Coty Inc. reports fiscal 2017 Q4 and full year results



Coty Inc. reports fiscal 2017 fourth quarter and full year results



PRESS RELEASE
August 22, 2017

 
Improved fourth quarter underlying net revenue trend.
Integration progressing well.

Coty Inc. (NYSE: COTY) today announced financial results for the fourth quarter and fiscal year ended June 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, as if the acquisition had occurred as of July 1, 2015. “NM” indicates calculation not meaningful.
Fourth Quarter Fiscal 2017 Summary
• Net revenues of $2,241.3 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 compared to the prior year

• Excluding the positive contribution from the acquisitions of ghd and Younique, combined company organic net revenues declined 3% on a constant currency basis, which includes a 1% net benefit as a result of pre-shipments to customers in advance of the termination of the Transition Services Agreement ("TSA") for Europe which occurred on July 1

• Reported operating loss of $(279.0) million increased from $(2.9) million for Legacy-Coty in the prior-year period driven primarily by a net increase of $190.2 million in restructuring and acquisition related costs, and a $35.6 million net increase in amortization expense primarily due to acquisitions

• Adjusted operating income of $90.1 million decreased from $94.2 million for Legacy-Coty in the prior-year period

• Reported net loss of $(304.8) million increased from $(31.0) million for Legacy-Coty in the prior-year period, while adjusted net loss of $(3.4) million declined from income of $45.7 million for Legacy-Coty

• Reported earnings per diluted share of $(0.41) declined from $(0.09) for Legacy-Coty in the prior-year period, while adjusted earnings per diluted share of $0.00 decreased from $0.13 for Legacy-Coty

• Net cash provided by operating activities was $50.8 million compared to $56.1 million for Legacy-Coty in the prior-year period
Fiscal 2017 Summary
• Net revenues of $7,650.3 million increased 76% as reported compared to Legacy-Coty net revenues in the prior year, and grew 1% on a combined company constant currency basis

• Excluding the positive contribution from the acquisitions of ghd, Younique, and seven additional months of Hypermarcas Brands, the combined company organic net revenues declined 5% on a constant currency basis

• Reported operating loss of $(437.8) million declined from income of $254.2 million for Legacy-Coty in the prior year, driven primarily by a net increase of $466.7 million in restructuring and acquisition costs and a $195.6 million net increase in amortization expense primarily due to acquisitions

• Adjusted operating income of $772.8 million increased 24% from $622.9 million for Legacy-Coty

• Reported net loss of $(422.2) million decreased from income of $156.9 million for Legacy-Coty in the prior year while adjusted net income of $408.5 million decreased from $485.2 million • Reported earnings per diluted share of $(0.66) decreased from $0.44 for Legacy-Coty in the prior year, while adjusted earnings per diluted share of $0.63 decreased from $1.37 for Legacy-Coty in part due to a larger tax benefit in fiscal 2016

• Net cash provided by operating activities was $757.5 million compared to $501.4 million for Legacy-Coty in the prior year reflecting improved working capital for the combined company, partially offset by an increase in cash acquisition and restructuring costs.

Commenting on Coty’s performance, Camillo Pane, CEO said: “Fiscal 2017 was a transformational year for Coty. We completed the incredibly complex acquisition of the P&G Beauty Business, fully reorganized into a product and customer focused organizational structure, successfully reached significant milestones in our integration efforts, and boosted our brand portfolio through the additions of Younique, ghd, and the agreement to acquire the Burberry Beauty license. Equally important, we believe the strategy we outlined earlier in the year which focuses on strengthening our global brands, shifting more resources to fuel the growth of the brands with higher growth potential, stabilizing the remaining brands, and continuing to expand the geographic reach of our portfolio, is beginning to bear fruit as demonstrated by the improvement in net revenue trends in the second half of the fiscal year.

Our Q4 results continued to demonstrate that our Professional and Luxury divisions are performing well. Professional Beauty's positive performance was driven by continued growth in Wella and improving trends at OPI, and the Luxury division delivered strong growth for the second quarter in a row supported by Hugo Boss, Gucci, Chloe and philosophy. On the other hand, our Consumer Beauty division remains under pressure and its recovery is a key priority for us.

Fourth quarter adjusted operating income declined year-over-year as a result of materially higher marketing spend to drive further revenue momentum in our business and to achieve flawless execution at retail for key launches. Profit was also impacted by a higher combined company fixed cost base that we are rapidly working to address as part of our synergy program and organic efficiency initiatives. Our cost base is not where it should be and we are highly focused on this issue as a key initiative for Fiscal 2018. On a separate note, our cash generation has been strong through the year, underlining its continued strength.

Regarding the P&G Beauty Business, our integration efforts are proceeding well and we remain on track with the synergy delivery. In Q4, we’ve achieved another significant milestone as Europe successfully exited its TSA on July 1, following North America’s TSA exit on May 1. ALMEA continues to progress well towards the final TSA exit expected in September.

On the M&A front, the combined impact of the acquisitions of the Hypermarcas Brands, ghd and Younique now represents a material addition to Coty's results and I am pleased with the contribution of these businesses.

In conclusion, I am proud of what we have been able to accomplish in less than a year since the transformational acquisition of the P&G Beauty Business and remain confident in our potential to establish Coty as a 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 and twelve months ended June 30, 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” 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 only 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.
Fiscal 2017 Summary Operating Review
Net revenues of $7,650.3 million increased 76% as reported compared to Legacy-Coty net revenues in the prior year and grew 1% combined company constant currency compared to the prior year. The performance reflected a strong contribution from the acquisitions of ghd, Younique, and seven months of the Hypermarcas Brands, and a 5% decline in organic combined company net revenues. The 5% organic decline was driven by flat performance in Professional Beauty, a modest decline in Luxury, and continued underlying challenges in Consumer Beauty.

Reported gross margin of 60.4% increased from 59.9% for Legacy-Coty in the prior-year, while adjusted gross margin of 62.4% increased from 60.4% for Legacy-Coty in the prior-year, reflecting the addition of the higher gross margin P&G Beauty Business and Younique.

Reported operating loss declined to $(437.8) million from income of $254.2 million for Legacy-Coty in the prior year, as the income contribution from the acquired businesses was more than offset by increased restructuring, amortization, and acquisition related costs. As a percentage of net revenues, operating margin declined to (5.7)% from 5.8% in the prior-year.

Adjusted operating income increased 24% to $772.8 million from $622.9 million for Legacy-Coty in the prior year, reflecting the profit contribution from P&G Beauty Business and Younique. As a percentage of net revenues, the adjusted operating margin decreased 420 basis points to 10.1% from 14.3% for Legacy-Coty due to materially higher marketing spend as a percentage of net revenues and the additional fixed costs arising from the formation of the new combined company, including operating under the TSA with P&G. The reduction in the adjusted operating margin was also due to revenue declines in the combined company.

Reported effective tax rate was 39.4% compared to (29.1%) for Legacy-Coty in the prior year.

Adjusted effective tax rate was 17.3% compared to 1.9% for Legacy-Coty in the prior year, reflecting a lower tax benefit realized in fiscal 2017 of $39 million compared to the tax benefit realized in fiscal 2016 of $113 million.

Reported net income decreased to $(422.2) million from $156.9 million for Legacy-Coty in the prior year, reflecting both lower operating income and a smaller tax benefit than in the prior year.

Adjusted net income decreased to $408.5 million from $485.2 million for Legacy-Coty in the prior year, reflecting higher adjusted operating income more than offset by higher interest and tax expense. As a percentage of net revenues, adjusted net income margin decreased 590 basis points to 5.3% from 11.2% in the prior-year.
Cash flows
• Net cash provided by operating activities for fiscal 2017 was $757.5 million, compared to $501.4 million for Legacy-Coty in the prior year reflecting improved working capital for the combined company, partly offset by an increase in cash acquisition related and restructuring costs.

• Free cash flow in fiscal 2017 of $325.2 million decreased from $351.3 million in the prior year, reflecting a significant increase in capital expenditures associated with the P&G Beauty Business integration.

• On June 13, 2017, the Company paid a quarterly dividend of $0.125 per share for a total of $93.4 million.

• Cash and cash equivalents of $535.4 million increased by $163.0 million, total debt of $7,215.6 million increased by $3,045.5 million, with net debt of $6,680.2 million up $2,882.5 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.
Fiscal 2017 Business Review by Segment
Fiscal 2017 Business Review by Segment
Luxury
• Luxury net revenues of $2,566.6 million increased 40% as reported compared to Legacy-Coty net revenues in the prior-year reflecting the contribution from the acquired P&G Beauty Business. Luxury net revenues decreased 1% for the combined company at constant currency compared to the prior year, reflecting declines in Calvin Klein and Marc Jacobs partly offset by growth in Hugo Boss, philosophy and Chloe.

• Adjusted operating income of $283.0 million increased 1% from $279.4 million in the prior-year, resulting in a 11.0% adjusted operating income margin, a decrease of 420 basis points versus Legacy-Coty in the prior-year.
Consumer Beauty
• Consumer Beauty net revenues of $3,688.2 million increased 63% as reported compared to Legacy-Coty net revenues in the prior year reflecting the contribution from the acquired P&G Beauty Business, Younique and Hypermarcas Brands. Consumer Beauty net revenues decreased 2% for the combined company at constant currency compared to the prior year, reflecting a 10% organic decline largely offset by positive contributions from both Younique and seven months of the Hypermarcas Brands. The organic decline reflected weakness in several of the acquired P&G Beauty Business brands COVERGIRL, Clairol and Wella Retail, as well as continued weakness in the U.S. nail category which pressured the Sally Hansen brand.

• Adjusted operating income of $355.7 million increased 33% from $267.0 million in the prior-year, resulting in a 9.6% adjusted operating income margin, a decrease of 220 basis points versus Legacy-Coty in the prior year.
Professional Beauty
• Professional Beauty net revenues of $1,395.5 million increased from $250.0 million for Legacy-Coty net revenues in the prior year reflecting the contribution from the P&G Beauty Business and ghd acquisitions. Professional Beauty net revenues increased 10% for the combined company at constant currency compared to the prior year, reflecting flat organic net revenues and a positive contribution from ghd. Strong momentum in Wella and System Professional salon hair care was offset by declines in OPI, though these declines moderated in Q4 compared to prior quarters.

• Adjusted operating income of $134.1 million increased 75% from $76.5 million in the prior-year, resulting in a 9.6% adjusted operating income margin, a decrease from 30.6% for Legacy-Coty in the prior year.
Fiscal 2017 Business Review by Geographic Region
Fiscal 2017 Business Review by Geographic Region
North America
• Reported net revenues increased 77% compared to Legacy-Coty in the prior year and declined 2% for the combined company at constant currency compared to the prior year, driven by declines in the U.S., primarily in the Consumer Beauty division.
Europe
• Reported net revenues increased 73% compared to Legacy-Coty in the prior year and was flat for the combined company at constant currency compared to the prior year.
ALMEA
• Reported net revenues increased 80% compared to Legacy-Coty in the prior year and grew 6% for the combined company at constant currency compared to the prior year, driven by positive organic growth in Brazil, the Middle East and Australia, as well as the contribution from seven months of Hypermarcas Brands.
Fourth Quarter Fiscal 2017 Summary Operating Review
• For the three months ended June 30, 2017, the Company reported net revenues of $2,241.3 million, up from $1,075.6 million for Legacy-Coty in the prior-year period, an increase of 5% for the combined company at constant currency in the prior-year period. The 5% combined company constant currency net revenue growth reflected a positive contribution from the acquisitions of ghd and Younique, and a 3% organic decline which included a 1% net benefit from pre-shipments to customers in advance of the Europe TSA exit.

• Luxury net revenues grew 61% as reported and 5% organically, supported by strong performance at Hugo Boss, Gucci, Chloe and philosophy brands. Consumer Beauty increased 85% as reported and declined 10% organically, reflecting continued pressure on COVERGIRL, Clairol, and Sally Hansen. Professional Beauty net revenues of $467.3 million increased from $63.6 million in the prior year and increased 3% organically, driven by growth in Wella and System Professional and moderating declines in OPI.

• Reported operating loss of $(279.0) million declined from $(2.9) million in the prior-year period, driven primarily by a net increase of $190.2 million in restructuring and acquisition related costs and a $35.6 million net increase in amortization expense.

• Adjusted operating income declined 4% to $90.1 million, primarily driven by a higher level of marketing investment to support the momentum in the business as well as a higher fixed cost base. Adjusted operating margin as a percentage of adjusted net revenues decreased to 4.0% compared to 8.8% in the prior-year period.

• Reported net loss attributable to Coty Inc. declined to $(304.8) million from a net loss of $(31.0) million, primarily driven by lower reported operating income.

• Adjusted net income attributable to Coty Inc. declined to $(3.4) million from $45.7 million in the prior-year period, primarily driven by lower adjusted operating income and higher interest expense. Reported earnings per diluted share declined to $(0.41) from $(0.09) in the prior-year period. Adjusted net earnings per diluted share of $0.00 decreased from $0.13 in the prior-year period.

• Net cash provided by operating activities was $50.8 million compared to $56.1 million in the prior-year period.
Noteworthy Company Developments
Other noteworthy company developments include:

• On May 1, 2017 and July 1, 2017, the Company exited from the Transition Services Agreements in North America and Europe, respectively. As a result, Coty is now in full control of processes, systems and data for all aspects of the Company's expanded businesses in these regions and impacted export countries.

• On August 22, 2017 Coty announced a dividend of $0.125, payable on September 14, 2017 to stockholders of record at the close of business on September 1, 2017.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, August 22, 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: 62175874). 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: 62175874).
About Coty Inc.
Forward Looking Statements
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Non-GAAP Financial Measures
Additional Tables
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