by region.

We saw growth across all regions, though the US and China continued to be standout performers and travel retail saw a true resurgence. The Americas region grew 23% like-for-like in the quarter, supported by double-digit growth in the US, as well as growth contribution from Latin America, Canada and Brazil. EMEA sales rose 17% like-for-like, with the most impactful contributors being the UK, Russia, as well as local travel retail. The Asia Pacific region increased 29% like-for-like, with local travel retail tripling year-on-year and China seeing nearly 50% growth in the quarter, proving our efforts in turning this market into a powerhouse are bearing fruit.

We are particularly pleased with these results in China and the broader market, particularly given some incremental restrictions that occurred in the quarter due to COVID. I will now hand the call over to Laurent to take you through our financial results.

Laurent Mercier -- Chief Financial Officer

Thank you, Sue. I am very pleased with our first quarter results, which continued our very strong pace of profit growth. Importantly, our virtuous cycle of growth is now in motion. Our profit was driven by strong gross margin improvements, allowing us to continue to reinvest in our strategic growth initiatives, thereby further fueling top line growth momentum.

Starting with our gross margin performance. Our Q1 adjusted gross margin of 63.4% increased by nearly 500 basis points from last year and 250 basis point from last quarter. This marks our third consecutive quarter of gross margin above 60%. Our gross margin performance was driven by favorable mix, both from the outside growth of prestige, as well as favorable product mix within the category, lower excess and obsolescence, fixed cost absorption on the increased sales, pricing and revenue management, supply chain productivity and material cost reduction program.

We continued to be very focused on further driving gross margin expansion, both this year and in the years to come. As such, we have a very clear multi-pronged, multiyear gross margin attack plan in place, while we also expect we will continue to benefit from positive channel, category and regional mix shifts. And gross margin expansion is key toward the virtuous cycle we have created of sales and profit growth. While the topic of inflationary pressure, supply chain bottlenecks and component shortages are dominating conversations across all industries, I am pleased to say that so far, Coty is navigating through this uncertain environment quite well.

This is a result of both the agility of our supply chain and procurement teams, as well as the structure and drivers of our business model, where we are overdriving gross margin accretive channels, categories and innovation. While we have seen isolated constraints in certain components, such as fragrance pumps, silicon and paper, our teams proactively increased safety stocks to protect our key consumption period, as well as implemented dual sourcing initiatives, all of which is proving to be effective. On freight, the vast majority of our freight is under contract rather than spot market, which has largely protected us from the excessive price hikes of recent months. At the same time, our teams proactively increased transportation lead time and secured freight capacity in advance to avoid potential freight constraints.

And in the context of global supply chain bottlenecks and port congestion, it is important to note that the majority of our inventory is manufactured in the region where it is sold, which likewise protects our business. The net result of all these proactive efforts and business design decisions is that our service level in Q1 was very strong in the mid-90s and actually higher than the prior year, which has allowed us to both over-deliver on our sales guidance for the quarter and deliver close to 500 basis point of gross margin expansion year on year. And our outlook for Q2 service levels is in a similar range despite higher than initially anticipated demand, which is also enabling us to raise our full year sales guidance. While we do expect the impacts from inflation in materials and freight to be somewhat higher in H2 '22, the impact is quite manageable.

And we continue to expect our gross margin to expand in fiscal year '22, fueled by revenue management initiatives in both prestige and consumer beauty, the mixed benefit of prestige expanding as a proportion of the mix, improved absorption from higher production volumes and broader productivity efforts. During Q1, we maintained our stepped-up marketing investment. A&CP was approximately 26% of sales, consistent with the level of Q4 and significantly above the 20% level a year ago. The year-over-year increase was primarily driven by working media, which more than doubled year on year.

Importantly, we remain vigilant in investing in the highest ROI opportunities and being nimble in our resource deployment. You will hear more from Sue regarding the details of our success and progress in driving growth during the quarter. However, let me highlight a few areas where we were putting our marketing dollars during the quarter. First, we had a very busy launch calendar in the quarter, particularly within prestige.

We launched Gucci Flora Gorgeous Gardenia, Burberry Hero, Calvin Klein Defy, and the relaunch of Kylie Cosmetics among others. These launches showed tremendous success in the quarter and contributed to our strong performance. We continued to fuel our expansion into new categories and markets, including prestige makeup and overall, Asia. Finally, we continued to invest behind the repositioning of COVERGIRL, Rimmel, and Max Factor, which all showed promising results, supporting consumer beauty business stabilization.

We continued to deepen our marketing investment and drive profit growth through further cost reduction. During Q1, our fixed costs declined by 8% year over year. We achieved approximately $60 million of cost savings during the quarter, with a front-loaded delivery of our fiscal '22 savings target to enable sufficient flexibility in the P&L to deliver profit yet reinvest in our brands during this critical holiday period. The primary drivers of this were cost savings, lower fixed costs and trade investments.

We remain well on track to achieve over $90 million of savings in fiscal '22. Recall, this is net of cost inflation, reinstating bonuses and structural organizational reinvestment behind our growth pillars. So it's important to note that this does not include our intended reinvestment in A&CP. We have now achieved nearly $400 million of total savings, and we remain well on track to reach our fiscal '23 target of a total of $600 million of savings, while we also continue to identify savings projects beyond fiscal '23.

Moving to profit delivery in Q1. Our adjusted EBITDA performance was exceptionally strong in the quarter, increasing 67% year over year to $279 million. This resulted in a margin of over 20%, up 550 basis point above our first quarter last year. This significant improvement was driven by strong sales growth, robust gross margin expansion and fixed cost leverage.

We believe the stellar performance this quarter is further evidence of the strength of both our strategy and business model. And we continue to target both revenue and profitability growth in the years ahead. Turning now to our EPS, which included the following drivers: adjusted EBITDA for Q1 of $279 million, depreciation of $78 million, income tax expense of $40 million, which equates to a tax rate of approximately 29%, in line with our expectations. As we previously noted, we expect a higher tax rate this year given our global principal jurisdictions are now in Amsterdam and in the US $8 million of other item and $29 million of adjusted preferred dividends.

Please note that the preferred dividends were higher than typical in Q1. At a very high level, this was due to accounting rule requirement associated with KKR's conversions of accrued dividends into common shares as part of their first transaction in September. As a result, our Q1 diluted adjusted EPS ended at $0.08. While not included in our adjusted EPS during the quarter, Wella's fair market value rose by $390 million.

Looking ahead to Q2 and fiscal '22, I would like to provide some context of the different drivers of our adjusted EPS. First, consistent with what I said last quarter, we continued to expect interest expense in the mid $200 million for fiscal '22, reflecting a lower net debt balance, offset by somewhat higher cost of debt post the recent refinancing. Second, as I previously mentioned, we anticipate an adjusted effective tax rate for fiscal '22 in the high 20s percentage. However, we know there is a high degree of uncertainty with effective tax rate projection in the current environment.

Third, on the preferred dividend, following today's announced transaction with KKR, we anticipate a roughly $7 million quarterly run rate going forward following this transaction and assuming no further conversion of preferred shares. Now, moving to free cash flow for the quarter, which was strongly positive despite Q1 typically being a seasonally weaker cash flow quarter as we build inventory for the key holiday consumption period. Importantly, working capital improved significantly in the quarter. We also continued strict management of capex and onetime costs.

As a result, our Q1 free cash flow was $241 million. As we head into Q2 and beyond, we remain intent on further bolstering our cash flow, as well as driving a steady reduction in our net debt. Turning to our capital structure. We ended Q1 with a financial net debt balance of approximately $4.96 billion, which is a decrease of over $200 million from Q4.

This is largely the result of our strong free cash flow. Factoring our 40% stake of Wella at quarter end valued at approximately $1.65 billion, we ended the quarter with economic net debt of around $3.3 billion. Please note that with the completion of the sale of an approximate 9% stake of Wella to KKR in October and today's announced sale of another 4%, we now own 26% of the Wella business. Based on our current ownership stake in Wella, our economic net debt at the end of Q1 '22 would have been closer to $3.9 billion.

We continue to view our retained 26% stake in Wella as a financial stake. The recent transactions proved the valuation upside in this business, as well as the liquidity of the stake. We will continue to be active and tactical in identifying opportunities to monetize this nonstrategic Wella asset and further reduce leverage. Additionally, we are continuing to make progress in improving the maturity profile of our debts.

We have secured commitments to extend our revolver maturity to fiscal '25 and reduce revolver capacity to $2 billion from previous $2.75 billion. This is on the back of our recent successful issuance of over $1.6 billion of senior secured notes, showing our strong progress in minimizing refinancing risk. In fact, we have recently made some tactical decisions by monetizing some noncore assets to help further our deleveraging. During Q2, we are executing several real estate divestitures, resulting in approximately $150 million of cash proceeds, the majority of which will flow in Q2.

The sizable cash inflow from these transactions, coupled with the expected strong free cash flow in Q1, reaffirm our confidence in ending calendar year '21 with financial net debt to EBITDA toward five times, as well to end calendar '22 with leverage of four times. In the meantime, we remain committed to the partial IPO of our Brazil business. In light of the current economic volatility in Brazil, we continue to monitor the market conditions to identify an opportune window to execute our partial IPOs. Due to local Brazilian regulation, we cannot offer further details at this time.

Before I hand the call back to Sue, I would like to quickly touch on the recent transactions regarding our preferred share and the simplification effect they are having on our capital structure. For some time now, we have seen three keys to further unlocking shareholder value at Coty: growing our sales and profits, deleveraging our balance sheet, and the last being simplifying our capital structure. We have made great progress on the first two of these and have a clear path toward further improvement. During the first half of this year, our capital structure has become significantly more simplified to take care of conversion of approximately 50 million preferred shares, combined with the subsequent redemption via two transactions of around 75 million KKR preferred shares in exchange for roughly 14% stake in Wella.

Make no mistake, these are positive developments for Coty. We understand these events, particularly the secondary offering that took place in early September led to questions and volatility. However, these developments were a net positive for Coty, as well as for our shareholders, including significant even further reduce the overhang of KKR's preferred share ownership, confirmation of the significantly higher value of Wella with approximately 40% appreciation versus the initial valuation, while also proving the liquidity of the asset, freeing approximately $65 million of cash on the lower preferred dividend that we can use to further reinvest behind brand or use toward deleveraging and the redemption of these convertible shares implies several cents of EPS accretion annually. Let me now turn it back to Sue.

Sue Nabi -- Chief Executive Officer

Thank you very much, Laurent. So we continue to make strong tangible progress across our six strategic pillars in the first quarter with many more milestones planned for fiscal '22 and beyond. I will now walk you through some of the key cost -- I'm sorry, highlights. And as a reminder, we will be covering each of these pillars and future initiatives in much greater detail next week, November 18 at our investor day in New York City.

Starting with our first strategic pillar, stabilizing our consumer beauty brands. This is a pyramid we hope many of you recognize. However, we believe it's important to remind each of you of our core consumer beauty brands and where they stand. I'm proud to say that we have a clarified view of the portfolio, with each brand positioned in a clear price tier and competing against a defined competitive brand.

COVERGIRL, Rimmel, and the corollary in Germany, the MANHATTAN brand, compete directly against Maybelline. Max Factor and Bourjois compete against L'Oreal Paris. And Sally Hansen holds the unique position of providing an affordable alternative to nail salon services. As you all know, COVERGIRL has been our first area of focus within consumer beauty, and I'm very pleased with the success we are seeing today.

COVERGIRL is the inventor of clean makeup and leads this high-growth area in the US, which is nicely accretive to our cosmetics portfolio. This has been supported by our strong launch cadence of clean, vegan and cruelty-free beauty products, including Clean Fresh makeup and Lash Blast Clean Mascara. In fact, we believe this renewed focus on clean makeup is further supporting our gains with key demographics, as well as key retail partners such as Ulta, who is elevating COVERGIRL as a leading example of an established mass brand, leading the path to clean beauty. I also want to note that clean beauty has the additional benefit of being margin accretive, with these key innovations carrying a higher price point.

I'm proud to say that since our reboot of COVERGIRL at the end of March, the brand has gained market share in four of the last seven months, and we expect the momentum to continue. Importantly, COVERGIRL is finally gaining shelf space in total in the US led by a key retailer, where the brand is significantly outperforming the cosmetics category and also improving productivity. And just as we discussed during our strategic update in April, we are reapplying the COVERGIRL turnaround playbook to other consumer beauty cosmetics brands. We just launched our first clean makeup brand at Rimmel called Kind & Free.

This makeup line is 100% vegan, cruelty-free, free from fragrance, mineral oils, and animal-derived ingredients. On this slide, you can see a brief ad showcasing the manifesto of this recent launch. [Commercial Break]

Laurent Mercier -- Chief Financial Officer

Kind & Free is our biggest consumer beauty launch in fiscal '22. Along with our retail partners, we believe this will truly be a game-changing innovation. And we have been very excited with the recent test results. While Kind & Free is still only in prelaunch phase, with a full national rollout and food media support going live in Jan, we are already beginning to see Rimmel sales at key retailers picking up in recent weeks.

For Max Factor, we are seeing very positive trends as the visuals and new assets have now gone live. Starting in the UK, Max Factor gained 20 basis points of market share in September. Across all customers, Max Factor is stable or gaining market share, which is a first for the brand in years. Similarly, in the Netherlands, the brand gained 50 basis points of share.

With the new brand positioning and campaign with Priyanka Chopra Jonas only starting in a couple of months ago, we are really encouraged to see that the brand is already stable or growing market share in over 75% of its markets. We plan to keep the momentum going in December as we continue to invest in media behind Max Factor. Moving to our next strategic pillar of accelerating luxury fragrances. As previously mentioned, we have some outstanding fragrance launches during the quarter, further supporting our success in this key category.

Gucci Flora Gorgeous Gardenia is one of these great launches. Ultimately, our goal is to cement this fragrance within the top 15 global female fragrance icon. And the result of recent months across geographies, channels and customers suggest that Flora is on track to reach this. Globally, this is a first for us, with a key innovation seeing such strong immediate success across major geographies.

In the US, it's already ranking No. 1 since its launch across many of our key US retail partners. Similarly, in the UK, the fragrance is No. 3 among female fragrances since its launch and supporting Gucci Flora as the No.

8 overall female fragrance line in UK In two of our key markets in Continental Europe, Germany and Italy, Flora sellout is also very strong, supporting the Flora line to be No. 8 in Germany, while Gorgeous Gardenia is the No. 1 female fragrance in Italy. The fragrance is also gaining strong traction in China, where it has been ranking as the top 10 female fragrance among our key brick-and-mortar retail partners, as well as on Tmall.

Within men's fragrances, we launched Burberry Hero during the first quarter, where the fragrance is similarly seeing great success across all key regions, and the fragrance remains on track to be a global male icon. In the US, Hero has been the No.  1 men's fragrance launched at many of our key retail partners since the launch, with its sellout results far exceeding our initial plans. In Italy, Hero has been a top 10 men fragrance launch, ensuring the Hero line is the top 10 overall men's fragrance line. In Germany, Hero is already a top 20 men's fragrance line.

In China, Hero is also now a top 10 male fragrance since launch at many of our key brick-and-mortar retail partners and on Tmall. It's also encouraging to see that Hero is ranking top three in key travel retail locations where the launch is present. Moving on to the acceleration of our prestige makeup portfolio. We relaunched Kylie Cosmetics during July.

Together with Kylie, we updated all of the cosmetic products, assuring that each product was vegan, cruelty-free, with clean formulations. We have been very pleased with the performance of Kylie, both across channels and geographies since this relaunch. In fact, we have had launched numerous collections that exceeded our initial targets. During the first quarter, the Birthday Collection dropped and was one of the most successful collections ever.

The recently launched A Nightmare On Elm Street Collection also turned out to be one of the best ever Kylie Cosmetics collections. Kylie also introduced her highly anticipated baby line during the quarter. This collection saw very strong sellout trends within the first moments of becoming available online, leading to over-delivery relative to our initial plans. Importantly, these launches and drops brought in a very significant amount of consumers who are new to the brand.

It's also important to note that with the relaunch, we have made Kylie Cosmetics significantly more productive than the initial range, with fewer SKUs but delivering very high sellout. The success of Kylie does not stop with these recent collections but can be further extended to the performance in brick-and-mortar, both in the US and the growth in Europe. Kylie Cosmetics is performing exceptionally well in the UK at our retail partners, including the recent relaunch at Boots. Meanwhile, the recent launch across a number of Scandinavian markets with our retail partner, Kix, was one of their best ever day one launches.

In US brick-and-mortar -- in brick-and-mortar, both skin and cosmetics sellout are up strong double digits year over year. All of this confirms the true omnichannel nature and global appeal of the Kylie brand. Moving to another of our prestige makeup brands, Gucci Beauty. The growth continues to be phenomenal.

Our Gucci makeup sales in the quarter tripling year-on-year. At the same time, sellout in the US and China continues to grow in the triple-digit range, as we've continued to build the Gucci makeup assortment phase, represents a very important opportunity for the brand. During the quarter, we launched the Gucci cushion foundation with beautiful and distinctive packaging, as you can see on this slide. The launch anchors Gucci Beauty in the most loyal, most profitable, and largest makeup category across Asia.

This has proven highly successful, as in China, the cushion foundation was one of the top-ranking luxury cushions with Tmall and at a key brick-and-mortar retailer. Moving to our next strategic priority of growing our skincare portfolio. Our rapid -- revitalization strategy, sorry, for Lancaster remains on track while we saw some slowdown during August in Hainan due to a COVID resurgence in China. As cross-border restrictions eased during September, we saw a rebound in both traffic, and of course, sales.

I'm also pleased to say that we are seeing a further strengthening of the skincare portfolio, which now makes up the majority of Lancaster sellout in Hainan. We view this as further evidence that the repositioning of Lancaster toward the full-fledged skincare brand is taking hold on this all-important prestige skincare market. Moving to our fourth strategic priority of building e-comm and direct-to-consumer. We continued to experience very strong growth, with e-comm rising 23% year-over-year.

Both prestige and consumer beauty saw growth exceed 20%. On a total company basis, e-commerce represented a mid-teens percent of revenue at the end of the first quarter, up from a low-teens percent from last year's first quarter. One of the key e-commerce highlights during Q1 was our performance at Ulta, driven particularly by the strength we are seeing on luxury fragrances. Our prestige fragrances sellout growth online at Ulta rose strong double-digits, with penetration in the high teens.

During the quarter, Marc Jacobs Perfect had outstanding performance. This icon was chosen as the Fragrance Crush in August, supporting triple-digit sellout growth for the month despite lapping last year's launch. As we build on our e-commerce momentum, our multi-pronged focus on fueling growth at pure players, brick-and-click and DTC is clearly bearing fruit. Moving now to our fifth strategic priority of expanding in China.

As I previously mentioned, the country did some -- did see some resurgence of COVID during the quarter, primarily toward the end of July and August, with improvements in September. I'm pleased to say that despite this mixed backdrop, our China sales grew close to 50% in Q1. And among the top 10 prestige beauty companies in China, Coty's sellout was again the fastest growing. This is in part supported by the momentum of Gucci and Burberry on Tmall, which led to a seven times growth in our Tmall revenues.

In addition, Chloe continues to be a standout performer, with a sellout doubling year over year, led by the ultra-premium fragrance collection, Atelier de Fleurs. This achievement is particularly notable given the limited amount of media support that we have given Chloe Atelier de Fleurs. However, we remain very committed to further building on this success to become a more significant player within ultra-premium and artisanal fragrances in China, as well as across the globe. That now brings me to our outlook for the year.

Starting with our view on first half fiscal '22. As we have detailed, we saw very strong prestige revenue growth in Q1 at 34 like-for-like percent growth, which in particular was amplified by the shipment of the key fragrance launches I have just discussed. Yet at the same time, we estimate our prestige sellout growth in Q1 was closer to the mid-teens. In consumer beauty, we estimate sell-in and sellout were relatively aligned in the low to mid-single digits.

As a result, the total Coty sellout in Q1 was a little over 10%. Given the strong cost reductions and profitability in Q1, we intend to reinvest more in marketing spend in Q2 to further boost our sellout during this critical holiday period, capitalizing on the unprecedented momentum our brands are seeing. We, therefore, expect our prestige sellout in Q2 to accelerate to high teens growth, with sell-in a bit below sellout following the Q1 pipe sale. We also expect consumer beauty sellout to accelerate to mid to high single digits with sell-in in line to better.

In total, this should drive low teens like-for-like growth in Q2, with sellout a bit higher. From a profit perspective, our strong gross margin and profit growth in the first quarter is further enabling us to fuel the growth investment in Q2. As a result, we expect to deliver first half of fiscal '22 EBITDA growth in the low 20s year on year, with EBITDA margins up approximately 100 basis points versus first half of fiscal '21. It's important to stress that our key brands in both prestige and consumer beauty are accelerating and in a unique momentum, which happens once in a decade.

And we will not miss this unprecedented opportunity to gain market share and to lead and pre-empt new businesses in key regions. We, therefore, need to invest to secure our near and midterm growth that will be more and more profitable given the high-margin nature of these new businesses, and our outstanding profit delivery in Q1 is allowing us to do just that. Moving to full-year guidance now. We now expect fiscal '22 like-for-like growth of low to mid-teens, above our prior guidance of low teens growth.

Please keep in mind, our guidance assumes no significant deterioration in regard to a resurgence of COVID and resulting restrictions or lockdowns. As we previously noted, while we have managed inflation and supply chain-related headwinds quite well to date, we will, of course, continue to monitor this situation. We are confident that our gross margin attack plan, the accretive innovations we are introducing, such as Rimmel Kind & Free or Gucci Flora, and the continued premiumization of our portfolio will fuel gross margin expansion for the year as compared to fiscal '21. Altogether, we expect fiscal '22 adjusted EBITDA of $900 million at a minimum, as we are intentionally reinvesting our gross margin gain and cost savings in our brands to maximize value and drive sustained momentum for the business into second half, and of course, beyond.

I'm also very pleased to announce that with significant progress made in simplifying our capital structure that we are now in a position to provide EPS guidance. We've been very focused on getting a more solid handle on our underlying EPS and believe providing this level of guidance is an important milestone as we work toward becoming a more simplified company. With that said, we target adjusted EPS of $0.19 to $0.23 for fiscal '22. Lastly, we continue to expect to end calendar '21 with leverage toward five times and further reduce this to leverage of around four times by the end of calendar 2022.

To conclude, we entered fiscal '22 with a goal of further building upon the great success we delivered last year. We ended Q1 with sales ahead of our guidance, while also delivering very strong gross margin expansion, both sequentially and versus last year, in a volatile inflation and supply chain backdrop. As a result, we were able to not only reinvest in our growth initiatives but also drive adjusted EBITDA growth. Our Q1 exemplifies what we intend to do through this year, as well as the virtuous circle -- cycle we have created, with strong sales and gross margin fueling our profit and reinvestment.

Of course, we have no intention of slowing down our progress, and we remain committed to aggressively executing on our strategic priorities. We intend to continue to demonstrate the tangible strides we are making across each pillar. We believe our brands are in a very unique position, which does not come around often. And we fully intend to invest behind these brands and capitalize on the momentum we are seeing today.

We very much look forward to providing even more detail on our strategy and our objectives at our investor day on November 18 to be held at the New York Stock Exchange. Thank you very much for your time today. We are now happy to take your questions.

Questions & Answers:

Operator

[Operator instructions] And we Will take our first question from Stephanie Wissink with Jefferies. Your line is now open.

Stephanie Wissink -- Jefferies -- Analyst

Thank you. Good day, everyone. We wanted to just unpack gross margins a bit more. Came in quite a bit stronger than we would have expected.

So maybe, Sue, the question for you is, as you look across the portfolio, can you give us a little bit more insight into where you're seeing that margin strength? And then I think as a follow-up, Laurent, if you could just talk through some of -- or help us quantify some of the key drivers. I think you've listed five or six items that were contributing to the strength. If you could just help us contextualize where the bigger pieces were maybe versus some of the minor pieces. Thank you.

Sue Nabi -- Chief Executive Officer

So let's start with the first part. Thank you. So again, we're pleased very much with this gross margin performance in the quarter with, as you've said, it's 500 basis points of improvement year on year and up 250 basis points up from last quarter. So this performance was driven by a number of different, I would say, factors.

Of course, the first one, and it's something that I've been insisting on since me joining Coty one year ago, a more favorable mix, both from outsized growth from prestige, as well as a favorable product mix within the different categories. If you take the example of consumer beauty, we've been operating on makeup, on mascara, which are more accretive and more profitable categories than lip color, for example. We've done a good work in terms of lowering E&O. And this is clearly in sync with the ability to say these are the products behind which we are going to put our money in terms of media.

So let's raise the volumes, and we'll meet this, I would say, new volumes raised because we are precisely investing behind what's doing well. The other initiative that helps us a lot is the high ROI initiatives, as Laurent mentioned. Fixed cost absorption on the increased sales, this is another element. Pricing and revenue management, supply chain productivity, and of course, material cost reduction program.

So all these elements altogether helped us to do this, I would say, a strong improvement on gross margin. Laurent, maybe?

Laurent Mercier -- Chief Financial Officer

Yes, I can add a few words. So indeed, as Sue explained, we're -- I mean, we are very disciplined in this gross margin. And indeed, there are two big categories. So the No.

1 is exactly what Sue has explained. So it's really what we are doing on E&O, on productivity, on fixed costs. And you saw already the result last year because last year we were already back even better versus fiscal '19 and above 60%. So we are really continuing this dream.

But where we are really intensifying the effort is what I will call is really on the value part of the gross margin, which is really the part above where exactly what to explain is really the mix, and this is really something to continue and which we will amplify in the revenue management, and obviously, it is also pricing. So the recipe on the cost part remains the same. But definitely, on the value part, this is what we are really amplifying. We started, and we will do even more in H2.

Just one last element to keep in mind is that, yes, we are going to continue this gross margin expansion all across the year. Still, keep in mind that gross margin in H2 is always lower versus H1, which is the typical seasonal pattern that we have in the industry.

Operator

And we will take our next question from Robert Ottenstein with Evercore. Your line is now open.

Robert Ottenstein -- Evercore ISI -- Analyst

Great. Congratulations on a terrific quarter. I was wondering if you could talk a little bit about what -- how 11.11 is shaping up. A lot of seasonality in China.

And despite that, you did extremely well. So how that's shaping up, as well as travel retail. And then, just on the cash flow side, perhaps talk about the seasonality of the cash flow and the fact that even in Q1, the cash flow was so strong. Do you expect that to continue throughout the year?

Sue Nabi -- Chief Executive Officer

Robert, thank you for the question. So again, you've seen the results we've posted around China, 50% of growth. This is really a great, I would say, demonstration and the KPI in terms of what we have put in place, in terms of the number of brands we're going to focus on, in terms of our ability to take a significant amount of sales on Tmall, creating the right content behind the right brands, with the right media investment. What I can tell you is that the sales momentum that we've seen during the first quarter is tracking in line to better than Q1 in the second quarter.

So clearly, this will help us to do a strong execution into 11.11 in China. So on the free cash flow, Laurent, maybe you can take this one, please?

Laurent Mercier -- Chief Financial Officer

Yes, absolutely. So Robert, and you're right, we need to focus on this. And as I mentioned, indeed, usually Q1, I would say, is a weaker quarter in terms of cash flow generation because, indeed, this is a quarter where we are building inventory for Q2. And yes, this is what we are doing.

But at the same time, you see in Q1 the results of all the initiatives that we have kicked off already a year ago, which is really a full program on cash flow optimization, where we are working on 10 specific streams. So I will not go in all the details, but it's really that going through all the working capital items, one of them is inventories. We are now with better tracking and better monitoring with the forecast accuracy on the demand. By doing that, in fact, we were able to optimize our inventory level, while keeping at the same time a very good service level.

So this is really something. We are doing the same on receivables with optimization on overdues, so really -- and also, on all the working capital. So this is really that you see the result in Q1 of all these initiatives. And indeed, it is a very great output.

And it confirms -- that's why we are confirming that our target to move toward five times leverage by end of calendar '21, we are fully confident, and this objective is going to be reached. Now, on total year, fiscal year '22, we are not giving guidance on free cash flow. But definitely, based on what I have just explained and combined, of course, with the growth and combined also with the EBITDA that we are delivering, we feel good that fiscal year '22 free cash flow should be nicely higher than fiscal '21.

Operator

And we will take our next question from Andrea Teixeira with JPMorgan. Your line is now open.

Andrea Teixeira -- JPMorgan Chase and Company -- Analyst

Yes. Thank you. Good morning. So just a clarification on the gross margin bridge.

I remember we were talking about pricing as you saw opportunity to take more actions, even prior to COVID with these RGM initiatives. How much list pricing did you take in the quarter? And when do you start to lap those price increases? And my other real question is the SG&A ratio that is coming below expectations, understanding that the team has emphasized the brand reinvestment remains a key focus for the company. Is there any seasonality we should be thinking of as you guide us for at least $900 million in EBITDA? And what is driving this SG&A leverage overall, please?

Laurent Mercier -- Chief Financial Officer

So definitely, yes. On pricing, so these are indeed the initiatives that we kicked off already last year because, I mean, these, I would say, commodities, the inflation is not coming as a surprise. So we -- and we flagged it already a few quarters ago. So that's why we initiated definitely some price increase.

And as Sue explained several times, I mean, we are really in an industry where highly desirable brands and also the -- all the investments that we are doing and all the great assets, thanks to that, I mean, we can afford, and we can implement indeed some price increase definitely in our business. So we continue this. And we are on track to take even more pricing initiatives in H2. And again, all this is really planned.

As I said, we knew that there would be some material inflation. And we know also that it's still to continue in H2. So we have also the plans really to intensify and to accelerate this price increase in H2. So on SG&A, so ratio below expectations, I will really make it in two parts.

So No. 1 is really the continuity that -- of the work we kicked off last year. So it means that we have very strict plans and it's part of our will to win. So really optimizing a lot of our fixed costs and non-people cost also like business services.

So here, we are continuing. At the same time, we are making sure that even in the SG&A, that we are reallocating some resources and we are also investing in the growth pillars, either markets, I mean, we mentioned about China, for example. So we are making sure that we are investing also in SG&A in China or also in the key strategic pillars that Sue has explained. So again, it's not only -- when you go through SG&A, it's not only one bucket.

We are making sure that these are different areas. And we are keeping good discipline, but at the same time, investing where we need to invest. So this is definitely the way we monitor our fixed cost. And on A&CP, the plan is to maintain roughly similar to Q1, mid to high 20s through the year.

Operator

And we will take our next question from Steve Powers with Deutsche Bank. Your line is now open.

Steve Powers -- Deutsche Bank -- Analyst

Yes. Hey, good morning. Thank you very much. Maybe picking up on that thread a little bit.

So the momentum on the top line is very evident and fantastic. The positive mix you talked about is also evident, making progress on productivity. So those are on the plus side of the ledger. On the other hand, cost inflation is real.

The cost of -- I'm assuming bolstering your supply chain has also picked up a bit. So when you talk about investing incrementally for your brands in the year, can you frame for us how much additional flexibility and incrementality you have in the plan as it stands today versus where you were when the plan started given the momentum? I'm a little bit just trying to understand how much incremental -- again, incremental flexibility you have to invest behind brands to fuel further growth.

Laurent Mercier -- Chief Financial Officer

I can start really to give you a frame, and indeed, Sue can build on this. Again, to give you the frame, and you see the Q1 results that we are over-delivering on EBITDA. We are over-delivering on profit because as we just explained, thanks to gross margin and thanks to SG&A discipline. So we are delivering a very strong quarter.

But we are not giving guidance quarter by quarter. We are giving the guidance on the fiscal year, on the total year. And we say that we will deliver $900 million EBITDA at minimum because we are very intentional on reinvesting behind our brands and where we have strong ROI. So what I'm telling you is really to answer your point, it's that, yes, we have the flexibility, and we are creating ourselves our own flexibility.

And you see it in Q1. And then, we decide with Sue and with the management team on a regular basis, OK, where we have the strong ROI. And we are allocating the resources when there is very strong ROI, and I can tell you, of course, and this is what Sue was explaining, that now we have a lot more and more initiatives with very strong ROI. And where, on the other hand, sometimes we can see that some tests and so on are not at the level we are expecting.

We are also very disciplined that we keep the money and then we reallocate to activities where there is a better return on investment. So yes, let's be very clear. We have the flexibility. We are creating our own flexibility, and we are very intentional on reinvesting behind our brands.

Operator

And we will take our next question from Lauren Lieberman with Barclays. Your line is now open.

Lauren Lieberman -- Barclays -- Analyst

Great. Thanks. Good morning. You've ran through a bunch of the recent successes in consumer beauty and the success you're seeing early indications of with the relaunch of the major brands and repositioning.

But sales are still tracking kind of like, I think, it's like 80-ish percent of where they were in the first quarter of '20, while prestige is comfortably above where you were back then. So just curious if you could share whether it's recent performance of some of the other brands that are not kind of growing as fast as those that have been repositioned or is it market recovery-related? But kind of what you see as the impediment to getting back up to that fiscal '20 benchmark for consumer beauty?

Sue Nabi -- Chief Executive Officer

Lauren, thank you for the question. In fact, what I would like to say is that I think we are in a way having figures that are imperative with what peers, with consumer beauty businesses and mass color cosmetics businesses have been posting. What we are seeing today is that the momentum on -- behind COVERGIRL, which is the largest brand of consumer beauty, is holding, and I would even say, is accelerating. COVERGIRL is growing both in sell-in and in sellout during the quarter.

And the recent weeks of Nielsen that you may have seen post quarter are showing four weeks of market share gain, including a strong 0.8% market share gain recently. And there is a lot more to come behind COVERGIRL for Q2 and probably for the remainder of the year. On Max Factor, again, I've been describing the success we are seeing. It's just the beginning because we are just starting to see the visibility in stores and online and on TV of the new, I would say, repositioning.

And already with this, we are seeing market share improvement in 70% of our markets. And Rimmel, which has secured its No. 1 position in UK already with -- prior to the relaunch of the brand has been doing a fabulous launch with Wonder'Extension in mascara that's one of the best-selling mascaras on Rimmel since many, many years. And we just put on the market a few weeks ago Kind & Free, which is the, I would say, the implementation of the recipe of success of COVERGIRL into Rimmel, which is the No.

1 brand in UK and in many countries. And Kind & Free is starting outstandingly well. We just received the test results of the advertising that I've been sharing with you a few minutes ago. And again, we are constantly, and that's the good news, breaking, I would say, the records in terms of beating the best KPIs.

So we are super confident that we are going to see an acceleration in Q2 in consumer beauty. That's for sure. So there is nothing today that I can share with you that would be, in a way, a disappointment versus what we have envisioned or versus the work that we have been putting behind the brands. Every time we put repositioning, advertising, the media pressure, etc., we see it deliver.

It's just a question of time, and you will see an acceleration in Q2.

Operator

[Operator instructions] We will take our next question from Olivia Tong with Raymond James. Your line is now open.

Olivia Tong -- Raymond James -- Analyst

Great. Thank you. So innovation really progressed well to drive the recovery, particularly in prestige. So can you just talk a little bit about the innovation pipeline and how the development process has changed in recent years? And then I just wanted to follow up on Steve's question a little bit.

Can you just quantify how much cost -- how much higher are costs versus your plans going into the year? And then to the extent there are profit upsides as the year progresses, are there -- do you have bigger projects planned for that upside? Because you're already at 26% of sales on A&CP, so I'd imagine it's not going to go much higher than that.

Sue Nabi -- Chief Executive Officer

So let me start with the first part of the question around the innovation pipeline and how the process has changed in the recent year. As you know, we've been putting in place a six-pillar strategy. The two first points of the strategy were, No. 1, stabilizing our consumer beauty business, starting with our cosmetics brands in Europe and in the US And the second part was to how can we accelerate the growth in the prestige division, which we have demonstrated during this first quarter at over 30% of growth.

And this had three parts. No. 1, accelerating our fragrance momentum and building a female top 10, top 15 fragrance, which seems is going to be the case with Gucci Flora. Confirming our leadership position in male prestige fragrances, and this seems to be also the case with the Hero, Burberry Hero, and Calvin Klein Defy.

Big successes. Adding a new growth engine, which is Gucci makeup, Burberry makeup, Kylie Cosmetics, and the three brands are outstandingly growing. If you think about Gucci makeup, it's triple-digit growth. So in a way, what you are seeing today in terms of growth and the way we are operating behind innovation, it's very, very easy to understand if you look back at the two key first points of the strategic pillars.

So we are really delivering behind what we have been describing in April. And that we'll be describing in much more detail next week in New York on November 18. So this was for the first part of the question around how we are dealing with innovation into the company. Maybe, Laurent, you want to take the second part, which is around our international impact on costs?

Laurent Mercier -- Chief Financial Officer

Yes. Absolutely. So Olivia, so indeed on -- again, I explained a few times or -- I mean, a few quarters ago. So what we raised is that indeed, we were assuming a 50 basis point impact related to cost in our gross margin.

And this is what I explained before, so that's why we already implemented some price increase already in H1 because we knew that this headwind will come. Now, what we are seeing indeed is that there is some amplification as we all know on this inflation. And now it's about size of one point -- 100 basis point in our gross margin equation. But here, same story.

We have all the plans in place. And what I explained before is that we have proactive efforts on pricing that we are going to implement in H2 fiscal '22 to keep mitigating inflation, but also completely consistent with our journey of value creation with accretive innovation and building a better and healthier business.

Sue Nabi -- Chief Executive Officer

And to complement Laurent's point, I would really say that the pricing power of the company has been very well demonstrated during the quarter as most of the innovations behind clean beauty in masks or behind the new fragrance launches makeup, they are all very, very strongly accretive to the profitability of the company. And really, they're even sometimes being very, very premium to the market. The innovations are highly delivering in terms of sellout. So it really is a great confirmation of the desirability and the ability to price up our brands.

Operator

And we will take our last question from Carla Casella with JPMorgan. Your line is now open.

Carla Casella -- JPMorgan Chase and Company -- Analyst

Hi. Just wanted to see, how much were the cost savings that you achieved in the quarter? And if you've got any update on the time frame of the $600 million cost savings achievement. And then, also, does your leverage target by the end of calendar '21 and '22, do those include the add-back for the go forward, the remaining cost savings?

Laurent Mercier -- Chief Financial Officer

OK. Yes. Thank you, Carla. So on cost savings, indeed, so the $600 million, the phasing is that -- so we delivered last year, as you remember, $330 million savings.

This year, we are confirming to deliver $90 million savings, and the rest will be in fiscal '23. So the $600 million savings will be delivered by end fiscal '23. So this is a plan we announced more than a year ago. As you could see, we are perfectly on track, even better on these savings.

With a very strong Q1, we delivered $60 million in Q1, and we are confirming the $90 million for this year. What I want to insist also related to the savings is also with one-off costs which are lower versus the initial plan. And this is also a big lever to optimize our cash. So perfectly on track and with very strong actions on fixed cost, on trade terms and then -- and also on all the items on COGS really to -- and it's part of the gross margin.

So on No. 2, which is the leverage target. So yes, very good question. So when we are saying toward five times, this is just, I mean, EBITDA and net debt.

So there is no add-back in this calculation. The add-back is something that we are using only for the covenant calculation and then the different number. But I'm insisting here that to meet two or five times end of calendar '21, and toward four times end of calendar '22 is excluding add-backs from the savings plan.

Carla Casella -- JPMorgan Chase and Company -- Analyst

Great. Thank you.

Operator

And we have no further questions on the line at this time. I will turn the call back over to Ms. Nabi for any additional or closing remarks.

Sue Nabi -- Chief Executive Officer

Thank you, everyone, for your questions. And we are super, super excited to see you next week in New York on the 18th. A lot, a lot of things that are new, that you would be super happy to discover about our potential growth in the coming months and years. Thank you very much.

Duration: 68 minutes

Call participants:

Sue Nabi -- Chief Executive Officer

Laurent Mercier -- Chief Financial Officer

Stephanie Wissink -- Jefferies -- Analyst

Robert Ottenstein -- Evercore ISI -- Analyst

Andrea Teixeira -- JPMorgan Chase and Company -- Analyst

Steve Powers -- Deutsche Bank -- Analyst

Lauren Lieberman -- Barclays -- Analyst

Olivia Tong -- Raymond James -- Analyst

Carla Casella -- JPMorgan Chase and Company -- Analyst

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