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Prev Next Coty Inc. Reports Third Quarter Fiscal 2016 Results

Date Posted: 

Coty Inc. (NYSE: COTY) today announced financial results for the third quarter of fiscal year 2016, ended March 31, 2016.  

Third Quarter Fiscal 2016 Summary

  • Net revenues of $950.7 million declined 1% like-for-like and increased 2% as reported
  • Adjusted operating income of $81.7 million decreased 19% from $100.9 million in the prior-year period
  • Reported net (loss) income of $(26.8) million decreased from $75.5 million in the prior-year period
  • Adjusted net income of $31.5 million decreased from $63.6 million in the prior-year period
  • Adjusted earnings per diluted share of $0.09 decreased from $0.18 in the prior-year period
  • Net cash (used in) provided by operating activities was $(71.8) million compared to $33.2 million in the prior-year period

  • First Nine Months Fiscal 2016 Summary

  • Net revenues of $3,273.5 million declined 1% like-for-like and decreased 3% as reported
  • Adjusted operating income of $469.7 million was flat with the prior-year period
  • Reported net income of $187.9 million decreased from $211.5 million in the prior-year period
  • Adjusted net income of $387.0 million increased from $329.8 million in the prior-year period, reflecting the favorable tax settlement of $113.3 million in the first nine months of fiscal 2016 compared to the favorable tax settlement of $32.5 million in the first nine months of fiscal 2015
  • Adjusted earnings per diluted share of $1.08 increased from $0.91 in the prior-year period
  • Net cash provided by operating activities was $445.3 million compared to $388.2 million in the prior-year period

  • Commenting on the merger progress and Q3 financial results, Bart Becht, Chairman and Interim CEO said:

    "Q3 revenues were consistent with our expectations for muted like-for-like trends through the end of the fiscal year, as we gradually rationalize non-strategic product lines and businesses. Power brands on the other hand continued to outperform the overall business both for the quarter and fiscal year-to-date. While Q3 adjusted operating income was down due to one-off items and fiscal year-to-date adjusted operating income is largely flat, we continue to target high single digit growth for the full year adjusted operating income at constant rates largely offset by negative FX impact.

    On the merger and acquisition side, integration efforts are well underway for both the Bourjois business and the Brazilian Beauty Business acquired from Hypermarcas. We remain confident regarding the financial benefits of both transactions. Regarding the P&G Beauty Brands transaction, on April 22 we filed a Registration Statement on Form S-4 detailing the transaction and the historical results of the P&G Beauty Brands, as well as a Supplemental Financial Overview with bridged revenue and EBITDA. We will provide a more comprehensive update on the transaction, including estimated cost synergies, which we expect to be higher, one-time costs, and working capital benefits, on the investor call at 8:00am EDT. We have made very good progress both in terms of preparing for the integration and the steps needed to realize the financial benefits of this transaction, and we now expect the transaction to close in October.

    In summary, we believe we are well on track to build a healthy platform for Coty to become a global leader and challenger in the beauty industry and provide the right basis to drive profitable growth and deliver shareholder value over time."

    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 acquisition related costs, 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.

    Third Quarter Fiscal 2016 Summary Operating Review

    Net revenues of $950.7 million decreased 1% like-for-like and increased 2% as reported from the prior-year period. Moderate like-for-like growth in Color Cosmetics was offset by modest like-for-like declines in Fragrances and pressure in Skin & Body Care. The 1% like-for-like increase in the Color Cosmetics segment was driven by growth in our power brand Rimmel, while lower Sally Hansen revenues reflected the decline in the U.S. retail nail market.  Fragrances modestly declined 1% like-for-like, as growth in Marc Jacobs supported by innovation did not offset declines in several brands. Skin & Body Care declined 5% like-for-like as continued strength in adidas was offset by a decline in philosophy and Playboy. The acquisition of the Brazilian Beauty Business from Hypermarcas, which closed on February 1, 2016, contributed $14.3 million in revenues, with revenues negatively impacted by a change in commercial terms to conform with Coty's standards. By geographic region, strong like-for-like growth in Asia Pacific and EMEA was offset by declines in the Americas. Asia Pacific net revenues grew 6% like-for-like, reflecting growth in China, Australia, Japan and Travel Retail. EMEA revenues increased 4% like-for-like, as growth in Germany, Eastern Europe, and the Middle East was partially offset by declines in the UK and regional exports. Americas net revenues decreased 8% like-for-like, reflecting declines primarily in the U.S.

    Adjusted gross margin of 61.8% increased from 61.6% in the prior-year period, driven primarily by a lower level of promotional and discounted pricing activity.  

    Adjusted SG&A expense increased from the prior year period. As a percentage of net revenues, adjusted SG&A increased to 51.0% from 48.8% in the prior-year period, primarily driven by higher share based compensation as well as the incurrence of costs related to the Brazilian Beauty Business, without a commensurate level of revenue. 

    Operating income decreased to $23.0 million from $114.7 million in the prior-year period. The reported operating income decrease primarily reflected acquisition related costs and higher SG&A expense.

    Adjusted operating income decreased 19% to $81.7 million from $100.9 million in the prior-year period, in part reflecting the one-time non-recurring negative impact of the Brazilian Beauty Business. As a percentage of net revenues, adjusted operating margin decreased 230 basis points to 8.6% from 10.9%.

    Adjusted effective tax rate was 26.4% compared to 16.1% in the prior-year period. The adjusted cash tax rate for the nine months ending March 31, 2016 was 22.2%.

    Net (loss) income decreased to $(26.8) million from $75.5 million in the prior-year period, reflecting lower operating income and higher interest and other expenses.

    Adjusted net income decreased to $31.5 million from $63.6 million in the prior-year period, primarily reflecting lower adjusted operating income and higher interest expense.  As a percentage of net revenues, adjusted net income margin decreased to 3.3% from 6.9% in the prior-year period.

    Cash Flows

  • Net cash (used in) provided by operating activities in the quarter was $(71.8) million, compared to $33.2 million in the prior-year period, primarily as a result of acquisition and restructuring costs, and the Brazilian Beauty Business acquisition.
  • Free cash flow was $(108.7) million in the quarter compared to $(28.7) million in the prior-year period.
  • No shares were repurchased during the quarter.
  • Net debt increased by $1,470.5 million to $3,763.9 million from $2,293.4 million at June 30, 2015 driven by borrowings in connection with the acquisition of the Brazilian Beauty Business, and the shares repurchased in the first half of the fiscal year, partially offset by strong free cash flow.

  • Third Quarter Fiscal 2016 Business Review by Segment