Coty Inc. has announced a turnaround plan to drive substantial improvement in consumer beauty while also further optimizing luxury and professional beauty. The plan focuses on three strategic pillars: rediscovering growth, regaining operational leadership and building 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.
 
Pierre Laubies, Coty’s CEO, said, “Over the past few months, we have focused on both stabilizing our operations and identifying a path towards turning around the company. Our Turnaround Plan will enable us to build a better business in the coming four years, while we gradually prepare for growth. We are fortunate to have a strong brand portfolio and talented and engaged people around the world, and we will provide the right framework to enable their success. We will focus our strategic effort and investments on fewer brands globally while simplifying our operations and organization. At the same time, we will make our cultural transformation agenda a key building block of our plan.
 
Our financial priorities are clear as well – to improve profitability and deleverage—and we are intent on setting realistic targets and delivering them. Today starts our new agenda—we will progress it as a team, with the right balance of discipline and creativity.”
 
Turnaround Plan Details
 
1. Rediscover Growth
Rediscover growth is focused on improving Coty’s execution and fundamentals to establish a better business over time, before focusing on building a bigger business. This includes:
 

• Focusing brand building efforts behind priority brand-country combinations and investing behind them at scale;
• Improving shelf productivity by better optimizing assortment choice, while simplifying product range and brand architecture;
• Driving better mix management through improved portfolio structure, optimized promotional tactics and support of higher margin pillars; and
• Building an innovation pipeline to support expansion of category coverage, up-trading and margin accretion.

 
2. Regain Operational Leadership
By reducing complexity and costs throughout the business, Coty will unlock substantial opportunities to reinvest and drive profit expansion. This includes:
 

• Improving cost of goods sold through the value engineering of product ranges and optimizing Coty’s supply chain utilizing its existing manufacturing footprint;
• Rationalizing SKU’s and sub-ranges to reduce product range complexity, lower inventory and drive better shelf productivity; and
• Reducing fixed costs with a new organizational structure that aligns Coty’s costs with its revenues, simplifies decision-making and enables teams in markets to act with closer guidance and greater speed. The key changes proposed include: reducing organizational layers and positioning all key markets closer to the executive committee; splitting commercial and marketing responsibilities to enable greater focus on portfolio strategies and operational excellence in-market; and creating scale in markets.

 
As such, Coty expects to move from the current organizational structure into regional commercial teams in Europe, Middle East & Africa (EMEA), Americas & Asia Pacific, and brand marketing units for luxury and consumer beauty. Professional beauty is expected to remain a distinct business unit due to its unique salon channel focus, though with the same principle of key markets reporting directly to its president. All markets are also expected to be supported by mutualized functions.
 
In connection with this new organization, the following changes to Coty’s executive cpmmittee will be effective by January 1, 2020:
 

• Edgar Huber will be appointed president of Americas & Asia Pacific;
• Gianni Pieraccioni will be appointed president of EMEA;
• Fiona Hughes will be appointed president of Consumer Beauty Brands; and
• Simona Cattaneo will be appointed president of Luxury Brands.

 
All other members of the executive committee will remain in their current roles:
 

• Pierre Laubies, chief executive officer;
• Sophie Hanrot, chief human resources officer;
• Greer McMullen, chief legal officer;
• Sylvie Moreau, president of professional beauty;
• Daniel Ramos, chief scientific officer;
• Pierre-André Terisse, chief financial officer; and
• Luc Volatier, chief global supply officer.

 
3. Build a Culture of Pride and Performance
Refining Coty’s culture is a critical element of energizing and engaging Coty’s associates as well as unlocking the substantial value in Coty’s business. Coty’s goal is to create a culture that balances discipline and creativity as well as fosters team spirit and engagement.
 
To achieve this, as well as reduce geographic fragmentation and costs, Coty intends to create a centralized management headquarters in Amsterdam where most of Coty’s executive team and corporate functions are expected to be based. Amsterdam is a cost-efficient and tax stable location, conveniently located to Coty’s main markets and has a strong base of FMCG talent. This new set-up is expected to not only drive scale but also lead to greater speed, efficiency and ultimately business results.
 
The new organization design is expected to be in effect by January 1, 2020. The full structure implementation and consolidation of management headquarters are expected to be completed by July 1, 2020, subject to legal processes where required by local regulations.
 
Financial Outlook
 
Pierre-André Terisse, chief financial officer, said, “We have built a realistic four-year plan focused on restoring our profitability and deleveraging our balance sheet. We will recover competitiveness by strengthening our brands, expanding our gross margins and methodically reducing our costs. Together this will give us the flexibility to step up our commercial investments while simultaneously driving significant operating margin expansion and enable Coty to achieve a leverage ratio of net debt to EBITDA below 4x by Fiscal 2023. Our new company-wide incentive system will be aligned to these financial objectives and in Fiscal 2020 will be focused on three key performance indicators: gross margin; operating income and free cash-flow. We are confident in this plan and the results of our actions to date support our belief that we can deliver our objectives.”
 
Coty is targeting the following for Fiscal Year 2023, assuming net revenues will remain similar in total to that of Fiscal Year 2019, at a constant foreign exchange rate and scope:
 

• Operating margin: Between 14% and 16%;
• Free cash flow: Around $1 billion; and
• Leverage: Net debt to EBITDA less than 4x.

 
To implement the turnaround, Coty expects to incur one-time cash costs of approximately $600 million spread over fiscal years 2020 through to 2023, in addition to approximately $160 million connected to previous programs.
 
As part of these financial targets, Coty expects the following for Fiscal Year 2020 (vs. Fiscal Year 2019):
 

• Moderating decline in net revenues;
• Constant currency adjusted operating income up 5% to 10%; and
• Moderate free cash flow improvement.

 
Other Financial Updates
 

• Coty is in the process of completing its annual testing for impairment in light of the turnaround plan and related projections, and expects to record an impairment of its intangible assets of approximately $3 billion. The final amount will be reflected in Coty’s Fiscal Year 2019 earnings.
• Coty has agreed with its banks an amendment to its credit agreement to align with the turnaround plan and provide the operational flexibility needed to reach its medium-term goals. Coty has ample liquidity and available credit lines for a total of more than $2 billion.

 
Webcast
 
Coty will host a call discussing its turnaround plan at 9:00 a.m. (ET). The call will be led by Pierre Laubies (CEO) and Pierre-André Terisse (CFO). Those wishing to access the webcast can do so at http://investors.coty.com. The webcast will also be archived on the website.