NEW YORK - August 16, 2016-- Coty Inc. (NYSE: COTY) today announced financial results for the fourth quarter and fiscal year ended June 30, 2016.
* These measures, as well as “free cash flow,” are Non-GAAP Financial Measures. Refer to “Basis of Presentation” and “Non-GAAP Financial Measures” for discussion of these measures. The adjusted performance measures have changed since Coty’s 3Q fiscal 2016 earnings release issued on May 3, 2016, to incorporate the exclusion of expense and tax effects associated with the amortization of acquisition-related intangible assets. 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 2016 Summary
Fourth Quarter Fiscal 2016 Summary
Commenting on Coty’s performance, Bart Becht, Chairman and Interim CEO said: “Fiscal 2016 showed our continued progress in our strategy of building a healthier and better business. In support of this strategy, we are actively preparing for the transformational merger with the P&G Beauty Brands business. During the year, reported revenues were positively impacted by our completed acquisitions, in line with our strategy, but negatively impacted by foreign currency. On a like-for-like basis, we drove net revenue growth in our Power Brands, on which we put disproportionate focus, outperforming the overall business. Reported operating and net income were lowered by acquisition related costs. On an adjusted basis, we generated solid growth in profitability and margins, with strong growth in the full year EPS.
We also made substantial progress on successfully integrating our recent acquisitions. The Bourjois acquisition, which closed in April 2015, has now reached profitability levels exiting the fiscal year consistent with the rest of our Color Cosmetics segment, while net revenues showed strong growth in the most recent quarter. Our acquisition of the digital marketing platform, Beamly, is contributing to a step change in our capabilities to digitally engage with our consumers. The Brazil Acquisition, which closed in February 2016, is also showing strong revenue and profit momentum in its first full quarter results, with the integration with Coty's Brazil business expected to be completed by September 2016.
Our preparation for the P&G Beauty Brands transaction is well advanced. The future organization is now finalized, including office locations, structure and staffing of key positions. As part of this, we are excited about the announcement of Camillo Pane as Chief Executive Officer and member of the Coty Board, effective the day after the closing of the transaction. Camillo has an excellent track record of accelerating growth, improving business performance, and strengthening capabilities to create a best-in-class organization. We have completed the cost and cash synergy analysis for the merger, confirming earlier announced targets of total potential cost savings of $780 million over four years post transaction close. We also continue to evaluate the impact of the intended portfolio and wholesale business rationalization. Finally, extensive work has been done on business, process and systems integration to prepare for the transition following the expected close of the transaction in October 2016.
Looking to fiscal 2017, while it is premature to comment on the outlook for the combined business as the transaction has not yet closed, we continue our work on building a healthier and better Coty stand-alone business. We are targeting for the Coty stand-alone business net revenue momentum to improve and return to growth in the second half of the fiscal year excluding foreign currency, with solid improvement in the adjusted operating margin and strong operating cash flow conversion.”
Basis of Presentation
To supplement financial results presented in accordance with GAAP, certain financial information is presented herein using the non-GAAP financial measures described in this section. The term “like-for-like” describes the Company's core operating performance, 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” 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” for additional disussion of these measures as well as the definition of free cash flow.
Net revenues are reported by segment and geographic region and are discussed below on a reported (GAAP) basis and 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.
Reported net revenues and adjusted operating income are presented on an actual and a constant currency basis. Reported net revenues are also presented on an adjusted and like-for-like basis. Operating income, net income 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. You are cautioned not to consider adjusted EPS (diluted) as a measure of liquidity. Gross margin, net revenues and operating income margin are presented on a reported (GAAP) and 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 operating margin on a constant currency basis, 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. Refer to "Non-GAAP Financial Measures" 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.
Fiscal 2016 Summary Operating Review
Net revenues of $4,349.1 million declined 1% as reported and like-for-like from the prior-year. The moderate reported revenue decline reflects the negative foreign exchange impact and a modest decline in the underlying business, partially offset by the positive contributions from the Brazil Acquisition and Bourjois. On a like-for-like basis, the 1% decline in the underlying business was driven by 3% like-for-like declines in both Fragrances and Skin & Body Care partly offset by 2% like-for-like growth in Color Cosmetics. The like-for-like net revenue decline also reflected moderate growth in the power brands, offset by declines in the remaining portfolio.
Gross margin of 59.9% was relatively consistent with 60.0% in the prior-year, as the underlying improvement in the gross margin driven by lower levels of discounting activity and continuous efforts in driving supply chain efficiencies was offset by acquisition-related inventory revaluation costs.
Adjusted gross margin of 60.4% increased from 60.1% in the prior-year, driven by lower levels of discounting activity and continuous efforts in driving supply chain efficiencies, partially offset by the addition of the lower gross margin Brazil Acquisition.
Operating income declined 36% to $254.2 million from $395.1 million in the prior-year. The reported operating income decrease primarily reflected a $139.9 million increase in acquisition-related costs. As a percentage of net revenues, operating margin decreased 320 basis points to 5.8% from 9.0% in the prior-year.
Adjusted operating income increased 3% to $622.9 million from $603.6 million in the prior-year, as a strong increase in strategic A&CP spending was more than offset by reduced non-strategic A&CP and lower fixed costs. As a percentage of adjusted net revenues, adjusted operating margin increased 60 basis points to 14.3% from 13.7%.
Net income decreased 33% to $156.9 million from $232.5 million in the prior-year, reflecting lower operating income partially offset by a higher tax benefit and the negative impact in the prior-year of $88.8 million from early extinguishment of debt. As a percentage of net revenues, net income margin decreased 170 basis points to 3.6% from 5.3% in the prior-year.
Adjusted net income increased 19% to $485.2 million from $408.5 million in the prior-year, reflecting higher adjusted operating income and a higher tax benefit in the current year. As a percentage of net revenues, adjusted net income margin increased 190 basis points to 11.2% from 9.3% in the prior-year.
Fiscal 2016 Business Review by Segment
Skin & Body Care
Fiscal 2016 Business Review by Geographic Region
Europe, the Middle East & Africa
Fourth Quarter Fiscal 2016 Summary Operating Review
Outlook for Fiscal 2017 Full Year
Coty only provides guidance 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.
Coty remains focused on growing its power brands through innovation, strong support levels, digital engagement with consumers, and improved "in-market" execution. For the Coty stand-alone business, the Company is targeting net revenue momentum to improve and return to growth in the second half of fiscal 2017, excluding foreign currency. With a focus on continuing to build a better business, the Company is targeting Coty stand-alone fiscal 2017 adjusted operating margin improvement on a constant currency basis, coupled with strong operating cash flow conversion.
Other noteworthy company developments:
Coty Inc. will host a conference call at 8:30 a.m. (ET) today, August 16, 2016 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: 63960619). 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: 63960619).
About Coty Inc.
Coty is a leading global beauty company with net revenues of $4.3 billion for the fiscal year ended June 30, 2016. 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 Coty Inc.’s (the “Company”) 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 year fiscal 2016. 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”, "committed," “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, 2016, and under “Cautionary Statement on Forward-Looking Statements”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of P&G Beauty Brands” in the Company’s Registration Statement on Form S-4 filed on April 22, 2016, including any amendments thereto, 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, except as required by law.
For more information:
Kevin Monaco, +1 212 389-6815
Jennifer Friedman, +1 212 389-7175
Non-GAAP Financial Measures
The Company operates on a global basis, with the majority of net revenues generated outside of the United States.
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 net revenue growth on a like-for-like basis. The Company believes that like-for-like net revenue growth allows 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 discontinuation of the TJoy brand, the Bourjois acquisition, the Brazil Acquisition, and does not exclude revenues from the acquisition or conversion of third-party distributors. For reconciliation of the Company's net revenues like-for-like net revenue growth, see the table entitled “Reconciliation of Reported Net Revenues to Like-For-Like Net Revenues.” For a reconciliation of the Company's like-for-like net revenue 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, net revenues 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 provide supplemental financial information that allows management and investors to analyze and compare the Company's operating performance from period to period. These non-GAAP financial measures are used as key metrics in the evaluation of the Company’s performance and annual budgets and to benchmark performance of its business against its competitors. The following are examples of how these non-GAAP financial measures are utilized by the Company’s management: (i) strategic plans and annual budgets are prepared using these non-GAAP financial measures, (ii) senior management receives a monthly analysis comparing budget to actual operating results that is prepared using these non-GAAP financial measures; and (iii) senior management’s annual compensation is calculated, in part, by using these non-GAAP financial measures. In addition, the Company’s financial covenant compliance calculations under its debt agreements are substantially derived from these non-GAAP financial measures. The Company's non-GAAP financial measures have changed since the Company's third quarter fiscal 2016 earnings release issued on May 3, 2016 to incorporate the exclusion of expense and tax effects associated with the amortization of acquisition-related intangible assets.
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 primarily excludes the impact of restructuring and other business realignment costs, amortization, costs related to acquisition activities, private company share-based compensation expense, and asset impairment charges. 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 reported 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 also presents free cash flow. 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 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."
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.