A Stronger Coty Emerging in Q1

Improved Operational Results Driven by Better Sales Trends Across All Coty Core Regions in both its Prestige and Mass Businesses
 

Wella Divestiture Expected to Close as Planned by End of CY20, Which Will Result in Significant Net Debt Reduction

Highlights

• Improving sales trends across all core regions and channels, driven by innovation product launches and e-commerce momentum
• 1Q21 Continuing Operations net revenues, which exclude Wella, declined 20% as reported and 19% LFL, with further sales trend improvement in October
• Continuing Operations reported operating loss of $66.0 million
• Strong growth in 1Q21 Continuing Operations adjusted operating income of $81.1 million, up 24%
• Good progress with approximately $80 million fixed cost reductions and very focused marketing investments; on-track to deliver over $200 million of cost savings in FY21
• 1Q21 free cash outflow of $28.3 million was ahead of internal expectations, despite the impact of delayed payments from 4Q20, fueled by profit growth and strong efforts on overdues collection
• Financial Net Debt stable at $7,864.5 million. Wella proceeds and residual value of Wella stake to underpin expected Economic Net Debt below $4.0 billion post closing
• Coty targets Financial Net Debt to EBITDA ~5x by end of Calendar 21 (3.5x Economic Net debt), with a medium term leverage target of < 3x Financial Net Debt to EBITDA
• Significant immediate liquidity of $1,721.7 million at end-quarter

Financial Results

Total Coty

• 1Q21 reported net revenues of $1,690.5 million decreased 13.0% year-over-year, with negligible FX impact. Like-for-like (LFL) revenue decreased 11.8%, driven by LFL decreases in the Asia Pacific segment of 36.6%, EMEA of 24.4%, and Americas of 4.5%, while Wella rose 6.5%.

• 1Q21 reported and adjusted gross margin of 61.8% decreased from 62.0% in the prior-year period, primarily due to the decline in sales volume as well as mix impact, including a higher proportion of sales coming from mass brands and the Brazil market which was impacted by FX depreciation, partially offset by a higher gross margin at Wella.

• 1Q21 reported operating income of $79.4 million declined from $126.0 million due to lower sales, reduced gross profit, as well as acquisition and divestiture related expenses of $46.3 million, and restructuring and other business realignment costs of $35.4 million. This was partially offset by lower media investments and fixed cost expenses, as well as strong operating income growth at Wella due to its increase in sales and gross margin, as well as no depreciation and amortization costs recorded for Wella as a 'held for sale' asset.
• 1Q21 adjusted operating income of $226.5 million increased 46% from $154.7 million in the prior year. The increase was driven by strong fixed cost reductions across both people and non-people costs, combined with active management of marketing investments, and the aforementioned operating income growth at Wella. For 1Q21, the adjusted operating margin increased to 13.4% from 8.0% in the prior year.

• 1Q21 reported net income of $200.6 million improved from a reported net income of $52.3 million in the prior year, aided by reported tax benefits associated with Coty's relocation of its tax principal.
• The 1Q21 adjusted net income totaled $83.6 million versus adjusted net income of $50.5 million in the prior year.

• 1Q21 reported income per share of $0.26 improved from $0.07 in the prior year.
• 1Q21 adjusted EPS of $0.11 increased from $0.07 in the prior year.

• 1Q21 cash from operations totaled $42.6 million compared to $39.9 million in the prior-year period, reflecting an increase in net income on a cash basis.
• 1Q21 free cash outflow of $28.3 million declined from a free cash outflow of $46.5 million in the prior year driven by the operating cash flow increase coupled with a $15.5 million reduction in capex.

• Financial Net Debt of $7,864.5 million on September 30, 2020 was largely flat with the balance of $7,848.0 million on June 30, 2020.

• Coty ended the year with $535.7 million in cash and cash equivalents, and immediate liquidity of $1,721.7 million.

Continuing Operations

• 1Q21 reported net revenues of $1,124.1 million decreased 20.3% year-over-year, with negligible FX impact. LFL revenue decreased 18.9%, driven by LFL decreases in the Asia Pacific segment of 36.6%, EMEA of 24.4%, and Americas of 4.5%. By channel, the mass business decline moderated to 10.1% from a 48% decline in the prior quarter, and the prestige business declined 25.0%, significantly improving from -73% in the prior quarter, as stores re-opened and the industry saw better alignment between sell-in and sell-out.

• 1Q21 reported and adjusted gross margin of 58.6% decreased from 60.2% in the prior-year period, primarily due to the decline in sales volume as well as mix impact, including a higher proportion of sales coming from mass brands and the Brazil market which was impacted by FX depreciation.

• 1Q21 reported operating loss from Continuing Operations of $66.0 million declined from reported operating income of $64.0 million due to lower sales, reduced gross profit, as well as acquisition and divestiture related expenses of $46.3 million, and restructuring and other business realignment costs of $35.4 million, partially offset by lower media investments and fixed cost expenses.
• 1Q21 adjusted operating income for Continuing Operations of $81.1 million increased 24% from $65.4 million in the prior year. The increase was driven by strong fixed cost reductions across both people and non-people costs, combined with active management of marketing investments. For 1Q21, the adjusted operating margin for Continuing Operations increased 260 bps to 7.2%, despite the overhang from stranded costs.
• Including the expected income under the Wella TSA, the 1Q21 adjusted operating income for Ongoing Coty of $93 million increased from $77 million in the prior year period.

• 1Q21 reported net income of $116.7 million improved from $12.8 million in the prior year, aided by reported tax benefits associated with Coty's relocation of its tax principal.
• The 1Q21 adjusted net loss of $15.9 million compared to adjusted net loss of $7.5 million in the prior year period.

• 1Q21 reported income per share of $0.13 improved from a reported income per share of $0.02 in the prior year.
• 1Q21 adjusted EPS of $(0.02) versus $(0.01) in the prior year.

First Quarter Business Review by Segment (Continuing Operations)

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

• 1Q21 Prestige net revenues of $644.1 million, or 57.3% of Coty continuing operations, decreased 20.2% as reported and decreased 25.0% LFL, with the reported sales aided by the inclusion of Kylie Beauty sales in the current quarter. Prestige sales improved sequentially across all regions, but continued to decline as consumer traffic in stores has not returned to pre-COVID levels and the core travel retail channel remains heavily depressed, accounting for close to half of the decline in our Prestige business. Encouragingly, Prestige e-commerce sales continued to grow double digits in the quarter, and represented a high teens percentage of Prestige sales in 1Q21, double the prior year. Kylie Cosmetics sales in the quarter were pressured by reduced supply related to its cosmetics third party manufacturer, while Kylie Skincare continued to deliver strong growth, supported by the launch of the brand in Nordstrom in the U.S., Douglas across Europe, as well as by several new launches.

• 1Q21 Mass net revenues of 479.8 million, or 43% of Coty continuing operations, decreased 20.6% as reported and decreased 10.1% LFL, with the reported sales decline pressured by the inclusion of Younique revenues in the prior year period. Although sales in this channel showed sequential improvement from 4Q20, sales trends remain under pressure as mask wearing and social distancing continues to weigh on demand for color cosmetics. Encouragingly, Mass e-commerce sales continued to grow double digits in the quarter, and represented a high single digit percentage of our Mass business sales in 1Q21, double the prior year. Coty brands continued to see excellent performance on Amazon, growing market share with the e-retailer in the U.S., U.K., and Germany.

Discontinued Operations

• 1Q21 Wella net revenues of $566.4 million increased 6.5% as reported and increased 6.5% LFL, driven by pent up consumer demand for services following the global salon closures in 4Q20 and associated inventory replenishment for both retail and professional hair products, continued strength within retail hair, and solid e-commerce growth.

Noteworthy Company Developments

• On September 1, 2020, Sue Y. Nabi, the highly experienced business leader and beauty entrepreneur, officially began her appointment as Chief Executive Officer of Coty.
• On October 7, 2020, Coty announced the launch of direct-to-consumer flagship websites for Kylie Skin in the United Kingdom, France, Germany, and Australia.
• On October 21, 2020, Coty announced two additions to its leadership team with the appointments of Isabelle Bonfanti as Chief Commercial Officer, Luxury, and Jean-Denis Mariani in the newly created role of Chief Digital Officer.

Conference Call

For more information:

About Coty Inc.

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, 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 timing, costs and impacts of the Wella Transaction or other divestitures, and the amount and use of proceeds from any such transactions;
• the Company's ability to successfully implement the separation of the Wella Business;
• 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 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, 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 Transaction and related transition services, the integration of the King Kylie 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;
• future divestitures and the impact thereof on, and future acquisitions (including the pending transaction with Kim Kardashian West), 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;
• 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 and marketing efforts;
• 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 business or market disruption arising from a "hard Brexit"), the current U.S. administration and upcoming 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);
• 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.

Non-GAAP Financial Measures

• Costs related to acquisition and divestiture activities: The Company excludes acquisition- and divestiture-related costs and the accounting impacts such as those related to transaction costs and costs associated with the revaluation of acquired inventory in connection with business combinations because these costs are unique to each transaction. Additionally, for divestitures, the Company excludes write-offs of assets that are no longer recoverable and contract related costs due to the divestiture. The nature and amount of such costs vary significantly based on the size and timing of the acquisitions and divestitures, and the maturities of the businesses being acquired or divested. Also, the size, complexity and/or volume of past transactions, which often drives the magnitude of such expenses, may not be indicative of the size, complexity and/or volume of any future acquisitions or divestitures.
• Restructuring and other business realignment costs: The Company excludes costs associated with restructuring and business structure realignment programs to allow for comparable financial results to historical operations and forward-looking guidance. In addition, the nature and amount of such charges vary significantly based on the size and timing of the programs. By excluding the referenced expenses from the non-GAAP financial measures, management is able to further evaluate the Company’s ability to utilize existing assets and estimate their long-term value. Furthermore, management believes that the adjustment of these items supplement the GAAP information with a measure that can be used to assess the sustainability of the Company’s operating performance.
• Asset impairment charges: The Company excludes the impact of asset impairments as such non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Our management believes that the adjustment of these items supplement the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
• Amortization expense: The Company excludes the impact of amortization of finite-lived intangible assets, as such non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Management believes that the adjustment of these items supplement the GAAP information with a measure that can be used to assess the sustainability of the Company’s operating performance. Although the Company excludes amortization of intangible assets from the non-GAAP expenses, management believes that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets.
• Loss/(Gain) on divestitures and sale of brand assets: The Company excludes the impact of Loss/(gain) on divestitures and sale of brand assets as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of divestitures. Our management believes that the adjustment of these items supplement the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
• Interest (income) expense: The Company excludes foreign currency impacts associated with acquisition-related and debt financing-related forward contracts, as well as debt financing transaction costs as the nature and amount of such charges are not consistent and are significantly impacted by the timing and size of such transactions.
• Other expense: The Company excludes the impact of costs incurred for legal and advisory services rendered in connection with the tender offer that was in fiscal 2019 initiated by certain of our shareholders. Our management believes these costs do not reflect our underlying ongoing business, and the adjustment of such costs helps investors and others compare and analyze performance from period to period. We have also excluded the impact of pension curtailment (gains) and losses and pension settlements as such events are triggered by our restructuring and other business realignment activities and the amount of such charges vary significantly based on the size and timing of the programs.
• Loss on early extinguishment of debt: We have excluded loss on extinguishment of debt as this represents a non-cash charge, and the amount and frequency of such charges is not consistent and is significantly impacted by the timing and size of debt financing transactions.
• Noncontrolling interest: This adjustment represents the after-tax impact of the non-GAAP adjustments included in Net income attributable to noncontrolling interests based on the relevant non-controlling interest percentage.
• Tax: This adjustment represents the impact of the tax effect of the pretax items excluded from Adjusted net income. The tax impact of the non-GAAP adjustments is based on the tax rates related to the jurisdiction in which the adjusted items are received or incurred. Additionally, adjustments are made for the tax impact of any intra-entity transfer of assets and liabilities.

FIRST QUARTER BY SEGMENT (CONTINUING OPERATIONS)
 

FIRST QUARTER FISCAL 2021 BY CHANNEL
 

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

RECONCILIATION OF REPORTED OPERATING INCOME TO ADJUSTED OPERATING INCOME
 

RECONCILIATION OF REPORTED INCOME BEFORE INCOME TAXES AND EFFECTIVE TAX RATES TO ADJUSTED INCOME BEFORE INCOME TAXES AND ADJUSTED EFFECTIVE TAX RATES FOR COTY INC.
 

RECONCILIATION OF REPORTED NET INCOME TO ADJUSTED NET INCOME FOR COTY INC.
 

FINANCIAL NET DEBT/ADJUSTED EBITDA
 

NET REVENUES AND ADJUSTED OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS BY SEGMENT
 

RECONCILIATION OF REPORTED OPERATING (LOSS) INCOME TO ADJUSTED OPERATING INCOME (LOSS) BY SEGMENT - CONTINUING OPERATIONS

COTY INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
 

COTY INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 

COTY INC. & SUBSIDIARIES

DISCONTINUED OPERATIONS