Coty - Earnings Call - Q1 2020
November 6, 2019
Transcript
Operator (participant)
Good morning, ladies and gentlemen. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's first quarter fiscal 2020 results conference call. As a reminder, this conference call is being recorded today, November 6th, 2019. On today's call are Pierre Laubies, Chief Executive Officer, and Pierre-André Terisse, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. All commentary on like-for-like net revenue reflects the comparison of the business at constant currency in the current and prior year, excluding the impact of acquisitions and divestitures.
In addition, except where noted, the discussion of our financial results and our expectations reflects certain adjustments as specified in the non-GAAP financial measures section of our earnings release. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release. I'll now turn the call over to Mr. Laubies.
Pierre Laubies (CEO)
Thank you, Maria. Welcome everybody to Coty's first quarter fiscal 2020 conference call. I will start by reviewing the progress we have made on our turnaround plan in the last few months, and Pierre-André will then discuss our financial results, outlook, and some of the recent strategic developments. Our Q1 can be characterized by several key developments. First, we have begun activating our turnaround plan announced on July 1st. Second, our operational and financial results illustrate that we are off to a solid start for the year and that we are showing improvement on the parameters that we seek to drive. Third, we remain confident in the fiscal 2020 targets we laid out on the last earnings call. As a reminder, we built our turnaround plan aimed at solving what we consider our most pressing issues.
More specifically, we were talking of the need to: redress the trajectory of our consumer beauty business, retain the high-performance levels of our luxury and professional beauty businesses, close our margin gap against our peers, reconcile our organizational design and our size, and build an engaging culture relying less on personal genius and more on collective mastery. Four months into the activation of our plan, we are tackling each of these areas one by one. To begin stabilizing our trends in consumer beauty, we have been refocusing our teams on the most pressing fundamentals, namely our working media strategies. In Q1, working media spend increased 11%, with the biggest step up behind consumer beauty brands. Within consumer beauty, we are actively focusing our resources behind our priority brand-country combinations, leading to an investment increase of close to 40% on these strategic priorities.
We are also returning, as you may have noticed with the recent announcement on CoverGirl, to a marketing strategy rooted on our strongest distinctive brand assets. We are also beginning to address our gross margin gap in several ways. First and foremost, we are now making sure that we have the best possible alignment between sell-in and sell-out, thus avoiding value-destructive selling tactics. Two, our plans include list price increases where relevant, which have already been or, as we speak, are being activated in several countries. Finally, we are advancing in our objectives to be a leaner and more aligned organization supported by an enabling culture with the right balance of creativity and discipline. We have defined our new organizational structure and have been communicating it for the core functions and in-market.
We are currently actively recruiting externally and internally for our new Amsterdam headquarter, which will be ready by Q4. We have recently named Richard Jones, our Global Chief Supply Officer. Richard joined us with extensive experience in the beauty industry and is a key addition to our leadership team to lead our COGS and SKU simplification agenda. To build further on the progress we have made, our proprietary approach to defining market turnaround plans has now covered approximately 50% of our business. This includes consumer beauty U.S., U.K., Germany, and Brazil, as well as luxury U.K., and an overall review of the philosophy brand. In these markets, we have arrived at core findings, identified the value at stake, and have begun deploying action plans.
This analytical approach is now being deployed in consumer beauty Russia, Poland, and Canada, as well as luxury U.S. and Germany, where we expect many of the same findings and conclusions. Our remaining markets will be covered in the next 12 to 18 months. Although we are still in the early stages of activating our plans, we are beginning to see some green shoots in our operational performance. In the U.K., where Rimmel, the number one mass cosmetics brand, had experienced market share erosions, our actions have driven a 200 basis point improvement in sell-out trends, driving market share gains.
Behind these improvements are a substantial increase in working media investment, particularly TV, the strong performance of recent launches Wonderluxe mascara and Lasting Matte Foundation, both of which were launched at premium pricing, and while still early, the limited demand elasticity we are experiencing following our recent pricing actions is in line with our expectations. In Germany, we are seeing many of the same dynamics in the mass fragrance category. Bruno Banani, the number one mass fragrance brand in the market, has also significantly increased its sell-out performance from a modest decline to a double-digit growth. Fueling the growth are the strong performance of the recently launched Loyal Men Fragrance, increased media support for both the male and female lines, and the successful expansion of the brand into the shower gel category through a product franchise launch.
In the U.S., we have also seen some early positive signals, though we are clear that the path to stabilization will take some time. Sally Hansen, the number one nail brand in the U.S. mass market, has struggled with sales declines for several years. Our analytical approach identified the core sub-brands we must focus on, as well as the key levers to drive consumer engagement. In recent months, we have increased our digital media support for the premium Miracle Gel line, improved the packaging on our treatment product range, and deployed seasonally relevant in-store displays, including a Halloween-themed InstaDry color collection. As a result, while the mass nail market continued to moderately decline, both Sally Hansen nail color and nail treatment are back to solid growth. In CoverGirl, while the improvement in the overall brand sell-out has been more moderate, our action plans are strengthening performance in key areas.
Our top eight sub-brands, which account for two-thirds of the brand sales, are now back to growth, marking a 320 basis point improvement. Underpinning this improvement is a strong ramp-up in TV support, so we are behind these sub-brands. While our sales continue to be weighed down by the shared space reduction, we are seeing productivity improvement in our core customers, as well as sales growth in omnichannel such as Amazon and Ulta. Speaking of Amazon, as we continue to focus on improving our fundamentals, both offline and online, we have seen very strong growth of our brands on Amazon, both in the U.S. and globally. This strong growth has been supported by our close collaboration with Amazon as part of the Global Vendor Management Program, the increased TV support for our hero sub-brands, and execution focus on core SKUs that work particularly well on Amazon.
As a result, in Q1, our mass brands listed on Amazon grew over 40%, and we now have our fair share on Amazon across most categories, which is a substantial change for us. In luxury and professional beauty, we are continuing to deploy our strategies of premiumization and category extension. In luxury, this is illustrated by Gucci Alchemist Garden, which remains amongst the top-performing ultra-premium collection, and now we are applying our learning to support the launch of Chloé's Atelier des Fleurs. We are also seeing strong success in extending our luxury brand into the cosmetics category, with our Q1 luxury makeup sales three times the level of last year. In professional beauty, the team is continuing to drive conversion of leading salons to the premium Vela Collection Perfect with EMI Plus line.
Following the core principle of innovation, penetration, driving, GHD has built on its strong positioning in traditional hair straightener to launch its very successful Glide Hot Brush. All of these positive signals give us confidence that we have the right brands, the right people, and the right action plans to steadily improve Coty's performance and unlock significant value. With that, let me turn it over to Pierre-André.
Pierre-André Terisse (CFO)
Thank you, Pierre, and good morning to everyone. Overall, as you have seen, our Q1 results are in line with expectations and sign a solid start to the year. Starting with top line, our like-for-like net revenues declined -1.1%, which was weighed down significantly by the weak performance in Munich. Therefore, for the rest of the scope, our net revenues were practically stable at -0.1%. This was obviously partially held by low comparables in Q1 last year, but it was nonetheless an improvement from the approximately -3% like-for-like decline on the same scope, so excluding Munich, both last quarter and in full year 2019 overall. Supporting the like-for-like performance was strong growth in luxury, in professional beauty, and a sequential improvement in consumer beauty.
As we focused on gross margin improvement and continued controlling costs, our adjusted operating income grew 10%, resulting in 110 basis points of operating margin expansion. I'll come back on that point in more detail in a few minutes. First, I'll go to the divisional result and start with luxury. As you can see here on the slide, the campaign for the new Tiffany and Love fragrance launch is expanding the brand into both male and female fragrances. Over the course of October, the line has been exclusive to Bloomingdale's in the U.S., but we are already seeing strong results. The sales of Tiffany and Love on the very first day of launch exceeded an entire week of sales of the initial Tiffany signature fragrance launch.
We are pleased to see that a quarter of the sales are coming from the male line, speaking to the appeal of the Tiffany brand across genders. On the right of the screen, close on the heels of the launch of our Gucci lipsticks globally, we also have been relaunching the Burberry makeup line focused on Asia-Pacific, and the results have been very promising. If I move to luxury financial performance then, in Q1, the division delivered another quarter of low to mid-single-digit growth. This included growth in Europe and Almeida in a luxury fragrance category that continues to grow in the low single digit, including in the U.S. While our revenue growth was broad-based, in part helped by easier comparables, some of our sales were impacted by the protests in Hong Kong.
This has been hampering our growth in the city and the surrounding travel retail corridor throughout the quarter. From a brand perspective, we are seeing solid performance in our innovation. Both Gucci and Burberry makeup continued to expand, contributing over a third of our divisional growth in the quarter. This confirms the strong potential of several of our luxury fragrance brands to expand into adjacent beauty categories. As I mentioned earlier, Tiffany and Love is off to a strong start. Gucci Mémoire has been a solid addition to the expanding Gucci portfolio, and Hugo Boss Bottled Infinite continues to be successful, fueling further distribution expansion. From a margin standpoint, luxury drove strong gross margin improvement coupled with cost control, and this resulted in over 300 basis points of operating margin improvement.
Now turning to consumer beauty, you can see on the next slide a number of our recent successful initiatives. On the left of the screen is Lili Reinhart, an actress and celebrity who has a strong following amongst Gen Z consumers, and she will be the new CoverGirl Easy Breezy Beautiful Ambassador. The consumer response and engagement with these announcements have been quite positive. For Adidas, we are capitalizing on the strength of the sports brand with the launch of three new fragrances, which are working well in market. As Pierre discussed already, Sally Hansen has significantly improved its momentum through a number of initiatives, including her Halloween nail collection and associated in-store displays. Let's turn now to the financial performance of the division.
For the quarter, the like-for-like net revenues declined 7.8%, improving from the -10% decline ex-Unix last quarter and in full year 2019. Europe reported solid results with a growth of net revenues reflecting incremental improvement in sell-out, so that's important. In North America, the performance was mixed but encouraging, with Sally Hansen once again back to growth and noticeable improvements on the priority CoverGirl SKUs, as already disclosed by Pierre. We expect such improvements to continue in the coming quarter as shelf loss is moderate and as our investment continues showing traction. Last, we chose in most Almeida countries for consumer to drive healthy and sustainable sales, forgoing margin dilutive low-value sales. As a result, revenue declined in this region.
In the division, as in the rest of the group, we remain indeed focused on driving gross margin improvement, and these trade-offs will allow us to free up gross margin dollars to reinvest in the business. On this point, in Q1, we actively ramped up working media and redeployed it to our priority brands. With working media investments behind these brands up 38% this quarter, we saw a noticeable improvement in the trends of such sales, which declined in low single digit in Q1 versus high single digit decline in full year in fiscal year 2019. As expected, this significant increase in ANCP coupled to revenue decline drove a contraction in operating margin in Q1.
To end up on consumer, while the performance of this division remains weak, this quarter has shown positive answers to our initiative, and we look forward to more gradual improvements in the coming quarters. I'm now shifting to professional beauty. GHD continued its strong momentum across core countries aided by innovations such as the Glide Hot Brush and the Platinum Plus Styler, as you can see on the left. As Christmas is getting close, you should really look at this as a gift idea for the people you really love. That's a great idea, so I recommend it. On the right, you see that OPI also returned to strong growth, supported by easier comparables and a successful execution of some of our collection. You see on the screen the Scottish collection in particular.
Talking about financials for the division, professional beauty returned to growth as expected, reporting a strong 5% like-for-like. We saw strong growth in Europe and North America, partially helped by low comparables in the case of the US specifically. As expected, U.S. customer discovering that it impacted our sales in the second half of last year has run its course, and we have been shipping in line with consumption. The combination of this top-line expansion and cost discipline drove over 400 basis points of operating margin expansion, which stood at close to 10% for the quarter. That is what for the division. I am now going back to Coty as a whole. A key outcome of the beginning of this year is the changing shape of our P&L, as we are seeing our active focus on gross margin translating into results.
Gross margin in the quarter was up 160 basis points to 62%, which was a strong improvement throughout the quarter. Consistent with our comments in August, we significantly increased working media in the quarter by 11%, and this resulted in an overall increase of 70 basis points in our ANCP as we continue rationalizing our non-working media. This is a key outcome since it builds a virtuous equation where gross margin progresses finance investment behind our brands, which will gradually help our revenues and in turn our gross margin. It's also the main driver of growth of our operating income, which was up 10% in Q1, or 110 basis point increase in terms of operating margin.
Last, our EPS landed at $0.07, which was down versus the $0.11 reported last year, which itself included $0.04 of non-recurring tax benefit, and therefore absent from this tax benefit, the EPS has been stable. I'm turning to cash flow statements, which, as you know, is an important element for us. While Q1 is always a seasonally weak period for cash generation, we did improve our free cash flow very meaningfully by $169 million year-over-year. This growth reflects strong underlying improvements in cash generation as well as an additional $75 million from factoring. Having closed the unique divestiture in the quarter, we received $50 million of proceeds, and at the same time, we purchased the remaining stake in our Southeast Asia JV for $45 million.
In total, added by FX, our net debt and resultant leverage moved down moderately versus last quarter to less than $7.4 billion for the debt. I am now moving to slide 18. In summary, Q1 was a solid delivery on all metrics. It was as well a turning point in the management of our equation and a first milestone in the construction of our turnaround plan. This makes us confident for the rest of the year, and we are happy to confirm our target for fiscal 2020 at constant scope as set in the last earning call. In detail, that means line-for-line net revenue stable to slightly lower year over year, an operating income at constant scope and constant currency growing 5%-10%, a mid-single digit growth in the EPS, and a moderate improvement in our free cash flow.
We expect Q2 trends to be generally consistent with this growth algorithm. To end up, let me remind you of an important decision which we announced two weeks ago. While our turnaround plan is fundamental to building a better business, and you have seen some first elements of delivery, we have with the board come to the conclusion that we need to accelerate the transformation of Coty to increase our focus on core categories and to free up resources to invest behind these categories, namely fragrances, cosmetics, and skincare. Therefore, we have decided to engage a strategic review of the professional beauty business, associated hair brands, as well as the Brazilian operations. The teams in these businesses have done an incredible job over the past three years in creating strong platforms in their respective business.
However, we believe we need to work to identify the best options for them with very simple objectives. Number one, unlock shareholder value. Number two, sharpen our focus on our fragrance, color cosmetics, and skincare businesses, and by doing so, reduce the complexity of our portfolio. With potential proceeds, deleverage Coty with a target proforma leverage, which we have fixed at around three times. We anticipate that the review will be completed by summer 2020, and I must say that we have already received multiple marks of interest, which I think says about the high attractiveness of these assets. After the stabilization of our supply chain, after the building of our turnaround plan, this is a key decision to accelerate the transformation of our company into a focused and competitive beauty company. That's the end of our opening comments.
Thank you for your attention, and let's now go to the questions you may have.
Operator (participant)
Thank you. The floor is now open for questions. If you wish to ask a question at this time, simply press star, then the number one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Our first question comes from Robert Ottenstein of Evercore.
Robert Ottenstein (Senior Managing Director and Partner)
Great. Thank you very much. I was just wondering.
Good morning. I was just wondering if you can maybe just help us understand a little bit more of why selling professional is a strategic imperative. Great business, important cash flow generator. I think we were a little surprised to hear about how you were thinking about it. Just really trying to understand in a little bit more depth kind of the thinking around that. Once assuming that happens, maybe give us a little bit of sense of any issues in terms of stranded costs or scale issues that could result from the sale. Finally, along those lines, what that does to your kind of expected medium-term algorithm, whether the kind of targets that you have for fiscal 2020 would make sense as a medium-term algorithm after that divestiture? Thank you.
Pierre-André Terisse (CFO)
Okay. this is Pierre-André. I think the reasoning is very simple. We have three great categories. We believe in each of them, but we also believe that each of them has a lot of potential, and we need to be able to put the means, human, and financial behind each of them to develop them. We do not believe at the moment we will be in the best position to manage the three at the same time for reasons which have to do with leverage on the one hand and for reasons which have to do with complexity and focus on the other.
We have chosen to focus on two segments, which are luxury and consumer, which in reality, category-wise, are fragrances, cosmetics, and skincare, because we believe by focusing on these categories and only these categories, we can go faster in creating value with them, and we can sharpen our focus and transform the group faster. At the same time, we believe that by putting the professional business, the hair business, and the Brazilian business in a different context, that is going to give these businesses as well the means they need to develop. Yeah, it is really a matter of focusing, of giving ourselves more attention to the categories we have chosen, freeing up financial means as well, recovering financial flexibility to invest behind those. This is, we believe, the way we are going to maximize the value creation for our shareholders.
With respect to stranded costs, this is something we'll have to deal with, but we are not overly worried for a couple of reasons. The main one being that most of the turnaround plan efforts have been focusing on consumer beauty and luxury, and therefore, the essence of the plan is going to remain on a slower base, and we think that's going to be definitely allowing us to deliver the target we had fixed for ourselves at that time, which was a 14%-16% operating margin, and which we have confirmed recently. Essentially, it doesn't change our target in terms of gross margin and operating margin improvements, and we hope it's going to help us accelerate the transformation of the group.
Robert Ottenstein (Senior Managing Director and Partner)
In terms of the algorithm, what do you see as a good medium-term algorithm x divestitures?
Pierre-André Terisse (CFO)
What do you mean by algorithm?
Robert Ottenstein (Senior Managing Director and Partner)
Just in terms of expected top-line growth, operating profit growth, EPS growth, the kind of targets that you gave for fiscal 2020.
Pierre-André Terisse (CFO)
Okay. We are opening a strategic review, and I think it's a bit early days to talk about all that. What we are confident about is our ability to deliver substantial margin improvement and to target the 14%-16%, and then for the rest, we need to work. We need to work.
Operator (participant)
Our next question comes from Olivia Tong of Bank of America.
Olivia Tong (Senior Equity Analyst)
Great. Thanks. Good morning. First question is just on luxury. If you could just break down the performance of it because it decelerated despite comping against a period where you had some supply chain issues. Are there still old disruptions you're working through? It doesn't seem like the underlying categories changed much, particularly in fragrances. If you could just talk about your exposure to Hong Kong and travel retail there, that'd be great. Thank you.
Pierre-André Terisse (CFO)
Yeah, I can take it, and Pierre can complement. It's true luxury had a favorable base. That's why the way to read the 4% is that it's a very strong performance, but at the same time, it reflects easy comps, and the Hong Kong and travel retail impact I've been mentioning. If you turn to Q2, you would expect the reverse, i.e., you would expect that the comps are going to be much higher, and therefore, probably luxury is going to be low single-digit growth in this particular quarter. We continue seeing fundamentally positive drivers of performance in the fragrance, in the expansion to cosmetic, and at the same time, we have this situation in Asia which is likely to continue impacting us for a few quarters.
Operator (participant)
Our next question comes from Nik Vlahos of RBC.
Nik Modi (Managing Director)
Hi. Good morning, everyone. Two quick questions for me. First, I just want to make sure I heard it right that your second quarter outlook is in line with the full year. I thought I heard that, but I just wanted to confirm that. Just given how important the December quarter is for the beauty business in general, any more clarity or specifics you can give us on kind of how you're thinking about that season would be very helpful in terms of selling new products or programs or anything that would give us a little bit more clarity. The second question is just a bigger picture question on makeup. Obviously, a lot of companies have been struggling in this area. Just wanted to get your views on what you see going on in that market. Do you think it's something that can be turned around?
Is it really just a function of a cyclical change between skincare and makeup that tends to go every three to five years? Any thoughts around that would be helpful.
Pierre Laubies (CEO)
Hi, Nick. This is Pierre. I'll take the last question first, and then Pierre-André will take the other ones. I think our vision on the makeup is that probably there has been a bit of a spending, if I may say so, and I think we probably are in a normal cycle of multiplication of purchase by consumer. The category is maxed out, probably in terms of penetration. It does probably increase penetration by going to lower ages, younger ages, sorry. We do think that clearly we have seen a pattern of increase of quantity of purchase over the years, and I think we are cycling through that.
We also, I think, have a certain number of channels which are not measured in the typical panel, like we were talking of the online business, and I assume that if we have such a good performance with Amazon, we may not be the only one having that performance. As a consequence, I think alternative channels are also taking their fair share. I think probably the shift in channel plays a role here in the official data that we see and probably have gone through, I would call it, an accelerated cycle of purchase for the last two years, which we need to cycle through. We do think that the category still has potential, and particularly, we really believe that the category has, or we have potential in the luxury side of this category.
Pierre-André Terisse (CFO)
Hi, Nick, Pierre-André. On the new launches, there's a couple of things. We've already mentioned Tiffany and Love, which is really a Q2, going to be a Q2 event, which is off a strong start, as you have seen. We have, in addition, Gucci Bloom Ambrosia, and the first sign we have are pretty positive in the U.S. and in the U.K., but these are very early days. We have Burberry Her Eau de Parfum Intense, which is adding to the range of Burberry for Her. We have as well two shades of glittery lipstick for Gucci, which are going to come in addition and widen the range. That is for luxury. We continue coming with innovation on the market.
With respect to Q2 and what we expect, you all know that the base of comparison, in particular for luxury and TV, was low this quarter, and therefore, you would expect to have still a solid and positive performance of these two businesses next quarter, but probably being on a higher base level. At the same time, we expect to see continuing progress in consumer beauty. If I look at the consensus now on net revenues, I would say that we are comfortable with that. On the operating income for H1, given the strong start, which for a part is attributable to fading elements, I would see the high up in the low part of the range we have given for the year, which means about mixing all digits.
Q2, it will be on a different base, very much in the continuation of what we have shown in Q1, and we're reflecting substantial improvement in the business.
Nik Modi (Managing Director)
Thank you very much.
Pierre-André Terisse (CFO)
Thank you.
Pierre Laubies (CEO)
Thank you.
Operator (participant)
Our next question comes from Faiza Alwy of Deutsche Bank.
Faiza Alwy (Managing Director)
Yes. Hi. Good morning. A couple of questions.[crosstalk]
Hi. First, I just wanted to understand, sort of why did you decide to include Brazil as part of your strategic review? Because I thought that business was doing reasonably well relative to the rest of consumer beauty. I just wanted to clarify how much did Brazil and the retail haircare business contribute to growth this quarter on an organic basis. I also just wanted to ask about gross margin and was hoping that you could disaggregate for us the margin increase here because I think last quarter, you had sort of higher incremental freight costs because of supply chain issues. I was wondering if we could get an underlying growth rate excluding that, and if possible, sort of a breakdown between mix, if there was any contribution from lower promotions, any contribution from productivity, cost cutting, and synergies. Thank you.
Pierre-André Terisse (CFO)
Okay. I'll take this question, number question. It may be about the gross margin element. Strong progress in luxury for the quarter, strong progress in professional beauty as well for the quarter. In consumer beauty, it's been mixed, pretty different from one market to the other. Almeya, for the reason I mentioned, which is that we have chosen to give the priority to gross margin and really to be extremely selective on sales, we are negative, but we have a strong rebound on the gross margin. Europe depends very much market by market. Overall, it's slightly negative, and so is the case of the Americas. Consumer beauty as a whole is pretty contrasted. With, again, very different movements and dynamics market by market, and I think it's important we try not to manage consumer as a whole, but really to address the specific situation of each market.
On Brazil, the reasoning is very simple. Once you eliminate hair, hair is a substantial part of Brazil, as well as mass product and the other ones in particular. Therefore, Brazil in this perimeter, with this portfolio, was not really fitting in our portfolio, so we thought it was natural for Brazil to go with professional and hair in this strategic review. Not for reason of performance because the performance of both Brazil and the rest of the scope and the review is positive. I mean, it is really not a question of getting rid of businesses which are not performing. It is more a question of having the right level of focus to invest our resources where we think we can generate more result.
On your question of what's been doing what on the quarter, the scope, which is under strategic review, was positive, low single digit, and the scope, which is not under strategic review, was negative, low single digit. I hope I've been complete.
Operator (participant)
Our next question comes from the line of Joe Lachky of Wells Fargo.
Joe Lachky (VP of Equity Research)
Hi. Thanks. I just wanted to get back to the strategic options review that you're doing. I guess, first off, on the timing of it, because four months ago, you guys presented plans after doing a thorough review of the business. I'm wondering what's really changed and what's driving the need to accelerate change, given the confidence that you had four months ago in the turnaround plan. Who's really driving the decision to do that? Is it the management team? Is it the board or the primary shareholder? Can you shed a little light on that? Thanks.
Pierre-André Terisse (CFO)
Hi. I mean, you're right on some things, which is that we go fast. Pierre has been in the business for about a year. I've been in the business for about nine months. In this period of time, we have solved the supply chain issues. We have stabilized the business in 2019. We have produced the turnaround plan, and now we're starting a strategic review. That is a lot of things in one year. I think that is just made necessary if we want to reshape Coty and to transform it into a performing beauty company and beauty champions somehow. I do not think there was any change. I once said that we had to take things one by one and not to try and do everything at the same time. That is really the methodology we followed.
We had to stabilize the company and solve the supply chain issues. That was done. We had to stabilize 2019 and to deliver 2019. That was done. We definitely had to look at a plan to close the performance gap of all of our businesses, and that is what we have tried to do with the turnaround plan. Once we have done that, we have started looking at the portfolio and thinking, "Is there any way we can improve faster? We can make faster the transformation of the group and improve faster our performance." Obviously, a key element was our ability to free up resources, human and financial, behind core categories, and this is why we have made this decision. No change. A diagnostic from the management, which has been shared with the board and fully supported by the board. There is not one company and another one.
There is only one company with management and board, and we have taken this decision together. That's fundamentally it.
Joe Lachky (VP of Equity Research)
If you could maybe talk about if you have any expectations for proceeds, is there a hurdle level in mind where you could potentially walk away from doing a deal and hold on to the businesses? Maybe if you could talk just generally—I know it's early—but generally about potential uses of the proceeds, how they could potentially be allocated between debt repayment and share repurchases. Along those lines, would you do a deal that could be diluted to EPS in order to hit your leverage target of three times?
Pierre-André Terisse (CFO)
I won't comment on the last one. Again, it's too early. Days. In terms of expectations, the only thing I can say is that these businesses are incredibly attractive. Whether you talk of professional beauty, which for many, many reasons, the hair business is one of the leading platforms in the world and has been performing well and has been strengthened for the past few years by the management, OPI, which is an outstanding brand, GHD, which is literally flying in terms of growth, and Brazil, which is a unique player on the Brazilian market, which is, as you would recall, a very attractive market in the beauty space. We have expectations which basically match the attractiveness of these assets, and I will not comment further on that.
On the potential use of proceeds, we've been pretty clear, I think, in the press release, saying that the potential proceeds would be used to decrease the indebtedness with a target leverage of about three times net debt to EBITDA, and any excess would be returned to shareholders. I've got nothing to add to that.
Operator (participant)
Our next question comes from Lauren Lieberman of Barclays.
Lauren Lieberman (Managing Director)
Great. Thanks. Good morning.
Pierre-André Terisse (CFO)
Hi, Lauren.
Lauren Lieberman (Managing Director)
Hi. I wanted to ask again about consumer beauty margins. I know you touched on it already, but I was intrigued by you saying you're not going to manage holistically, but more thinking about the specific situation of each market. With that in mind, when you said that for Almeya, where you've really decided to start to prioritize gross margins more dramatically, sales were down. When I think about the situation in the U.S. and promotional intensity and things that you've talked about needing to start to correct, how does that play out? If I think about the trajectory for consumer beauty of the U.S., is there a point in time somewhere in the next, I don't know, 12 months, 18 months when we see more pressure on sales because that focus switches to be more about gross margin?
Pierre Laubies (CEO)
Hi, Lauren. This is Pierre. How are you? I think I'll come back to that point. At the end of the day, first and foremost, our strategy is to raise the gross margin, and we raise the gross margin by a combination of being relatively competitive on the promotion, but do not be overly competitive. Clearly, we do understand that there is a certain degree of promotional intensity that you need to respect. We are going to be in line with what we think should be the level of promotion in the market. Certainly, what we believe is that we have not exerted pricing power on our products over the course of the last five years, and it is time to return to that. All right? We do know that we have our math in order.
We do clearly understand that there is some elasticity, and we are ready to accept some of these volume losses associated with that because we think it is very important that we generate the gross margin, which enables us to increase the velocity of our brands by advertising. Having that model, we are convinced that this model will work, and we are going to exert it. The second thing we are going to work to improve our gross margin is to really simplify our portfolio, simplify our range, and make sure that the SKUs, which are penetration drivers and are also, in general, a high-margin SKU, get the shelving that they deserve. Being working on a shelf of six elements, four elements, two elements, or one element.
I think there is a lot of tacking and blocking there to be done, but actually, I do believe that we can both, at the same time, play by the rules of the game, the promotional intensity which is required, but not over, and at the same time, raise our gross margin by balancing the mix of our offer over time.
Lauren Lieberman (Managing Director)
Okay. That's great. Thank you.
Thanks.[crosstalk]
Operator (participant)
Our next question comes from Steph Wissink of Jefferies.
Steph Wissink (Managing Director)
Hi. Good morning, everyone. I wanted to just focus on the working media. I want to make sure I have the statistics right here. I think you mentioned core brand investment in working media was up about 38%. Can you help us understand what percentage of the business falls into that priority or core brand mix? Also, tell us a little bit about where some of those media dollars are going. I know you mentioned TV, but if there are any other areas of emphasis in terms of your media mix, that would be helpful.
Pierre Laubies (CEO)
Media mix is established by a reach-based strategy. As a consequence, we apply the media mix that we need to apply based on, again, the specific country situation. You have countries where you need to have a balance between a tilted balance in terms of online versus regular TV, and due to the penetration of digital, and other countries where the penetration of digital is lower. As a consequence, you do more mainstream media. Even in some countries, you will do regional balances. Take Russia. If you look at the Moscow area, you are going to be massively investing into digital, while the rest of the country, you are going to invest in TV. I think we tailor-made this media plan market by market, and there is not a one-size-fits-all strategy. That is one of the first drivers.
The second thing is that these core brands at this stage, or these core BMUs, as we call them, brand-market intersection, represent on which we are focusing this media effort, represent about 60% of our revenues, and they tend to be also our biggest global brands. Over time, we do want to continue to increase that because we still have gaps to close in terms of media investment in a certain number of markets. This is why the job that I was relating to earlier on gross margin is absolutely important, as well as the balance between working media and non-working media, which still can be improved at Coty.
Operator (participant)
Our next question comes from Mark Astrachan of Stifel.
Mark Astrachan (Managing Director)
Thanks. Good morning, everybody. Two follow-ups.[crosstalk]
Morning. One on the pricing commentary. Is this something that's more of a one-time repositioning of product pricing? Is it something that you want to use as a lever on a more ongoing basis, kind of inflation? Plus, kind of curious on that. Secondly, back on the potential asset sales, I realize it's obviously early, and this is kind of a second step, if you will, but the implication of what you said about leverage would imply redeploying proceeds, assuming multiples or value that we all kind of believe is reasonable for the business. Maybe holistically, if you could talk a bit about what you would do with cash, were you unencumbered by the current debt levels, that would be kind of helpful, and just hearing your thoughts there.
Pierre Laubies (CEO)
Okay. I'm Mark. I'll take the pricing decision. This is Pierre, or the pricing questions for you. I think both of the above will be my answer. Yes, we have a catch-up plan to do, and we are executing a catch-up plan. We have not taken pricing for many years, and it has depleted our ability to—it has depleted our gross margin. As a consequence, it has weakened our brand. As a consequence, it has, unfortunately, led us to increase promotional intensity. We need to get out of this vicious circle to get back into a virtuous circle. At this stage, this is why we do think that we need to have a bit of a reset, right? Going forward, indeed, you're absolutely right.
We need to make sure that we manage inflation correctly, and we do not fall back into this trap we have fallen into.
Pierre-André Terisse (CFO)
Pierre-André here. I think it's really a matter of—it is a matter of trade-offs and financial flexibility. Trade-off, we have a debt level which, given the recent evolution of the business, has led us to make a lot of trade-offs in favor of cash as opposed to in favor of brand investment and profits, by the way. I think by coming back to a leverage level which is more adapted to the industry and category, we are putting ourselves in a position to make better trade-offs overall, which sometimes will still be in favor of cash, but sometimes will be in favor of growth. Altogether, that is giving us more financial flexibility.
More financial flexibility means that with two categories which offer a lot of possibilities of growth, we have the ability to invest if and when in front of the right opportunity. Yeah, I would say overall, that's definitely an improvement in order to grow the business we have chosen to keep.
Operator (participant)
Our next question comes from [audio distortion].
Analyst (participant)
Hi. Good morning. My first question has to do with the comments you made about selling on Amazon and the great growth that you're seeing there. You're one of the few beauty companies who talks about that. I was curious, why do you think that is? Are you doing extra promotion on Amazon? Can you talk about what your margins look like on Amazon, selling to Amazon versus selling to traditional retail? My second question, just on the divestitures, I mean, I was stunned to see the price, the proceeds you got for Unique. I mean, one-tenth of what you paid is kind of stunning. I'm a little bit worried that that sends a signal to potential buyers for professional haircare or the Brazilian business that you're in kind of fire sale mode, and you'll sell these assets for anything.
Was Unique a one-off situation you just wanted out, or was it really that bad a business? I mean, maybe you could just comment on how much discipline you're going to show in terms of the proceeds you'll get for these businesses. Thanks.
Pierre Laubies (CEO)
I'll take the first part of the question, and I'll let Pierre-André answer on the second one. Why are we growing on Amazon? Mostly because we are applying on Amazon the strategy that we aim at applying in the rest of the grocery retail or the mass market. We clearly know now what our core SKUs are. We know what our high-velocity items, which are penetration-building items, are, and we are making sure that they get their fair share on Amazon. As a consequence, the business is growing. You have an absolute correlation between the job that we have been doing in these markets that we have identified: U.K., U.S., Germany, and Brazil, and what we are doing on Amazon.
The benefit is that definitely with online, I mean, the implementation of the situation of that strategy works faster, and the ability to expand your assortment or the ability to adapt your assortment is just more rapid. As a consequence, we get this result. Also, we have put resources behind it, which probably we have not been necessarily putting before. Our margin is fundamentally similar.
Pierre-André Terisse (CFO)
We are absolutely not in a fire sale mode. I think Unique, you would understand, was a very specific case, not to use the Unique word, of course. It is a business which was far away from our competencies, which we have been struggling to manage for the past few quarters now, with very difficult performance. At some stage, we just chose to move on.
We chose to move on and to divest it in conditions which I agree are not very good-looking. At the same time, we thought it was very important for the rest of Coty that we could move on and that we could put this problem on the side, knowing that Derek would be managing us much better than we have done together. That is a choice we made. Again, not being in a fire sale mode. What we are doing now with the strategic review is completely different. Of course, we are talking of an asset which has not been losing growth or falling. We are talking of an asset which is performing well. You see this quarter. This is the case of professional beauty. This is the case of hair. This is the case of OPI, GHD, Brazil.
We are talking of brands which are recognized by many, many people, professionals of the sector, but also by many investors which attract a lot of interest, which was not the case of Unique. These are brands which have a fairly good level of profitability, improving. PB was 12% last year, OI, and that's a good proxy for the overall group. If you take into account the common costs which are going to remain for a part at Coty, we're talking of a scope which has mid-teens operating income. Given what I say about the profitability, about the growth, given the obvious appetite which we see and which I'm sure you can see, we expect these transactions to be creating a lot of value, actually, just creating a lot of value. We are going to make sure that this is happening this way.
It's really about exteriorizing value for the group and reshaping Coty in a much more substantial way than Unique, which was a very different small case.
Operator (participant)
Thank you. Our final question will come from the line of Andrea Teixeira of JPMorgan.
Andrea Teixeira (Executive Director)
Thank you. Just as a final question, sorry, on a couple of clarifications. One is on the Q2 guide. When you mentioned first half, did you mean the first half operating profit would be at mid-single, or were you referring just to Q2 specifically? The second one was on the expectation of the proceeds from the sale of the assets. I mean, I think the $8 billion-$9 billion from what FT talked about implies about 20-21 times EBITDA. As a follow-up, just to see if you think that could be feasible from what you just mentioned about not being on a fire sale. On the marketing spending, sorry, the third one would be you said working media was up 11%, but can you comment about the whole A&CP? Because I understand you were taking down couponing.
In the couponing, on the total A&CP spend, is it still down? Relatively, I think it is still down. I want to just double-check that. Also, how like-for-like, I understand that you do on a net basis. How like-for-like would have been without reduction in couponing? Thank you.
Pierre-André Terisse (CFO)
Okay. Pierre-André, I'll take these—I think I'll take these questions. On A&CP first, it's up 70 basis points altogether. So 11% is the increase of the working media, but the total A&CP is up 70 basis points. It's been up, and it will continue going up. I mean, we believe it's important that we keep reinvesting altogether, and therefore, we'll invest or we'll increase our investment in A&CP. On the guidance for—on the guidance for the operating income, I said mid-single digit for H1. That includes a Q1 which has been specifically strong with some fading elements, as I said. Altogether, H1 is going to be up. We expect it to be up mid-single digit, within the range we have given for the year in the lower part of the range. For the proceeds, we didn't say to $9 billion.
That was, I think, an information in the press, in the Financial Times, if I'm not mistaken. Now, clearly, that's going to be a sizable transaction. You know how much we're talking about in terms of earnings. I've given you some elements about that. You know how strategic transaction can price on the market, what kind of multiple it can attract, and therefore, you can make the math. It's going to be a sizable transaction, and we don't want to speculate on the amount. That's far too early, but we believe it's going to be a sizable one. I think that's it. We'll conclude the call now. Thank you very much for your attention. It's an exciting time at Coty. Exciting to see the progress we are making, and we look forward to sharing more progresses with you next quarter in February. Thank you. Bye.
Operator (participant)
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.
