Coty reports fiscal Q3 net loss of US$253.3M, compared to year-ago earnings of US$20.4M, due to impairment charge; revenue rises to US$1.01B from US$997.7M in year-ago period, bolstered by strength in emerging markets
Nevin Barich
NEW YORK
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May 14, 2014
(press release)
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Net Revenues Return to Growth
Industry Intelligence Editor's Note: This press release omits select charts and/or marketing language for editorial clarity. Click here to view the full report.
Strong Momentum in Emerging Markets
Adjusted EPS +29% to $0.22 Driven by Tax Benefits
Coty Inc. (NYSE: COTY) today announced financial results for the fiscal third quarter ended March 31, 2014.
Third Quarter Fiscal 2014 Summary
Net revenues of $1,008.7 million increased 2% like-for-like and 1% as reported relative to the prior-year period
Adjusted operating income of $81.4 million decreased from $103.7 million in the prior-year period
Adjusted net income of $86.7 million increased from $68.4 million in the prior-year period, driven by an increase in one-time tax benefits of $14.3 million
Adjusted diluted EPS increased to $0.22 from $0.17 in the prior-year period
Net cash used by operating activities totaled $4.2 million compared to net cash provided of $70.2 million in the prior-year period, excluding prior-period cash used for private company stock option exercises
The Company recorded a non-cash asset impairment charge of $316.9 million in the Skin & Body Care segment
First Nine Months Fiscal 2014 Summary
Net revenues of $3,510.1 million decreased 2% like-for-like and as reported relative to the prior-year period
Adjusted operating income of $450.8 million decreased from $527.4 million in the prior-year period
Adjusted net income of $306.3 million decreased from $313.3 million in the prior-year period, including $38.1 million in tax benefits in the current-year period
Adjusted diluted EPS decreased to $0.78 from $0.79 in the prior-year period
Net cash provided by operating activities increased by $38.9 million to $443.1 million from $404.2 million in the prior-year period, excluding cash used for private company stock option exercises
Commenting on the Company's performance, Michele Scannavini, CEO of Coty Inc., said,
"Coty returned to revenues growth in the 3rd quarter. The majority of our power brands showed positive development thanks to a competitive innovation program, and growth in the emerging markets accelerated to 15%. Both prove our strategic focus on these brands and geographies is starting to bear fruit. While market conditions remain challenging in some product segments in parts of the world, we are sticking to our current strategy and targeting for continued growth for the remainder of the calendar year while working to significantly improve the cost profile of the business."
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 non-recurring 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. 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 and operating income margin are presented on an adjusted (non-GAAP) basis. Net revenues on a constant currency basis and like-for-like, 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 2014 Summary Operating Review
Net revenues of $1,008.7 million increased 2% like-for-like and increased 1% as reported from the prior-year period. By segment, Fragrances grew 6%, supported by growth in 4 out of Coty's 5 Fragrances power brands: Calvin Klein, Davidoff, Marc Jacobs, and Playboy. Skin & Body Care increased 8%, as philosophy continued its growth momentum, adidas benefitted from its traction in the emerging markets, and Lancaster saw strong growth particularly in the sun category. Color Cosmetics' 6% decline reflected continued pressure on the nail category in the U.S., partially offset by strong Rimmel performance. By geographic region, the growth was driven by EMEA and Asia Pacific, partially offset by continued challenges in the overall U.S. market. EMEA net revenues increased 8% in the quarter, supported by strong results in the U.K., Southern Europe, Eastern Europe, South Africa, and the Middle East. Asia Pacific revenues grew 19%, with strong momentum in Australia and Southeast Asia. Emerging markets had very strong 15% growth, aided by the company's new joint ventures and subsidiaries in Southeast Asia, South Africa, and the Middle East. Net revenue growth was helped by favorable comparison due to cancelled and unshipped orders in the prestige distribution channel in the prior-year period, following the transition to a new third-party logistics provider in Europe.
Adjusted gross margin decreased to 61.6% compared to 61.7% in the prior-year period. This marginal decline primarily reflected the negative impact of higher customer discounts and allowances and the negative impact from foreign currency exchange transactions, almost fully compensated by continuous supply chain savings.
Adjusted SG&A expense as a percentage of net revenues increased to 51.4% from 49.0% in the prior-year period. This reflected higher advertising and consumer promotion spending in support of the brands, increased variable compensation expense, and accelerated investments to build capabilities in emerging markets, partially offset by discretionary cost reductions in the developed markets.
Operating income decreased to an operating loss of $(272.0) million from an operating income of $30.1 million in the prior-year period. The decline in operating income was driven by a $316.9 million non-cash asset impairment charge.
Coty determined that the actions taken by the Company to revamp the TJoy business in the China mass channel have not improved the actual and projected cash flows in the business. As such, the Company has recorded a non-cash asset impairment charge of $316.9 million in the Skin & Body Care segment. On a prospective basis, this action will result in approximately $8.3 million of annual amortization savings, which should benefit the ongoing profitability of the Skin & Body Care segment. The Company is actively evaluating a number of options for its mass channel business in China, with the objective of further improving profitability in the region and in the Skin & Body Care segment.
Adjusted operating income decreased 22% to $81.4 million at actual rates, from $103.7 million in the prior-year period. As a percentage of net revenues, adjusted operating income margin decreased 230 basis points to 8.1% from 10.4%, primarily driven by increased adjusted SG&A expense in part reflecting higher investment behind the brands.
Adjusted effective tax rate was (40.9%) compared to 6.9% in the prior-year period. The tax benefit in the quarter was a recognition of certain tax benefits upon settlement of certain foreign audits totaling $38.1 million compared to a one-time tax benefit of $23.8 million in the prior-year period related to the extension of 954(c)(6), resulting in a $14.3 million increase in one-time tax benefits. The adjusted cash tax rate for the nine months ending March 31, 2014 was 14.8%.
Net income decreased to a net income loss of $(253.3) million from net income of $20.4 million in the prior-year period. This decrease primarily reflected lower operating income as a result of the asset impairment, partially offset by lower interest expense and the income tax benefit during the quarter.
Adjusted net income increased to $86.7 million from $68.4 million in the prior-year period. This increase primarily reflected higher net revenues in the period and the income tax benefit, partially offset by lower adjusted operating income margin. As a percentage of net revenues, adjusted net income margin increased 170 basis points to 8.6% from 6.9%.
Cash Flows
Net cash used by operating activities totaled $4.2 million compared to cash provided of $70.2 million in the prior-year period, excluding cash used for private company stock option exercises. The modest operating cash use in the quarter was primarily a result of working capital changes in accounts receivable, inventory, and the funding of emerging markets.
Net debt decreased by $111.9 million to $1,597.9 million from $1,709.8 million at June 30, 2013.
Free cash flow in the quarter was ($82.8) million, resulting in year-to-date free cash flow of $247.9 million, $27.2 million above the prior-year period, fueled by strong improvement in net working capital.
Third Quarter Fiscal 2014 Business Review by Segment
Fragrances
Revenue growth was generated by power brands Calvin Klein, Davidoff, Marc Jacobs, and Playboy, as well as some of the Company's regional brands.
Adjusted operating income for Fragrances decreased 2% to $54.3 million from $55.5 million in the prior-year period, resulting in 10.7% adjusted operating income margin, a decline of 70 basis points versus the prior year.
Color Cosmetics
Net revenues declined primarily due to pressure on Sally Hansen as a result of continued weakness in the U.S. nail category, unfavorable comparisons versus the sizeable sell-in of the successful gel technology launch in the prior-year period, and market share decline in the U.S.
Rimmel continued to grow at a fast pace, gaining market share in Europe and the U.S. supported by a strong innovation pipeline, and gaining traction in the emerging markets.
Adjusted operating income for Color Cosmetics decreased to $36.7 million from $50.4 million in the prior-year period, resulting in 10.6% adjusted operating income margin, a decline of 310 basis points compared to the prior-year period.
Skin & Body Care
Skin & Body Care net revenues increased by 8% on a like-for-like basis, with growth across all key brands, including philosophy, adidas, and Lancaster.
philosophy recorded strong growth for the fourth consecutive quarter. The brand experienced growth across its three key distribution channels, including retail, QVC, and e-commerce supported by higher demand for new launches and existing core franchises. Positive progress in international expansion also fueled the brand strength.
adidas returned to growth in the quarter, fueled by momentum in the emerging markets, including China, Brazil, the Middle East, South Africa, and Southeast Asia.
TJoy continued to struggle during the quarter, in spite of the launch of a new ginseng product line, Hydractive, in December 2013, and the reorganization of the management team and distribution network.
Adjusted operating loss for Skin & Body Care was ($9.6) million compared to ($2.2) million in the prior-year period, primarily as a result of ramped up advertising & promotion spending in support of the segment's expansion and growth. Fiscal year-to-date, adjusted operating loss for the segment was ($7.0) million. Net of TJoy, the Skin & Body Care segment would have been profitable. The action taken with the non-cash impairment charge in the Skin & Body Care segment is expected to benefit the segment's prospective profitability by $8.3 million annually through reduced amortization expenses.
Third Quarter Fiscal 2014 Business Review by Geographic Region
The net revenues decrease reflected the decline in the U.S., driven by weakness in the mass color cosmetics and overall fragrance markets, with particular pressure in the nail category and Sally Hansen brand.
Emerging markets in the region experienced strong net revenues growth, driven by Argentina and Brazil, and Travel Retail.
Europe, Middle East & Africa
Growth in the region was driven by good performance in developed markets such as the U.K. and Southern Europe, as well as emerging markets, including the Middle East, South Africa, and Eastern Europe.
Key brands positively contributing to the performance in the region included Calvin Klein, Davidoff, Rimmel, and Lancaster.
Asia Pacific
The net revenues growth was driven by a solid increase in Australia, Southeast Asia, China, and Travel Retail.
Calvin Klein and adidas brands were among the key drivers for the growth in the region.
Outlook for Fiscal 2014 Fourth Quarter and Fiscal 2015
While market conditions remain challenging, particularly in the mass channel in North America, Coty is targeting to keep growth momentum for the remainder of the calendar year.
While the Company expects the fiscal 2014 fourth quarter to be overall flat due to comparison with a strong quarter in the prior-year period, Coty is targeting growth acceleration in the first half of fiscal year 2015 supported by a powerful innovation plan on its Power brands and further development in the emerging markets.
Other noteworthy Company developments:
On February 19th, Coty and Avon Products Inc. signed a letter of intent regarding a distribution agreement where Avon Brazil would market and sell select Coty celebrity and lifestyle fragrances and their ancillaries through Avon's 1.5 million independent Sales Representatives in Brazil. This morning the companies completed a formal agreement, with Coty products anticipated to be included in Avon's Brazil catalogs in time for the calendar 2014 holiday season
Coty advanced its SAP Rollout Program with the April 1st launch of SAP in the Company's largest manufacturing plant, located in Sanford, North Carolina. The system and process ramp-up period is underway. Coty expects to exit fiscal year 2014 with over 70% SAP global coverage in both commercial and manufacturing.
During the third quarter, Coty repurchased approximately 4.5 million shares of its Class A Common Stock for approximately $67.6 million under the Company's $200 million share repurchase program announced on February 14, 2014.
Conference Call
Coty Inc. will host a conference call at 9:30 a.m. (ET) today, May 14, 2014 to discuss its results. The dial-in number for the call is 800-299-8538 in the U.S. or 617-786-2902 internationally (conference passcode number: 92650694). The call will also be webcast live at http://investors.coty.com. The conference call will be available for replay. The replay dial-in number is 888-286-8010 in the U.S. or 617-801-6888 internationally (conference passcode number: 96621186).
About Coty Inc.
Coty is a leading global beauty company with net revenues of $4.6 billion for the fiscal year ended June 30, 2013. Founded in Paris in 1904, Coty is a pure play beauty company with a portfolio of well-known fragrances, color cosmetics and skin & body care products sold in over 130 countries and territories. Coty's product offerings include such power brands as adidas, Calvin Klein, Chloé, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen.
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