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Coty Inc. Reports First Quarter Fiscal 2016 Results

The following excerpt is from the company's SEC filing.

Strong Progress on the Merger With the P&G Specialty Beauty Business

Mixed Q1 Fiscal 2016 Results

NEW YORK--(BUSINESS WIRE)--November 5, 2015--Coty Inc. (NYSE:COTY) today provided an update on the planned merger with the P&G Specialty Beauty Business and announced financial results for the first quarter of fiscal year 2016, ended September 30, 2015.

Commenting on the Merger Progress and Q1 Financial Results, Bart Becht, Chairman and Interim CEO said:

Merger Update

"In July 2015, we announced the intended merger of Coty with the P&G Specialty Beauty Business to create a strong global leader and challenger in the Beauty Industry, with market leading positions in Fragrances, Color Cosmetics and Hair Coloring & Styling, while also targeting a clear set of financial benefits.

Since that time much has happened. Over the last few months, the financing structure for this transaction has been put in place. Extensive discussions with the twelve licensors have taken place with respect to the transfer of their fragrance licenses to Coty. To date, ten out of the twelve licenses will transfer to Coty upon regulatory approval and completion of the transaction. This has allowed us to stay on track with the regulatory clearance process. As a result, we continue to anticipate a closure of the transaction in the second half of calendar 2016.

We have also announced the new organizational structure for the merged entity. That structure will be all about servicing consumers in terms of what they buy, where they shop, and how they buy. By putting the consumer first, and the salon professional first in the case of the salon business, we believe we will strengthen the growth trajectory of the merged entity. Each division will have full end to end responsibility to optimize the consumer beauty experience in its relevant categories and channels to drive sustainable profitable growth. As a result, we will be organizing the Coty business, upon completion, around three divisions:

Coty Luxury Division, focused on servicing consumers in fragrances and skin care in a mostly prestige channel

Coty Consumer Beauty Division, focused on servicing consumers in color cosmetics, retail hair coloring and styling products as well as body care in a mostly mass channel

Coty Professional Beauty, focused on servicing salon owners and professionals in both hair and nail care

We will also be launching a new department, called Growth and Digital, which will be focused on accelerating top-line growth. It will regularly review Coty’s portfolio strategy and drive changes where needed. It will also work with the three divisions to improve their growth capabilities in areas such as innovation, traditional and digital communication, as well as sales execution and e-commerce. As a precursor to the formation of this department, we recently acquired Beamly, a cutting edge digital marketing firm. We have high hopes for this acquisition to improve the effectiveness and efficiencies of our digital marketing campaigns and help accelerate our e-commerce business.

This week we announced the acquisition of the Beauty & Personal Care business of Hypermarcas. This acquisition is expected to increase Coty’s exposure to higher growth emerging markets over time. We believe the transaction will also be an excellent platform to integrate the existing small Coty business and the P&G Specialty Beauty business in Brazil.

Finally, we have just announced the new Coty Executive Team, effective subject to the closing of the merger with the P&G Specialty Beauty Business. It is a team of highly experienced and proven executives. We believe the new consumer centric and category focused organizational structure and our strong brand portfolio, together with the new team, will position Coty well to realize its ambition of becoming a true leader and challenger in the Beauty Industry and drive profitable growth and shareholder value over time.

Q1 Results

Results in the first quarter were mixed. Profits were very good. The operating profit and margin continued showing very strong progress and earnings per share growth was up well ahead of profit growth, also helped by a one-off tax benefit. This confirms that our Global Efficiency Program continues to generate the benefits we have been targeting. On the other hand, revenue growth was not where we would like it to be. While Color Cosmetics growth continued to be very strong due to Sally Hansen and Rimmel, and Skin & Body Care trends are improving, Fragrance growth is lacking. Fragrance revenues continue to suffer from a very large number of unsustainable historical launches, not being compensated by current brand building efforts and launches. We will be working hard to clean up past portfolio practices, while strengthening our innovation pipeline and improving our capabilities in the areas of innovation and sales & marketing execution.

We continue to believe that our strategy of investment in growing our power brands while bringing Coty back to profitable growth behind our efficiency programs, remains the right basis for delivering shareholder value over time."

Results at a glance

Change YoY

(in millions, except per share data)





Net revenues





Operating income - reported


Operating income - adjusted*



Net income - reported


Net income - adjusted*

EPS (diluted) - reported

EPS (diluted) - adjusted*

* 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.

First Quarter Fiscal 2016 Summary

Net revenues of $1,112.3 million declined 2% like-for-like and decreased 6% as reported

Adjusted operating income of $173.4 million increased 4% from $167.1 million in the prior-year period

Reported net income of $125.7 million increased from $10.6 million in the prior-year period

Adjusted net income of $219.7 million increased from $103.0 million in the prior-year period principally due to a favorable tax settlement of $113.3 million. Adjusted earnings per diluted share of $0.59 increased from $0.28 in the prior-year period

Net cash provided by operating activities was $116.7 million compared to $26.2 million in the prior-year period

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.

First Quarter Fiscal 2016 Summary Operating Review

of $1,112.3 million decreased 2% like-for-like and declined 6% as reported from the prior-year period. Continued strong like-for-like growth in Color Cosmetics was offset by declines in Fragrances and Skin & Body Care. The 9% like-for-like increase in the Color Cosmetics segment was driven by power brands Sally Hansen, Rimmel, and OPI. Fragrances declined 8% like-for-like driven by difficult innovation comparisons in the prior-year period and pressure on Calvin Klein. Skin & Body Care declined 1% like-for-like, driven primarily by lower net revenues from Playboy and philosophy, partially offset by like-for-like growth in adidas. By geographic region, solid growth in Asia Pacific was offset by declines in EMEA and the Americas. Asia Pacific net revenues grew 4% like-for-like, reflecting growth in Australia, Southeast Asia, and regional exports. EMEA revenues decreased 3% like-for-like, as declines in the UK and Travel Retail were partially offset by growth in Eastern Europe, the Middle East, and Germany. Americas net revenues decreased 3% like-for-like, reflecting moderate declines in the U.S., Travel Retail, and a decrease in Brazil as a result of difficult comparisons in the prior year period as well as underlying economic weakness.

Adjusted gross margin

of 60.3% increased from 59.6% in the prior-year period, driven by supply chain efficiencies.

Adjusted SG&A

expense as a percentage of adjusted net revenues decreased to 43.0% from 43.9% in the prior-year period, reflecting lower fixed costs as well as efforts to maintain working media investments behind the brands while reducing non-working media and other advertising and promotion spending.

decreased to $81.7 million from $120.1 million in the prior-year period. The reported operating income decrease primarily reflected acquisition related costs and higher restructuring costs.

increased 4% to $173.4 million from $167.1 million in the prior-year period. As a percentage of adjusted net revenues, adjusted operating margin increased 150 basis points to 15.6% from 14.1%.

Adjusted effective tax rate

was (44.0%) compared to 24.9% in the prior-year period. The decline was primarily driven by the recognition of certain tax benefits upon settlement of certain audits totaling $113.3 million. The adjusted cash tax rate for the quarter was 23.3%.

increased to $125.7 million from $10.6 million in the prior-year period, reflecting the recognition of certain tax benefits as discussed above and the expense incurred on early extinguishment of debt related to the prepayment of the Company’s Senior Notes in the prior-year period, partially offset by lower operating income.

increased to $219.7 million from $103.0 million in the prior-year period, fueled by the recognition of certain tax benefits as discussed above as well as higher adjusted operating income. As a percentage of net revenues, adjusted net income margin increased to 19.8% from 8.7% in the prior-year period.

Cash Flows

Net cash provided by operating activities in the quarter was $116.7 million, compared to $26.2 million in the prior-year period, primarily driven by higher profitability and working capital improvement.

Free cash flow was $74.1 million in the quarter compared to $(33.7) million in the prior-year period.

During the quarter, the Company repurchased in the open market 5.5 million Class A shares for $155.7 million.

Net debt increased by $83.1 million to $2,376.5 million from $2,293.4 million at June 30, 2015.

First Quarter Fiscal 2016 Business Review by Segment

Net Revenues


Adjusted Operating