Coty Inc. reports third quarter FY17 results




Coty Inc. reports
third quarter FY17 results



PRESS RELEASE
May 10, 2017

Coty Inc. (NYSE: COTY) today announced financial results for the third quarter of fiscal year 2017, ended March 31, 2017.   
 
* As compared to combined Coty and P&G Beauty Business net revenues. These measures, as well as “free cash flow,” are Non-GAAP Financial Measures. Refer to “Basis of Presentation and Exceptional Items” and “Non-GAAP Financial Measures” for discussion of these measures. Net Income represents Net Income Attributable to Coty Inc. Reconciliations from reported to adjusted results can be found at the end of this release. Combined Company year-over-year change in net revenues is presented giving effect to the completion of the acquisition of the P&G Beauty Business (the "Merger"), as if the Merger had occurred as of July 1, 2015. “NM” indicates calculation not meaningful.

 

Third Quarter Fiscal 2017 Summary


  • Net revenues of $2,032.1 million increased >100% as reported compared to Legacy-Coty net revenues in the prior-year period and increased 6% at constant currency compared to combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period
  • Excluding the positive contribution from the acquisitions of ghd and Younique and one month of the Brazil Acquisition, the combined company net revenues declined 2% on a constant currency basis. This performance reflects the benefit of approximately 1% as a result of pre-shipments to customers in advance of the termination of transition services for North America under the Transition Services Agreement ("TSA"), which occurred on May 1
  • Reported operating loss of $(192.5) million decreased from $23.0 million for Legacy-Coty in the prior-year period due to $213.5 million in restructuring and acquisition related charges
  • Adjusted operating income of $208.3 million increased >100% from $102.6 million for Legacy-Coty in the prior-year period
  • Reported net income of $(164.2) million decreased from $(26.8) million for Legacy-Coty in the prior-year period, as Coty initiated its cost savings program with $213.5 million in pre-tax restructuring and acquisition related charges, while adjusted net income of $110.3 million increased from $47.8 million for Legacy-Coty in the prior-year period
  • Reported earnings per diluted share of $(0.22) decreased from $(0.08) for Legacy-Coty in the prior-year period, while adjusted earnings per diluted share of $0.15 increased from $0.14 for Legacy-Coty in the prior-year period
  • Net cash provided by operating activities was $43.3 million compared to $(71.8) million in the prior-year period for Legacy-Coty, reflecting improved working working capital for the combined company​


First Nine Months Fiscal 2017 Summary
 
  • Net revenues of $5,409.0 million increased 65.2% as reported compared to Legacy-Coty net revenues in the prior-year period and was flat on a constant currency basis compared to combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period
  • Excluding the positive contribution from the acquisitions of ghd, Younique and seven months of the Brazil Acquisition, the combined company net revenues declined 6% on a constant currency basis
  • Reported operating loss of $(158.8) million decreased from $257.1 million for Legacy-Coty in the prior-year period due to $454.1 million in restructuring and acquisition related charges
  • Adjusted operating income of $682.7 million increased 29% from $528.7 million for Legacy-Coty in the prior-year period
  • Reported net income of $(117.4) million decreased from $187.9 million for Legacy-Coty in the prior-year period due to $454.1 million in pre-tax restructuring and acquisition related charges, while adjusted net income of $411.9 million increased from $439.5 million for Legacy-Coty in the prior-year period
  •  Reported earnings per diluted share of $(0.19) decreased from $0.53 for Legacy-Coty in the prior-year period, while adjusted earnings per diluted share of $0.67 decreased from $1.23 for Legacy-Coty in the prior-year period
  • Net cash provided by operating activities was $706.7 million compared to $445.3 million in the prior-year period, primarily as a result of improved working capital for the combined company partially offset by lower cash-related net income

Commenting on Q3 financial results and strategic outlook, Camillo Pane, Coty CEO said:
 
“Q3 was a better quarter. The underlying net revenue trend, excluding the contributions from ghd, Younique and one month of the Brazil Acquisition, improved sequentially to -2% at constant currency compared to a high single digit decline in the first half. This improvement was driven by good growth performance in the Luxury division, flat performance in Professional Beauty, and some improvement but continued negative performance in the Consumer Beauty division.
 
Equally encouraging was the performance of our acquired businesses of the Brazil acquisition, Younique and ghd. These three businesses combined showed strong performance year over year, outperforming their respective markets and are expected to materially strengthen the growth profile of the total company.
 
As to profits, our Q3 performance was very solid, with our adjusted operating income more than doubling in Q3 versus the prior year period, underlining the margin strength of our business.
 
It is clear that fiscal 2017 is a transitional year and the path to recovery will take some time and will not be a straight line. For example, we expect the constant currency net revenue trends in Q4 excluding Younique and ghd to weaken sequentially versus Q3.
 
In Q3, we continued to execute on the strategy I outlined last quarter to position Coty to become a challenger and leader in beauty, and drive sustained profitable growth over time. We aim to achieve these strategic objectives through four key pillars, specifically the repositioning some of the brands, making significant changes to our innovation and product development process, accelerating our end-to-end digital transformation including e-commerce, and  revamping our in-store execution. I am pleased with the progress made in the quarter on the four pillars, especially on the announced partnerships with new creative agencies and the implementation of changes to our innovation process.
 
On the integration of the P&G Beauty Business, we are making good progress and we just exited the Transitional Services Agreement in North America on May 1, which is a significant milestone in this journey.
Regarding acquisitions, the recently announced agreement to acquire the long term exclusive license of the Burberry Beauty business should further strengthen our Luxury portfolio of brands without a material impact to our leverage ratio, highlighting our disciplined approach to valuation, and maintaining a strong balance sheet.
In sum, I am confident that the strategies and action plans we are deploying throughout the organization are setting the stage to realize the enormous potential of Coty as a global leader and challenger in beauty."


Basis of Presentation and Exceptional Items

To supplement financial results presented in accordance with GAAP, certain financial information is presented herein using the non-GAAP financial measures described in this section. The term “combined company” describes net revenues of Coty Inc. and the P&G Beauty Business giving effect to the Merger for purposes of the three and nine months ended March 31, 2017 as if it had occurred on July 1, 2015. Combined company year-over-year and combined company constant currency year-over-year do not include any adjustments related to potential profit improvements, potential cost savings or adjustments to fully conform to the accounting policies of Coty. The term “combined company constant currency” describes the combined company net revenues excluding the effect of foreign currency exchange translations. The term “adjusted” primarily excludes the impact of restructuring and business realignment costs, amortization, costs related to acquisition activities, private company share-based compensation expense, and asset impairment charges to the extent applicable. Refer to “Non-GAAP Financial Measures” for additional discussion of these measures as well as the definition of free cash flow.
 
Net revenues are reported by segment and geographic region and are discussed below on a reported (GAAP) basis and combined company constant currency basis. Operating income is reported by segment. All changes in margin percentage are described in basis points rounded to the nearest tenth of a percent.
 
Net revenues are presented on an actual, combined company and combined company constant currency.  Operating income, net income, operating income margin, gross margin, effective tax rate, and earnings per diluted share (EPS (diluted)) are presented on a reported (GAAP) basis and an adjusted (non-GAAP) basis. Adjusted EPS (diluted) is a performance measure and should not be construed as a measure of liquidity.  Net revenues on a combined company basis, net revenues on a combined company constant currency basis, adjusted operating income, adjusted operating income on a constant currency basis, adjusted operating income margin, adjusted effective tax rate, adjusted net income, adjusted gross margin, adjusted EPS (diluted) and free cash flow are non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" for additional discussion of these measures. A reconciliation between GAAP and non-GAAP results can be found in the tables and footnotes at the end of this release.
 
Coty only provides guidance on a non-GAAP basis and does not provide reconciliations of such forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation, including adjustments that could be made for restructuring, integration and acquisition-related expenses, amortization expenses, adjustments to inventory, and other charges reflected in our reconciliation of historic numbers, the amount of which, based on historical experience, could be significant.


Third Quarter Fiscal 2017 Summary Operating Review

Net revenues of $2,032.1 million increased  >100% as reported compared to Legacy-Coty net revenues in the prior-year period and increased 6% at constant currency compared to combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period. The 6% constant currency net revenue growth compared to the combined company revenues in the prior-year period reflected an 8% contribution from ghd, Younique, and one month of the Brazil Acquisition, and a 2% decline in the underlying business. The sequential improvement in the underlying revenue performance was driven by growth in the Luxury division, flat performance in Professional Beauty, with continued underlying challenges in the Consumer Beauty division that were partially offset by strong performance in Brazil. Q3 trends reflect the benefit of approximately 1% as a result of pre-shipments to customers  in advance of the termination of transition services for North America under the TSA, which occurred on May 1.
 
Gross margin of 59.8% decreased from 61.2% for Legacy-Coty in the prior-year period, while adjusted gross margin of 63.3% increased from 61.8% for Legacy-Coty in the prior-year period, reflecting the addition of the higher gross margin P&G Beauty and Younique businesses.  
 
Operating income decreased to $(192.5) million from $23.0 million for Legacy-Coty in the prior-year period, as the income contribution from the acquired businesses was more than offset by increased restructuring costs and acquisition related costs. As a percentage of net revenues, operating margin decreased to (9.5)% from 2.4%.
 
Adjusted operating income increased >100% to $208.3 million from $102.6 million for Legacy-Coty in the prior-year period, reflecting the profit contribution from P&G Beauty Business and Younique. As a percentage of net revenues, adjusted operating margin remained flat at 10.3% at actual rates.
 
Reported effective tax rate was 36.9% compared to (133.3)% for Legacy-Coty in the prior-year period.
 
Adjusted effective tax rate was 22.2% compared to 25.1% for Legacy-Coty in the prior-year period. 
 
Net income decreased to $(164.2) million from $(26.8) million for Legacy-Coty in the prior-year period, reflecting lower operating income and higher interest expense.
 
Adjusted net income increased to $110.3 million from $47.8 million for Legacy-Coty in the prior-year period, primarily reflecting higher adjusted operating income partially offset by higher interest expense.  As a percentage of net revenues, adjusted net income margin increased to 5.4% from 5.0% in the prior-year period.

Cash Flows

  • Net cash provided by operating activities in the quarter was $43.3 million, compared to $(71.8) million for Legacy-Coty in the prior-year period, reflecting improved working capital for the combined company.
  • Free cash flow was $(82.5) million in the quarter compared to $(108.6) million for Legacy-Coty in the prior-year period, reflecting higher cash from operations partially offset by increased capital expenditure.
  • On March 10, 2017, the Company paid a quarterly dividend of $0.125 per share for a total of $93.4 million.
  • Cash and cash equivalents of $767.0 million increased by $394.6 million, total debt of $7,184.8 million increased by $3,014.7 million, with net debt of $6,417.8 million up $2,620.1 million from the balance on June 30, 2016. This increase reflected the assumption of approximately $1,941.8 million of debt as part of the P&G Beauty Business transaction and financings for the acquisition of ghd and the investment in Younique.


Third Quarter Fiscal 2017 Business Review by Segment


 

Luxury

  • Luxury net revenues of $634.6 million increased 56% as reported compared to Legacy-Coty net revenues in the prior-year period reflecting the contribution from the acquired P&G Beauty Business. Luxury net revenues increased 2% at constant currency compared to combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period, reflecting revenue momentum in several brands including Hugo Boss, Calvin Klein, and Chloe behind strong launch activity in the quarter partially offset by declines in philosophy and Marc Jacobs.
  • Adjusted operating income for Luxury increased 94% to $86.1 million from $44.4 million in the prior-year period, resulting in a 13.6% adjusted operating income margin, an increase of 270 basis points versus Legacy-Coty in the prior-year period.

Consumer Beauty

  •  Consumer Beauty net revenues of $988.6 million increased >100% as reported compared to Legacy-Coty net revenues in the prior-year period reflecting the contribution from the acquired P&G Beauty Business and Younique. Consumer Beauty net revenues grew 5% at constant currency compared to combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period, reflecting a 11% contribution from Younique and one month of the Brazil Acquisition, and a 6% decline in the underlying business. This decline reflected an improvement relative to the trends in the first half FY17, driven by continued underlying challenges in the Consumer Beauty division that were partially offset by strong performance in Brazil.
  • Adjusted operating income for Consumer Beauty increased >100% to $121.5 million from $43.2 million for Legacy-Coty in the prior-year period, resulting in an 12.3% adjusted operating income margin, an increase of 350 basis points versus Legacy-Coty in the prior-year period.

Professional

  • Professional Beauty net revenues of $408.9 million increased > 100% as reported compared to Legacy-Coty net revenues in the prior-year period reflecting the contribution from the acquired P&G Beauty Business and the ghd acquisition. Professional Beauty net revenues increased 14% at constant currency compared to combined Legacy-Coty and P&G Beauty Business net revenues in the prior-year period, reflecting a 14% contribution from ghd, and strength in professional hair offset by declines in OPI. 
  • Adjusted operating income for Professional decreased to $0.7 million from $15.0 million for Legacy-Coty in the prior-year period, resulting in a 0.2% adjusted operating income margin versus 26.6% for Legacy-Coty in the prior-year period as the seasonally weak period in the Salon market weighed on the margin profiles of both Salon Hair and ghd.

Third Quarter Fiscal 2017 Business Review by Geographic Region

North America

  • Reported net revenues increased >100% compared to Legacy-Coty net revenues in the prior-year period and increased 4% at constant currency compared to combined Coty and P&G Beauty Business net revenues in the prior-year period driven primarily by the contribution from Younique, partially offset by declines in the U.S., primarily in the Consumer Beauty division.

Europe

  • Reported net revenues increased >100% compared to Legacy-Coty net revenues in the prior-year period and increased 4% at constant currency compared to combined Coty and P&G Beauty Business net revenues in the prior-year period driven primarily by the contribution from ghd partially offset by declines in Germany.

ALMEA

  • Reported net revenues increased >100% compared to Legacy-Coty net revenues in the prior-year period and increased 13% at constant currency compared to combined Coty and P&G Beauty Business net revenues in the prior-year period driven by Brazil, the Middle East and Australia.

Noteworthy Company Developments
 
Other noteworthy company developments include:

  • On March 7, 2017, Coty announced the appointment of Laurent Kleitman as President of the Consumer Beauty division. Laurent brings extensive experience in both the Beauty industry and the Hair Care category, and strong operational background in both developed and emerging markets. Laurent will begin his new role on May 15, 2017, and will be located in Coty’s Consumer Beauty headquarters in New York.
  • On April 3, 2017, Coty announced that it had entered into an agreement to acquire the exclusive long-term global license rights for Burberry Beauty luxury fragrances, cosmetics and skincare. Under the agreement, Coty will develop, manufacture and distribute the full range of Burberry Beauty products globally. In FY 2015/16 Burberry Beauty revenue was £203M, as disclosed in Burberry’s annual results. Coty will pay cash consideration of £130M for the long-term exclusive global license. The deal is expected to close in calendar Q4 2017.
  • On April 18, 2017, Coty announced that it had appointed Sabine Chalmers to the Board of Directors. She will also serve on the Audit and Finance Committee. Sabine brings to the Board 25 years of senior management experience in international consumer goods and an extensive track record in M&A.
  • On May 10, 2017, Coty announced a dividend of $0.125, payable June 13, 2017 to shareholders of record on May 31, 2017.
Conference Call
About Coty Inc.
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Non-GAAP Financial Measures