Coty Reports Strong 2Q22 Across All Metrics, With Significant Momentum Into 3Q22

Strong Sales and Sell-Out Momentum in 1H22, Fueled by U.S., China and Travel Retail
Consumer Beauty Accelerates Growth And Gains Market Share
Leverage Below 5x Exiting CY21, Ahead of Expectations
Robust Gross Margin Expansion Fuel Media Reinvestment and Profit Growth
FY22 Sales Expected at Upper End of Guidance Range, with Adjusted EPS Outlook Higher

NEW YORK--(BUSINESS WIRE)--Coty Inc. (NYSE: COTY) ("Coty" or "the Company") today announced its results for the second quarter of fiscal year 2022, ended December 31, 2021. The results represented another quarter of solid financial improvement and continued strong delivery across its strategic growth pillars.

In Q2, Coty's sales increased 12% as reported and LFL, in-line with its prior guidance of low-teens LFL growth year-on-year, following the strong sales growth during Q1 as Coty shipped key launches including Gucci Flora Gorgeous Gardenia, Burberry Hero and the relaunch of the full Kylie Cosmetics range. With each of these launches strongly resonating in-market and the Consumer Beauty business gaining sales growth momentum and market share, the total Coty sell-out improved in Q2. As a result, both sales and sell-out in 1H22 saw mid-teens growth, with January LFL sales accelerating from Q2 levels to +13%.

Coty's Prestige segment generated solid 12% reported and LFL growth in Q2, and 21% in 1H22. Prestige fragrance sales continued to grow at a double-digit pace in Q2, with nearly all brands contributing, particularly Gucci, Burberry, Chloe, and Hugo Boss. Encouragingly, Coty's key launches saw strong in-market success, with Gucci Flora Gorgeous Gardenia and Burberry Hero among the top launches in the U.S. market and in China, including on Tmall. Simultaneously, Prestige cosmetics sales nearly doubled in 1H22, led by global momentum in Gucci makeup and the continued expansion of Kylie Cosmetics following the relaunch over the summer. Regionally, the 1H22 performance was largely broad based as the U.S. and China delivered double digit growth, Travel Retail more than doubled, and many European markets continued to recover.

Consumer Beauty revenues increased 11% as reported and 12% LFL in Q2, and grew by 8% as reported and LFL in 1H22. The early success of Coty's strategy to stabilize and grow its Consumer Beauty business is evident in the latest measured market share data, in which Coty grew its market share on a global basis for the first time in 5 years. This was underpinned by market share gains across all 4 key color cosmetics brands - CoverGirl, Rimmel, Sally Hansen and Max Factor - as the new brand equities, communications, and product launches resonated with consumers.

During the quarter, Coty's virtuous circle continued to take hold with significant gross margin expansion and further cost reductions allowing the Company to grow profit while simultaneously reinvesting in media to fuel sell-out growth. Q2 reported gross margins expanded by 570 bps YoY to 64.4%, while adjusted gross margin grew 590 bps YoY and 120bps QoQ to 64.6%, despite inflationary headwinds. This robust gross margin expansion was driven by favorable product and category mix, pricing, improved excess & obsolescence, and higher absorption. In addition, Coty continued to lower its cost base, with year-over-year savings of over $40 million in Q2, bringing total YTD savings to close to $100M. Coty delivered Q2 reported operating income of $244.0 million and adjusted EBITDA of $311.9 million. 1H22 reported operating income totaled $261.2 million and adjusted EBITDA totaled $590.4 million, reflecting over 30% growth YoY, ahead of guidance.

Financial Net Debt improved by approximately $500 million to just under $4.5 billion at the end of Q2, fueled by strong free cash flow generation and real estate divestitures. As a result, the financial leverage ratio of 4.9x at the end of CY21 was ahead of expectations. With an increase in the value of Coty's 26% Wella stake to approximately $1.18 billion at quarter-end, the Company's Economic Net Debt totaled approximately $3.3 billion.

Commenting on the operating results, Sue Y. Nabi, Coty's CEO, said:

"With our 1H22 now complete, I am very pleased to say that the year is shaping up as we had hoped, and in many respects even better. During the quarter, we continued to execute on our strategic growth pillars, allowing us to deliver sales, profit, and leverage results inline or ahead of guidance for the sixth consecutive quarter. The second quarter, and even more so the first half, further illustrates the virtuous cycle we have created. Strong topline growth combined with gross margin expansion and strong cost execution are generating both profit growth and re-investment in the business in the most promising opportunities. This combination has contributed to sequentially improving sell-out trends in Q2, which sets the stage for accelerating sales growth in the second half. Importantly, we also delivered on our leverage target goals, ending CY21 with financial net debt to adjusted EBITDA leverage ratio of below 5x, and we are already making strong strides toward our CY22 leverage target of approximately 4x with the expected $175 million of shareholder distribution from Wella.

Q2 marked another quarter of progress across each of our six strategic pillars. I am extremely proud to say that the repositioning of Consumer Beauty brands is generating success. For the first time in 5 years, all 4 of our top cosmetics brands - CoverGirl, Rimmel, Sally Hansen, and Max Factor - are gaining market share on a global basis, fueling market share gains for the overall Consumer Beauty business. While the path to sustained Consumer Beauty expansion may not be linear, these strong results confirm that our Consumer Beauty brands are as relevant as ever and with the right products, communication strategy, in-store execution and teams, we can truly excel.

Trends within our Prestige fragrance portfolio remained strong, with double digit sell-out growth and strategic launches like Gucci Flora and Burberry Hero already on track to become global icons. At the same time, the success of Gucci makeup and continued expansion of Kylie cosmetics are further cementing Coty's position within prestige cosmetics. Meanwhile, Q2 was a busy quarter in relation to our skincare ambitions, as we announced the license of the Orveda brand and the launch of CoverGirl skincare, and hired Dr. Shimei Fan as our Chief Scientific Officer, all while solidifying Lancaster's position in China through new door openings and innovative activations. In digital, we are leading with social commerce across each region, fueling a truly omnichannel approach with our retailer partners. In China, we have maintained double digit growth, even as COVID restrictions weighed on market growth in the short term, with our Prestige sell-out growth 6 times higher than the prestige beauty market. Finally, on sustainability, we completed a comprehensive footprint analysis ex-Wella, which will serve as the baseline for more ambitious sustainability targets in line with the Science Based Target initiative.

The strong business trajectory of the first half of the year and continuing through January gives us confidence in our outlook for the second half of FY22. Therefore, we now expect our FY22 LFL sales growth to be towards the higher end of our guidance range of low-to-mid teens LFL growth. We continue to anticipate the impact of inflation to step up in the second half of FY22, and we expect to fully offset this through a combination of mix management, pricing, and cost savings. As we navigate through this dynamic environment, we remain confident in achieving FY22 constant currency adjusted EBITDA of $900 million at a minimum, while increasing our adjusted EPS outlook to $0.22-0.26.

Our short-term and medium-term ambitions remain fully on track, as we continue to transform Coty into a true global beauty powerhouse."

Highlights

• 2Q22 net revenues increased 12% on a reported and LFL basis. Net revenue trends were driven by solid growth in both Prestige and Consumer Beauty.
• Reported operating income was $244.0 million in 2Q22.
• 2Q22 adjusted operating income increased to $236.3 million, up from $203.0 million, with 70 bps of margin expansion to 15.0%.
• 2Q22 adjusted EBITDA of $311.9 million, increased 10%, with an adjusted EBITDA margin of 19.8%.
• 2Q22 reported EPS was $0.23. Adjusted EPS of $0.17, improved from $0.13 last year, including a 2 cent discrete tax benefit in the quarter.
• Cost reductions remained solid with over $40 million of additional reductions, bringing YTD total savings close to $100 million.
• 2Q22 free cash flow of $408.0 million improved by $18.6 million from last year driven by higher net income on a cash basis.
• Financial Net Debt was in line with expectations at $4,454.2 million, which decreased sequentially, fueled by the free cash flow generation and bringing the financial leverage to 4.9x. Economic Net Debt totaled $3,279.2 million at quarter end.
• Entering Q3, Wella has completed a refinancing of its existing debt in order to fund a shareholder distribution, which should result in approximately $175 million of cash proceeds to Coty. The Company will utilize this distribution primarily to reduce existing financial net debt.

Outlook

The strong sales and sell-out momentum in 1H22, extending through January with LFL sales growth of +13%, reinforces Coty's confidence that FY22 LFL sales will be at the upper end of its guidance range of low-to-mid teens percentage growth. Based on current FX rates, Coty expects a headwind of 3-4% to its reported sales in 2H22.

The Company continues to expect FY22 adjusted of EBITDA of $900 million at a minimum, on a constant currency basis, as Coty navigates the inflationary environment while intentionally reinvesting gross margin gains and costs savings in its brands to maximize value and fuel sustained topline growth. This reflects strong EBITDA margin expansion YoY. Based on current FX rates, Coty expects a negligible FX impact to its FY22 adjusted EBITDA outlook, as FX benefits in 1H22 are offset by FX headwinds in 2H22.

With the strong Q2 EPS delivery, Coty raises its FY22 adjusted EPS guidance to $0.22-0.26, up from its previously guided range of $0.20-0.24. The FY22 adjusted EPS guidance includes approximately 1 cent of net discrete tax benefits expected for the year.

In addition, the Company continues to target leverage of approximately 4x exiting CY22. Given Wella has completed a refinancing of its existing debt in order to fund a shareholder distribution, the expected $175 million distribution from Wella represents a strong contribution towards this target. Coty continues to target leverage of approximately 2x exiting CY25.

 

Financial Results*

Refer to “Non-GAAP Financial Measures” for discussion of the non-GAAP financial measures used in this release; reconciliations from reported to adjusted results can be found at the end of this release.

Revenues:

• 2Q22 reported net revenues of $1,578.2 million increased 12% year-over-year. LFL revenue increased 12%, driven by an 12% increase in both Prestige and Consumer Beauty.
• Year-to-date reported net revenues of $2,949.9 increased 16% year-over-year, including a positive FX impact of 1%. LFL revenue increased 16%, driven by LFL increases in Prestige of 21%, and Consumer Beauty of 8%.

Gross Margin:

• 2Q22 reported gross margin of 64.4% increased from 58.7% in the prior-year period, while adjusted gross margin of 64.6% increased from 58.7% in 2Q21. The increase was driven by positive intra-category mix-shift, including in both Prestige and Consumer Beauty, price and mix management, excess & obsolescence improvement, and better absorption on improved volumes.
• Year-to-date reported gross margin of 63.9% increased from 58.7%, while adjusted gross margin of 64.0% increased from 58.7% in 2Q21. The increase was due to positive mix-shift, including in both Prestige and Consumer Beauty, excess & obsolescence improvement, better absorption, and improved volumes.

Operating Income and EBITDA:

• 2Q22 reported operating income of $244.0 million improved from a reported operating income of $17.0 million in the prior year due to a $59.7 million reduction in restructuring and other business realignment costs, a $44.8 million reduction in acquisition and divestiture related expenses, the real estate sale gain, and higher gross margin, partially offset by higher SG&A expenses stemming from increased marketing investment.
• 2Q22 adjusted operating income of $236.3 million rose from $203.0 million in the prior year, while the adjusted EBITDA of $311.9 million increased 10% from $284.5 million in the prior year. The increase was driven by a higher gross margin and continued fixed cost reductions, partially offset by higher A&CP expenses, primarily within working media. For 2Q22, the adjusted operating margin increased 70 bps to 15.0%, while the adjusted EBITDA margin was 19.8%.
• Year-to-date reported operating income from Continuing Operations of $261.2 million increased from a reported operating loss of $49.0 million due to lower restructuring and other business realignment costs, reduced acquisition and divestiture-related expenses, increased sales, the real estate gain, and a higher gross margin, partially offset by higher SG&A expenses. Year-to-date adjusted operating income for Continuing Operations increased 51% to $436.8 million, with a margin of 14.8%, while the adjusted EBITDA totaled $590.4 million with a margin of 20.0%.

Net Income:

• 2Q22 reported net income of $188.9 million improved from a net loss of $39.8 million in the prior year, primarily due to the $128.3 million change in fair value of investment in Wella and the aforementioned increase in reported operating income, partially offset by higher taxes compared to the year-ago period.
• The 2Q22 adjusted net income of $147.7 million increased from $102.3 million in the prior year period.
• Year-to-date reported net income of $291.9 million compared to net income of $56.1 million in the prior year. Year-to-date adjusted net income of $210.8 million increased from $92.5 million in the prior year.

Earnings Per Share (EPS) - diluted:

• 2Q22 reported earnings per share of $0.23 improved from a reported loss per share of $(0.05) in the prior year.
• 2Q22 adjusted EPS of $0.17 improved from $0.13 in the prior year.
• Year-to-date reported earnings per share of $0.36 rose from $0.07 in the prior year.
• Year-to-date adjusted EPS of $0.26 increased from $0.12 in the prior year.

Operating Cash Flow:

• 2Q22 cash from operations totaling $449.0 million improved from $430.1 million in the prior-year period, reflecting an increase in net income on a cash basis. First half operating cash flow totaled $734.7 million, an increase of $262.0 million from the same period of the prior year.
• 2Q22 free cash flow of $408.0 million improved from a free cash flow of $389.4 million in the prior year driven by the increase in operating cash flow of $18.9 million. First half free cash flow of $648.7 million increased by $287.6 million from the prior year.

Financial Net Debt:

• Financial Net Debt of $4,454.2 million on December 31, 2021 decreased from $4,955.1 million on September 30, 2021. The decrease was driven by the strong free cash flow generated in the quarter coupled with the sale of real estate assets.
  
  

Second Quarter Business Review by Segment*

Prestige
In 2Q22, Prestige net revenues of $1,008.0 million or 64% of Coty sales, increased by 12% versus the prior year. On a LFL basis, Prestige net revenues delivered robust growth of 12%, driven by strength across all regions including continued rebound of market growth in most EMEA markets, Travel Retail, China, and the U.S.

During 2Q, U.S. Prestige fragrance sell-out continued to generate stellar growth, increasing over 40% versus last year. Performance continued to be particularly favorable for Burberry, Gucci, Marc Jacobs, and Chloe. Importantly, Coty's recent key innovations, notably Gucci Flora Gorgeous Gardenia and Burberry Hero, also continue to deliver very strong sell-out performance and are amongst the top selling fragrance innovations in key markets. In EMEA, Prestige fragrances showed further improvement in 2Q22. In China, fragrance sell-out showed strong double-digit growth in the quarter, which was supported by the strength of recent launches, including Gucci Flora Gorgeous Gardenia which ranked as a top 7 fragrance on Tmall in December.

Additionally, Coty continued to make progress further expanding into Prestige cosmetics and skincare in the quarter. Prestige cosmetics sales nearly doubled in both Q2 and 1H22, fueled by Gucci makeup and Kylie cosmetics. In skincare, the Company continued to build the foundations for acceleration in the segment, including strengthening Lancaster's brand image in Hainan and mainland China through innovative activations and continued distribution expansion.

The Prestige segment generated a reported operating income of $141.6 million in 2Q22, compared to $110.8 million in the prior year. The 2Q22 adjusted operating income was $182.0 million, up from an adjusted operating income of $160.6 million in the prior year, driven by gross margin improvement, partially offset by higher working media expenses. Adjusted EBITDA for the Prestige segment rose to $219.0 million from $199.4 million in the prior year, with a margin of 21.7%.

Consumer Beauty
In 2Q22, Consumer Beauty net revenues of $570.2 million, or 36% of Coty sales, increased by 11% versus the prior year. On a LFL basis, Consumer Beauty net revenue growth accelerated to 12%. Encouragingly, all regions generated double-digit LFL growth in the quarter. From a category perspective, color cosmetics led, with LFL growth in the mid-teens.

During the quarter, for the first time in 5 years the total Coty Consumer Beauty business gained market share, driven by particularly strong performance of color cosmetics, which grew in share by over 1 point. In the U.S., CoverGirl continues to show that the brand is on a sustainable path of improvement and growth as it has grown or maintained share in 6 of the last 9 months since the new brand equity was launched. Meanwhile, Sally Hansen remains strong as it gained share through the quarter and sell-out remains ahead of pre-pandemic levels.

In Europe, Coty grew market share for the first time in two years, which was supported by the re-positioning efforts behind Rimmel and Max Factor. In the UK, Rimmel continues to lead the market with share increasing, supported by particularly strong e-commerce trends. Meanwhile, Max Factor continued to take share across many key markets including the UK, Spain, Czech Republic, and Poland.

The Consumer Beauty reported operating income was $43.3 million in 2Q22, an increase from $30.4 million in the prior year. The 2Q22 adjusted operating income of $54.3 million increased from $42.4 million in the prior year, driven by a higher gross margin and solid fixed cost reductions, partially offset by a reinvestment in marketing expenses, particularly towards working media. During the quarter, adjusted EBITDA increased to $92.9 million from $85.1 million in the prior year, with a margin of 16.3%.

Second Quarter Fiscal 2022 Business Review by Region*

Americas

• In 2Q22, Americas net revenues of $587.0 million, or 37% of Coty sales, increased 9% as reported and LFL. This was driven by strong growth of both Prestige and Consumer Beauty. The Prestige performance continued to benefit from particularly robust fragrance category trends in the U.S., coupled with the solid performance of Coty's recent fragrance innovations, with Gucci Flora the #1 fragrance launch in the U.S. and Canada, and Burberry Hero the #4 male launch in the U.S. for all of CY21. CoverGirl also exhibited strong growth, gaining market share in the quarter, while Sally Hansen also gained share.

EMEA

• In 2Q22, EMEA net revenues of $795.0 million, or 50% of Coty sales, increased 12% as reported and 13% LFL. Similar to the Americas region, growth was fairly broad-based across both Prestige and Consumer Beauty.

Asia Pacific

• In 2Q22, Asia Pacific net revenues of $196.2 million, or 12% of Coty sales, increased 17% as reported and 16% LFL. Sales were driven by strong performance in China as well as the continued recovery in Travel Retail.

Noteworthy Company Developments

Other noteworthy company developments include:

• On November 10, 2021, Coty announced the sale of KKR's remaining 2.4% ownership stake in Coty. This sale further simplifies Coty's capital structure and results in additional annual dividend cash savings of approximately $11 million.
• On November 16, 2021, Coty announced that Dr. Shimei Fan will join the Company as Chief Scientific Officer, beginning on January 3, 2022. From her prior experience, Shimei brings deep and invaluable expertise across three of Coty's strategic growth drivers: color cosmetics, skincare, and the Chinese beauty market.
• On November 17, 2021, Coty released its 2021 Sustainability Report. In the report, Coty shares its progress in advancing the Company's dedicated sustainability strategy, Beauty That lasts, during Coty's FY21.
• On November 18, 2021, Coty announced that it entered into a licensing agreement with Orveda, an ultra-premium skincare brand made in France. The diversity-owned haute-professional skincare combines the best of nature with cutting-edge biotechnology and dermatological benefits to help consumers achieve a healthy skin glow that rivals makeup.
• On November 18, 2021, Coty hosted an Investor Day, where it provided an update on the significant progress made across the Company's six strategic pillars, elaborated on key operational milestones, reported on its comprehensive transformation program, and announced its financial goals through FY25 and beyond.
• On November 30, 2021, Coty completed the issuance of $500 million of 4.750% senior secured notes due in 2029. The proceeds are net leverage neutral and have been used to repay all of the euro-denominated loans outstanding under Coty's existing senior secured "term A" credit facility and a portion of the amount outstanding under its senior secured revolving credit facility due in April 2023.
• Entering Q3, Wella has completed a refinancing of its existing debt in order to fund a shareholder distribution, which should result in approximately $175 million of cash proceeds to Coty. The Company intends to utilize this distribution plus excess cash on the balance sheet to redeem its 2023 EUR 550M unsecured bonds in full following the time that the bond call premium drops to par on April 15th 2022, thereby accelerating the Company's deleveraging trajectory.
  
  

Conference Call
Coty Inc. will host a conference call at 8:00 a.

Investor Relations
Olga Levinzon, +1 212 389-7733
olga_levinzon@cotyinc.com

Media
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