Coty Inc. reports Fiscal 2019 fourth quarter and full year results, in-line with guidance

Coty Inc. reports Fiscal 2019
fourth quarter and full year results,
in-line with guidance
 
PRESS RELEASE
August 28, 2019

 
FY19 Reported EPS ($5.04), Adjusted EPS of $0.65

FY20 Adjusted EPS Targeted Growth in the Mid-Single Digits

NEW YORK - August 28, 2019-- Coty Inc. (NYSE: COTY) today announced financial results for the fourth quarter and fiscal year ended June 30, 2019.
Highlights
  • Results in-line with February guidance
  • FY19 net revenues down 8.0%, with LFL decline of 3.5%
  • Strong LFL growth in Luxury, offset by decline in Consumer Beauty
  • Reported operating income and margin include significant impairment costs as anticipated
  • Adjusted operating margin of 11.0%, up 30 bps YoY
  • Adjusted EPS of $0.65 down 6%, including 4% FX headwind
  • FY19 free cash flow of $213.0 million
 
Commenting on the operating results, Pierre Laubies, Coty CEO said:
 
"2019 is the beginning of a new phase in Coty's journey, but I am pleased to start delivering against the targets we shared with you in February, with FY19 adjusted EPS of $0.65, constant currency adjusted operating income of $992 million, and solid cash flow generation. We are now fully engaged in FY20. Our Turnaround Plan focuses on reshaping and simplifying our beauty business to generate fuel for growth and leverage the potential of our Consumer Beauty brands, while continuing to improve growth and margins in our Luxury and Professional Beauty divisions. Our plan will deliver gradually, but we expect dynamics to start changing as soon as this upcoming year, as reflected in our targets for FY20."
 
Commenting on the financial results, Pierre-André Terisse, Coty CFO said:
 
"FY19 has been a key milestone, with solid delivery in H2; a thorough review of our assets, including the adjustment of their value in our financial statements; and the strengthening of our financial position and financial policy. This includes a target leverage at 4x net debt to adjusted EBITDA and the confirmation of our dividend, with the option to receive half of it in shares. We now have a clear business and financial framework for the next four years, targeting in FY23 the gradual return to low single digit sales growth, stronger operating margins at 14-16%, and free cash flow above $1 billion. FY20 will be a first step towards these goals, and building on the delivery of FY19, we are confident in the delivery of our targets for the coming year."
FY20 Outlook
  • Net Revenues: Stable to slightly lower LFL, starting in 1Q20.
  • Adjusted Operating Income: 5-10% YoY growth, at constant FX and portfolio scope, after increased investment behind our brands.
  • Adjusted EPS: Mid-single digit growth.
  • Free Cash Flow: Moderate improvement YoY.
* 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.
Financial Results
Revenues:
  • FY19 reported net revenues of $8,648.5 million decreased by 8.0%, with a like-for-like (LFL) revenue decline of 3.5% and negative foreign exchange (FX) impact of 3.6%. The LFL performance reflected strong growth in the Luxury division of 4.7% LFL, offset by a 10.6% LFL decline in the Consumer Beauty division and a 1.7% LFL decline in the Professional Beauty division. FY19 net revenues included $358 million from Younique.
  • 4Q19 net revenues of $2,115.4 million decreased by 8.0% and declined by 4.1% on a LFL basis, driven by an 11.5% LFL decline in Consumer Beauty reflecting continued share pressure in the core business and softness in Younique, and a 3.1% LFL decline in Professional Beauty primarily as a result of trade inventory destocking at certain customers. The Luxury division delivered very good 5.8% LFL growth, fueled by Burberry, Gucci, and Calvin Klein.
Gross Margin
  • FY19 reported gross margin of 61.8% increased by 20 bps from 61.6% in the prior-year. Our FY19 adjusted gross margin of 61.9% decreased by 40 bps, as solid gross margin expansion in Professional Beauty was offset by margin contraction in Consumer Beauty reflecting country-mix shift and elevated promotional activity.
  • 4Q19 reported gross margin of 62.2% increased by 120 bps versus the prior year period, while the adjusted gross margin of 62.1% increased by 20 bps, driven by margin expansion in the Luxury division which also contributed to a greater portion of the revenue mix.
Operating Income:
  • FY19 reported operating loss totaled $3,471.5 million, compared to reported operating income of $153.3 million in FY18, and the 4Q19 reported operating loss totaled $2,731.7 million compared to a reported operating loss of $72.1 million in the prior-year period.
  • The 4Q19 reported operating loss reflected $2.9 billion non-cash impairment charge primarily connected to the Consumer Beauty division and specific brand trademarks, bringing the FY19 total impairment charge to $3.9 billion. This impairment total includes $3.4 billion of Consumer Beauty goodwill, and $0.4 billion of indefinite-lived trademarks with the majority of the trademark impairment related to several Consumer Beauty brands.
  • FY19 adjusted operating income of $949.7 million declined by 5% from $1,002.3 million in the prior year, with negative FX impact accounting for a 4% decline. The broadly stable constant currency adjusted operating income as compared to the prior year was delivered in spite of approximately $100 million of negative impact on our operations from supply chain disruptions, as we actively managed our fixed costs as well as non-working media. FY19 adjusted operating income included $16 million from Younique.
  • The FY19 adjusted operating margin expanded 30 bps to 11.0% in FY19, on the back of 320 bps margin expansion in Luxury to 15.5% and 190 bps margin growth in Professional Beauty to 12.1%, partially offset by a 340 bps decline in Consumer Beauty to 6.2%.
  • The 4Q19 adjusted operating income of $257.1 million increased 12% from the prior-year period, despite 5% negative impact from FX. The 4Q19 adjusted operating margin grew 220 bps to 12.2%.
Net Income:
  • FY19 reported net loss of $3,784.2 million compared to a reported net loss of $168.8 million in the prior-year, and the 4Q19 reported net loss of $2,799.4 million compared to a reported net loss of $181.3 million in the prior-year period.
  • The FY19 adjusted net income of $487.6 million declined 6% from $516.3 million in the prior year.
  • 4Q19 adjusted net income of $123.6 million increased 16% from $106.6 million in the prior year period.
Earnings Per Share (EPS):
  • Our FY19 reported earnings per share of $(5.04) decreased compared to $(0.23) in the prior-year, and the 4Q19 reported EPS of $(3.72) decreased compared to $(0.24) in the prior-year period.
  • The FY19 adjusted EPS of $0.65 decreased from $0.69 in the prior-year, and the 4Q19 adjusted EPS of $0.16 improved from $0.14 in the prior-year period.
Operating Cash Flow
  • In FY19, net cash provided by operating activities was $639.6 million, up $225.9 million from $413.7 million in FY18, benefiting from the impact of working capital management initiatives, including successful cash collection initiatives for receivables and the net contribution of approximately $118 million from a receivables factoring program. 4Q19 operating cash flow totaled $188.2 million, down $36.6 million from $224.8 million in the prior year period.
  • FY19 free cash flow of $213.0 million improved by $245.7 million from negative free cash flow of $(32.7) million in the prior year, reflecting the strong improvement in operating cash flow coupled with a $19.8 million reduction in capex. 4Q19 free cash flow of $92.5 million was stable YoY.
Net Debt:
  • Net debt of $7,405.4 million on June 30, 2019 increased by $113.8 million from the balance of $7,291.6 million on June 30, 2018 and increased modestly by $17.2 million from the balance on March 31, 2019. This sequential increase relative to 3Q19 was driven by a negative FX impact of approximately $59 million, partially offset by net debt reduction of approximately $42 million. The net debt reduction was the result of  $92.5 million of free cash flow in the quarter and approximately $13 million of other cash inflow, partially offset by $63.4 million of cash dividend payment. At the end of Q4, there was over 20% headroom available under our financial covenants.
Fiscal 2019 Divisional Business Review
Luxury Division
 
In FY19, reported Luxury net revenues of $3,294.3 million or 38% of total Coty, increased by 2.6% versus the prior year. On a LFL basis, Luxury net revenues grew by 4.7% in FY19 driven by strength in ALMEA and Europe, and solid performance in Travel Retail despite disproportionate supply chain disruption in this channel in the first half of the year. FY19 marked the second consecutive year of double-digit growth in Luxury's emerging markets, with particular strength in China.  By brand, FY19 was fueled by Burberry, Calvin Klein and Gucci, supported by successful launches such as Burberry Her, Gucci Guilty Revolution and Gucci's new Alchemist Garden collection. We also had strong performance in Luxury e-commerce revenues in FY19, with approximately 30% e-commerce net revenue growth, with e-commerce penetration reaching a little over 10%.
 
In 4Q19, reported Luxury net revenues increased by 1.7% versus the prior year, with very strong LFL growth of 5.8%. ALMEA and Travel Retail were stand-out growth contributors in the quarter, including great performance in China. Growth was led by the Burberry, Gucci, Calvin Klein, Hugo Boss, and Marc Jacobs brands.  During the quarter, the performance of Luxury also benefited from the successful May launch of the Gucci lipstick collection, which also represents the initial step in our re-launch of the overall Gucci make-up line.
 
The Luxury division delivered reported operating income of $232.8 million in FY19, a decrease of 6% versus FY18, while adjusted operating income was $511.2 million, reflecting significant 30% growth from the prior-year. The adjusted operating margin was 15.5%, growing 320 bps versus FY18, driven by fixed cost reductions and lower non-working media. In 4Q19, reported operating loss of $(17.2) million fell from $47.5 million in the prior year period, while adjusted operating income of $106.6 million grew 36% from the prior year period, again supported by net revenue growth and fixed cost management. The adjusted operating margin in 4Q19 was 14.1%, an increase of 360 bps from the prior-year period.

Consumer Beauty
FY19 Consumer Beauty reported net revenues of $3,539.3 million or 41% of total Coty. Revenues declined 17.1% as reported, and decreased 10.6% on a LFL basis. Our sell-out performance remained consistent over the course of the year, declining high single digits, as our brands faced share losses and continued weakness of the mass beauty category in North America and Europe. While our sell-out in North America and Europe declined high single digits, net revenues in these regions - which together accounted for approximately 70% of Consumer Beauty - declined double digits, impacted by elevated promotional activity and trade spending, as well as by the supply chain disruptions at the start of the year. On the other hand, revenues and sell-out in ALMEA grew in the low single digits, supported by consistent strength and share gains in Brazil.
 
By category in FY19, color cosmetics brands continued to account for close to half of the divisional net revenues and declined in the low teens LFL, reflecting the category pressure in mass cosmetics and market share losses. Retail hair color, which accounted for a mid-teens percentage of net revenues, declined high single digits reflecting stable performance of Wella Retail and declines in Clairol. Body care revenues, accounting for mid-teens percentage of Consumer Beauty, grew moderately fueled by our Brazilian local brands. Mass fragrances accounted for approximately 10% and experienced significant decline. Finally, Younique accounted for approximately 10% of the division, with continuing declines in presenter sponsorships.

In 4Q19, net revenues declined 15.2% as reported and decreased 11.5% LFL, with continuing pressure in Younique. Trends in the core Consumer Beauty categories remained fairly consistent with the prior nine months.
Consumer Beauty's reported operating loss in FY19 of $3,598.7 million compared to reported operating income of $278.9 million in the prior year period, reflecting the division's asset impairment charges of $3.7 billion as well as underlying profit decline. FY19 adjusted operating income declined 47% to $219.0 million. The adjusted operating margin declined by 340 bps to 6.2% due to a reduction in net revenues and gross margin decline, partially offset by lower fixed costs and A&CP management. The 4Q19 reported operating loss totaled $(2,697.3) million as a result of the impairment charge recorded in the quarter, while the adjusted operating income for the quarter of $94.3 million grew 1%.

Professional Beauty
Professional Beauty FY19 net revenues of $1,814.9 million or 21% of total Coty, decreased by 5.4% as reported and decreased 1.7% LFL. FY19 was a challenging year for the Professional Beauty division, primarily within the North American region, due to supply chain disruptions coupled with trade inventory reductions at certain key customers. Despite this pressure in North America, the division saw solid growth in ALMEA and very strong growth in ghd globally fueled by new product introductions and improved execution. We also made strong progress in our e-commerce efforts, which reached a low teens percentage of our divisional sales, primarily fueled by our online platforms for Wella and ghd.
 
4Q19 reported revenues of $458.3 million declined by 7.0% on a reported basis, with a LFL decline of 3.1%, primarily related to weakness in North America stemming from continued de-stocking at key accounts.
 
Professional Beauty reported operating income was $122.1 million in FY19, a growth of 2% versus the prior year, while adjusted operating income grew 13% to $219.4 million, fueled by gross margin expansion and fixed cost reduction. In 4Q19, reported operating income was $12.6 million compared to $36.2 million in 4Q18, while adjusted operating income was $57.2 million and relatively stable YoY. The Professional Beauty adjusted operating margin of 12.1% grew 190 bps during FY19 driven by higher gross margins and reduced fixed costs.
Fiscal 2019 Business Review by Geographic Region
 
 North America
  • North America net revenues of $2,656.5 million, or approximately 31% of total net revenues, decreased 10% as reported and 10% LFL. The overall decline was primarily due to weakness in both Consumer Beauty and Professional Beauty. Consumer Beauty was impacted by a difficult mass beauty market, shelf space losses in several brands, supply chain disruption, as well as ongoing pressure on Younique. Professional Beauty revenues were challenged due to certain key customers' trade inventory reduction as well as supply chain disruptions.
 
Europe
  • Europe net revenues of $3,777.8 million, or approximately 44% of the total, decreased 10% as reported and  5% LFL. The decline is largely related to softness in Consumer Beauty stemming from underlying mass beauty market challenges, market share pressure, and the aforementioned supply chain disruptions. This was partially offset by solid performance in Luxury.
 
ALMEA
  • ALMEA net revenues of $2,214.2 million, or approximately 25% of the total, decreased 1% as reported and grew 7% LFL fueled by very strong momentum in Luxury as well as solid growth for both Professional Beauty and Consumer Beauty. Growth in China, Brazil, and Middle East were strong in FY19.
Cash Flows
  • In FY19, net cash provided by operating activities was $639.6 million, up $225.9 million from $413.7 million in FY18, benefiting from the impact of working capital management initiatives, including successful receivable collection initiatives which also resulted in the improvement in the underlying aging. Working capital also benefited from the net contribution of approximately $118 million from a receivables factoring program. 4Q19 operating cash flow totaled $188.2 million from $224.8 million in the prior year period, fueled by approximately $17 million increase in adjusted net income and continued progress on receivables.
  • FY19 free cash flow of $213.0 million improved by $245.7 million from negative cash flow of $(32.7) million in the prior year, reflecting the strong improvement in operating cash flow coupled with a $19.8 million reduction in capex. 4Q19 free cash flow of $92.5 million was stable YoY.
  • In FY19, we distributed $346.2 million in quarterly cash dividends, including a cash distribution of $63.4 million paid on June 28, 2019. During the quarter, we issued 2.4 million shares as part of the newly initiated dividend reinvestment program.
  • Net debt of $7,405.4 million on June 30, 2019 increased by $113.8 million from the balance of $7,291.6 million on June 30, 2018 and increased modestly by $17.2 million from the balance on March 31, 2019. This sequential increase relative to Q3 was driven by a negative FX impact of approximately $59 million, partially offset by net debt reduction of approximately $42 million. The net debt reduction was fueled by the $92.5 million of free cash flow in the quarter and approximately $13 million of other cash inflow, partially offset by $63.4 million of cash dividend payment.
Noteworthy Company Developments
Other noteworthy company developments include:
  • On June 28, 2019, we paid a quarterly dividend of $0.125 per common share. This was the first dividend payment following the introduction of the stock dividend reinvestment program. The participation rate in the program totaled 68% in the quarter to receive the dividend 50% cash and 50% stock.
  • At the end of June, our credit agreement was amended to expand our operational flexibility and align with our deleverage target. Coty has a very solid balance sheet with significant liquidity and no material maturities until FY23.
  • On July 1, 2019, we announced an operational plan to drive substantial improvement in Consumer Beauty while also further optimizing Luxury and Professional Beauty. The Plan focuses on three strategic pillars: rediscover growth, regain operational leadership and build a culture of pride and performance, with the objective to steadily improve gross margin and operating margin, more in line with Coty’s peer group, as well as to drive free cash flow and reduce leverage.
  • On August 28, 2019 Coty announced a dividend of $0.125, payable on September 30, 2019 to stockholders of record at the close of business on September 9, 2019.
  • In 4Q19, we recorded a non-cash impairment charge primarily connected to the Consumer Beauty division and specific brand trademarks of $2,874.2 million, bringing the FY19 total impairment charge to $3,851.9 million. This impairment total includes $3,391 million of Consumer Beauty goodwill, and $429 million of indefinite-lived trademarks with the majority of the trademark impairment related to several Consumer Beauty brands as well as philosophy and Wella.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, August 28, 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: 7047837). 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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