Global Brands : FY2019 Annual Results Announcement

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ANNOUNCEMENT OF FINAL RESULTS

FOR THE YEAR ENDED 31 MARCH 2019

HIGHLIGHTS

• Strategic divestment completed, creating a leaner and more focused operation with a stronger financial position
• Special dividend of US$305 million paid in cash and scrip on 4 April 2019
• Restructuring program implemented to reduce operating expenses and drive efficiencies; positive impact already seen in the Reporting Period
• Group now disclosing financial information according to its three business segments: North America, Europe, and Brand Management
• Revenue stabilized while unprofitable businesses eliminated

	Year ended 31 March
	2019	2018	Change
(US$ million)		Restated	(1)
Revenue	1,513	1,585	-4.6%
Total margin	458	500	-8.4%
As % of revenue	30.2%	31.5%
Operating costs(2)	672	578	16.3%
Operating loss	(215)	(114)
Net loss for the year
- Continuing Operations	(250)	(153)
- Discontinued Operations	(138)	(734)
- Total	(388)	(887)
Net loss attributable to shareholders
- Continuing Operations	(261)	(169)
- Discontinued Operations	(139)	(734)
- Total	(400)	(903)
Losses per Share - Basic from Continuing Operations	(24.42) HK cents	(15.94) HK cents
(equivalent to)	(3.15) US cents	(2.06) US cents

1. Restated comparative financials to reflect the divestment of select North American businesses and China Kids business, with their financial results separately presented as Discontinued Operations, and the effect on adoption of HKFRS 15
2. Represented operating costs net of other gains/losses and gain on disposal of interest in an associate
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CEO'S STATEMENT

In the past year, Global Brands has undergone a major transformation. On 29 October 2018, we completed the divestment of select licensing businesses in North America. This included all our North American Kids and Accessories businesses, and the portion of our Fashion businesses located on the West Coast. The proceeds from this transaction have allowed us to retire long-term debt and pay shareholders a special cash dividend, with the option to receive it in the form of new shares through a scrip dividend alternative. This strategic divestment, along with the sale of our China Kids business in October 2018, has re-shaped the Group into a leaner and more focused operation, with a stronger financial position and balance sheet.

As I assumed the role of Chief Executive Officer, we continued to look for ways to enhance the Group's performance. At our interim results in November 2018, we announced a substantial restructuring plan aimed at reducing operating expenses by US$100 million. The program focuses on flattening our structure and building a more responsive organization. We are simplifying our processes from design to product development to sourcing, and have begun moving these functions offshore, closer to the needlepoint, where our production is located. In addition, we have consolidated our apparel businesses in the U.S., previously organized by brands, into a single operating unit. We also began the consolidation of warehouses in both the U.S. and Europe, and significantly reducing the office space we use across the globe. As a result, we have exceeded our initial plan and are well on our way to achieving a US$140 million reduction in operating costs in the restructuring program, and an additional US$24 million reduction in the cost of goods related items.

To help lead the Group during this process of transformation, we have made a number of key executive appointments. Ron Ventricelli has been named President of North America and Chief Operating Officer, Mark Caldwell has been appointed Chief Financial Officer, Brian Lee was named Chief Restructuring Officer and Rob Sinclair, President of Supply Chain. All these executives have specialized expertise and proven track records in our industry. I am confident they will make important contributions to the Group and play a critical role in our continued transformation.

During the Reporting Period (year ended 31 March 2019), we have already begun to see the benefits of the restructuring program. Results of the second half of the fiscal year significantly improved from the first half; topline of the Group stabilized while we eliminated unprofitable businesses. This was also partly due to the reduction in operating costs starting to impact positively in the fourth quarter of the Reporting Period. Going forward, we will continue to review our operating efficiencies and expenses with the goal of completing our restructuring by the end of the fiscal year 2020.

The changes we are implementing are making the Group a more relevant and nimble organization. This puts us in a strong position to face a macro environment that is likely to remain challenging for some time. The escalating trade war between the U.S. and China as well as any potential tariff increases will mean higher costs for products made in China. It also underscores the need to diversify our own supply chain to other countries - a process we initiated last year in order to mitigate the impact. The retail sector in the U.S. remains strong, but the shift from traditional brick-and-mortar to e-commerce is an increasingly disruptive force, while many emerging, young brands that are consumer-focused and socially relevant taking a greater share of the market. In Europe, meanwhile, retail sales, along with overall consumer confidence, remain weak.

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To navigate this complex environment, our strategy will focus on strengthening our owned brands and the strategic expansion of our Brand Management business. In addition, to accelerate the product design and development process, the Group is expanding the use of new technologies, such as 3D design and virtual samples. We are also focusing on reducing working capital needs by shortening the buying cycle and managing inventory levels. As we complete our restructuring, we will continue to improve efficiencies and reduce operating expenses, while adjusting and refining our business model to adapt to the changing market and ensure that we set Global Brands on a long-term growth trajectory.

I would like to take this opportunity to thank my colleagues for their commitment to the Group. During this period of change, I have been deeply impressed by the positive attitude and tremendous effort so many have made in contributing to the transformation of Global Brands. With a streamlined, more nimble organization, a new approach and strong management team in place, I am confident that we have laid the foundation for an exciting new phase of development.

Rick Darling

Chief Executive Officer

Hong Kong, 26 June 2019

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MANAGEMENT DISCUSSION AND ANALYSIS

Strategic Divestment and Special Dividend

In June 2018, the Group announced the strategic divestment of select assets in its North American licensing businesses, including all of its North American Kids and Accessories, and the portion of its Fashion businesses located on the West Coast. The divestment of these businesses allows the Group to have more focused operations for growth going forward, to improve its operational efficiency and reduce working capital needs. Proceeds from the transaction were used to fund a Special Dividend, to reduce the Group's financial debt and for general working capital purposes.

The divestment received approval from our shareholders in August 2018, and it subsequently closed on 29 October 2018 and brought in US$1.2 billion in cash.

On 1 February 2019, the Group announced that the special cash dividend paid from the proceeds of the above mentioned strategic divestment to be 28 HK cents per share, and offered to shareholders the option to receive dividends in the form of new shares in place of cash ("Scrip Dividend Alternative"). This Scrip Dividend Alternative enabled shareholders to reinvest their dividends into the Group's shares and benefit from its future growth.

The payment of the special cash dividend and the issue and allotment of the scrip shares were subsequently completed on 4 April 2019.

New Phase of Streamlined Operation

Following the strategic divestment, to allow Global Brands to focus on its remaining core businesses, the Group divested its Kids business in China in October 2018. In addition, the Group launched a substantial restructuring program starting in November 2018 aimed at reducing operating expenses by US$100 million, with a focus on flattening the structure and building a more responsive organization. The Group is now well on its way to exceeding its initial plan and achieving a US$140 million reduction in operating costs, with the goal of completing the restructuring by the end of the fiscal year 2020.

As a result, the Group now manages its businesses by three segments, namely North America, Europe, and Brand Management, and will disclose its segmental information accordingly, starting from this Reporting Period. In addition, the financial results and management discussion and analysis for the Reporting Period will mainly focus on our Continuing Operations. The financial results of the divested businesses and the gain on disposal of the divested business are classified as Discontinued Operations and presented separately in the consolidated profit and loss account as a single line item.

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Results Overview

During the 12-month period from 1 April 2018 to 31 Mar 2019 (the "Reporting Period"), the Group continued to focus on its core business and leverage its position as the licensing partner of choice.

The table below summarizes the Group's financial results for the year ended 31 March 2019 and 2018.

	12 months ended	12 months ended	Change
	31 March 2019(1)	31 March 2018
		(Restated)(2)
	US$mm	US$mm	US$mm		%
Revenue	1,513	1,585	(73)		-4.6%
Total Margin	458	500	(42)		-8.4%
% of Revenue	30.2%	31.5%
Operating Costs(3)	672	578	94		16.3%
Impairment of	-	35	(35)		-100.0%
Goodwill(4)
Operating Loss	(215)	(114)	(101)		-88.8%
% of Revenue	-14.2%	-7.2%
EBITDA(5)	(19)	115	(134)		-116.5%
% of Revenue	-1.3%	7.2%
Net Loss for the year	(250)	(153)	(97)		-63.4%
from Continuing
Operations
% of Revenue	-16.5%	-9.6%
Net Loss for the year	(388)	(887)	499		56.2%
% of Revenue	-25.7%	-55.9%
Net Loss Attributable to	(400)	(903)	503		55.7%
Shareholders
% of Revenue	-26.4%	-57.0%

1. Group's results of the Discontinued Operations, being the divested select North American businesses and China Kids business, are separately presented
2. Restated comparative financials to reflect the divestment of select North American businesses and China Kids business, with their financial results separately presented as Discontinued Operations, and the effect on adoption of HKFRS 15
3. Operating Costs: Net of other gains/losses and gain on disposal of interest in an associate
4. Impairment of Goodwill: a non-cash impairment of goodwill due to the external market condition and business performance
5. EBITDA: Net (loss)/profit before net interest expenses, tax, depreciation and amortization, also excludes share of results of an associate and joint ventures, material gains or losses which are of capital nature or non-operational related, acquisition related costs, discontinued operations and non-cash gain on remeasurement of contingent consideration payable
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