Coty Inc. reports first quarter fiscal 2018 results



Coty Inc. reports first quarter fiscal 2018 results



PRESS RELEASE
November 09, 2017

 
Improving net revenue trends as strategy starts to deliver. Reported operating income impacted by acquisition and restructuring costs. Significant growth in adjusted operating income

Coty Inc. (NYSE: COTY) today announced financial results for the first quarter of fiscal year 2018, ended September 30, 2017.
* As compared to combined Coty and P&G Beauty Business net revenues (herein defined as “Combined Company”). 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 (Loss) represents Net Income (Loss) 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.
First Quarter Fiscal 2018 Summary
• Net revenues of $2,238.3 million increased >100% as reported compared to Legacy-Coty net revenues in the prior-year period and increased 5% for the combined company at constant currency

• Excluding the positive contribution from the acquisitions of ghd and Younique, the combined company organic net revenues declined 2% on a constant currency basis

• Reported operating income of $28.7 million decreased from $46.4 million for Legacy-Coty

• Adjusted operating income of $195.1 million increased 17% from $166.4 million for Legacy-Coty

• Reported net loss of $(19.7) million, declined from $0.0 million for Legacy-Coty, while adjusted net income of$76.3 million is in line with Legacy-Coty

• Reported earnings per diluted share of $(0.03) decreased from $0.00 for Legacy-Coty, while adjusted earnings per diluted share of $0.10 declined from $0.23 for Legacy-Coty

• Net cash used in operating activities was $(8.9) million compared to $(15.0) million for Legacy-Coty

Commenting on Coty's performance, Camillo Pane, Coty CEO said: “Q1 was a much better quarter. We saw strong growth in Luxury, continued positive momentum in Professional and a reduced net revenue decline in the Consumer Beauty division. While results are likely to be a bit uneven from quarter to quarter going forward, the improving revenue trend gives me confidence that the growth strategy I outlined earlier this year is moving Coty gradually onto a path of full recovery.

We also delivered significant improvement in profits, driven by better gross margin performance and strong financial discipline on the cost structure.

I am pleased to announce that, as of September 1, we have exited our third and final TSA with P&G for the ALMEA region and now have control of processes, systems and data across the new Coty.

We are also satisfied with the contributions from our other strategic acquisitions, Hypermarcas, ghd and Younique and continue to strengthen our overall portfolio through our strategic partnership with Burberry, an iconic brand that is an exciting addition to our portfolio. We believe we are uniquely positioned to develop and grow this luxury brand to its full potential.

Looking ahead to the remainder of fiscal 2018, we expect to continue to deliver on our announced synergies, finalize the streamlining of our brand portfolio and relaunch several of our key brands. With these programs, we aim to deliver improved net revenue growth trends for the remainder of the year, with an organic second half top line roughly comparable to prior year, as well as healthy margin improvement over the balance of the year.

I am highly confident that all of our efforts will lead to Coty becoming a new global leader and challenger in beauty."
Basis of presentation
To supplement financial results presented in accordance with GAAP, certain financial information is presented in this release 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 months ended September 30, 2017 as if it had occurred on July 1, 2015. Combined company period-over-period and combined company constant currency period-over-period 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” below 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 presented on a reported (GAAP), combined company 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.

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" below 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.

To the extent that Coty provides guidance, it does so only 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.
First Quarter Fiscal 2018 Summary Operating Review
Net revenues of $2,238.3 million increased >100% as reported compared to Legacy-Coty net revenues in the prior-year period due to the P&G Beauty Business acquisition and increased 5% on a combined company constant currency basis. The 5% combined company net revenue growth reflected a 7% contribution from ghd and Younique, and a 2% decline in the underlying business. The decline was driven by Consumer Beauty, partially offset by strong growth in Luxury and moderate growth in Professional Beauty.

Gross margin of 60.9% increased from 58.8% for Legacy-Coty, while adjusted gross margin increased to 61.6% from 58.8%, driven by the acquisition of higher margin businesses and supply-chain and procurement synergies.

Reported operating income decreased to $28.7 million from $46.4 million for Legacy-Coty due to higher SG&A and amortization expenses driven by the P&G Beauty Business acquisition, partially offset by improved gross margin and lower acquisition-related costs.

Adjusted operating income increased 17% to $195.1 million from $166.4 million for Legacy-Coty driven by improved gross margin as well as tight financial discipline.

Reported effective tax rate was 61.1% compared to (108.5)% for Legacy-Coty.

Adjusted effective tax rate was 27.4% compared to 30.1% for Legacy-Coty.

Reported net income decreased to $(19.7) million from $0.0 million for Legacy-Coty, reflecting lower reported operating income and higher interest expense from the acquisitions.

Adjusted net income of $76.3 million was in line with $78.3 million for Legacy-Coty, with higher interest expense, offset by the benefit from higher adjusted operating income.
Cash flows
• Net cash from operating activities in the quarter was $(8.9) million, compared to $(15.0) million for Legacy-Coty, reflecting improved working capital for the combined company.

• Negative free cash flow of $(120.3) million was impacted by acquisition and restructuring costs and declined from $(101.8) million for Legacy-Coty, reflecting increased capital expenditures partially offset by improvements in cash from operations.

• On September 14, 2017, the Company paid a quarterly dividend of $0.125 per share for a total of $93.6 million.

• Net debt of $6,919.4 million up $239.2 million from the balance on June 30, 2017 driven primarily by negative quarterly free cash flow.
First Quarter Fiscal 2018 Business Review by Segment
First Quarter Fiscal 2018 Business Review by Segment
Luxury
• Net revenues of $764.4 million increased 70% as reported compared to Legacy-Coty net revenues in the prior-year period reflecting the contribution from the acquired P&G Beauty Business. Net revenues increased 4% on a combined company constant currency basis reflecting momentum in Hugo Boss, Gucci and Tiffany & Co.

• Adjusted operating income of $89.9 million was in line with $90.6 million in the prior-year period.
Consumer Beauty
• Net revenues of $1,043.4 million increased 82% 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. Net revenues grew 2% on a combined company constant currency basis reflecting a 10% contribution from Younique and an (8)% decline in the underlying business. The decline was driven by the performance of certain brands, including our retail hair brands, as well as continued weakness in the global mass beauty market.

• Adjusted operating income increased 54% to $88.3 million from $57.5 million for Legacy-Coty.
Professional Beauty
• Net revenues of $430.5 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. Net revenues increased 13% on a combined company constant currency basis reflecting a 12% contribution from ghd and continued strength in Wella and System Professional which was partly offset by declines in Clairol Professional.

• Adjusted operating income declined slightly to $16.9 million from $18.3 million for Legacy-Coty.
First Quarter Fiscal 2018 Business Review by Geographic Region
First Quarter Fiscal 2018 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 12% on a combined company constant currency basis 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 and increased 1% on a combined company constant currency basis driven primarily by the contribution from ghd partially offset by declines in Germany.
ALMEA
• Reported net revenues increased 74% compared to Legacy-Coty net revenues and was flat on a combined company constant currency basis.
Noteworthy Company Developments
Other noteworthy company developments include:

• On September 8, 2017, Coty announced the appointment of Daniel Ramos as Chief Scientific Officer. Daniel brings extensive experience in the consumer goods industry spanning the health, beauty & grooming, fragrance and cosmetics categories where he has delivered transformative and disruptive innovation internationally. Daniel will be located in Coty’s R&D center of global excellence in Morris Plains, New Jersey.

• On October 2, 2017 Coty announced the completion of the acquisition of the exclusive long-term global license rights for Burberry Beauty luxury fragrances, cosmetics and skincare.

• On November 9, 2017, Coty announced a dividend of $0.125 per share, payable December 14, 2017 to holders of record on November 30, 2017.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, November 9, 2017 to discuss its results. The dial-in number for the call is (855) 889-8783 in the U.S. or (720) 634-2929 internationally (conference passcode number: 9396799). The call will also be webcast live at http://investors.coty.com. The conference call will be available for replay. The replay dial-in number is (855) 859-2056 in the U.S. or (404) 537-3406 outside the U.S. (conference passcode number: 9396799).
About Coty Inc.
Forward Looking Statements
For more information:
Non-GAAP Financial Measures
Additional Tables
Click here for Additional Tables.