COTY Inc. (NYSE: COTY) today announced financial results for the fourth quarter and fiscal year ended June 30, 2014.
* 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.
Fiscal 2014 Summary
Fourth Quarter Fiscal 2014 Summary
Commenting on the Company’s performance, Michele Scannavini, CEO of COTY Inc., said,
In fiscal 2014 Coty made good progress on its strategic objectives by rapidly expanding its business in emerging markets and growing most of its power brands.
"In fiscal 2014 COTY made good progress on its strategic objectives by rapidly expanding its business in emerging markets and growing most of its power brands. As a result, the company enjoyed strong performance in EMEA and Asia Pacific, which was more than offset by revenues softness in North America, where our nail and fragrance businesses were impacted by market contraction, trade de-stocking and increased promotional and competitive pressure, mainly in the mass channel.
As we look to fiscal 2015, we are targeting to return to revenue growth, through competitive innovations, continuous expansion in the emerging markets and by improving our mass business in North America. The implementation of our global efficiency plan, which is expected to generate over $200 million in annual savings within the next three years, should further contribute to fuel our growth and expand our margins.”
Basis of Presentation and Exceptional Items
The term “like-for-like” describes the performance of the business on a comparable basis, excluding material acquisitions, all divestitures, discontinued operations and foreign currency exchange translations to the extent applicable. “Like-for-like” does not exclude net revenues from joint venture consolidations and conversion from third-party to direct distribution. The term “adjusted” excludes the impact of nonrecurring items, private company share-based compensation expense, impairment charges and restructuring costs to the extent applicable. Refer to “Non-GAAP Financial Measures” for a definition of free cash flow.
Net revenues are reported by segment and geographic region and are discussed below on a like-for-like 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 and adjusted operating income are presented on an actual and a constant currency basis. Net revenues are also reported on an adjusted basis and like-for-like. Operating income, net income and earnings per diluted share (EPS (diluted)) are presented on a reported (GAAP) basis and an adjusted (non-GAAP) basis. Selling, general and administrative expense (SG&A), effective tax rate, cash tax rate, gross margin, net income, operating income and operating income margin are presented on an adjusted (non-GAAP) basis. Net revenues on a constant currency basis and like-for-like, adjusted net revenues, adjusted operating income on a constant currency basis, adjusted operating income, adjusted operating income margin, adjusted effective tax rate, adjusted cash tax rate, adjusted net income, adjusted gross margin, adjusted EPS (diluted), adjusted SG&A and free cash flow are non-GAAP financial measures. A reconciliation between GAAP and non-GAAP results can be found in the tables and footnotes at the end of this release.
Fiscal 2014 Summary Operating Review
Net revenues of $4,551.6 million decreased 1.6% like-for-like and 2.1% as reported from the prior-year. The like-for-like decline was driven by pressure in the Color Cosmetics segment, which was heavily impacted by the sharp decline in the nail business, while the Fragrances and Skin & Body Care segments experienced modest growth. Fragrances grew 1% like-for-like, with positive performance on the Calvin Klein, Marc Jacobs, Davidoff and Chloé power brands. Skin & Body Care also increased 1% like-for-like, with growth across philosophy, adidas, and Lancaster, partially offset by the TJoy decline. The Color Cosmetics segment declined 7% like-for-like, driven by weakness in the nail category and the Sally Hansen brand, partially offset by continued growth on Rimmel. By geographic region, EMEA and Asia Pacific saw strong momentum, offset by pressure in the Americas. EMEA grew 3%, benefitting from the UK, Travel Retail, Eastern Europe, Middle East and South Africa performance, partially offset by softness in Russia, Germany and Southern Europe. Asia Pacific grew 7% like-for-like, with strong momentum in Southeast Asia and Australia. Revenues in the Americas declined 9%, with pressure in the U.S. and Canada, particularly in the Color Cosmetics segment, partially offset by growth in the Latin America and Travel Retail. In total, emerging markets grew 10% during the year, accounting for 29% of net revenues in fiscal 2014 compared to 26% in the prior year on a like-for-like basis.
Adjusted gross margin decreased to 59.6% compared to 60.0% in the prior year. Savings in cost of goods from the supply chain savings programs were more than offset by the negative impact of higher customer discounts and allowances necessary to compete in the highly promotional U.S. and European markets, particularly in the mass channel, and the negative transactional foreign currency impact.
Adjusted SG&A expense was flat at both actual rates and constant currency, though increased as a percentage of net revenues to 46.7% from 45.7% in the prior-year. The percentage increase was related to higher investment into emerging markets, higher advertising and consumer promotion spending as a percentage of net revenues, and the negative impact from foreign currency exchange translations, partially offset by cost containment programs in developed markets.
Operating income decreased to $25.7 million from $394.4 million. The reported operating income decline primarily reflected a $316.9 million non-cash asset impairment charge in the Skin & Body Care segment.
Adjusted operating income decreased 13% to $500.6 million from $572.8 million in the prior-year. As a percentage of adjusted net revenues, adjusted operating margin declined 130 basis points to 11.0% from 12.3%, primarily driven by lower gross margin and higher SG&A expense.
Adjusted effective tax rate was 18.9% in fiscal 2014 compared to 28.2% in the prior year. The decline was largely driven by the recognition of a tax benefit of $38.1 million during the third quarter. The adjusted cash tax rate for the year was 19.5%.
Net income decreased to $(97.4) million from $168.0 million in the prior-year, driven by lower operating income primarily as a result of the asset impairment charge, partially offset by lower interest expense and lower tax expense.
Adjusted net income decreased modestly to $316.2 million from $323.2 million in the prior-year, primarily reflecting lower adjusted operating income, partially offset by lower interest expense and lower tax expense. As a percentage of adjusted net revenues, adjusted net income margin decreased 10 basis points to 6.9% from 7.0%.
Fiscal 2014 Business Review by Segment
Skin & Body Care
Fiscal 2014 Business Review by Geographic Region
Europe, the Middle East & Africa
Fourth Quarter Fiscal 2014 Summary Operating Review
Outlook for Fiscal 2015
COTY is targeting to return to revenue growth in fiscal 2015 through a competitive innovation program, continuous expansion of the emerging market business, and the progressive recovery in the nail business in North America. The Company is targeting modest growth in the first half in light of the challenging market conditions. COTY will also continue executing its share repurchase program, with $300 million remaining under the current authorization.
Other noteworthy Company developments:
COTY is strengthening its focus on eliminating non-value added costs and optimizing purchase terms with a global efficiency program whose main pillars are:
The global efficiency program is expected to deliver annual savings of over $200 million within the next three years, with pre-tax charges of $250 to $300 million. The anticipated savings and costs associated with the global efficiency program include the previously announced Productivity Program and the China mass channel business reorganization.
In an effort to increase flexibility in COTY's capital structure to support its growth plans, COTY intends to prepay its 2010 Private Placement Notes. The Company intends to borrow a new term loan to prepay the notes, with the intent to refinance the new term loan and other existing bank debt with longer term debt instruments later this fiscal year.
About COTY Inc.
COTY is a leading global beauty company with net revenues of $4.6 billion for the fiscal year ended June 30, 2014. Founded in Paris in 1904, COTY is a pure play beauty company with a portfolio of well-known fragrances, color cosmetics and skin & body care products sold in over 130 countries and territories. COTY's product offerings include such power brands as adidas, Calvin Klein, Chloé, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen.
For additional information about COTY Inc., please visit www.coty.com.
Forward Looking Statements
Certain statements in this release are forward-looking statements. These forward-looking statements reflect the our current views with respect to, among other things, its future operations and financial performance; new brand and business partnerships; expected growth; its ability to support its planned business operation on a near- and long-term basis and its outlook for the full and first half of fiscal 2015. These forward-looking statements are generally identified by words or phrases, such as “anticipate”, “estimate”, “plan”, “project”, “expect”, “believe”, “intend”, “foresee”, “forecast”, “will”, “may”, “should,” “outlook,” “continue,” “target,” “aim” and similar words or phrases. Reported results should not be considered an indication of future performance, and actual results may differ materially from the results predicted due to risks and uncertainties including:
More information about potential risks and uncertainties that could affect the Company’s business and financial results is included under “Risk Factors” and “Management Discussion and Analysis of Financial
Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 and other periodic reports the Company may file with the Securities and Exchange Commission from time to time.
The Company assumes no responsibility to update forward-looking statements made herein or otherwise.
For more information:
Kevin Monaco, 212-389-6815, Senior Vice President, Treasurer and Investor Relations
Catherine Walsh, 212-389-7346, Corporate Communications Officer
Non-GAAP Financial Measures
The company operates on a global basis, with the majority of net revenues generated outside of the U.S.
Accordingly, fluctuations in foreign currency exchange rates can affect results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented excluding the impact of foreign currency exchange translations to provide a framework for assessing how the underlying businesses performed excluding the impact of foreign currency exchange translations (“constant currency”). Constant currency information compares results between periods as if exchange rates had remained constant period-over-period, with the current period’s results calculated at the prior-year period’s rates. The Company calculates constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using constant foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies. The Company discloses the following constant currency financial measures: net revenues and adjusted operating income.
The Company presents growth on a like-for-like basis. The Company believes that like-for-like growth better enables management and investors to analyze and compare our organic growth from period to period. In the periods described in this release, like-for-like growth excludes the impact of foreign currency exchange translations, the divestiture of one of our licenses, the expiration of a certain North American service agreement that was not renewed and product returns associated with the reorganization of our mass business in China and does not exclude revenues from the acquisition or conversion of third-party distributors. For reconciliation of our net revenues like-for-like growth, see the table entitled
“Reconciliation of Reported Net revenues to Like-For-Like Net Revenues.” For a reconciliation of our like-for- like growth by segment and geographic region, see the tables entitled “Net Revenues and Adjusted Operating Income by Segment” and “Net Revenues by Geographic Regions.”
The Company presents SG&A, operating income, operating income margin, gross margin, effective tax rate, cash tax rate, net income, net income margin and EPS (diluted) on a non-GAAP basis and specifies that these measures are non-GAAP by using the term “adjusted”. The Company believes these non-GAAP financial measures better enable management and investors to analyze and compare the underlying business results from period to period. In calculating adjusted SG&A expense, operating income, operating income margin, gross margin, effective tax rate, cash tax rate, net income, net income margin and EPS (diluted), the Company excludes the impact of nonrecurring items, private company share-based compensation expense, impairment charges and restructuring costs, to the extent applicable. The Company has provided a quantitative reconciliation of the difference between the non-GAAP financial measures and the financial measures calculated and reported in accordance with GAAP. For a reconciliation of adjusted SG&A expense to SG&A expense, adjusted gross margin to gross margin, adjusted EPS (diluted) to EPS (diluted), and adjusted net revenues to net revenues, see the table entitled “Reconciliation of Reported to Adjusted Results for the Consolidated Statements of Operations.” For a reconciliation of adjusted operating income to operating income and adjusted operating income margin to operating income margin, see the table entitled “Reconciliation of Reported Operating Income to Adjusted Operating Income.” For a reconciliation of adjusted effective tax rate and adjusted cash tax rate to effective tax rate, see the table entitled “Reconciliation of Reported Income Before Income Taxes and Effective Tax Rates to Adjusted Income Before Income Taxes, Effective Taxes and Cash Tax Rate.” For a reconciliation of adjusted net income and adjusted net income margin to net income, see the table entitled “Reconciliation of Reported Net Income to Adjusted Net Income.”
The Company presents net working capital, which is defined as Accounts Receivable plus Inventory minus Accounts Payable, which can be found in the “Consolidated Statements Balance Sheet.”
The Company also presents free cash flow and the cash conversion ratio. Free cash flow is defined as net cash provided by operating activities, less capital expenditures and the contingent purchase price consideration payments of up to $30.0 per year related to the Unilever Cosmetics International acquisition. Free cash flow excludes cash used for private company stock option exercises and cash used for acquisitions. Management believes that free cash flow is useful for investors because it provides them with an important perspective on the cash available for debt repayment and other strategic measures, after making necessary capital investments in property and equipment to support the Company's ongoing business operations, and provides them with the same measures that management uses as the basis for making resource allocation decisions. For a reconciliation of Free Cash Flow, see the table entitled “Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow.” The cash conversion ratio is defined as net cash provided by operating activities divided by the adjusted operating income.
These non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP.