Coty Maintains Momentum in Q2

Continued Improvement In Profit and Net Debt Reduction, with Revenues In Line
 

FY21 Fixed Cost Savings Target Increased to ~$300M
 

Strong Strategic Progress in Prestige Business Especially in U.S. and China, and E-Commerce
 

Highlights

• 2Q21 net revenue trends show moderate sequential improvement, despite resurgence of COVID and related lockdowns, with Continuing Operations net revenues declining 16% as reported and 18% LFL
• Continuing Operations reported operating income of $17.0 million
• Solid growth in 2Q21 Continuing Operations adjusted operating income of $188.4 million, up 7% YoY, with 280 bps of margin expansion to 13.3%
• 2Q21 adjusted EBITDA of $284.1 million brings the 1H21 adjusted EBITDA to $449.9 million, with an adjusted EBITDA margin of 17.7%
• 2Q21 cost reductions remained strong with an additional approximately $80 million of savings, bringing the year-to-date total to over $160 million; Coty raises FY21 cost reduction target to approximately $300 million from previous expectations of over $200 million, which will protect profitability in 2H21 and support increased reinvestment behind upcoming FY22 initiatives
• Strong 2Q21 free cash flow of $389.4 million was ahead of internal expectations, driven primarily by solid profit growth
• Financial Net Debt better than expected at $4,842.6 million, supported by the proceeds from the Wella transaction and strong free cash flow, partially offset by negative FX impact. Economic Net Debt now $3,656.1 at quarter end.
• Significant immediate liquidity of $2,832.1 million at end-quarter, with comfortable headroom under Coty's financial debt covenants. Given Coty's financial position and free cash flow characteristics, Coty expects to be in full compliance of covenant requirements going forward.

Financial Results

Total Coty

• 2Q21 reported net loss for Total Coty, which includes two months of contribution from Wella, of $275.4 million declined from a net loss of $21.1 million in the prior year, due to the impact of the Wella transaction costs as well as additional restructuring accruals under the fixed cost savings plan.
• The 2Q21 adjusted net income for Total Coty of $133.8 million compared to $205.2 million in the prior year period, reflecting in part only 2 months of contribution from Wella in the current period.
• Year-to-date reported net loss for Total Coty of $74.8 million compared to net income of $31.2 million in the prior year. Year-to-date adjusted net income of $217.4 million declined from $255.7 million in the prior year.

• 2Q21 reported loss per share for Total Coty of $(0.36) compared to a reported loss per share of $(0.03) in the prior year.
• 2Q21 adjusted EPS for Total Coty of $0.17 versus $0.27 in the prior year, reflecting in part only 2 months of contribution from Wella in the current period.
• Year-to-date reported loss per share for Total Coty of $(0.10) compared to reported net earnings per share of $0.04 in the prior year.
• Year-to-date adjusted EPS for Total Coty of $0.28 versus $0.34 in the prior year.

• 2Q21 cash from operations totaled $430.1 million compared to $422.1 million in the prior-year period, reflecting an increase in net income on a cash basis. First half operating cash flow totaled $472.7 million, an increase of $10.7 million from the same period of the prior year.
• 2Q21 free cash flow of $389.4 million increased from a free cash flow of $363.5 million in the prior year driven by the increase in operating cash flow of $8.0 million coupled with a $17.9 million reduction in capex. First half free cash flow of $361.1 million increased by $44.1 million from the prior year.

• Financial Net Debt of $4,842.6 million on December 31, 2020 declined from $7,864.5 million on September 30, 2020. The decline was driven by gross proceeds of $2.9 billion from the closing of the Wella transaction, including $2.5 billion of proceeds from disposition and $0.4 billion return of capital, as well strong free cash flow generation of $389.4 million, partially offset by over $300 million of negative FX impact. 

• Coty ended Q2 with $549.1 million in cash and cash equivalents, and immediate liquidity of $2,832.1 million, with comfortable headroom under its financial debt covenants.

Second Quarter Fiscal 2021 Business Review by Channel (Continuing Operations)

• 2Q21 Prestige net revenues of $903.7 million, or 63.8 % of Coty Continuing operations, decreased 11.1% as reported and decreased 15.6% LFL, reflecting significant sales trend improvement from the mid 20s decline in Q1. Continued pressure in Travel Retail accounted for half of the decline in the prestige business. Reported sales were aided by the inclusion of Kylie Beauty sales in the current quarter.
• The improvement in sales trends vs. Q2 came despite additional waves of COVID, particularly in the EMEA region, which led certain markets to close or place additional restrictions on non-essential stores. Encouragingly, Prestige e-commerce sales grew over 40% in the quarter, representing a mid 20s penetration rate of Prestige sales in 2Q21. While Kylie's cosmetics business remained pressured from broader cosmetics category weakness, we saw good momentum in the Kylie Skin DTC business as well as strong consumer engagement with the brand.

• 2Q21 Mass net revenues of $511.5 million, or 36.1 % of Coty continuing operations, decreased 23.3% as reported and decreased 21.6% LFL. Mass sales continue to be challenged, largely due to lower demand for color cosmetics stemming from fewer usage occasions and reduced in-store traffic, particularly amid additional waves of COVID. Despite this pressure, Mass e-commerce sales continued to grow at a double-digit pace in the quarter, and represented a high-single-digit percent of our Mass business in 2Q21. Encouragingly, Coty brands continued to generate very strong growth both on retailer websites and on Amazon in the U.S., U.K., and Germany, with market share on Amazon nearly doubling in the quarter.

Noteworthy Company Developments

• On November 30, 2020 Coty completed the sale of a majority stake in Wella to KKR for gross proceeds of approximately $2.9 billion and net cash proceeds of approximately $2.5 billion. Coty will retain a 40% stake in the business, which will be carried on the books as a fair market value asset.
• On December 2, 2020 Coty announced two additions to its leadership team with the appointments of Stefano Curti as Chief Brands Officer, Consumer Beauty, and Alexis Vaganay as Chief Commercial Officer, Consumer Beauty.
• On December 9, 2020, Coty announced the promotion of Laurent Mercier to Chief Financial Officer effective February 15, 2021.
• On December 21, 2020, Coty announced the appointment of two new Board Directors, Anna Adeola Makanju and Mariasun Aramburuzabala Larregui.
• On January 5, 2021, Coty announced it completed the acquisition of a 20% ownership interest in Kim Kardashian West's business for $200 million, which had previously been announced in June 2020. Together, Coty and Kim Kardashian will focus on entering new beauty categories, including development of her skincare line, as well as global expansion of existing product lines.
• On January 22, 2021, Coty announced the promotion of Stephane Delbos to Chief Procurement Officer, effective February 1, 2021.
• On January 27, 2021, Coty announced the planned closure of its manufacturing site in Cologne, Germany, which comes as Coty consolidates its global fragrance operations. The closure, which will occur in stages, is expected to be completed by Summer 2022.

For more information:

Forward Looking Statements

• the impact of COVID-19 (or future similar events), including demand for the Company’s products, illness, quarantines, government actions, facility closures, store closures or other restrictions in connection with the COVID-19 pandemic, and the extent and duration thereof, the availability and widespread distribution of a safe and effective vaccine, related impact on the Company's ability to meet customer needs and on the ability of third parties on which the Company relies, including its suppliers, customers, contract manufacturers, distributors, contractors, commercial banks and joint-venture partners, to meet their obligations to the Company, in particular collections from customers, the extent that government funding and reimbursement programs in connection with COVID-19 are available to the Company, and the ability to successfully implement measures to respond to such impacts;
• the Company’s ability to successfully implement its multi-year Transformation Plan, including its management realignment, reporting structure changes, operational and organizational changes, and the initiatives to further reduce the Company’s cost base, and to develop and achieve its global business strategies (including mix management, select price increases, more disciplined promotions, and foregoing low value sales), compete effectively in the beauty industry, achieve the benefits contemplated by its strategic initiatives (including revenue growth, cost control, gross margin growth and debt deleveraging) and successfully implement its strategic priorities (including innovation performance in prestige and mass channels, strengthening its positions in core markets, accelerating its digital and e-commerce capabilities, building on its skincare portfolio, and expanding its presence in China) in each case within the expected time frame or at all;
• the Company’s ability to anticipate, gauge and respond to market trends and consumer preferences, which may change rapidly, and the market acceptance of new products, including new products related to Kylie Jenner’s or Kim Kardashian West’s existing beauty business, any relaunched or rebranded products and the anticipated costs and discounting associated with such relaunches and rebrands, and consumer receptiveness to our current and future marketing philosophy and consumer engagement activities (including digital marketing and media);
• use of estimates and assumptions in preparing the Company’s financial statements, including with regard to revenue recognition, income taxes (including the expected timing and amount of the release of any tax valuation allowance), the assessment of goodwill, other intangible and long-lived assets for impairments, the market value of inventory, the fair value of the equity investment, and the fair value of acquired assets and liabilities associated with acquisitions;
• the impact of any future impairments;
• managerial, transformational, operational, regulatory, legal and financial risks, including diversion of management attention to and management of cash flows, expenses and costs associated with the Company's response to COVID-19, the Transformation Plan, the Wella TSA, the integration of the King Kylie transaction and the KKW transaction, and future strategic initiatives, and, in particular, the Company's ability to manage and execute many initiatives simultaneously including any resulting complexity, employee attrition or diversion of resources;
• the timing, costs and impacts of divestitures and the amount and use of proceeds from any such transactions;
• future divestitures and the impact thereof on, and future acquisitions, new licenses and joint ventures and the integration thereof with, our business, operations, systems, financial data and culture and the ability to realize synergies, avoid future supply chain and other business disruptions, reduce costs (including through the Company’s cash efficiency initiatives), avoid liabilities and realize potential efficiencies and benefits (including through our restructuring initiatives) at the levels and at the costs and within the time frames contemplated or at all;
• increased competition, consolidation among retailers, shifts in consumers’ preferred distribution and marketing channels (including to digital and prestige channels), distribution and shelf-space resets or reductions, compression of go-to-market cycles, changes in product and marketing requirements by retailers, reductions in retailer inventory levels and order lead-times or changes in purchasing patterns, impact from COVID-19 on retail revenues, and other changes in the retail, e-commerce and wholesale environment in which the Company does business and sells its products and the Company’s ability to respond to such changes (including its ability to expand its digital, direct-to-consumer and e-commerce capabilities within contemplated timeframes or at all);
• the Company and its joint ventures’, business partners’ and licensors’ abilities to obtain, maintain and protect the intellectual property used in its and their respective businesses, protect its and their respective reputations (including those of its and their executives or influencers), public goodwill, and defend claims by third parties for infringement of intellectual property rights, and specifically in connection with the strategic partnerships with Kylie Jenner and Kim Kardashian, risks related to the entry into a new distribution channel, the potential for channel conflict, risks of retaining customers and key employees, difficulties of integration (or the risks associated with limiting integration), risks related to regulation of multi-level marketing business models, ability to protect trademarks and brand names, litigation or investigations by governmental authorities, and changes in law, regulations and policies that affect KKW Holdings, LLC’s (“KKW Holdings”) business or products, including risk that direct selling laws and regulations may be modified, interpreted or enforced in a manner that results in a negative impact to KKW Holdings’ business model, revenue, sales force or business;
• any change to the Company’s capital allocation and/or cash management priorities, including any change in the Company’s dividend policy or, if the Company's Board declares dividends, the Company’s stock dividend reinvestment program;
• any unanticipated problems, liabilities or integration or other challenges associated with a past or future acquired business, joint ventures or strategic partnerships which could result in increased risk or new, unanticipated or unknown liabilities, including with respect to environmental, competition and other regulatory, compliance or legal matters;
• the Company’s international operations and joint ventures, including enforceability and effectiveness of its joint venture agreements and reputational, compliance, regulatory, economic and foreign political risks, including difficulties and costs associated with maintaining compliance with a broad variety of complex local and international regulations;
• the Company’s dependence on certain licenses (especially in the fragrance category) and the Company’s ability to renew expiring licenses on favorable terms or at all;
• the Company’s dependence on entities performing outsourced functions, including outsourcing of distribution functions, and third-party manufacturers, logistics and supply chain suppliers, and other suppliers, including third-party software providers, web-hosting and e-commerce providers;
• administrative, product development and other difficulties in meeting the expected timing of market expansions, product launches, re-launches and marketing efforts, including in connection with new products related to Kylie Jenner’s or Kim Kardashian West’s existing beauty businesses;
• global political and/or economic uncertainties, disruptions or major regulatory or policy changes, and/or the enforcement thereof that affect the Company’s business, financial performance, operations or products, including the impact of Brexit (and related business or market disruption), the current U.S. administration and recent election, changes in the U.S. tax code, and recent changes and future changes in tariffs, retaliatory or trade protection measures, trade policies and other international trade regulations in the U.S., the European Union and Asia and in other regions where the Company operates;
• currency exchange rate volatility and currency devaluation;
• the number, type, outcomes (by judgment, order or settlement) and costs of current or future legal, compliance, tax, regulatory or administrative proceedings, investigations and/or litigation, including litigation relating to the tender offer by Cottage Holdco B.V. (the “Cottage Tender Offer”) and product liability cases (including asbestos), and litigation or investigations relating to the strategic partnerships with Kylie Jenner and Kim Kardashian West;
• the Company’s ability to manage seasonal factors and other variability and to anticipate future business trends and needs;
• disruptions in operations, sales and in other areas, including due to disruptions in our supply chain, restructurings and other business alignment activities, the Wella Transaction and related carve-out and transition activities, manufacturing or information technology systems, labor disputes, extreme weather and natural disasters, impact from COVID-19 or similar global public health events, and the impact of such disruptions on the Company’s ability to generate profits, stabilize or grow revenues or cash flows, comply with its contractual obligations and accurately forecast demand and supply needs and/or future results;
• restrictions imposed on the Company through its license agreements, credit facilities and senior unsecured bonds or other material contracts, its ability to generate cash flow to repay, refinance or recapitalize debt and otherwise comply with its debt instruments, and changes in the manner in which the Company finances its debt and future capital needs;
• increasing dependency on information technology, including as a result of remote working in response to COVID-19, and the Company’s ability to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, including ransomware attacks, costs and timing of implementation and effectiveness of any upgrades or other changes to information technology systems, and the cost of compliance or the Company’s failure to comply with any privacy or data security laws (including the European Union General Data Protection Regulation, the California Consumer Privacy Act and the Brazil General Data Protection Law) or to protect against theft of customer, employee and corporate sensitive information;
• the Company's ability to attract and retain key personnel and the impact of senior management transitions and organizational structure changes;
• the distribution and sale by third parties of counterfeit and/or gray market versions of the Company’s products;
• the impact of the Transformation Plan as well as the Wella Transaction on the Company’s relationships with key customers and suppliers and certain material contracts;
• the Company’s relationship with Cottage Holdco B.V., as the Company’s majority stockholder, and its affiliates, and any related conflicts of interest or litigation;
• the Company’s relationship with KKR, whose affiliates KKR Rainbow Aggregator L.P. and KKR Bidco are respectively a significant stockholder in Coty and an investor in the Wella Business, and any related conflicts of interest or litigation;
• future sales of a significant number of shares by the Company’s majority stockholder or the perception that such sales could occur; and
• other factors described elsewhere in this document and in documents that the Company files with the SEC from time to time.

COTY INC. SUPPLEMENTAL SCHEDULES INCLUDING NON-GAAP FINANCIAL MEASURES
 

COTY INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 

RECONCILIATION OF REPORTED TO ADJUSTED RESULTS FOR THE CONSOLIDATED STATEMENTS OF OPERATIONS
 

RECONCILIATION OF REPORTED TO ADJUSTED RESULTS FOR THE CONSOLIDATED STATEMENTS OF OPERATIONS
 

RECONCILIATION OF REPORTED OPERATING (LOSS) INCOME TO ADJUSTED OPERATING INCOME