Coty Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017. Coty manufactures and sells beauty products through Luxury, Consumer Beauty and Professional Beauty. Results include recent acquisitions, notably P&G Beauty, Younique, ghd and the Burberry Beauty Business; therefore, reported year-over-year growth is not directly comparable.
Key financial metrics
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Net revenue | $2,637.6 million, up 15% | $4,875.9 million, up 44% |
| Revenue excluding incremental acquisition contributions | $2,444.3 million, up 7%; FX +4%, volume +4%, price/mix −1% | $3,519.9 million, up 5%; FX +4%, price/mix +2%, volume −1% |
| Gross profit / gross margin | $1,612.6 million / 61.1%; cost of sales was 38.9% of revenue | $2,976.6 million / 61.0%, versus 60.4% |
| Operating income / margin | $174.4 million / 6.6%, versus a $12.7 million loss | $203.1 million / 4.2%, versus $33.7 million / 1.0% |
| Adjusted operating income / margin (non-GAAP) | $347.5 million / 13.2%, versus $308.0 million / 13.4% | $542.6 million / 11.1%, versus $474.4 million / 14.0% |
| Net income attributable to Coty / diluted EPS | $109.2 million / $0.15, versus $46.8 million / $0.06 | $89.5 million / $0.12, versus $46.8 million / $0.09 |
| Adjusted net income attributable to Coty (non-GAAP) | $237.2 million, versus $223.3 million | $313.5 million, versus $301.6 million; adjusted diluted EPS was $0.42 versus $0.55 |
| Operating cash flow | Not separately presented for the quarter | $307.8 million, versus $663.4 million |
Balance sheet and liquidity
- At December 31, 2017, cash and cash equivalents were $400.1 million; restricted cash was $25.6 million.
- Total debt was $7,517.8 million, up from $7,215.6 million at June 30, 2017. Long-term debt, net, was $7,145.8 million. Cash less total debt implies net debt of approximately $7.1 billion.
- Current assets of $3,879.2 million were below current liabilities of $4,155.8 million. Management said cash, operating cash generation and access to revolving credit and other lenders were sufficient for near- and long-term needs.
- Debt maturities include $2,412.7 million in fiscal 2021 and $1,915.7 million in fiscal 2022. Coty was in compliance with debt covenants; the applicable leverage covenant was temporarily set at 5.95-to-1 following acquisitions.
Material changes and management commentary
- Quarterly revenue grew across all segments: Luxury +14%, Consumer Beauty +14% and Professional Beauty +19%. Excluding acquisition contributions, segment growth was strongest in Luxury; Consumer Beauty’s increase was modest and Professional Beauty grew 7%.
- For the six-month period, Consumer Beauty revenue excluding acquisition contributions was essentially flat. North American revenue excluding acquisitions declined 7% in the quarter and 5% year to date, with weakness in CoverGirl, Sally Hansen and Clairol. Professional Beauty operating income declined 12% for the quarter and 28% year to date.
- Reported operating income improved substantially, mainly because acquisition-related costs were lower than in the prior-year comparison. Adjusted operating income increased, but adjusted operating margin fell, reflecting higher adjusted cost of sales and selling, general and administrative costs.
- Management targets approximately $750 million of cumulative P&G acquisition synergies through fiscal 2020: approximately 50% by fiscal 2018, 80% by fiscal 2019 and the full amount by fiscal 2020. It expects further Global Integration Activities expenses through fiscal 2021 and approximately $130 million of additional restructuring charges over the next two fiscal years.
- Operating cash flow declined as working capital changes shifted to a $112.1 million cash outflow from a $524.6 million inflow in the prior-year period. Investing outflows increased, including $245.1 million paid for the Burberry Beauty Business and higher capital expenditures.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management describes a focus on stabilizing Consumer Beauty, brand repositioning, innovation, in-store execution, digital capabilities and potential divestitures of non-core brands.
- The Tax Cuts and Jobs Act was enacted during the quarter. Coty estimated a neutral fiscal 2018 cash and financial-statement effect, but its accounting remained incomplete and provisional estimates could change. The quarter’s tax results also reflected resolution of approximately $43 million of foreign uncertain tax positions; the prior-year comparison included a $111.2 million U.S. valuation-allowance release.
- Acquisition integration, execution of synergies, consumer demand and brand relaunches, retailer and channel shifts, foreign exchange, variable-rate debt and covenant requirements are material risks. Goodwill and intangible-asset impairment estimates are sensitive to assumptions, particularly for Professional Beauty and Sally Hansen.
- Restructuring, acquisition and integration costs remained significant. Legal proceedings are ongoing; management did not expect current matters to have a material effect, while noting outcomes remain uncertain.
- The company declared a $0.125-per-share quarterly dividend payable March 15, 2018. It made no company share repurchases during the quarter; JAB separately purchased shares in the open market.
Important facts for investors to verify
- How much reported growth reflects acquired businesses, foreign exchange and sustainable organic demand, particularly in Consumer Beauty and North America.
- Whether planned CoverGirl and Clairol relaunch spending improves sales and margins, and whether recent brand launches sustain Luxury growth.
- Progress and costs against the $750 million synergy target and remaining restructuring commitments.
- Working-capital recovery, cash generation, capital spending, debt reduction and headroom under leverage covenants.
- Final Tax Act accounting, future effective tax rates, and impairment-test assumptions for goodwill and trademarks.