Continued Improvement In Profit and Net Debt Reduction, with Revenues In Line
FY21 Fixed Cost Savings Target Increased to ~$300M
Strong Strategic Progress in Prestige Business Especially in U.S. and China, and E-Commerce
NEW YORK--(BUSINESS WIRE)-- Coty Inc. (NYSE: COTY) today announced continued improvement in financial results for the second quarter of fiscal year 2021, ended December 31, 2020.
In Q2, Coty reported adjusted operating income of $188.4 million, up 7% versus last year, with a reported operating income of $17.0 million. Strong profit performance in the quarter was fueled by fixed costs savings, which totaled approximately $80 million, consistent with Q1. The strong delivery in 1H21 coupled with the acceleration of certain projects into the year are driving an increase to the savings target for FY21, now expected to be approximately $300 million compared to the previous target of over $200 million. For the quarter, the operational improvements and stringent cost controls resulted in Adjusted EPS for Total Coty of $0.17, which includes two months of contribution from Wella, while reported EPS was $(0.36) driven by the impact of the cost of the Wella transaction as well as additional restructuring accruals under the fixed cost savings plan.
The Wella divestiture closed as planned on November 30, delivering $2.9 billion gross proceeds. Combined with free cash flow of $389.4 million, Financial Net Debt fell to approximately $4.8 billion at the end of Q2. Economic Net Debt, which includes the stake in Wella valued at quarter end at approximately $1.2 billion1, fell to approximately $3.6 billion. Coty has elected to recognize its Wella stake on a fair value basis going forward, as permitted by U.S. GAAP. Separately, Coty will now use Adjusted EBITDA as a key performance measure, in order to more directly drive and highlight its focus on cash flow and deleveraging, which remains a priority. Adjusted EBITDA was $449.9 million for 1H21, up 6% versus the last year, and is expected to be $750 million in FY21.
Revenues continued to improve in the second quarter, with a 16% revenue decline on a reported basis, or an 18% LFL decline which was 1 percentage point ahead of Q1, despite the resurgence of COVID and related lockdowns in multiple parts of the world. The Prestige business saw the biggest gain, with LFL trends better by 9 percentage points sequentially, even as the travel retail channel remained under pressure. Within the prestige business, which accounted for approximately 60% of net revenues in the first half of FY21, highlights for the quarter included strong retail sales momentum in the U.S. and China, and broad-based strength in e-commerce.
Coty continues to make progress on its strategic priorities, including digital and e-commerce acceleration, which grew 40% in Q2, expanding into white space opportunities including prestige cosmetics and skincare, building out its presence in China, and strengthening its core prestige fragrance business and stabilizing share in the mass beauty business through leading innovation and improved execution.
Commenting on the operating results, Sue Y. Nabi, Coty's CEO, said:
"Our strong second quarter results build on the momentum of the first quarter, as the entire organization continued to act with discipline, flexibility and creativity in an uncertain environment. With revenues delivering on our objectives and profit, cash flow and debt all ahead of expectations, including 6% EBITDA growth, it is clear that a much stronger Coty is emerging, which we believe will weather any near-term market headwinds while simultaneously positioned strongly to capture the opportunities of the eventual global recovery. Entering Q3, January trends are starting inline with our expectations.
The strong execution on our fixed cost savings plan, with approximately $160 million of savings generated in the first half of FY21, and a solid pipeline of projects for the second half, give us confidence to raise our savings target for the full year to approximately $300 million. The additional savings will allow us to protect our profitability in the coming months of uncertainty while simultaneously freeing up funds to increase our A&CP investments in the second half of FY21 to support our carefully chosen strategic initiatives.
We continued to progress on our strategic objectives during the quarter. Our e-commerce momentum, with 40% sales growth was broad-based, spanning the prestige and mass businesses, across key regions, and fueled by success in pureplay e-retailers, brick & click retailers, and DTC. Our China prestige business continues to grow, with strong fragrance sell-out and the more than doubling of retail sales for both Gucci and Burberry cosmetics, speaking to the strong appeal of both brands to Chinese consumers. And we have continued building on Gucci's momentum in China, with the opening this week of the Gucci Beauty flagship store on Tmall, for which we see tremendous potential in the coming years. And in our core business, we continue to deliver leading innovation in both prestige and mass. I am delighted to see Marc Jacobs Perfect ending the year as the #1 fragrance launch of CY20 in the U.S., U.K, Canada and Australia, while Hugo Boss delivered strong innovation behind Alive and Boss Bottled. Meanwhile, we continued to build our prestige cosmetics footprint, with sales growing double digits in Q2. In mass, Rimmel's revamped Lasting Finish 25H foundation helped strengthen its market share in the UK and Italy, while Cover Girl continued to strengthen its positioning as the brand leading on clean, vegan and cruelty free products, through its Clean Fresh line-up and the more recent launch of Lash Blast Clean mascara. Additionally, we are gradually stabilizing market share in our mass beauty business, fueled by the strong momentum of our brands online, including nearly a doubling of share on Amazon.
At the same time, we have strengthened the Coty leadership team with Stefano Curti joining as Chief Brands Officer, Consumer Beauty; Alexis Vaganay as Chief Commercial Officer, Consumer Beauty; Laurent Mercier elevated to Coty CFO and Stephane Delbos promoted to Chief Procurement Officer. The new Coty team is now in place, bringing strong beauty and business experience, deep knowledge of Coty, and relevant knowledge of new areas like skincare. At the same time, we are supported by a strong and female-majority Board of Directors, including the recent additions of two new directors, Anna Adeola Makanju and Mariasun Aramburuzabala Larregui.
As we have finalized our strategic review, including new growth opportunities, brand equity mapping, and a repositioning plan for our core mass brands, we will share our strategic priorities around accelerating growth in mid-April, with a full Investor Day planned for Fall 2021.
I am excited by the tremendous opportunities and exciting journey ahead for Coty, and look forward to sharing this vision in the coming months."
*Adjusted financial metrics used in this release are non-GAAP. See reconciliations of GAAP results to Adjusted results in the accompanying tables. 1Based on fair market value, reflecting the final Wella capital structure
Highlights
Outlook
Despite continued disruptions to sales channels and short-term orders related to the COVID-19 pandemic, we remain focused on our strategic priorities and the improvement of our sell-out trends, and will start raising our commercial investments to fuel improvements ahead of FY22.
This is made possible by the decrease of our fixed costs, which we expect to reach approximately $300M for this fiscal year and will contribute to an expected adjusted EBITDA of $750M for FY21. With a financial net debt that has now crossed below $5B, we will continue to drive our leverage ratio towards 5x by the end of CY21, in line with our prior guidance.
Our strong cost discipline and cash flow dynamics are key drivers for building profitable growth and positioning Coty as a best-in-class beauty company.
Financial Results
Note: Discussions of "Total Coty" results reflect the full scope of Coty's revenues and costs, inclusive of Wella, through the closing date of the Wella transaction on November 30, 2020. "Continuing Operations" results reflect Total Coty results less the revenues and directly attributable costs of the divested Wella business through the transaction closing date, but include the TSA cost reimbursement received from Wella for the month of December 2020.
Refer to “Non-GAAP Financial Measures” for discussion of the non-GAAP financial measures used in this release; reconciliations from reported to adjusted results can be found at the end of this release.
Continuing Operations
Revenues:
Gross Margin:
Operating Income and EBITDA:
Total Coty
Net Income:
Earnings Per Share (EPS) - diluted:
Operating Cash Flow:
Financial Net Debt:
Immediate Liquidity:
Second Quarter Business Review by Segment (Continuing Operations)
Americas
In 2Q21, Americas net revenues of $539.5 million or 38% of total Coty Continuing Operations, decreased by 7.2% versus the prior year. On a LFL basis, Americas net revenues decreased by 7.4%, or a mid-single digit decline when excluding the impact from the heavily impacted Travel Retail channel. While the mass beauty business was pressured by softness in the color cosmetics market, the prestige business recorded tremendous results with high single digit revenue growth supported by strength in prestige fragrances, cosmetics, and skincare.
During the quarter, we continued to see strength within U.S. prestige fragrances, with Marc Jacobs, Gucci, and Burberry delivering robust growth. We are particularly encouraged by the continued strong performance of Marc Jacobs Perfect, which was the #1 national fragrance launch in calendar 2020, and remains on track to be the largest Coty U.S. fragrance launch in 15 years. Once again Gucci saw robust sell-out across both fragrances and cosmetics. Gucci fragrance performance was supported by Gucci Bloom Profumo and Gucci Guilty. Meanwhile, Gucci cosmetics generated triple-digit sell-out growth, fueled by bronzer and mascara. In January, we further expanded the line to include a foundation and primer, with very strong initial results.
Within our mass beauty business, the cosmetics and fragrance categories remained pressured, with further deceleration in Q2 as COVID cases accelerated in parts of the U.S., impacting both store traffic and make-up usage occasions. At the same time, we continued to make headway in strengthening our focus brands. CoverGirl maintained momentum in its Clean Fresh franchise of face makeup, which we are continuing to build upon with the Q3 launch of Lash Blast Clean mascara. CoverGirl also continued to gain market share in the cosmetics category on Amazon. Meanwhile, Sally Hansen continued to be a solid market share winner in the U.S. In Brazil, our local brands remain well positioned amid the current environment, with our brands growing market share in the quarter, particularly in nail and deodorants.
During the quarter, e-commerce sales for the region increased over 50% in Q2 and over 60% in 1H21, with strong growth across both prestige and mass fueled by strong execution across e-retailers, brick & click, and DTC with philosophy.com. E-commerce penetration as a percentage of sales in the Americas region increased to the low teens, including significantly higher penetration in the prestige business.
The reported sales for the Americas segment benefited from the contribution from the Kylie Jenner joint venture, with Q2 sales consistent with Q1.
The Americas segment generated a reported operating income of $31.6 million in 2Q21, compared to a reported operating income of $21.5 million in the prior year. The 2Q21 adjusted operating income was $56.9 million, up from $34.2 million in the prior year, driven by close management of marketing investment and strong fixed cost reduction more than offsetting the sales decline. The adjusted operating margin was 10.5% versus 5.9% in the prior year.
EMEA
In 2Q21, EMEA net revenues of $708.9 million, or 50% of total Coty continuing operations, declined by 21.9% versus the prior year. On a LFL basis, EMEA net revenues declined 24.8%. While the LFL was pressured, sales trends remained consistent with Q1, despite a second wave of COVID-19 and multiple market lockdowns impacting the region exiting Q2,
In our prestige fragrance business, we continued to see strong performances of recent launches including Marc Jacobs Perfect, Hugo Boss Alive, and Hugo Boss Bottled. Marc Jacobs Perfect continued to be the #1 prestige fragrance launch in the U.K. for CY20, supporting market share growth for the overall brand. Hugo Boss Alive saw great performance as the #1 fragrance launch in Germany in CY20, and contributing to double digit sell-out growth for Hugo Boss female fragrances in the U.K. In our mass beauty business, Rimmel grew market share in the U.K., its top market, as well as Italy, Poland, and Spain, aided by the strong consumer reception to its Lasting Finish 25H foundation relaunch. Meanwhile, Sally Hansen gained share across the region, driven by market share growth in the U.K., Italy, and France.
2Q21 EMEA e-commerce sales grew approximately 30%, driving e-commerce penetration as a percentage of sales to the mid-20s percentage level, with strong growth in both prestige and mass.
Reported operating income was $88.0 million in 2Q21 versus reported operating income of $98.9 million in the prior year. The 2Q21 adjusted operating income of $118.4 million declined from $130.7 million in the prior year, driven by the lower sales, partially offset by controlled marketing spend and solid fixed cost reductions. For 2Q21, the adjusted operating margin rose to 16.7% from 14.4% in the prior year.
Asia Pacific
2Q21 Asia Pacific net revenues of $167.2 million, or 12% of total Coty continuing operations, decreased 13.9% on a reported basis and declined 17.2% LFL. Similar to last quarter, the bulk of the LFL decline was due to continued significant pressure in the travel retail channel, and to a lesser extent, the continued active reduction of sales to low value channels. Despite these headwinds, LFL trends showed a meaningful sequential improvement from Q1. Of note, our prestige business recorded high single digit sell-out growth in the region, fueled by both brick & mortar and online.
In China, sell-out trends for our prestige beauty brands in both brick & mortar and e-commerce remained strong, particularly in Gucci and Burberry. During the quarter, we continued see momentum in Gucci and Burberry's prestige cosmetics businesses, with Burberry make-up sell-out up 48% and Gucci make-up sell-out up over 400%. In fact, Gucci make-up ranked the #2 make-up brand among all beauty brands in social business, WeChat.
E-commerce sell-out in the region continued to grow solidly, particularly in prestige with over 20% growth, partially tempered by continued proactive reduction of low value sales.
Reported operating income in 2Q21 of $6.4 million increased from reported operating income of $5.6 million in the prior year. The 2Q21 adjusted operating income of $12.5 million rose from $11.8 million in the prior year, driven by reduced fixed costs and lower marketing investments. The 2Q21 adjusted operating margin of 7.5% increased from 6.1% in the prior year.
Second Quarter Fiscal 2021 Business Review by Channel (Continuing Operations)
Prestige
Mass
Discontinued Operations
Wella Business
Noteworthy Company Developments
Other noteworthy company developments include:
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, February 9, 2021 to discuss its results. The dial-in number for the call is (866) 834-4311 in the U.S. or (720) 405-2213 internationally (conference passcode number: 1397791. The live audio webcast and presentation slides will be available at http://investors.coty.com. The conference call will be available for replay.
About Coty Inc.
Coty is one of the world’s largest beauty companies with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. Coty is the global leader in fragrance, and number three in color cosmetics. Coty’s products are sold in over 150 countries around the world. Coty and its brands are committed to a range of social causes as well as seeking to minimize its impact on the environment. For additional information about Coty Inc., please visit www.coty.com.
Forward Looking Statements
Certain statements in this Earnings Release are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's current views with respect to, among other things, the impact of COVID-19 and potential recovery scenarios, the Company’s comprehensive transformation agenda (the “Transformation Plan”), strategic planning, targets, segment reporting and outlook for future reporting periods (including the extent and timing of revenue, expense and profit trends and changes in operating cash flows and cash flows from operating activities and investing activities), the impact of the Wella divestiture and the related transition services (the “Wella TSA”), the Company’s future operations and strategy (including the expected implementation and related impact of its strategic priorities), ongoing and future cost efficiency, optimization and restructuring initiatives and programs, strategic transactions (including their expected timing and impact), the Company’s capital allocation strategy and payment of dividends (including suspension of dividend payments and the duration thereof), investments, licenses and portfolio changes, synergies, savings, performance, cost, timing and integration of acquisitions, including the strategic partnership with Kylie Jenner and the strategic partnership with Kim Kardashian West, future cash flows, liquidity and borrowing capacity, timing and size of cash outflows and debt deleveraging, the availability of local government funding or reimbursement programs in connection with COVID-19 (including expected timing and amounts), the timing and extent of any future impairments, and synergies, savings, impact, cost, timing and implementation of the Company’s Transformation Plan, including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, supply chain changes, e-commerce and digital initiatives, and the priorities of senior management. These forward-looking statements are generally identified by words or phrases, such as “anticipate”, “are going to”, “estimate”, “plan”, “project”, “expect”, “believe”, “intend”, “foresee”, “forecast”, “will”, “may”, “should”, “outlook”, “continue”, “temporary”, “target”, “aim”, “potential”, “goal” and similar words or phrases. These statements are based on certain assumptions and estimates that we consider reasonable, but are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual events or results (including our financial condition, results of operations, cash flows and prospects) to differ materially from such statements, including risks and uncertainties relating to:
When used herein, the term “includes” and “including” means, unless the context otherwise indicates, “including without limitation”. More information about potential risks and uncertainties that could affect the Company’s business and financial results is included under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Quarterly Report on Form 10-K for the year ended June 30, 2020 and other periodic reports the Company has filed and may file with the SEC from time to time.
All forward-looking statements made in this release are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this release, and the Company does not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.
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, organic like-for-like (LFL) net revenues, adjusted gross profit and adjusted operating income.
The Company presents period-over-period comparisons of net revenues on a constant currency basis as well as on an organic (LFL) basis. The Company believes that organic (LFL) better enables management and investors to analyze and compare the Company's net revenues performance from period to period. For the periods described in this release, the term “like-for-like” describes the Company's core operating performance, excluding the financial impact of (i) acquired brands or businesses in the current year period until we have twelve months of comparable financial results, (ii) the divested brands or businesses or early terminated brands, generally, in the prior year non-comparable periods, to maintain comparable financial results with the current fiscal year period and (iii) foreign currency exchange translations to the extent applicable. For a reconciliation of organic (LFL) period-over-period, see the table entitled “Reconciliation of Reported Net Revenues to Like-For-Like Net Revenues”.
The Company presents operating income, operating income margin, gross profit, gross margin, effective tax rate, net income, net income margin, net revenues, EBITDA, and EPS (diluted) on a non-GAAP basis and specifies that these measures are non-GAAP by using the term “adjusted” (collectively the Adjusted Performance Measures). The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Adjusted operating income/Adjusted EBITDA from continuing operations excludes restructuring costs and business structure realignment programs, amortization, acquisition- and divestiture-related costs and acquisition accounting impacts, asset impairment charges and other adjustments as described below. For adjusted EBITDA, in addition to the preceding, we adjust for non-cash stock-based compensation expense. We do not consider these items to be reflective of our core operating performance due to the variability of such items from period-to-period in terms of size, nature and significance. They are primarily incurred to realign our operating structure and integrate new acquisitions, and exclude divestitures, and fluctuate based on specific facts and circumstances. Additionally, Adjusted net income attributable to Coty Inc. and Adjusted net income attributable to Coty Inc. per common share are adjusted for certain interest and other (income) expense as described below and the related tax effects of each of the items used to derive Adjusted net income as such charges are not used by our management in assessing our operating performance period-to-period.
Adjusted Performance Measures reflect adjustments based on the following items:
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 gross profit to gross profit, 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 tables entitled “Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income” and "Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income by Segment." For a reconciliation of adjusted effective tax rate to effective tax rate, see the table entitled “Reconciliation of Reported Income (Loss) Before Income Taxes and Effective Tax Rates to Adjusted Income Before Income Taxes and Adjusted Effective Tax Rates.” For a reconciliation of adjusted net income and adjusted net income margin to net income (loss), see the table entitled “Reconciliation of Reported Net Income (Loss) to Adjusted Net Income.”
The Company also presents free cash flow, adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA"), immediate liquidity, Financial Net Debt and Economic Net Debt. Management believes that these measures are useful for investors because it provides them with an important perspective on the cash available for debt repayment and other strategic measures and provides them with the same measures that management uses as the basis for making resource allocation decisions. Free cash flow is defined as net cash provided by operating activities less capital expenditures; adjusted EBITDA is defined as adjusted operating income, excluding adjusted depreciation and non-cash stock-based compensation. Net debt or Financial Net Debt (which the Company referred to as "net debt" in prior reporting periods) is defined as total debt less cash and cash equivalents, and Economic Net Debt is defined as total debt less cash and cash equivalents less the value of the Wella Stake. For a reconciliation of Free Cash Flow, see the table entitled “Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow,” for adjusted EBITDA, see the table entitled “Reconciliation of Adjusted Operating Income to Adjusted EBITDA” and for Financial Net Debt and Economic Net Debt, see the tables entitled “Reconciliation of Total Debt to Financial Net Debt and Economic Net Debt.” Further, our immediate liquidity is defined as the sum of available cash and cash equivalents and available borrowings under our Revolving Credit Facility (please see table "Immediate Liquidity").
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.
To the extent that the Company 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, non-cash stock-based compensation, adjustments to inventory, and other charges reflected in our reconciliation of historic numbers, the amount of which, based on historical experience, could be significant.
- Tables Follow -
COTY INC.
SUPPLEMENTAL SCHEDULES INCLUDING NON-GAAP FINANCIAL MEASURES
RESULTS AT A GLANCE
|
| Three Months Ended December 31, 2020 | Six Months Ended December 31, 2020 | |||||||||||||
(in millions, except per share data) |
|
|
| Change YoY |
|
| Change YoY | |||||||||
CONTINUING OPERATIONS |
|
|
| Reported Basis |
| Organic| (LFL) |
|
| Reported Basis |
| Organic (LFL) | |||||
Net revenues |
| $ | 1,415.6 |
|
| (16%) |
| (18 | %) | $ | 2,539.7 |
|
| (18%) |
| (18%) |
Operating income (loss) - reported |
| 17.0 |
|
| >100% |
|
| (49.0) |
|
|