Coty Inc. reports second quarter fiscal 2018 results




Coty Inc. reports
second quarter
fiscal 2018 results




PRESS RELEASE
February 8, 2018

 
Improving Net Revenue Performance
Significant Growth in Reported and Adjusted Profit
 
Coty Inc. (NYSE: COTY) today announced financial results for the second quarter of fiscal year 2018, ended December 31, 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 “Non-GAAP Financial Measures” for a 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. 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 (the "Merger"), as if the Merger had occurred as of July 1, 2015.
Second Quarter Fiscal 2018 Summary
  • Net revenues of $2,637.6 million increased 14.8% as reported compared to the prior year and increased 10.3% at constant currency
     
  • Excluding the positive contributions from the acquisitions of Younique, Burberry and two months of ghd, organic net revenues increased 2.8% on a constant currency basis
     
  • Reported operating income of $174.4 million increased from a loss of $(12.7) million
     
  • Adjusted operating income of $347.5 million increased 12.8% from $308.0 million
     
  • Reported net income of $109.2 million increased from $46.8 million, and adjusted net income of $237.2 million increased from $223.3 million
     
  • Reported earnings per diluted share of $0.15 increased from $0.06 and adjusted earnings per diluted share of $0.32 increased from $0.30
     
  • Net cash provided by operating activities was $316.7 million compared to $678.4 million in the prior year
First Six Months Fiscal 2018 Summary
  • Net revenues of $4,875.9 million increased 44.4% as reported compared to the prior year net revenues, and increased 7.6% for the combined company at constant currency
     
  • Excluding the positive contribution from the acquisitions of Younique, Burberry and five months of ghd, organic net revenues were flat on a constant currency basis
     
  • Reported operating income of $203.1 million increased from $33.7 million
     
  • Adjusted operating income of $542.6 million increased from $474.4 million
     
  • Reported net income of $89.5 million increased from $46.8 million, and adjusted net income of $313.5 million increased from $301.6 million
     
  • Reported earnings per diluted share of $0.12 increased from $0.09, while adjusted earnings per diluted share of $0.42 declined from $0.55
     
  • Net cash provided by operating activities was $307.8 million compared to $663.4 million in the prior year
 
Commenting on Coty's performance, Camillo Pane, Coty CEO said:
 
"Q2 was a very strong quarter marked by Coty’s return to organic top line growth. We delivered excellent growth in Luxury, an acceleration in positive momentum in Professional Beauty and a significant improvement in Consumer Beauty. Our recent acquisitions continue to have strong performance. Across each of our three businesses we continue to see improving results with our strong performance in Q2 directly linked to our growth strategy. Recent innovations are working well, e-commerce is performing ahead of the market and we are working to implement better in-store execution.
 
Fiscal 2018 continues to be a year of stabilization and this is what our results have shown so far. While I am pleased with our performance, there is still much work to be done before we achieve the consistency that we seek as we still need to relaunch many brands, deliver our synergies and continue with our integration of the P&G Beauty business.
 
Based on the much improved results to date, we have refined our revenue growth objectives for the remainder of the fiscal year. While revenue recovery will not be a straight line, we now aim to deliver positive but modest net revenue growth for the second half of the year. For margin, we continue to aim for a healthy improvement in the second half of the year versus the prior year, with most of the impact coming in Q4, as we continue to deliver on our merger synergies.
 
I remain confident that the real progress we have seen year-to-date, coupled with our commitment to our growth strategy, will continue to move Coty gradually onto the path of full recovery."
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 six months ended December 31, 2017, as compared to the six months ended December 31, 2016, as if it had occurred on July 1, 2015. Combined company period-over-period and combined company constant currency period-over-period do not include any adjustments related to potential profit improvements, potential cost savings or adjustments to fully conform to the accounting policies of Coty. "Constant currency” describes 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, and certain interest expense and other (income) expense items 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 for the three months ended December 31, 2017, as compared to three months ended December 31, 2016, are reported by segment and geographic region and are presented on a reported (GAAP) and a constant currency basis. Net revenues for the six months ended December 31, 2017, as compared to six months ended December 31, 2016, are reported by segment and geographic region and are presented on a reported (GAAP), combined company and combined company constant currency basis. Certain percentages may not agree to the tables due to rounding. 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 constant currency basis, 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 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.
 
Second Quarter Fiscal 2018 Summary Operating Review
Net revenues of $2,637.6 million increased 14.8% as reported compared to the prior year and increased 10.3% on a constant currency basis. The 10.3% constant currency net revenue growth reflected a 7.5% contribution from Younique, Burberry and two months of ghd, and a 2.8% increase in the underlying business, driven by strong growth in Luxury, sustained momentum in Professional Beauty and partially offset by a modest decline in Consumer Beauty.
 
Gross margin of 61.1% was flat as compared to the prior year, while adjusted gross margin declined to 61.6% from 63.6%, primarily attributable to positive momentum in our emerging market Consumer Beauty business as well as favorable items following the P&G Beauty acquisition in the prior year.  
 
Reported operating income increased to $174.4 million from a loss of $(12.7) million, primarily due to higher reported net revenues and lower acquisition costs.
 
Adjusted operating income increased 12.8% to $347.5 million from $308.0 million driven by improved net revenues and tight cost controls.
 
Reported effective tax rate was (7.1)% compared to 174.4%. The current period rate reflects a $41.8 million positive impact from a foreign tax settlement.
 
Adjusted effective tax rate was 10.3% compared to 8.8%. The current period rate reflects a $41.8 million positive impact from a foreign tax settlement.
 
Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. The Tax Act significantly revises the U.S. corporate income tax system by, amongst other things, lowering corporate income tax rates, implementing the territorial tax system and imposing a one-time deemed repatriation tax on un-repatriated earnings of foreign subsidiaries.
 
The Company has performed a preliminary analysis and estimates the overall impact on our recurring tax rate to be neutral from both a cash and financial statement perspective for Fiscal 2018. The Company expects to fully offset the cash and financial statement impacts of the one-time deemed repatriation tax with tax attributes (e.g. net operating loss carryforwards, foreign tax credits, etc.).
 
Reported net income increased to $109.2 million from $46.8 million, driven by higher operating income, partially offset by a lower tax benefit.
 
Adjusted net income of $237.2 million increased from $223.3 million, reflecting higher adjusted operating income.
Cash Flows
  • Net cash from operating activities in the quarter was $316.7 million, compared to $678.4 million in the prior year, largely due to a one time benefit associated with the ramp up of accounts payable and accrued expenses following the close of the acquisition of the P&G Beauty business.
     
  • Positive free cash flow of $195.9 million in the quarter compared to $567.0 million in the prior year primarily reflects lower cash from operations.
     
  • On December 14, 2017, the Company paid a quarterly dividend of $0.125 per share for a total of $93.7 million.
     
  • Cash and cash equivalents of $400.1 million decreased by $135.3 million compared to June 30, 2017.
     
  • Total debt of $7,517.8 million increased by $302.2 million while net debt of $7,117.7 million increased by $437.5 million from the balance on June 30, 2017.

Second Quarter Fiscal 2018 Business Review by Segment

Luxury
  • Reported net revenues of $951.2 million increased 13.9% compared to the prior year and 9.1% on a constant currency basis. The increase in constant currency reflects 8.1% growth in the underlying business driven by the on-going success of the debut Tiffany & Co. and Gucci Bloom fragrance launches as well as growth in Chloe, and a 1.0% contribution from Burberry.
     
  • Adjusted operating income of $125.4 million increased 28.6% from $97.5 million in the prior year.
Consumer Beauty
  • Net revenues of $1,138.6 million increased 13.7% compared to the prior year and 9.8% on a constant currency basis. The increase in constant currency reflects an 11.1% contribution from Younique and a modest (1.3)% decline in the underlying business. The modest decline in our underlying net revenues was driven by certain U.S.-focused brands and largely offset by strong growth in Wella Retail, Max Factor and Monange.
     
  • Adjusted operating income increased 19.4% to $131.9 million from $110.5 million in the prior year.
Professional
  • Net revenues of $547.8 million increased 19.1% compared to the prior year and 13.6% on a constant currency basis. The increase in constant currency reflects a 11.6% contribution from ghd and 2.0% growth in the underlying business driven by strength in OPI globally.
     
  • Adjusted operating income declined 9.8% to $90.2 million from $100.0 million in the prior year.
Second Quarter Fiscal 2018 Business Review by Geographic Region
North America
  • Reported net revenues increased 6.1% compared to the prior year and increased 5.6% on a constant currency basis, driven primarily by the contribution from Younique and the on-going success of Tiffany & Co. and Gucci Bloom, partially offset by declines in the U.S. Consumer Beauty division.
 
Europe
  • Reported net revenues increased 13.7% compared to the prior year and increased 5.7% on a constant currency basis driven primarily by the contribution from ghd, the on-going success of Tiffany & Co. and Gucci Bloom as well as mass fragrances and retail hair across the region.
 
ALMEA
  •  Reported net revenues increased 30.9% compared to the prior year and increased 28.8% on a constant currency basis reflecting strong growth in all three divisions. Performance reflects strength in retail hair in Brazil and Max Factor in China, the on-going success of Tiffany & Co. and Gucci Bloom and the initial restage of OPI gel.
Noteworthy Company Developments
 Other noteworthy company developments include:
  • On February 8, 2018, Coty announced a dividend of $0.125 per share, payable March 15, 2018 to holders of record on February 28, 2018.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, February 8, 2018 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: 2698723). 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: 2698723).
About Coty Inc.
Forward Looking Statements
For more information:
Non-GAAP Financial Measures
Additional Tables
Click here for Additional Tables.