Coty Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, Coty’s first quarter of fiscal 2023. Comparisons are with the three months ended September 30, 2021. Amounts are in U.S. dollars unless noted.
Business context
Coty manufactures and sells fragrance, color cosmetics, skincare and body-care products globally. Its reportable segments are Prestige and Consumer Beauty. The quarter reflected higher pricing and product mix, offset in reported results by foreign-exchange headwinds and the ongoing Russia wind-down.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net revenue | $1,390.0 million | $1,371.7 million |
| Gross profit / gross margin | $888.7 million / 63.9% | $866.9 million / 63.2% |
| Operating income / operating margin | $171.9 million / 12.4% | $17.2 million / 1.3% |
| Adjusted operating income / margin (non-GAAP) | $249.6 million / 18.0% | $200.5 million / 14.6% |
| Adjusted EBITDA / margin (non-GAAP) | $307.9 million / 22.2% | $278.5 million / 20.3% |
| Net income from continuing operations | $134.5 million | $228.9 million |
| Net income attributable to Coty Inc. | $128.6 million | $226.0 million |
| GAAP earnings per common share | $0.15 | $0.13 |
| Adjusted net income attributable to Coty Inc. (non-GAAP) | $92.7 million | $63.1 million |
Revenue rose 1% reported; management cited a 6% positive price-and-mix contribution and 2% higher unit volume, offset by a 7% adverse foreign-currency translation impact. The Russia exit reduced current-quarter revenue by approximately 2%. Segment revenue was $863.4 million for Prestige, down 1%, and $526.6 million for Consumer Beauty, up 5%.
Gross margin improved about 70 basis points. Pricing, lower returns and markdowns, and manufacturing and procurement efficiencies helped; freight, product mix, and excess and obsolescence costs partly offset those gains. Management estimated inflation’s adverse impact on material and freight costs at approximately 180 basis points.
Operating income increased substantially, supported in part by lower stock-based compensation, advertising and promotional spending, amortization, restructuring, and acquisition/divestiture costs. The prior-year quarter included a much larger gain from the Wella investment: other income was $98.2 million in the current quarter versus $386.1 million in the prior-year period. The current-period Wella fair-value gain was $135.0 million, compared with $390.0 million in the prior period. Consequently, GAAP net income fell despite stronger operating results; adjusted results are non-GAAP and exclude specified items.
Cash flow, debt and liquidity
- Operating cash flow was $163.2 million, down from $285.7 million, primarily due to less favorable working-capital movements, including payment and accrual timing.
- Capital expenditures were $75.0 million, compared with $45.0 million. Cash used in investing activities was $75.0 million.
- Cash used in financing activities was $87.8 million. Cash, cash equivalents and restricted cash totaled $251.1 million at quarter-end, including $215.7 million of unrestricted cash and $35.4 million of restricted cash.
- Total debt was $4,407.1 million, compared with $4,498.5 million at June 30, 2022; balance-sheet debt, net of financing fees and discounts, was $4,345.5 million including current debt. Long-term debt, net, was $4,312.8 million. The filing reports no short-term debt outstanding, though $32.7 million was classified as current portion of long-term debt.
- The company had $279.5 million outstanding under its revolving credit facility. It reported compliance with all credit-agreement covenants at September 30, 2022; the applicable maximum total net leverage ratio was 4.50-to-1.00, but the actual ratio is not stated here.
- Net interest expense was $65.9 million, up from $59.8 million, mainly because of higher average interest rates despite lower debt balances. The company’s common-stock dividend remains suspended; management said it expects the suspension to continue until net debt to Adjusted EBITDA reaches 2x.
Outlook, commentary and risks
- Management expected fiscal 2023 net revenue growth in the mid-to-high single digits versus the prior year, excluding foreign exchange and after adjusting for the Russia exit. This is forward-looking guidance, not a reported result.
- Supply-chain constraints, including component shortages and transportation delays, were reducing order fill rates, particularly for Prestige fragrances and Consumer Beauty color cosmetics. Management expected challenges to continue through the remainder of fiscal 2023.
- Inflation in material, logistics and other costs was expected to persist into the second quarter and the second half. Pricing, portfolio premiumization and cost savings were intended to mitigate the pressure, but might not fully offset it.
- Coty continued winding down its Russian subsidiary. It anticipated up to $9.0 million of additional costs to complete the wind-down and future net cash costs of $30–$35 million, to be funded by the subsidiary; timing and amounts remain subject to regulatory and legal developments. Management also anticipated derecognizing the subsidiary’s cumulative currency translation adjustment.
- Other identified risks include foreign-exchange volatility, the war in Ukraine and related sanctions, demand and consumer-spending changes, China lockdowns, execution of the transformation plan, debt and refinancing needs, and potential legal, tax and compliance outcomes.
- Brazilian tax assessments remained in administrative proceedings. Coty said it believes it has meritorious defenses and had not recognized a loss because it did not consider one probable; the largest listed assessment was approximately $132.0 million. Surety bonds of approximately $25.0 million had been entered into in connection with appeals. Management said current legal proceedings were not expected to have a material effect, while noting outcomes are uncertain. A Delaware stockholder litigation matter had reached an agreement in principle to resolve, which Coty did not expect to materially affect financial results.
Most important facts for investors to verify
- Whether the fiscal 2023 revenue outlook is being met, separating underlying growth from foreign-exchange effects and Russia-related impacts.
- Whether supply constraints and inflation persist, and how they affect order fill rates, gross margin and operating cash flow.
- The quality and repeatability of operating improvement, including the effects of lower CEO-related stock compensation and marketing spend, and the reconciliation of GAAP to non-GAAP measures.
- Wella’s valuation assumptions and the extent to which fair-value movements continue to affect reported earnings.
- Debt, interest costs, covenant headroom and cash generation; the filing does not state the actual leverage ratio.
- Costs and timing of the Russia wind-down, and developments in the Brazilian tax assessments and other legal matters.
- The company’s dividend policy and conditions for any resumption of common-stock dividends.