NEW YORK--(BUSINESS WIRE)--Aug 21, 2018--Coty Inc. (NYSE: COTY) today announced financial results for the fourth quarter and fiscal year ended June 30, 2018.

* Please refer to footnote below

Highlights

Revenues:

FY18 reported net revenues of $9,398.0 million increased by 22.8% with like-for-like (LFL) revenue growth of 0.4% driven by a very strong performance in the Luxury division, which delivered 6.0% LFL growth, a solid 1.7% LFL growth by the Professional Beauty division, offset by a 4.0% LFL decline in the Consumer Beauty division revenues. Reported 4Q18 net revenues of $2,299.4 million grew by 2.6% and increased by 0.3% on a LFL basis, driven by very good 5.3% growth in Luxury, 2.1% growth in Professional Beauty, offset by a 3.4% decline in Consumer Beauty. 4Q18 growth for Consumer and Professional Beauty was impacted by the Brazilian trucker strike and short term supply chain disruptions resulting from the consolidation of warehouses and planning centers in North America and Europe, as the ex P&G business is integrated into Coty.

Gross Margin

FY18 reported gross margin of 61.6% increased by 120 bps from 60.4% in the prior-year. Our FY18 adjusted gross margin of 62.3% decreased by 10bps as solid improvement in the Luxury and Professional Beauty divisions, together with the capture of synergies, was offset by operating de-leverage in the Consumer Beauty division. 4Q18 reported gross margin of 61.0% increased by 10bps versus the prior year, while the adjusted gross margin of 61.9% decreased by 20bps from 4Q17, primarily driven by the supply chain disruptions.

Operating Income:

FY18 reported operating income of $161.2 million improved from a reported loss of $(437.8) million, and the 4Q18 operating loss of $(61.8) million improved from $(279.0) million in the prior year period as our restructuring and acquisition-related costs decreased. FY18 adjusted operating income of $999.8 million grew by 29% from $772.8 million in the prior year, with the adjusted operating margin expanding 50 bps to 10.6% in FY18. The 4Q18 adjusted operating income of $229.4 million more than doubled from $90.1 million in the prior-year period, with 600bps of adjusted operating margin expansion to 10.0%.

Net Income:

FY18 reported net loss of $(168.8) million improved from $(422.2) million in the prior-year, and the 4Q18 reported net loss of $(181.3) million improved from $(304.8) million in the prior period. The FY18 adjusted net income of $516.3 million grew 26% from $408.5 million in the prior year driven by operating income improvement. 4Q18 adjusted net income of $106.6 million improved from a loss of $(3.4) million in the prior year period.

Earnings Per Share (EPS):

Our FY18 reported earnings per share of $(0.23) improved from $(0.66) in the prior-year, the 4Q18 reported EPS of $(0.24) improved from $(0.41) in the prior-year period. The FY18 adjusted EPS of $0.69 grew from $0.63 in the prior year, and the 4Q18 adjusted EPS of $0.14 improved from $0.00 in the prior year period.

Operating Cash Flow & Net Debt:

In FY18, net cash provided by operating activities was $413.7 million, down from $757.5 million in FY17 which benefited from over $400 million related to the timing lag between one-time costs accruals and the associated cash outlay. 4Q18 cash from operations totaled $224.8 million, up $174.0 million from $50.8 million in the prior year period. Net debt of $7,291.6 million on June 30, 2018 increased by $611.4 million from the balance of $6,680.2 million on June 30, 2017.

Outlook and Management Comments

Commenting on the financial results, Camillo Pane, CEO, said: “Coty made good progress in fiscal year 2018 although much remains to be done. We delivered our target of modest like-for-like net revenue growth and, importantly, a very healthy improvement in adjusted operating margin in the second half of the year.

Transformation after an immensely complex merger takes time. After exiting the Transitional Services Agreement with P&G in calendar 2017, we are building and streamlining back office processes, upgrading systems, optimizing our manufacturing and logistics, and overall, simplifying our operations. In parallel, we are investing in our brands and starting to transform our digital capabilities to fuel sustainable growth.

While we work on the full turnaround of the new Coty, we are pleased with the significant progress we have made in under two years and expect the integration to be largely completed by the end of FY19. The first half of our synergies commitment has been delivered as planned by FY18 and we are now focused on enhancing operating income growth by delivering the remaining synergies and returning the business to low single digit LFL net revenue growth. This level of top line growth, combined with our ongoing focus on reducing costs even after the synergies are fully delivered, underpins our medium term target of achieving a high teens adjusted operating margin.

Against this backdrop, we view FY19 as an important step in the right direction to achieve our medium term ambitions. For FY19, we are targeting well over 100 bps of adjusted operating margin expansion, which, combined with our target of flat to modest LFL net revenue growth would deliver mid-teens adjusted operating income growth. Our FY19 EPS target of $0.74 - 0.78 is fully consistent with this level of adjusted operating income growth. Financial performance across quarters in FY19 will not be linear. The peak of the impact of the supply chain disruptions due to our logistics and manufacturing consolidation will come in 1Q19, with a smaller tail end in 2Q19. This will have a significant impact on both top and bottom line, and together with the impact of our brand rationalization program, is expected to drive a low teens decline in our 1Q19 adjusted operating income year over year. Having said that, we do expect that these business integration related impacts will be largely over by the end of first half 2019 and our FY19 targets take these disruptions into consideration.

With respect to integration costs, we continue to expect total costs of approximately $1.3 billion, and as of FY18, we have accrued $1.15 billion of these costs, with the remaining costs expected in FY19-20. To further boost our net revenue growth and operating margins, we are now announcing a new cost savings program, which is fully independent from our P&G integration efforts. This new program will add $250 million in restructuring charges and is expected to deliver up to $150 million of gross savings over a 3 year period. Part of the gross savings will be used to fuel strategic investments such as those in the digital and e-commerce areas. After re-investments, this will result in expected total net savings of approximately $60 million over the next 3 years.

Now that the merger integration is nearing completion, we are also turning our attention to enhancing our cash flow and reducing Coty’s leverage. In this regard, we have set ourselves a target of achieving below 4.0x Net Debt/ Adjusted EBITDA ratio by the end of calendar 2020, down from our current ratio of 5.27x.

As we complete the final stages of our integration and deliver the associated synergies, we are focused on rejuvenating our core business and amplifying our growth potential, by supporting and strengthening our brands, developing a stronger innovation pipeline, advancing our end-to-end digital transformation, and expanding our presence in the faster-growing emerging markets.

The strategic and financial improvements we are making to our business reaffirm our confidence in Coty’s potential to be a leader and challenger in the beauty industry while delivering meaningful short and long term financial results.”

* As compared to combined Coty and P&G Beauty Business net revenues (herein defined as "Combined Company"). These measures, as well as “adjusted gross margin”, “adjusted operating income”, “Net Debt / Adjusted EBITDA ratio”, and “free cash flow,” are Non-GAAP Financial Measures. Refer to “Non-GAAP Financial Measures” for discussion of these measures. Reconciliations from reported to adjusted results can be found at the end of this release. “NM” indicates calculation not meaningful.

Fiscal 2018 Divisional Business Review

Luxury Division

In FY18, reported Luxury net revenues of $3,210.5 million increased by 25.1% versus the prior year. On a LFL basis, Luxury net revenues grew by 6.0% in FY18 fueled by strong momentum in all regions and Travel Retail. Luxury’s growth in FY18 was powered by the success of Gucci Bloom and Tiffany, strong performance in Calvin Klein and philosophy, and excellent innovation execution across other global brands including Chloe Nomade and Marc Jacob’s Daisy Love, each of which gained share in 4Q18. Growth in emerging markets was particularly strong during FY18, with Luxury brands growing low double digits in ALMEA driven by both fragrance and skin care. We also had a great performance in Luxury e-commerce revenues in FY18 led by excellent growth in the US, Germany, the UK and China, where we have forged successful partnerships with key local players.

In 4Q18, reported Luxury revenues increased by 14.6% versus the prior year, while LFL growth was 5.3% during the same period. Our brands were particularly strong in Europe and North America in the fourth quarter with great performances in the U.S., U.K., China, France, Latin America and Travel Retail. Growth was led by the Gucci, Tiffany, philosophy, Chloe and Marc Jacobs brands.

The Luxury division delivered reported operating income of $248.7 million in FY18, an increase of 57% versus FY17, while adjusted operating income was $393.8 million, a growth of 39% from the prior-year. The adjusted operating margin was 12.3%, growing 130 bps versus FY17, driven by gross margin expansion, synergy delivery, and fixed cost reductions. In 4Q18, reported operating income grew from $(43.8) million to $47.5 million, while adjusted operating income increased from $10.0 million to $78.1 million, again supported by net revenue growth and fixed cost management. The adjusted operating margin in 4Q18 was 10.5%.

We remain excited about the prospects for the Burberry brand. While not fully finished, we have made significant progress in reducing Burberry trade inventory since acquiring the business in October 2017.

Consumer Beauty

In FY18, our Consumer Beauty reported net revenues totaled $4,268.1 million, growing 15.7%, but declining 4.0% on a LFL basis. Since the completion of the P&G Beauty transaction, we have made progress towards stabilizing the Consumer Beauty business, with LFL performance improving from (10%) in FY17 to (4%) in FY18. The (3.4%) LFL Consumer Beauty performance in 4Q18 reflected a moderate sequential improvement compared to the (4.5%) LFL performance in the prior nine months. However, it is clear that the recovery is taking longer than expected. Contributing to this delay are external conditions including the decline of the mass beauty market in Europe and North America, increasingly strong competition, and an evolving retail environment that has shifted towards specialty retailers and e-commerce. Performance has also been impacted by internal factors such as short term supply chain disruption and the longer time required to rejuvenate global brands that have sustained multi-year declines. While FY18 was a step in the right direction, we are not satisfied with our results, and we will continue to drive for a better outcome in FY19 in particular by targeting revenue growth in ALMEA, overall e-commerce, and Younique.

In FY18, our Consumer Beauty Europe and North America regions - which together account for over 70% of the division’s net revenues - declined mid to high single digits. This decline occurred against the backdrop of a weak underlying mass beauty market, which declined in the low single digits in Europe and North America across our key color cosmetics, retail hair, body care, and mass fragrance brands. Our emerging markets ALMEA region was stable for Consumer Beauty, as strong double digit growth in most ALMEA markets was offset by decline in Brazil, following our strategic intervention on inventory and pricing, and the recent trucker strike. However Brazil in-market performance continues to be very strong as we are gaining share and growing well ahead of the market. We also saw very strong e-commerce growth in the Consumer Beauty division, even excluding Younique.

As previously mentioned, the short-term supply chain disruptions pressured 4Q18 results. This has primarily impacted our Consumer Beauty division, and has resulted in our inability to meet all of the demand from our customers, with particular impact on the Rimmel, Max Factor and CoverGirl brands. The combination of this supply disruption and the Brazil trucker strike impacted the Consumer Beauty LFL trend in 4Q18. Nevertheless during the fourth quarter, net revenues for the Consumer Beauty North America division grew as we cycled favorable comparables in the prior year related to our 4Q17 TSA exit, while net revenues in ALMEA were flat as declines in Brazil offset strong momentum in the rest of the region, and Europe net revenues remained under pressure.

From a brand perspective, FY18 marked an important milestone for several of our color cosmetics brands, with color cosmetics in total accounting for close to half of the Consumer Beauty net revenues. As we execute our multi-year brand turnaround strategy for CoverGirl in North America, which accounts for a low teens percentage of total Consumer Beauty net revenues, FY18 saw the introduction of a new brand positioning, look, and communication in 2Q18, new in store displays and signage in 3Q18, and the ongoing roll-out of new packaging and innovation, beginning in 2H18 and continuing into 1H19. We continue to have great conviction in the new positioning of CoverGirl and our ability to support this iconic, beloved brand across the most relevant consumer touchpoints. Max Factor, whose key markets include Europe and ALMEA, benefited from a smaller scale relaunch in the second half of the year, resulting in modest growth for the Max Factor brand in FY18. Rimmel, which is present in all of our regions, declined in FY18 and 4Q18, as pockets of growth in certain European countries did not offset declines in the U.K. and U.S.

Within our retail hair brands, which in total account for less than 20% of our Consumer Beauty business, our leading brands Wella and Clairol were affected by different headwinds during the year. Our larger brand, Wella, was pressured by more limited innovation in FY18 but benefited from the brand's disproportionate exposure to faster growing emerging markets. Clairol, whose core geographies are the U.S. and the U.K., was pressured in FY18 but benefited from the 2Q18 relaunch of the Nice'N'Easy franchise, on the back of a breakthrough new formula, with the relaunch now largely implemented on shelf.

Younique, our online peer-to-peer social selling platform, accounts for just over 10% of Consumer Beauty net revenues and delivered strong growth in FY18 on a full year basis. We remain very excited about the role that Younique plays within Coty and are pleased with the performance of this partnership, although 4Q18 was a challenging quarter for Younique as we lapped one of the highest presenter quarters in 4Q17.

From a profit perspective, Consumer Beauty FY18 reported operating income grew 7% to $278.9 million and the adjusted operating income grew 16% to $411.1 million. The adjusted operating margin remained stable at 9.6%, as operating pressure on the core business and higher logistics costs were offset by the full year contribution from the higher-margin Younique brand. The 4Q18 reported operating income of $53.5 million declined 34%, while the adjusted operating income for the quarter of $93.6 million grew 44%. This resulted in an adjusted operating margin of 8.8%, a 300 bps increase versus the prior year period, which was driven by a strong effort in fixed cost control.

Professional Beauty

Professional Beauty FY18 net revenues of $1,919.4 million increased by 37.5% from $1,395.5 million in the prior year, with LFL growth of 1.7%. FY18 was a solid year for the Professional Beauty division, driven by good growth by our hair brands and mid-single digit growth of our OPI nail brand. We were particularly pleased with the high single digit growth of our business in ALMEA where OPI and Wella performed particularly well. Our ghd business had solid growth in FY18, on the back of good performance in Europe, with the business ending with a positive 4Q18. The Wella Professionals brand had a great year in FY18 and 4Q18, as we saw solid growth from both our Color and Care franchises, and an encouraging result for innovations such as WellaPlex. Our OPI sales were driven by a very strong performance from our OPI Gel Color portfolio which is performing well in both developed and emerging markets.

4Q18 reported revenues of $492.6 million grew by 5.4% on a reported basis and 2.1% LFL, a strong end to the year and the fifth consecutive quarter of growth. Our hair brands delivered good growth in North America in 4Q18, while ALMEA growth was low double digits in the same period, driven by great performances in Japan, Latin America, India and China. OPI grew mid-single digits in 4Q18, including robust growth in Europe and ALMEA.

Professional Beauty reported operating income was $119.4 million in FY18, a growth of 52% versus the prior year, while adjusted operating income grew 45% to $194.9 million. In 4Q18, reported operating income was $36.2 million while adjusted operating income was $57.7 million. The Professional Beauty Adjusted Operating margin of 10.2% grew 60 bps during FY18 driven by good fixed cost reduction.

Fiscal 2018 Business Review by Geographic Region

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