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NEW YORK--(BUSINESS WIRE)-- Coty Inc. (NYSE: COTY) ("Coty" or "the Company") today announced its results for the second quarter of fiscal year 2023, ended December 31, 2022. The Company continued to deliver strong financial results, maintaining progress across its strategic growth pillars.

Coty's strong Q2 sales performance came in ahead of expectations, despite significant industry-wide constraints in key fragrance components. Q2 sales decreased 3% as reported, fully driven by a 7% headwind from FX, with sales up 4% on a LFL basis, which includes approximately 300 bps of negative impact from the Russia business exit. 1H23 sales declined 1% as reported, while LFL sales grew 6% including approximately 300 bps of negative impact from the Russia exit. As a result, 1H23 LFL sales growth for the core business surpassed the Company's 1H23 guidance of +6-8% LFL growth, adjusting for the impact of the Russia exit.

During the quarter, consumer demand for beauty products, particularly prestige fragrances, remained robust, with high-single-digit growth in the prestige fragrance market and mid-single-digit growth in the mass beauty market. Although the Company delivered strong LFL growth across both divisions, as expected Coty's Prestige revenue and sell-out growth continued to be constrained by industry-wide component shortages stemming from accelerated fragrance demand. Encouragingly, the Company has already begun to see an improvement in its Prestige service levels entering Q3.

Coty's Prestige business delivered solid performance in Q2 due to the success of key innovations, even as this year's launch pipeline was primarily composed of brand extensions. Q2 Prestige revenues decreased 5% as reported and grew 3% LFL, which included approximately 300 bps of negative impact from Coty's exit from Russia. With no signs of slowing in the premiumization trend in global prestige fragrances, Coty's key fragrance launches reached top positions, with Burberry Hero EDP ranking as a Top 3 innovation, Boss Bottled Parfum a Top 2, and Gucci Flora Gorgeous Jasmine as a Top 3 innovation in most key markets. Meanwhile, Prestige makeup revenues were impacted by the COVID-related total lockdowns in China. However, Coty continued to drive momentum outside of China, with particular strength in the U.S., where retail sales of Gucci makeup and Kylie makeup grew over 40%.

Coty's Consumer Beauty business delivered a strong performance in Q2, supported by solid market growth and Coty gaining market share. Consumer Beauty Q2 revenues decreased 1% as reported and grew 6% LFL, which included approximately 250 bps of negative impact from Coty's exit from Russia. LFL revenues grew across key categories, including cosmetics, bodycare, and mass skincare. During the quarter, the global mass beauty category grew at a mid-single-digit pace year-on-year, while Coty continued to outperform the market, delivering a full year of global market share gains in the portfolio.

Geographically, revenues grew in all regions on a constant currency basis. EMEA sales declined 10% as reported due to significant FX headwinds, but grew 2% LFL in Q2 and 6% LFL in 1H23 despite a 5% negative impact from the Russia exit. This solid growth was fueled by significant Travel Retail momentum and growth across most markets. Americas sales rose 6% as reported and 8% LFL driven by strong momentum in Brazil and Latin America, while the continued strength in U.S. demand was offset by supply constraints. Asia Pacific sales declined 5% as reported but grew 2% LFL in Q2 and 6% LFL in 1H23, with strong momentum in Asia-ex-China and Travel Retail, while China revenues were impacted by COVID-related total lockdowns.

Despite the continued inflationary environment, Coty continued to generate material gross margin expansion in the quarter, while also maintaining strong level of media activities to further drive revenue and sell-out growth. In Q2, reported gross margins expanded by 110 bps YoY to 65.5%, while adjusted gross margin grew 90 bps YoY to 65.5%. This solid gross margin expansion was driven by the full benefit of Coty's pricing execution exiting Q1, enhanced planning and productivity, and improvements in trade spend. Coty's Q2 reported operating income of $199.3 million was lower than 2Q22 primarily due to a real estate gain recognized last year. Meanwhile, adjusted operating income of $261.4 million grew a very robust 11% YoY despite a high-single-digit headwind from FX. Adjusted EBITDA of $317.6 million also grew 2% YoY.

During Q2, Coty generated strong free cash flow of $455.1 million, driving Financial Net Debt lower to $3.9 billion at the end of the quarter. As a result, the financial leverage ratio of ~4.1x exiting Q2 improved sequentially from the