Coty Inc. Class A

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 COTI's first quarter fiscal 2020 results conference call. As a reminder, this conference call is being recorded today, November 6, 2019. On today's call are Pierre Louvies, Chief Executive Officer, and Pierre-André Therese, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Cody'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 reflect 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 reflect 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. Lubies.

Thank you, Maria. And welcome, everybody, to COTI's first quarter fiscal 20 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. 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. And third, we remain confident in the fiscal 20 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 and 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 spent 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 the 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, avoiding value destructive selling tactics. Two, our plans include lease 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. and 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 code 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 UK, 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, Wondolux 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 are 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 product range launch. In the US, 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 US mass market, has struggled with sales declines for several years. Our analytical approach identify 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 MiracleDuel 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 continues to moderately decline, both Sally Hansen nail color and nail treatment are back to solid growth. And in CoverGirl, while the improvement in the overall brand sell-out has been more moderate, our actions 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're behind these sub-brands. And while our sales continue to be weighed on by the shared space reduction, we are seeing productivity improvement in our core customers, as well as sales growth in untracked channels 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, Execution focused on core SKUs that were 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 Collestant Perfect with ME Plus line. And following the core principle of innovation, penetration, driving, GSD 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 COTI's performance and unlock significant value. With that, let me turn it over to Pierre-André.

Thank you, Pierre, and good morning to everyone. So overall, as you have seen, our Q1 results are in line with expectation and sign a solid start to the year. Starting with top line, our like-for-like net revenues declined minus 1.1%, which was weighed down significantly by the performance in Unique. And therefore, for the rest of the scope, our net revenues were practically stable at minus 0.1%. This was obviously partially held by low comparables in Q1 last year, but it was nonetheless an improvement from the approximately minus 3% like-for-like decline on the same scope, so excluding Unique. both last quarter and in full year 19 overall. Supporting the life-for-life 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 adjusting 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. But first, I'll shift to, I'll go to the digital results and start with luxury. As you can see here on the slide, the campaign for the new Tiffany & 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 & Love on the very first day of launch exceeded an entire week of sales of the initial Tiffany signature fragrance launch, and we're 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. So if I move to luxury financial performance, then in Q1, the division delivered another quarter of low to meet single-digit growth. This included growth in Europe. and Almea 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 Balmerie makeup continue to expand, contributing over a third of our divisional growth in the quarter. And this confirms the strong potential of several of our luxury fragrance brands to expand into adjacent beauty categories. As I mentioned earlier, Tiffany & Love is off a strong start to a strong start. Gucci Memoir has been a solid addition to the expanding Gucci portfolio, and Hugo Boss Bottles Infinite continue to be successful, fueling further distribution expansion. From a margin standpoint, luxury drove strong gross margin improvements coupled with cost control, and this resulted in over 300 basis points of operating margin improvement. And now turning to consumer beauty, you can see on the next slide the 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. And the consumer response and engagement with this announcement has 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. And 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. So 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 minus 10% decline ex unix last quarter and in full year 19. 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 discussed by Pierre. We expect such improvements to continue in the coming quarter as shelf losses moderate and as our investments continue showing traction. Last, we choose in most ALMEA countries for consumers to drive healthy and sustainable sales, foregoing margin-dilutive low-value sales, and 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 improvements, and these trade-offs will allow us to free up gross margin dollars to reinvest in the business. And so 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 fiscal year 2019. So as expected, this significant increase in NCP 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 Gly Hot Brush and the Platinum Plus Styler, as you can see on the left. And as Christmas is getting close, you should really look at this as a gift ID for the people you really love. That's a great ID, 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 collections. 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 U.S. specifically. As expected, U.S. customer discounting that impacted ourselves 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. So that was for the division. I'm now going back to COTI 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 the ANCP as we continue rationalizing our non-working media. This is a key outcome. since it builds a virtuous equation where growth margin progresses finance investments 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 7 cents, which was done versus the 11 cents reported last year, which itself included four cents of non-recurring tax benefit, and therefore, absent from this tax benefit, the EPS has been stable. I'm turning to cash flow statement, 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 EV feature in the quarter, we received $50 million of proceeds, and at the same time, we purchased the remaining stake in our Southeast Asia JD for $45 million. In total, added by FX, our net debt and resultant leverage moved down moderately, this is last quarter, to less than $7.4 billion for the debt. So I'm 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're happy to confirm our target for fiscal 2020 at Consumscope as set in the last earning call. In detail, that means like-for-like net revenues stable to slightly lower year-over-year, an operating income at Consumscope and Consumcurrency growing 5% to 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 COTI. to increase our focus on core categories and to free up resources to invest behind these categories, namely fragrances, cosmetics, and skincare. And therefore, we've 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. and with potential proceeds, deleverage COTI with a target pro forma 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 utility 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.

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 a line of Robert Ottenstein of Evercore.

Great. Thank you very much. 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. So just really trying to understand in a little bit more depth kind of the thinking around that. And then once... you know, 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. And then finally, along those lines, what that does to, you know, 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.

Okay. 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 don't believe at the moment we would be in the best position to manage the three at the same time for reasons which has to do with leverage on the one hand and for reasons which have to do with complexity of and focus on on the other so we've chosen to focus on two segments which are luxury and consumer which in reality category wise are fragrances, cosmetics, and skin care 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's going to give this business as well the means it needs to, the need to develop. So it's, yeah, it's really a matter of focusing, of giving ourselves more attention to the categories we've chosen, freeing up financial means as well, and recovering financial flexibility to invest behind dues. And 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. 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 seeked for on sale at that time, which was a 14% to 16% operating margin, and which we have confirmed recently. So essentially, it doesn't change our target in terms of gross margin and operating margin improvement, and we hope it's going to help us accelerate the transformation of the group.

And in terms of the algorithm, what do you see as a good medium-term algorithm X divestitures?

What do you mean by algorithm?

Well, you know, just in terms of expected top-line growth, operating profit growth, EPS growth, as you know, the kind of targets you gave for fiscal 2020.

Okay. So, you know, we're 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 to 16% and then for the rest we need to work.

Our next question comes from the one of Olivia Tong of Bank of America.

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. So are there still old disruptions you're working through? Because it doesn't seem like the underlying categories changed much, particularly in fragrances. And then if you could just talk about your exposure to Hong Kong and travel retail there, that'd be great. Thank you.

Yeah, I can take it and Pierre can complement. It's true luxury had a favorable base. So That's why the way to read the 4% is that it's a very strong, it's a strong performance, but at the same time, it reflects easy comps and the Hong Kong and travel retail impact I've been mentioning. And so 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 cosmetics. And at the same time, we have this situation in Asia, which is likely to continue impacting us for a few quarters.

Our next question comes from one of Nick Modi of RBC.

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. And just given how important the December quarter is for the beauty business in general, just any more clarity or specifics you can give us in kind of how you're thinking about that season would be very helpful in terms of selling of new products or programs or anything that would give us a little bit more clarity. And then the second question is just a bigger picture question on makeup. Obviously a lot of companies have been struggling in this area and Just wanted to get your views on what you see going on in that market. You know, do you think it's something that can be turned around? Is it really just a function of a cyclical change between skin care and makeup that tends to go every three to five years? Any thoughts around that would be helpful.

Hi, Nick. This is Pierre. I'll take the last question first, and then Caroline will take the other ones. I think our vision on the makeup is that probably – There has been a bit of a standing, 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. But we do think that clearly we have seen a pattern of increase of quantity of purchase over the years. And I think we're cycling through that. We also, I think, have a certain number of channels which are not measured in the typical panel. And like we are 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. And as a consequence, I think alternative channel are also taking their fair share. So 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. But we do think that the categories still have potential. And particularly, we really believe that the category has or we have potential in the luxury side of this category.

So 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 of 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 US and in the UK, 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. And that is for luxury, so we continue coming with innovation on the market. With respect to Q2 and what we expect, so 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. And at the same time, we expect to see continuing progress in consumer beauty. So 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 fell apart, is attributable to phasing elements, I would see the eye up in the low part of the range we have given for the year, which means about mixing all digits. So a Q2, it will be on a different base very much in the continuation of what we are showing in Q1, and we're reflecting substantial improvement in the business.

Thank you very much.

Thank you.

Our next question comes from Alana of Deutsche Bank.

Yes, hi, good morning. So a couple questions. Hi. So 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. And so just wanted to clarify how much did, you know, Brazil and the retail hair care business contribute to growth this quarter on an organic basis. And then 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 the higher incremental freight costs because of the supply chain issues. So I was wondering if we could get an underlying growth rate excluding that, and if possible, sort of a breakdown between, you know, mix, if there's any contribution from lower promotions, you know, any contribution from productivity, cost-cutting, and synergies. Thank you.

Okay, I'll take this question, number question, maybe about the gross margin element. So 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. Almea, 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 margin. Europe depends very much market by market, overall it's slightly negative and so is the case of the Americas, so consumer beauty as a whole is pretty contrasted. Again, very different movements and dynamics market by market and I think it's important we try not to managed consumer as a whole, but really to address the specific situation of each market. On Brazil, well, the reasoning is very simple. Once you eliminate hair, hair is a substantial part of Brazil, as well as mass products and deodorants in particular. And 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 and not for reason of performance because the performance of both Brazil and the rest of the scope and the review is positive. It's really not a question of getting rid of businesses which are not performing. It's more a question of having the right level of focus to invest the resources where we think we can generate more results. And 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. My hope has been complete.

Our next question comes from one of Joe Lackey of Wells Fargo.

Hi, thanks. I just wanted to get back to the strategic options review that you're doing. And I guess first off on the timing of it, because four months ago you guys presented plans, you know, after doing a thorough review of the business. So I'm wondering, you know, 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? And who's really driving the decision, you know, 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.

Hi. Well, I mean, you're right on something, which is that we go fast. You know, Pierre has been in the business for about a year, has been in the business for about nine months. And in this period of time, we have – solve the supply chain issues, then we have stabilized the business in 19, then we have produced the and now we're talking strategic review. So that's a lot of things in one year. I think that's just made necessary if we want to reshape Coty and to transform it into a performing beauty company and beauty champions somehow. I don't 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. So that's really the methodology we followed. We had to stabilize the company and solve the supply chain issues. That was done. We had to stabilize 19 and to deliver 19. That was done. We definitely had to look at a plan to close the performance gap of all of our businesses. And that's what we've tried to do with the turnaround plan. And once we've done that, we 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. And 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 so no change a diagnostic from the management which has been shared with the board and fully supported by the board you know there's not one company and another one there is only one company with management and both and we have taken this decision together that's fundamentally it and then

If you could maybe talk about, you know, if you have any expectations for proceeds, is there a hurdle level in mind, you know, where you could potentially walk away, you know, from doing a deal and hold on to the businesses? And then maybe if you could talk just generally, I know it's early, but generally about, like, potential uses of the proceeds, you know, how they could potentially be allocated between debt repayment and share repurchases and along those lines. would you do a deal that could be diluted to EPS in order to hit your leverage target of three times?

Well, I won't comment on the last one. Again, it's two early days. In terms of expectations, the only thing I can say is that these business 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. So 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. So I've got nothing to add to that.

Our next question comes from one of Lauren Lieberman of Barclays.

Great. Thanks. Good morning. Hi, Lorraine. Hi. So 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 Almia where you've really decided to start to prioritize gross margins more dramatically, sales were down. So when I think about the situation in the U.S. and, you know, promotional intensity and things that you've talked about trying, you know, needing to start to correct, how does that play out? Like 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.

Hi, Lauren. This is Pierre. How are you? I think I come back to that point. At the end of the day, it's first and foremost our strategy is to raise the gross margin, and we raise the gross margin by a combination of... be relatively competitive on the promotion, but do not be overly competitive. So clearly we do understand that there is a certain level of promotion intensity that you need to respect. So we are going to be in line with what we think should be the level of promotion in the market. But 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, right? And so... We do know that we have our map 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. And I think 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 driver and are also in general a high margin SKU, get the shelving that they deserve. And being working on a shelf of six elements, four elements, two elements, or one element. And 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 was required, but not over, and at the same time raise our gross margin by balancing the mix of our offer over time.

Okay. That's great. Thank you.

Our next question. Our next question comes from the line of Steph Wissink of Jefferies.

Hi. Good morning, everyone. I wanted to just focus on the working media. I want to make sure I have the statistics right here. So 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? And then 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.

Our media mix is established by a rich base strategy. And as a consequence, we apply the media mix that we need to apply based on the, again, the specific country situation. You have countries where you can use, 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. And as a consequence, you do more mainstream media. And 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. Whereas the rest of the country, you are going to invest in TV. So I think we tailor-made this media plan market by market, and there is not a one-size-fits-all strategy. So that's one of the first drivers. The second thing is that these core brands at this stage or these core BMUs that 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. And 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.

Our next question comes from one of Mark Ashton of Stifel.

Thanks. Good morning, everybody. Good morning. One on the pricing commentary. So 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. And then 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 leverage redeploying proceeds, assuming multiples or value that we all kind of believe is reasonable for the business. So 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 in just hearing your thoughts there.

Okay. Hi, Mark. I'll take the pricing decision. This is Pierre. Or the pricing question, sorry. 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, and as a consequence has weakened our brand. And as a consequence, has unfortunately led us to increase promotional intensity. So we need to get out of this vicious circle to get back into a virtuous circle. And at this stage, this is why we do think that we need to have a bit of a reset. And then 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.

I think it's really 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. So I think by coming back to a leveraged level, which is more adapted to the industry and category, we are putting ourselves in a position to make better trade-offs overall, which sometime will still be in favor of cash, but sometime will be in favor of growth. And then all together, that's giving us more financial flexibility, and more financial flexibility means that with two categories which offers a lot of possibilities of growth. We have the ability to invest if and when in front of the right opportunities. So, yeah, I would say overall that's definitely an improvement in order to grow the business we have chosen to keep.

Our next question comes from the line of Wendy Nicholson of Citigroup.

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. And you're one of the few beauty companies who talks about that. So I was curious, you know, 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? And then 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. And I'm a little bit worried that that sends a signal, you know, to potential buyers for professional hair care or the Brazilian business that you're in kind of, fire sale mode, and you'll sell these assets for anything. So was it unique, like 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. 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 and the strategy that we are not 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 going. So do you have an absolute correlation between the job that we have been doing in this market that we have identified UK, US, Germany, and Brazil, and what we are doing on Amazon? And 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, and as a consequence, we get this result. And also, we have put resources behind it, which probably we haven't been necessarily putting before. And our margin is fundamentally similar.

So we are absolutely not in a fine-cell mode. I think unique, you would understand, was a very specific case, not to use the unique word, of course. It's a business which was far away from our competencies. which we have been struggling to manage for the past two quarters now with very difficult performance and at some stage we just choose to move on. And we choose to move on and to divest it in conditions which, I agree, are not very good looking. But at the same time, we thought it was very important for the rest of COTI that we could move on and that we could put this problem on the side, knowing that Derek will be managing us much better than we have done together. That's 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 rather than falling. We are talking of an asset which is performing well. You see this quarter. This is a case of professional beauty. This is a case of hair. This is a case of OPI, GHD, Brazil. We are talking of brands which are recognized by many, many people, professionals in 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. PV was a 12% last year, OI, and that's a good proxy for the overall group. So if you take into account the common costs which are going to remain for a part that we're talking of, a scope which has a mid-teens operating income. So, you know, given what I said about the profitability, about the growth, given the obvious appetite which we see and which I'm sure you can see, we expect this transaction to be creating a lot of value, actually, just creating a lot of value. And we are going to make sure that this is happening this way. It's really about exteriorizing value for the group and reshaping COTI in a much more substantial way than unique, which was a very different small case.

And thank you. Our final question will come from the line of Andrea Teixeira of J.P. Morgan.

Thank you. So just as a final question, sorry, on a couple of qualifications. One is on the Q2 guide, when you mentioned first half, did you mean first half reporting 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 to 9 billion from what FT talked about implies about 20 to 21 times EBITDA. So as a follow-up, you know, just to see if, you know, you think that could be feasible from what you just mentioned about not being on a fire sale. And then 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&P? Because I understand you were taking down couponing. So in the couponing, on the total EMP and spend, is it still down relatively? I think it is still down. So I want to just double-check that and also how, like for like, I understand that you do on a net basis. How, like for like, would it have been without reduction in component? Thank you.

Okay. Okay. Pierre-André, I'll take these questions. On ANCP first, it's up 70 dips altogether, so 11% is increase of the working media, but the total ANCP is up 70 basis points. It's been up and it will continue going up, and we believe it's important that we keep reinvesting altogether, and therefore we'll increase our investment in LTP. On the guidance for the operating income, so I said mid-single digit for H1. And therefore, that includes a Q1 which has been specifically strong with some fading, as I said. But altogether, H1 is going to be up. We expect it to be up mid-single digit. So within the range we have given for the year in the lower part of the range. And then for the proceeds, We didn't say it's $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.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.