Coty’s Q1 Revenues Miss the Mark

Having closed its P&G Specialty Beauty Business merger on Oct.1, Coty has reported that for Q1 2017, pre-merger reported net revenues were $1.08 billion, a decline of 3% as reported and 2% at constant currency.
 
According to Coty,the reported net revenue decline reflects a 1% negative foreign exchange impact and an 8% decline in the underlying business, impacted by company resources shifting to support the closing of the P&G Specialty Beauty Business merger, partially offset by the contribution of the Brazil acquisition. The 2% decline in constant currency revenues was driven by a 9% decline in fragrances, a 7% decline in color cosmetics, a 5% decline in skin & body care, and a 6% contribution from the Brazil acquisition.
 
With the close of the merger, Coty says it has paid $11.6 billion, including $1.9 billion in assumed debt, a savings of $1 billion from the announced July 2015 acquisition price.
 
Operating incomedecreased to $46.4 million from $81.7 million in the prior-year period, driven primarily by the gross profit decline in the quarter. As a percentage of net revenues, operating margin decreased 300 basis points to 4.3% from 7.3%, said Coty. Adjusted operating income decreased 14% to $166.4 million from $192.6 million in the prior-year period, reflecting added staffing and other investment in anticipation of the closing of the P&G Specialty Beauty transaction coupled with sustained advertising & promotion spending. As a percentage of net revenues, adjusted operating margin decreased 190 basis points to 15.4% from 17.3%.
 
“The last several months have been truly transformational for Coty,” said Bart Becht, chairman of the board. On October 1, we closed the P&G Specialty Beauty Business merger, with a $1 billion lower cash payment than anticipated at the announcement of the transaction.”
 
According to Becht, Coty’s new CEO Camillo Pane, the executive team and the divisional, regional and country management teams “are now almost fully in place and are working on exiting transitional service agreements while increasingly focusing on rebuilding business momentum.”
 
He continued, “As expected, the extensive work over the last 15 months on closing the transaction and merging the two businesses has come at a cost. As discussed prior to the closing, the resources which normally work on the business, have also been working on closing the transaction, and setting up and preparing for the future of the combined company. The resulting distraction as well as the recent change in management teams in our headquarters, regions and countries, have contributed to a decline in Coty stand-alone revenues and profits in Q1. Reported and constant currency revenues declined moderately, and adjusted operating income declined by a mid-teens percentage compared to the same period last year.”
 
Becht said that while Coty is anticipating similar revenue trends in Q2, we are committed not only to real improvement in the trend in the second half, excluding divestitures, but also to achieving further improvement for the combined company in the following fiscal years.
 
“Additionally, we remain firmly committed to deploying Coty’s expected strong post merger cash-flow to participate in industry consolidation and build Coty into a much stronger global leader and challenger in the beauty industry, benefiting both consumers and shareholders. In this respect we are very happy with our recent acquisition of the Hypermarcas Beauty Business and our pending acquisition of ghd, which have and we expect will continue to strengthen Coty’s global portfolio, its growth exposure, and its profit and cash generation.”