Coty Inc. Reports Fiscal Third Quarter 2019 Results

Coty Inc. reports third quarter fiscal 2018 results
Coty Inc. reports third quarter fiscal 2018 results
Coty Inc. reports fiscal
third quarter
2019 results
 

PRESS RELEASE
May 8, 2019

 
Coty Inc. Reports Fiscal Third Quarter 2019 Results
 
Third Quarter Results Show Solid Profit and Cash Delivery
Full Year FY19 Outlook Remains On Track with Expectations
Quarterly Dividend of $0.125 with Stock Dividend Election Program Introduced
 
NEW YORK - May 8, 2019 -- Coty Inc. (NYSE: COTY) today announced financial results for the third quarter of fiscal year 2019, ended March 31, 2019.

Overview
Revenues:
• 3Q19 reported net revenues of $1,990.6 million decreased 10.4% year-over-year, with a like-for-like (LFL) revenue decrease of 3.7%. This LFL decline reflected two temporary factors: (i) changes in revenue recognition accounting, which reversed to a negative impact in 3Q19 from a positive impact in 2Q19; and (ii) moderate supply chain related headwinds.
• We estimate that these two factors together negatively impacted LFL revenues by approximately 2%. This performance reflects solid LFL growth in Luxury, a slightly negative performance in Professional Beauty, and a 10% decline in Consumer Beauty, with the latter including approximately 3% of headwinds from the temporary factors.
• During the quarter, we largely resolved the supply constraints across all divisions, resulting in a significant reduction in supply chain-related headwinds in 3Q19 and a minimal expected impact in 4Q19. Year-to-date, we estimate the supply chain disruptions negatively impacted net revenues by over $150 million.
• Year-to-date reported net revenues of $6,533.1 million decreased by 8.0%, with a LFL revenue decline of 3.3%. We estimate that the year-to-date negative impact of the temporary factors cited above was over 2%.
 
Gross Margin
• 3Q19 reported gross margin of 62.8% decreased by 70 bps from the prior-year period, while the adjusted gross margin of 62.9% decreased by 140 bps, as margin expansion in Luxury and Professional Beauty was more than offset by margin contraction in Consumer Beauty, reflecting the negative impact from the change in revenue recognition accounting, adverse regional mix and margin weakness at Younique.
• Year-to-date reported gross margin of 61.6% decreased 20 bps from the prior-year, while the adjusted gross margin of 61.8% decreased by 60 bps, driven primarily by the supply chain disruptions in YTD19.

Operating Income:
• 3Q19 reported operating income of $85.5 million increased versus 3Q18 reported operating income of $20.7 million, supported by lower restructuring charges and good control of SG&A costs.
• 3Q19 adjusted operating income of $229.5 million was in line with the prior year, despite foreign exchange headwinds of approximately 5%. The adjusted operating margin of 11.5% increased 120 bps from the prior-year period. The stable year-over-year profit performance reflects strong fixed cost control, lower stock compensation, lower A&CP spending tied to reductions in non-working media and transactional FX benefits, all of which offset the profit impact from the lower top-line result.
• 3Q19 adjusted operating income was also impacted by the temporary revenue recognition and supply chain headwinds cited above. We estimate that the cumulative negative impact from these factors in 3Q19 was approximately $30 million.
• Year-to-date reported operating loss of $739.8 million compared to reported operating income of $225.4 million in the prior year, reflecting a $965.1 million non-cash impairment charge taken in 2Q19 primarily connected to the Consumer Beauty division and select trademarks.
• Year-to-date adjusted operating income of $692.6 million declined by 10% from the prior year including foreign exchange headwinds of approximately 4%, with an adjusted operating margin of 10.6%. We estimate that year-to-date adjusted operating income was adversely impacted by temporary factors of approximately $105 million, including approximately $100 million from the supply chain disruptions. On a constant currency basis, year-to-date adjusted operating income totaled $723.8 million.
 
Net Income:
• 3Q19 reported net loss of $12.1 million compared to reported net loss of $77.0 million in the prior-year period driven by an improved reported operating income, while the adjusted net income of $101.6 million grew by 6%, reflecting stable adjusted pre-tax income and a decline in our redeemable non-controlling interest as compared to the prior-year period.
• Year-to-date reported net loss of $984.8 million compared to reported net income of $12.5 million in the prior-year driven by the 2Q19 impairment charge, while the adjusted net income of $364.0 million decreased 11% driven by the adjusted operating income decline.
 
Earnings Per Share (EPS):
• 3Q19 reported earnings per share of $(0.02) improved from $(0.10) in the prior year period, and the adjusted EPS of $0.13 was flat with the prior year period.
• Year-to-date reported earnings per share of $(1.31) declined from $0.02 in the prior-year as a result of the aforementioned impairment charge, and adjusted EPS of $0.48 declined from $0.54 in the prior year.
 
Operating Cash Flow & Net Debt:
• In 3Q19, net cash provided by operating activities was $213.7 million, a $332.6 million improvement from the prior year period net cash used in operations of $118.9 million. This operating cash flow improvement reflected the impact of working capital management initiatives, including a solid improvement in the aging of our underlying receivables and the contribution of approximately $110 million from a receivables factoring program. Year-to-date operating cash flow totaled $451.4 million, an increase of $262.5 million from the same period of the prior year.
• Our 3Q19 free cash flow of $142.1 million improved by $347.5 million from the prior year period, fueled by the operating cash flow increase and a $14.9 million decline in capex. Year-to-date free cash flow of $120.5 million increased from a free cash flow use of $129.8 million in the prior year, driven by the increased operating cash flow in 3Q19.
 
Dividend and Net Debt:
• On May 8, 2019, Coty announced a dividend of $0.125 per share payable on June 28, 2019 to holders of record on June 6, 2019. This dividend will be considered a taxable dividend.
• Consistent with our objective of deleveraging to below 4.0x Net Debt/Adjusted EBITDA, Coty is initiating a stock dividend reinvestment program giving shareholders the option to receive their full dividend in cash or to receive their dividend in 50% cash / 50% common stock. Shareholders will be able to make this election on a quarterly basis, beginning with the June 2019 dividend payment, for which the election deadline is June 20, 2019. JAB Group, Coty’s largest shareholder, has informed us that it will elect to receive 50% of its dividend in common stock, until Coty has reached its targeted leverage.
• Net debt of $7,388.2 million on March 31, 2019 decreased by $100.3 million from the balance of $7,488.5 million on December 31, 2018 driven by positive free cash flow and a benefit from foreign exchange. This resulted in a last twelve months Net debt to adjusted EBITDA ratio of 5.7x, a slight improvement over the 5.8x reported ratio on December 31, 2018.
Management Comments
Commenting on the operating results, Pierre Laubies, Coty CEO said:
 
"The close of the third quarter comes only a few months after the new senior management team has been put into place, and I'm very pleased with how the new management team has coalesced. Third quarter results clearly indicate that supply issues are largely resolved and we expect very limited impact from supply chain disruption on the business in the remainder of fiscal 2019. Performance this quarter also shows the increased control that we now have over our cost structure, both in terms of general and administrative costs as well as proactive management of non-working A&CP. Taken together, these factors have allowed us to deliver solid adjusted operating income in-line with the expectations we laid out last quarter. Thus, while we have achieved good profit delivery, the weak top-line result demonstrates that there is still much to be done to turnaround the business. We must capitalize on the solid results of the Luxury and Professional Beauty divisions, and address the weakness of the Consumer Beauty division's performance via shelf productivity, product range simplification, and brand investment at scale. These are the main priorities of the strategic plan that we are completing and which we will start deploying as soon as fiscal 2020. We are more than ever convinced that the core business principles, which were outlined on the second quarter earnings call, are the most relevant levers to maximize value creation in the short and medium term."
 
Commenting on the financials, Pierre-Andre Terisse, Coty CFO said:
 
"Alongside the solid profit result, we achieved positive free cash flow in both the quarter and year-to-date, which reflects increased focus and prioritization in the business. As a result, we ended the quarter with our leverage under control. Having been immersed in the business for several months and deeply involved in the formulation of the strategic plan, I would like to confirm that, in the medium term, we are targeting a net debt to adjusted EBITDA ratio of less than 4 times, which will be achieved through a combination of EBITDA growth and net debt paydown. Consistent with this objective, Coty will maintain our quarterly dividend of $0.125 per share and initiate a stock dividend reinvestment program giving shareholders the option to receive dividends fully in cash or in a combination of 50% cash and 50% common stock. JAB has informed us that it will elect to receive its dividend in stock for half of its holdings until Coty has reached its medium term targeted leverage. We are also pleased with the successful completion of the Tender Offer in recent days and the transaction's underlying expression of confidence and support in Coty from JAB.”

Outlook
 
We continue to expect that FY19 constant currency adjusted operating income will be moderately below FY18, implying a solid profit performance in the fourth quarter, despite expected continued weakness in top-line. We continue to expect positive free cash flow for FY19, with solid free cash flow generation in 4Q19.

Third Quarter Fiscal 2019 Business Review by Segment
 



In 3Q19, reported Luxury net revenues of $729.2 million decreased by 3.1% versus the prior year. On a LFL basis, Luxury net revenues increased by 2.8%. We estimate that the required revenue recognition accounting change and supply chain disruptions negatively impacted revenues by approximately 1%.
 
Solid 3Q19 results were supported by continued strength in Burberry, Gucci and Calvin Klein, and the return to strong growth in Hugo Boss as the supply chain disruptions abated and the brand saw momentum behind the launch of Boss Bottled Infinite. The continued sell-out strength of Chloé Nomade and Marc Jacobs' Daisy drove sustained share gains for both brands. We recently announced the renewal of the Marc Jacobs fragrance license, reinforcing the strength and longevity of the Luxury brand portfolio. We also recently launched our new Gucci lipstick collection, which features a wide range of shades and finishes, and represents the first step in our re-launch of the Gucci make-up line.
 
The Luxury division delivered reported operating income of $87.7 million, an increase of 48% vs. the prior-year period. 3Q19 adjusted operating income was $126.1 million, reflecting very strong 26% growth from the prior year, driven by solid fixed cost reductions, cost of sales savings resulting from the supply chain integration programs and streamlining of non-working A&CP. The 3Q19 adjusted operating margin was 17.3%, an increase of 400 bps versus 3Q18. Despite close to $50 million in profit impact from supply chain disruptions and $12 million FX translation impact, the year-to-date Luxury adjusted operating income grew 28.2%, resulting in a 310 bps margin improvement to 15.9%.


3Q19 Consumer Beauty net revenues of $840.3 million declined 17.8% on a reported basis and declined 10.0% LFL. We estimate that the required revenue recognition policy change and supply chain disruptions impacted revenues by approximately 3%. Excluding these temporary factors, this performance continues to be broadly in-line with sell-out trends, which are declining high single digits as our brands face share losses and continued weakness in the global mass beauty category, particularly in the U.S. and Europe.
 
By category, and adjusting for negative impact of the revenue recognition accounting change, net revenue in color cosmetics declined high single digits and was consistent with the retail performance. Sell-out in Cover Girl, Rimmel and Max Factor cosmetics brands was in line with our category average, while Sally Hansen delivered low single digit sell-out growth and share gains in the U.S. Net revenues in retail hair also declined high single digits, though sell-out performance was strong in ALMEA and Wella Retail gained share across multiple markets. Body care revenues improved year over year as we lapped an easy comparable from 3Q18 when body care net revenues were temporarily depressed as a result of our pricing intervention in Brazil, which significantly impacted shipments of Brazil local body care brands. During the quarter, we saw solid share gains in both Brazil local brands and the adidas body care portfolio.
 
Younique revenues and profit declined during 3Q19 driven by lower presenter sponsorship, although Younique's customizable skincare line, YOU·OLOGY, was launched during the quarter and is off to a solid start.
 
Reported operating loss in 3Q19 of $24.1 million compared to reported operating income of $64.2 million in the prior year period. The 3Q19 adjusted operating income of $55.8 million declined from $97.3 million in the prior year period, resulting in an adjusted operating margin of 6.6%. Despite reductions in fixed costs, the adjusted operating margin was impacted by net revenue contraction and gross margin pressure, driven by both the negative impact from the change in accounting for revenue recognition and regional mix linked to Brazil.


Professional Beauty 3Q19 net revenues of $421.1 million declined by 6.1%, with LFL down 0.6%, including minor impact from both supply chain and the revenue recognition accounting change. The modest decline was driven by weakness in North America, due to lingering impacts from Coty's supply chain disruptions, and trade inventory reductions at certain key customers.  With service levels now largely restored for OPI, the brand returned to solid growth, and we continued to enjoy very strong momentum in ghd due to the product launch of the ghd Glide hot-brush in the quarter and the continued success of the Platinum+ styler.
 
Professional Beauty reported operating income of $30.7 million increased from $11.4 million in the prior year period, while adjusted operating income grew 57% to $47.3 million. The Professional Beauty division adjusted operating margin of 11.2% grew 450 bps, driven by strong gross margin performance and good fixed cost reduction. Despite over $20 million in profit impact from supply chain disruptions and $8 million negative FX impact, the year-to-date Professional Beauty adjusted operating income grew 18.2%, resulting in 240 bps margin improvement to 12.0%.
Third Quarter Fiscal 2019 Business Review by Geographic Region



North America
• North America net revenues of $611.7 million, or approximately 31% of total net revenues, declined 14% as reported and declined 13% LFL. The revenue recognition accounting change, which primarily affected North America, negatively impacted net revenues by approximately 3%. The overall decline was driven by weakness in Consumer Beauty, reflecting underlying mass beauty market challenges, shelf space losses in several brands, and pressure on Younique. Professional Beauty net revenues were lower as a result of certain key customers' trade inventory reduction and lingering impacts from the supply chain disruptions.
 
Europe
• Europe net revenues of $837.9 million, or approximately 42% of total net revenues, declined 14% on a reported basis and declined 5% on a LFL basis driven by weakness in Consumer Beauty as a result of performance challenges, largely offset by growth in Luxury fueled by Germany, UK, and Spain, and growth in Professional Beauty, particularly in the U.K. and Russia.
 
ALMEA
• ALMEA net revenues of $541.0 million, or approximately 27% of total net revenues, increased 1% as reported, and grew a very strong 11% LFL driven by Consumer Beauty, primarily as a result of favorable comparables in Brazil, and strong growth in Luxury on the back of robust performance China and the Middle East.
Cash Flows
• In 3Q19, net cash provided by operating activities was $213.7 million, a $332.6 million improvement from the prior year period net cash used in operations of $118.9 million. This operating cash flow improvement reflected the impact of working capital management initiatives, including the contribution of approximately $110 million from a receivables factoring program and a solid improvement in the aging of our underlying receivables. Year-to-date operating cash flow totaled $451.4 million, an increase of $262.5 million from the same period of the prior year.
• Our 3Q19 free cash flow of $142.1 million improved by $347.5 million from the prior year period, fueled by the operating cash flow increase and a $14.9 million decline in capex. Year-to-date free cash flow of $120.5 million increased from a free cash flow use of $129.8 million in the prior year, driven by the increased operating cash flow in 3Q19.
• In 3Q19, we distributed $94.4 million in quarterly dividends for a cumulative total of $282.8 million.
• Cash and cash equivalents of $384.1 million decreased modestly from $417.5 million on December 31, 2018. Total debt of $7,772.3 million decreased by $133.7 million from December 31, 2018, with net debt of $7,388.2 million, a decrease of $100.3 million from the balance of $7,488.5 million on December 31, 2018. This net debt decrease reflects positive free cash flow and a benefit from foreign exchange, as well as the payment of $94.4 million of dividends.
Other Company Developments
Other company developments include:
 
• On February 13, 2019, JAB Holding Company S.à r.l. commenced its Tender Offer, pursuant to which an affiliate of JAB Group would acquire up to 150 million additional shares of Coty's Class A common stock at a price of $11.65 per share in cash. This Tender Offer was completed on April 30, 2019, with JAB Group's ownership of Coty now accounting for 60% of our outstanding shares.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, May 8, 2019 to discuss its results. The dial-in number for the call is (866) 834-4311 in the U.S. or (720) 405-2213 internationally (conference passcode number: 2479048). The live audio webcast and presentation slides will be available at http://investors.coty.com. The conference call will be available for replay.
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