Coty Inc. Reports Fiscal First Quarter 2020 Results

Coty Inc. Reports
Fiscal First Quarter 2020 Results
 
PRESS RELEASE
November 6, 2019

 
Q1 In-line with Expectations

Strong Gross Margin Improvement, Increased Working Media, Solid EPS and FCF Delivery

Full Year FY20 Outlook Confirmed

 
NEW YORK - November 6, 2019 -- Coty Inc. (NYSE: COTY) today announced financial results for the first quarter of fiscal year 2020, ended September 30, 2019.
Highlights
  • 1Q20 net revenue down 4.4%, with 1.1% LFL decline including a 1% negative impact from Younique
  • Strong LFL growth in Luxury and Professional Beauty, offset by declines in Consumer Beauty
  • Adjusted operating income of $154.7 million grew 10% YoY
  • Adjusted EPS of $0.07, down 36% YoY, reflecting the 1Q19 non-recurring tax benefit
  • 1Q20 free cash flow improved by $169 million from the prior year period
 
Commenting on the operating results, Pierre Laubies, Coty CEO said:
 
"Q1 marked the first quarter of implementing our turnaround plan. With Younique excluded from our results as of September, we have also begun to see some improvements in the Consumer Beauty division. These improvements include revenue growth and market share gains on select brands in Europe, strong performance in Sally Hansen U.S., and some early progress on Covergirl. Throughout the organization, our teams are building a better business, including making trade-offs in favor of healthy, sustainable sales. Our strong Q1 gross margin improvement is a reflection of our progress in this area. With the consistent delivery of our Luxury division in a more volatile environment, and the strong performance of the Professional Beauty division, our Q1 is well on the path of our turnaround deployment."
 
Commenting on the financial results, Pierre-André Terisse, Coty CFO said:
 
"The beginning of the year was in-line with our expectations on all key financial metrics, including net revenues, adjusted operating income, adjusted EPS, and free cash flow. More importantly, our equation is healthier as the significant gross margin improvement allowed us to reinvest behind our brands. This gives me confidence in our ability to deliver our targets for the year. As we continue to explore how to accelerate the transformation of Coty, with a strategic review which has already attracted strong interest, we will in the coming quarters continue to focus on the fundamentals of our turnaround: deploying operational excellence, improving the performance of our supply chain, expanding gross margin to support our brands, streamlining the organization and maintaining discipline on cash and costs."
FY20 Outlook
The FY20 outlook remains unchanged:
  • Net Revenues: Stable to slightly lower LFL
  • 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.

 
Financial Results
Revenues:
  • 1Q20 reported net revenues of $1,942.8 million decreased 4.4% year-over-year, with a like-for-like (LFL) revenue decrease of 1.1% and negative foreign exchange (FX) impact of 2.4%. The LFL performance, which partially benefitted from low comparables in the prior year, was supported by solid growth in the Professional Beauty and Luxury divisions of 5.1% and 4.4% LFL, respectively, offset by a decline in the Consumer Beauty division of 9.7% LFL.
  • The divestment of Younique was completed September 16, 2019. The business decline in Younique negatively impacted the Coty LFL result by approximately 1% and the Consumer Beauty LFL result by approximately 2%.
Gross Margin:
  • 1Q20 reported gross margin of 62.0% increased by 180 bps from the prior-year period, while the adjusted gross margin of 62.0% increased by 160 bps, driven by the mix shift toward the higher-margin Luxury and Professional Beauty divisions, as well as significant margin expansion in both divisions reflecting easier comparables, improved price and mix in Professional Beauty and improved COGS productivity in Luxury.
Operating Income:
  • 1Q20 reported operating income of $126.0 million increased versus a 1Q19 reported operating loss of $20.7 million, supported by an $84.5 million gain on the Younique divestiture as well as lower impairment, restructuring and amortization charges.
  • 1Q20 adjusted operating income of $154.7 million rose 9.9% from the prior year, despite foreign exchange headwinds of approximately 4%. The adjusted operating margin of 8.0% increased 110 bps from the prior-year period. The higher year-over-year profit performance reflects an 11% increase in working media, offset by gross margin expansion and strong fixed cost control.
Net Income:
  • 1Q20 reported net income of $52.3 million compared to reported net loss of $12.1 million in the prior-year period driven by an $84.5 million gain on the Younique divestiture. The adjusted net income of $50.5 million declined from $80.5 million in 1Q19, reflecting a $30 million one-time tax benefit in the prior-year period.
Earnings Per Share (EPS):
  • 1Q20 reported earnings per share of $0.07 improved from $(0.02) in the prior year period, and the adjusted EPS of $0.07 declined year-over-year due to the aforementioned one-time tax benefit, which benefited EPS in the prior year by $0.04.
Operating Cash Flow:
  • In 1Q20, net cash provided by operating activities was $39.9 million, a $121.8 million improvement from the prior year period net cash used in operations of $81.9 million. This operating cash flow improvement during a seasonally weak cash flow period reflected the contribution of approximately $75.5 million from receivables factoring programs as well as underlying profit improvement.
  • Our 1Q20 free cash flow of $(46.5) million improved by $169 million from the prior year period, fueled by the operating cash flow increase and a $47.2 million decline in capex.
Dividend and Net Debt:
  • On November 6, 2019, Coty announced a dividend of $0.125 per share payable on December 27, 2019 to holders of record on November 18, 2019.
  • Net debt of $7,366.1 million on September 30, 2019 decreased by $39.3 million from the balance of $7,405.4 million on June 30, 2019 driven by a benefit from foreign exchange of approximately $161 million partially offset by a net debt increase of approximately $122 million. The net debt increase was the result of $46.5 million of free cash outflow, the purchase of the remaining noncontrolling shares of a subsidiary in Southeast Asia of $45 million and $63.3 million of cash dividend payment.
  • This resulted in a last twelve months Net debt to adjusted EBITDA ratio of 5.5x, a slight improvement from the 5.6x reported ratio as of June 30, 2019.
First Quarter Fiscal 2020 Business Review by Segment
Luxury
 
In 1Q20, reported Luxury net revenues of $806.7 million increased by 1.7% versus the prior year. On a LFL basis, Luxury net revenues increased by 4.4%, fueled by growth in Europe and ALMEA. The luxury fragrance market continued to grow at a steady pace of 3-4%, with consistent trends in each of our key regions. While we recovered the majority of the shipment disruptions in the prior-year period, this was partially offset by geopolitical disruptions in Hong Kong and the surrounding Travel Retail corridor.
 
Solid 1Q20 results were supported by strength in Gucci, Burberry, Hugo Boss, and Chloe fragrances. Our expansion in the luxury cosmetics category continued successfully, with strong growth in both the Gucci lipstick line as well as Burberry cosmetics in Asia Pacific. We expect this momentum in luxury cosmetics to be fueled in the coming quarters through a gradual expansion of doors and product lines.
 
The Luxury division delivered reported operating income of $90.3 million, an increase of 85% vs. the prior-year period. 1Q20 adjusted operating income was $128.3 million, reflecting very strong 26% growth from the prior year. The 1Q20 adjusted operating margin was 15.9%, an increase of 310 bps versus 1Q19, driven by gross margin expansion and strong fixed cost leverage.

Consumer Beauty
1Q20 Consumer Beauty net revenues of $716.5 million declined 13.5% on a reported basis and declined 9.7% LFL. Younique contributed approximately $56 million of net revenue in the quarter. The business decline in Younique negatively impacted the Consumer Beauty LFL result by approximately 2%. Global sell-out for our brands continued to decline in the high single digits, though showed some sequential improvement in trend. By region, Europe delivered low single digit revenue growth, reflecting lower comparables in the prior-year period following the supply disruptions as well as improved sell-out trends. In North America, revenues continue to be pressured by shelf space reductions and the continued low single digit declines in the mass beauty market segment. ALMEA sales were soft as we pro-actively reduced sales to lower value channels in select countries in support of our gross margin expansion agenda.
 
By category, net revenue in color cosmetics continued to decline high single digits. Within this core category, we saw pockets of improvement as we began implementing our turnaround plan, including Sally Hansen share gains in its core U.S. market segment, Rimmel share gains in its core U.K. market segment, moderate growth in CoverGirl's core sub-brands and broad-based improvement in Max Factor resulting in a low single digit sell-out decline. In retail hair, revenues remained pressured. In body care and mass fragrances, revenues declined mid-single digits, though our core brands adidas and Bruno Banani both drove sell-out growth. Importantly, as we actively reallocated nearly all working media to our priority brand and country combinations and stepped up our media investments, revenues in our Consumer Beauty priority brand and country combinations declined low single digits in the quarter, an improvement from high single digit declines in FY19.
 
Reported operating loss in 1Q20 of $43.3 million compared to reported operating loss of $18.6 million in the prior year period. The 1Q20 adjusted operating loss of $14.2 million, with Younique contributing approximately $4 million of the loss, decreased from income of $14.8 million in the prior year period, resulting in an adjusted operating margin of (2.0)%. The profit performance reflected a decline in gross profit as a result of the revenue decline coupled with a step-up in A&CP, particularly working media.


Professional Beauty
Professional Beauty 1Q20 net revenues of $419.6 million rose by 2.4%, with LFL increasing 5.1%. The quarter was driven by particular strength in North America, as it lapped last year's supply chain issues and key customers' destocking. Europe and ALMEA also delivered solid growth during the quarter. ghd continued to generate very robust growth across channels and regions.
 
Professional Beauty reported operating income of $24.4 million increased from $5.0 million in the prior year period, while adjusted operating income grew 75% to $41.6 million. The Professional Beauty division adjusted operating margin of 9.9% grew 410 bps, driven by strong gross margin performance and fixed cost reduction.
First Quarter Fiscal 2020 Business Review by Geographic Region
 North America
  • North America net revenues of $586.6 million, or approximately 30% of total net revenues, declined 9.0% as reported and declined 7.1% LFL. The overall decline was driven by weakness in Consumer Beauty, reflecting underlying mass beauty challenges, the continued impact of shelf space losses, and declines in Younique. This was partially offset by strength within the Professional Beauty division. The performance decline in Younique negatively impacted North America LFL by approximately 2%.
 
Europe
  • Europe net revenues of $869.6 million, or approximately 45% of total net revenues, declined 0.3% on a reported basis, but increased 4.4% on a LFL basis. The LFL strength was driven by growth in each division, with particular outperformance in Luxury, in part due to lapping the prior year supply chain disruptions.
 
ALMEA
  • ALMEA net revenues of $486.6 million, or approximately 25% of total net revenues, decreased 5.4% as reported, and 3.1% on a LFL basis. The LFL decline is largely a result of temporary softness within the Consumer Beauty division as we drove gross margin expansion through proactive reduction in lower value sales channels in select countries. Additionally, Luxury sales growth decelerated in the quarter, reflecting a slowdown in the Asia Pacific region and associated Travel Retail corridor associated with the Hong Kong protests.
Cash Flows
  • In 1Q20, net cash provided by operating activities was $39.9 million, a $121.8 million improvement from the prior year period net cash used in operations of $81.9 million. This operating cash flow improvement during a seasonally weak cash flow period primarily reflected the contribution of approximately $75.5 million from receivables factoring programs.
  • Our 1Q20 free cash flow of $(46.5) million improved by $169 million from the prior year period, fueled by the operating cash flow increase and a $47.2 million decline in capex.
  • In 1Q20, we distributed $63.3 million in cash dividends and issued 3.2 million shares as part of the dividend reinvestment program.
  • Net debt of $7,366.1 million on September 30, 2019 decreased by $39.3 million from the balance of $7,405.4 million on June 30, 2019 driven by a benefit from foreign exchange of approximately $161 million partially offset by a net debt increase of approximately $122 million. The net debt increase was the result of $46.5 million of free cash outflow, the purchase of the remaining noncontrolling shares of a subsidiary in Southeast Asia of $45 million and $63.3 million of cash dividend payment
Other Company Developments
Other company developments include:
  • On September 16, 2019, Coty completed the divestment of its 60% ownership stake in Younique for cash proceeds of $50 million and a secured promissory note with a face value of $27.9 million.
  • On September 30, 2019, the Company paid a quarterly dividend of $0.125 per common share. The participation rate in the program totaled 69% in the quarter to receive the dividend 50% cash and 50% stock.
  • On October 21, 2019, Coty announced that it is launching a process to explore strategic alternatives for its Professional Beauty business and associated hair brands, as well as the company's Brazilian operations, including a divestiture. The Company expects that the proceeds from any potential transaction will be used to pay down debt and return excess cash directly to shareholders.
  • On November 6, 2019, Coty announced a dividend of $0.125, payable on December 27, 2019 to stockholders of record at the close of business on November 18, 2019.
Conference Call
Coty Inc. will host a conference call at 8:00 a.m. (ET) today, November 6, 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: 9369578). The live audio webcast and presentation slides will be available at https://investors.coty.com. The conference call will be available for replay
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