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Coty Tackles Its Own Transformation

A $1 billion deal is struck with Brazil's Hypermarcas and the corporate structure is reorganized into three divisions run by presidents recruited from outside Coty. That's week one.

Coty Inc.’s to-do list continues to grow as it readies for the acquisition of the 43 Procter & Gamble Co. beauty brands.

This week alone, Coty revealed it purchased several Brazilian beauty brands from Hypermarcas for $1 billion, and detailed major executive-level restructuring of the corporation that involved the setting up of three divisions for its various operations as well as the move of its executive headquarters to London. The reorganization and relocation of its executive offices is slated to happen after the close of the P&G deal in the second half of next year.

The one thing Coty is not doing is searching for a new chief executive officer.

During the firm’s first-quarter earnings call on Thursday, Coty chairman and interim eco Bart Becht said he plans to stick around for awhile to oversee the “transformation of the Coty business” and “make the P&G merger a success.”

He told analysts, “That may mean I’ll become one of the longest-serving interim ceo’s, but so be it.”

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Asked by one analyst how Coty is handling the “organizational stress” of all the changes facing the company, Becht said, “What you are seeing is a company that is in reconstruction mode.” He added that he is shifting Coty from a sell-in mentality to a sell-out, brand-building one, and he will continue to upgrade the company’s executive bench strength, eyeing external candidates as well. In fact, Coty reached outside the organization for presidents of each of the three new divisions, selecting former L’Oréal veteran Edgar Huber as the president of Coty Luxury, P&G’s Esi Eggleston Bracey as president of Coty Consumer Beauty and P&G’s Sylvie Moreau as president of Coty Professional Beauty. The posts will be effective after the close of the P&G deal.

In the meantime, analysts are waiting to see how Coty will get its sales growing again.

Stifel analyst Mark Astrachan wrote in a research note on Thursday, “Coty’s ability to grow sales has been a focal point for investors, and we believe today’s result and lack of forward commentary are likely to exacerbate concerns. That said, while we anticipated modest growth in fiscal 2016, we believe improving profitability and free cash flow, the pending transformative acquisition of P&G’s beauty business, along with future acquisitions, are long-term drivers of shareholder value.”

On Thursday, Coty reported a steep jump in net income for the first quarter, with profits rising to $125.7 million, compared with $10.6 million in the year-ago period. Adjusted net income was $219.7 million, or 59 cents a diluted share, compared with $103 million, or 28 cents a share, in the prior-year period, largely due to a favorable tax settlement of $113.3 million.

The company’s net revenue for the three months ended Sept. 30 declined 6 percent to $1.11 billion, or 2 percent in constant currency, dragged down by a double-digit decline in fragrance sales in the quarter.

By category, in the quarter, fragrance sales declined 14 percent to $548.1 million, or down 8 percent in constant currency, color cosmetics gained 14 percent to $390.9 million, or up 25 percent in constant currency, and skin- and body-care sales decreased 12 percent to $173.3 million, or down 2 percent in constant currency.

Becht said fragrance revenues continue to suffer from a very large number of unsustainable launches, adding, “We will be working hard to clean up past portfolio practices, while strengthening our innovation pipeline and improving our capabilities in the areas of innovation and sales and marketing execution.” He noted that the portfolio clean-up may extend into next year.

Becht stated the company is making good progress preparing for the planned merger with the P&G beauty brands. “Over the last few months, the financing structure for this transaction has been put in place. Extensive discussions with the 12 licensors have taken place with respect to the transfer of their fragrance licenses to Coty. To date, 10 out of the 12 licenses will transfer to Coty upon regulatory approval and completion of the transaction. This has allowed us to stay on track with the regulatory clearance process. As a result, we continue to anticipate a closure of the transaction in the second half of calendar 2016.”