Coty Inc

NYSE:COTY

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's Fiscal Second Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded today, February 8th, 2019.

On today's call are Pierre Laubies, Chief Executive Officer; Pierre-André Terisse, Chief Financial Officer and Ayesha Zafar, Group Controller. 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 organic net revenue reflect a comparison of the business at constant currency, in the current and prior year period, 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 will now turn the call over to Mr. Laubies.

[Pierre Laubies, CEO]

Thank you, Maria and welcome everybody to Coty's fiscal 2019 second quarter conference call. I'm very happy to be participating on my first earnings call since joining Coty. Actually, it's my first ever earnings call since I've been working private businesses all my life. I'm also very pleased to have Pierre-André Terisse here with us as our newly appointed Chief Financial Officer and Pierre-André and I will walk you through the second quarter financials and we would together take questions. We also have with us on the call, Ayesha Zafar, who has served us as our Interim CFO over the past five months.

Before diving into the details of our business, let me just acknowledge that I've been with Coty for fewer than 3 months and Pierre-André has been with us for one week. So therefore, we are very much still in the learning phase about our business. We will do our best to answer all of your questions on the call today and will expect to do so on the future ones. Today's clearly a bit of an unusual situation and there may be questions that we will need the Investor Relations team to get back to you as appropriate.

Since I joined the company, I've been discovering each part of our business, aiming to assess what is and what is not working and where the opportunities lie in. As a result, I have not yet had the chance to speak to many of you directly, but I look forward to do doing so as we conclude our assessment and finalize our strategic plan.

Before we get into the substance of our last quarter, I thought that it would be appropriate for me to share a bit of my background as well as some introductory remarks and initial observations about Coty. As you may know, I've spent most of my career at Mars where I started in Finance and later became General Manager, Regional President and then Divisional President.

I acquired extensive experience across the world as I operated in France, Russia, Latin America, Broader Europe and eventually globally as I became Global Pet Care President of Mars. I left Mars to become CEO of Douwe Egberts, which became later JDE, after the merger with Mondelēz's coffee business and which also required substantial strategic reconfiguration.

My first experience of business transformation occurred in Russia 23 years ago and it feels like I've been doing little else since that time. I derived from this experiences a few core beliefs. I believe that there is no shortcut to greatness that persistence and consistency are key elements of any successful turnaround plan. I believe that my job together with my leadership team is to lead our organization to mastery, therefore offering space for creativity and innovation so that we can generate lasting growth.

If you examine my tactical elsewhere, while exact financial figures are private, you will find that with the teams I had the privilege to lead, we systematically created value by deploying the same business philosophy that we intend to be applying at Coty. I'm also particularly proud to say that each time I moved on to a new challenge, I'll have very skilled and highly engaged team and the business continued to grow and perform for the year that followed.

Our approach to Coty will be no different. To turn on our business means rapidly refocusing Coty on the fundamentals. My observation is that we can unlock significant value at Coty by running our company better. This will give us the headroom that we needed to address the most strategic issues that we face and capture the opportunity that we see. I must stress to you that while we are confident we can return Coty to a path of growth, we are also realistic that it will take some time. Our luxury and professional beauty businesses are growing reasonably well, but they cannot compensate completely for the difficult trajectory of our consumer beauty division.

In consumer beauty, we need to earn our right to grow again. In that respect, my personal experience has led me to conclude that the path to building a bigger business is always to build a better one. That means producing better products, better advertising, better store execution, better pricing, less complexity, lower cost, more engaged people, simpler organizational design, flatter structure and so on.

So, we'll just do that. We will focus on doing quality business and we will not be obsessed by market shares at any cost. We will refocus our portfolio and make sure that we advertise our power brands at scale. We will strike the right balance between advertising and promotion, but we will ensure that our media choices delivered right amount of reach and frequency, we will create advertising, which cuts through and consistently build our brand asset, we will make sure that our product lines provides the velocity that our retail partners expect from us and we will right size our innovation pipeline to deliver fewer, yet bigger projects.

We already execute on this fundamentals well in our luxury and our professional beauty division, but we need to do that in all our categories, all our markets, all of the time. From a financial standpoint, we will be gross margin obsessed. We clearly understand that gross margin is the lifeblood of the business and that we have a gap here versus our beauty peers that we must close overtime. That means managing revenue and cost, improving product mix and range, shipping higher portfolio and formulation and systematically deploying lean inspired methodologies in our manufacturing and logistics operation.

We will depart from having an experimental culture to one that embraces a disciplined approach, grounded in logic, playbook, standardization and prioritization. I've observed over time that while there are many ways to [indiscernible], there is truly one way to build a great one. In marketing and selling, like in all other functions, our objective will lead to - will be to lead our organization to mastery, we will become experts at what we do and will aim to make sure that all our people clearly know what is expected of them and that they have the tools and methodologies to excel in their job.

I want to stress that I do not see any contradiction between discipline and innovation. On the contrary, I'm quite convinced that discipline enables innovation and maximizes its chance of success. This is very purposely an ambitious agenda. We will deploy these principles whenever possible during the remainder of fiscal 2019, although our main objective is to finalize a strategic plan, which will define our agenda for the medium term.

I have a great deal of confidence that the management team that we have now put in place is the right one to develop this plan. We will leverage the products and the capabilities of each, we will make sure that we have true alignment within our leadership team and across the organization on our roadmap and our way of doing things. I am personally very confident that we can do this, yet, I am also conscious that we need to earn back the trust of our investors.

To achieve this, we will need to build a believable plan, which will be shared with you over the next few months and to build also a technical delivery in the quarters to come. In the meantime, we intend to carry on and deliver profit time recovery in the second half.

Now, let me turn things over to Pierre-André who brings deep tactical, he comes to us with nearly 30 years of public company finance experience, including nearly 7 years as the CFO of Danone. We are delighted to have him join Coty at this important, yet exciting junction for our company.

[Pierre-André Terisse, CFO]

Thank you, Pierre and good morning, everyone and I am excited too to join a company where the potential for value creation is so meaningful, combining challenges, strong brands and teams and opportunities for improvement and this will obviously be a long journey, but every day, since I joined is concerning this impression and I look forward very much to contributing to the new management team and building together in the coming months strong plans and execution.

So on to our second quarter results. In general, I think it's important to say that the quarterly results show continued difficulties, first, but at the same time, they also showed some progress in strengthening our control over the business. We had a number of positive developments in the quarter, including improving visibility and progress on supply chain issues, strong luxury results and improved dynamics in professional beauty.

On a like for like basis, second quarter revenue increased by 0.7% and this strong sequential improvement in the like for like progress was connected to several temporary factors. The addition of Burberry, the positive impact from the monetary change in the revenue recognition policy, the shift of some luxury shipments from the first quarter into the second quarter as a result of US Hurricane Florence and last supply chain related headwinds. We estimate these factors cumulatively benefited our like for like revenue growth rate by approximately 2%, which imply a modest underlying second quarter like for like decline of minus 1.1% for the total company, as was seen for all one-off factors we experienced in the quarter. Year to date like for like revenues were down 3.2%, that's again on an underlying basis. We estimate that the like for like revenues declined approximately 2% in the first half.

Let me get now into a bit more detail on the highlights of the quarter. I'll start with the supply chain disruption, which in November - which we reported in November with four major issues, we drove the business disruption across the three divisions. We now have significantly more visibility around these issues and we can confirm that nearly $150 million of net revenues in the first half of full year '19 represent the majority of the impact we expect for the year.

We've made significant progress in resolving these issues in our luxury warehouse in Germany, such that shipment backlogs have been cleared and capacity constraints are effectively resolved. We do not anticipate any further impact connected to this warehouse during the second half of fiscal 2019. The disruption that we experienced during the ramp up of the consumer beauty planning hub and manufacturing plant in the UK has also been steadily improving and service levels for the current cosmetic portfolio are nearing normalized levels. We expect only minor residual impacts on third quarter results as this consumer beauty supply chain disruption is getting fully resolved.

However, we still have progress to make on the consolidation of a professional beauty distribution center in the US, which continues to negatively impact customer service, particularly for the OPI nail brands. We expect to stabilize OPI service levels during the second half and the teams are working very hard on this as we speak with good progress. I would also recall that there were two external factors last quarter that mainly affected the luxury division. As a result of strategies from component parts suppliers, we continued to experience a deficit of pumps and certain glass bottles and expect this to be an ongoing issue during the second half. We have been assured though by our suppliers that Coty's orders are being very tight with strong capacity in their own plants and we expect to see here again progress. We firmly believe altogether that we have resolved the most critical supply chain integration issues and we are confident that the disruption, which will be solved by year end with a much more moderate impact expected in the second half.

With that for supply chain, I'll now move to luxury with the division which returned to strong 10.8% like for like net revenue growth in the second quarter. The supply chain issues of course continue to be a sizable headwind, but this was more than offset by strong growth in the Burberry in light of very depressed prior year comps as well as US hurricane related impact previously mentioned. On an underlying basis, luxury was still strong, growing approximately 5% in both the quarter and the first half, which is consistent with historical trends.

We continue to see strong growth across many of our programs, including Gucci, Calvin Klein, Marc Jacobs and Chloe supported by robust innovation and execution. Looking at the detail for some of them, in Gucci, we have continued to expand the Bloom pop up and as we enter the second half, key launches include the ultra-premium Calvin Klein collection, Gucci Guilty Revolution, and a select relaunch of items in the Gucci color cosmetic line. In Burberry, the launch of Her is off to a strong start driving improved share trends, particularly in the US, UK and Germany.

01:00 been impacted by the supply chain disruptions, the brand remains a core focus, with a key launch slated from second half.

We continue to see strong ecommerce momentum in the division with online growth well ahead of overall divisional growth, fueled by both traditional retailers and e-commerce pure players. And from a profitability standpoint, luxury continues to drive exceptional financial performance with 41% adjusted operating income growth in the second quarter and 29% in the first half, contributing to a 15.4% adjusted operating margin in the first half. These continue therefore to be a very strong business for us.

Professional beauty next, second quarter like for like trends improved sequentially with a decline of 0.8%, including the negative effect of supply chain disruption. These disruptions are impacting our business, including Wella whereas disproportionately impacted our OPI brands as already mentioned, disrupting sequence of the brands both in North America and internationally. Adjusting for the supply chain disruptions, underlying professional beauty like for like revenues remain consistent at plus 1.5%.

On the positive side, strong improvement in the divisional gross margin supported by product mix and accretive innovation together with fixe cost control drove a 1% increase in the second quarter adjusted operating income, resulting in a 17.3 adjusted margin for the quarter and 12.3 adjusted margin for the first half.

From a brand perspective, Wella continue to benefit from a steady increase in converting certain stores to the Wella current effect with ME+ line. We continue to see growth, strong momentum in GHD across many all countries due by a combination of our platinum plus styler launch, a new brand campaign and growing distribution.

Before I move ahead with consumer, I would like to outline here that together luxury and professional beauty represents 60% of the portfolio and that this 60% of the portfolio are showing solid to strong performance. Let me now focus on the 40% of the business, which is still facing difficulties.

Consumer beauty second quarter like for like results of negative 7.3 improved meaningfully from the 14% decline in first quarter, but was nonetheless a weak result, indicating that we have much work to do to achieve in the division. On an underlying basis, second quarter like for like was a negative 7.8% with Unique contributing to the decline. During the second quarter, the performance was broadly in line with set out trends, as our brands were pressured by continued weakness in the mass beauty category, particularly in the US and Europe. Clear trends have shown a moderation in the pace of our share.

From a category and brand perspective, so color cosmetic declined mid-single digits with CoverGirl and Sally Hansen benefiting from easy comps in the prior year, ahead of their brand relaunches, while Rimmel and Max Factor were weighed down by the supply chain disruptions. In retail hair, Wella trends remain positive with Wella heavily gaining share over the last year helped by innovation. Wella trends at Clairol remain pressured, while net revenues benefited from low comps ahead of last year media relaunch.

In body care, the Brazilian local brands continued their momentum with strong revenue growth once again. Ecommerce was bright spot in consumer beauty with strong growth in the quarter and year to date and share gains from them as well across a number of categories and in our core consumer beauty category.

During the second quarter '19, unit revenues and profits remained pressures, due to a decline in product sales and presence of sponsorship. We continue to refine our product offering and compensation plan structure to drive improvements in present sales activity, recruitment and retention. And from a profit standpoint, consumer beauty second quarter adjusted operating margin totaled 5.6%, as supply pressure and the loss profit contribution from the divested brand more than offset cost reduction.

Our expectation for second half of fiscal 2019 is for both a moderation in supply chain disruptions, as already said and more discipline, strategic approach to our investments, above and below net revenues, which should translate into an improved profit picture in the second half.

Connected to the continued pressure we are seeing at the consumer beauty division, let me briefly touch on the 965 million that are non-cash impairment charge that we are taking this quarter, primarily connected with the consumer beauty division and selected brands, trademarks. The consumer beauty division has experienced increased competitive and market pressure throughout the first half of fiscal '19, which has resulted in weaker than expected revenues and earnings.

Additionally, the discount rate associated with the division has also increased in the quarter. Based on these two factors, management determined that there were indications that the goodwill of the division as well as certain trademarks, intangible assets may be impaired and accordingly an interim goodwill impairment test was performed as of December 31, 2018. The charge announced today reflect non-cash impairment charge of 832 million for the consumer beauty goodwill and 97.8 million to the trademarks of CoverGirl, Clairol, and two small regional brands.

While this charge clearly had a material impact on reported operating profit, our adjusted operating income excludes this charge of course. Second quarter adjusted operating income was 322.3 million, declined by 7% from the prior year with a margin of 12.8%, bringing first half adjusted operating income to $463 million and an adjusted margin of 10.2%.

In the first half, the adjusted operating income was adversely impacted by temporary factors of approximately $48 million, including over 19 million from the supply chain disruption. Excluding these temporary impacts, the first half underlying adjusted operating income declined about 6% year-over-year with an operating margin of approximately 11%.

We anticipate our profit trend recovering in the second half compared with the first half. Our second quarter adjusted net income $181.9 million declined 23% versus the prior year, primarily due to a $41.8 million positive foreign tax settlement in the prior year, which is not sure of course. Interest expense was modestly higher than last year as a result of our higher debt balance, while net income attributable to minority interest was declining due to the decrease in unique profitability. As a result of all these, adjusted EPS for the quarter was $0.24 per share.

I'll now comment on the improvement in our net debt during the quarter. Debt decreased in the second quarter due to approximately $320 million of operating cash flow and $195 million of free cash flow generated during the quarter as we drove strong conversion of operating income into operating cash flow, supported by working capital improvements. Our team remains focused on free cash flow as deleveraging is a strong priority for Coty and the most important lever for value creation for both equity and debt orders in the short term.

Like Pierre, I believe that more discipline and systematic focus on cash will meaningfully enhance our cash flow in the medium term. This in turn will free up resources to both invest behind our brands and to expand our profits.

Net debt of $7,498 million on December 31, 2018 decreased $173 million from the balance of $7,662 million on September 31, 2018, resulting in the last 12 months net debt to adjusted EBITDA ratio of 5.8 times. The reduction in net debt reflects positive free cash flow, the payment of $94 million dividend and the positive foreign exchange impact relating to the part of our net debt, which is in euro. Our covenant adjusted net leverage ratio remains, as a result of all these, below our threshold and we have entire liquidity available under our revolver with no significant debt maturities until 2023.

Let me to finish also some final color on our fiscal 2019 outlook. As we focus on building a healthier business model, we anticipate profit trend recovery in the second half of full year 2019. We expect that full year 2019 constant currency adjusted operating income will be moderately below last year adjusted operating income of $1 billion. And we continue to expect positive free cash flow for full year 2019 and for the rest of the year.

Before wrapping up, let me quickly review mainly our key priorities for the remainder of the year. The first of course is to fully resolve the supply chain issues and on this front, we are making very good progress, which will need to be carefully monitored in the third quarter. Collectively, as a team, we will work toward delivering the profit target I just mentioned. My own growth focus, as a CFO, will be on improving free cash flow generation as part of our commitment to deleveraging and finally as mentioned several times by Pierre, and under his leadership, we will spend the next few months assessing the risk and opportunities of the business and building medium term plans with a focus on gross margin, adjusted operating income and free cash flow.

That's what I wanted to tell you as a comment for this second quarter. And with that, let's move to Q&A. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Nik Modi of RBC Capital Markets.

[Nik Modi, RBC Capital Markets]

Pierre, maybe you can just, I know it's still early, but as you've come in and looked at the businesses, just wanted to get your assessment on the consumer insights capabilities at Coty today, and maybe on a scale of 1 to 10, where would you rank it. Obviously, 10 being the best. And just from the CoverGirl perspective, obviously, it was relaunched, it looked like it had some early success, just wanted to get the state of the union on how that relaunch is progressing?

[Pierre Laubies, CEO]

Nik, thank you very much for this question. So when it comes to consumer insight capabilities, I think that we have, based on my superficial assessment and I will be very cautious about what I say, I think our assessment of where the market is going, where - what are the consumer trends and that is it that we need to do is probably reasonably good. So I'll give it 6 or 7, I mean if I wanted to rank it. I do happen to believe that where all opportunities lie is how to transform this insight into a consistent marketing strategy, a disciplined opportunity to brand building, a discipline opportunity to portfolio management and I would say, yeah, and a disciplined media approach overall. So that's kind of what I think of new opportunities, not [indiscernible] but how we transform them into concrete action.

When it comes to CoverGirl, I have to say I think this is an amazing brand and this has had a lot of scale, a lot of opportunities, not only in the US market, but I'm talking from intuition here and so I accept that this is sort of answer first answer. I think that brand, as we hear, a lot of potential, it is very distinctive. It has really strong international expansion capabilities. So I think that we have a very strong asset here. When it comes to the re-launch, I think - I would say that the assessment is a bit less clear at this stage. We are not happy with the development of the brand. I know distribution plays into that, but I think that there are also some issues the way we market that brand from a structural standpoint. Again, you come back to the same conversation we had, maybe our choices, building on not a distinctive asset of the brand and velocity of our sales and complexity of our branch. So we are taking stock of that, but again, I think the team is quite conscious of some of the trajectory that we have with that brand. We really believe it deserves better and we will work strongly to turn it on.

[Operator]

Our next question comes from the line of Shannon Coyne of BMO Capital Markets.

[Shannon Coyne, BMO Capital Markets]

Pierre, you talked about introducing playbooks in a more standardized, disciplined approach to the business. Can you give more details on what that means and maybe talk about how that marries up with being in beauty, which is often a changing and a dynamic industry?

[Pierre Laubies, CEO]

Actually thank you, Shannon for this very good question. Playbooks talks of the way on how we do business, not - nothing else. Beauty is a pretty world and so is music, all right and nobody can play into a [indiscernible] without mastering music, right, or the feeling of music and learning music. This is a bit of the same analogy. What we need to do is to have strong standout ways of doing things, organization everything which matters, the why, the how and the what, the why is it very clear, why we are in the business, why does the company exist and in general, it's relatively easy to answer this question.

The what is what makes the difference, if I want to sell more CoverGirl, I need to do something with range, we need to do something with the pies, we need to do something with the distribution, we need to do something with recipes, that's the what and that's where we spend most of all, we must spend most of our time. Large organizations face complexity, complexity is the ransom of success and with complexity comes complexity of businesses, complexity of processes and complexity of organization. And that's what the how operates.

What we don't want is to have people who disclose on how they have to perform their job, we want them to really master that by giving them a marketing philosophy, a selling philosophy, a manufacturing philosophy or finance philosophy or whatever it counts, all right. And so that's what we are going to do in this company. We need to invest a bit at the initial phase, but it will free up a lot of time and a lot of energy, so we can focus on selling more beauty.

[Shannon Coyne, BMO Capital Markets]

And just real quick, can you give us some sense of how, based on the guidance you gave today, how Q3 and Q4 plays out?

[Pierre-André Terisse, CFO]

I'll take that. It's going to be skewed towards Q4 clearly, there are different reasons for that, one of them being the supply chain resolution, which is obviously going to improve. There will be some impact as well as revenue recognition due to the change of norm, there is going to have different impacts throughout the quarter, as we normalizing it. And some cost saving as well. Yeah.

[Operator]

Our next question comes from the line of Lauren Lieberman of Barclays.

[Lauren Lieberman, Barclays]

Pierre-André, I know you've been there only a week as you pointed out, but a couple of questions for you. First, just thoughts on capital allocation, sort of where does the dividend fit in on your priority list. Also, I noticed in the release the net debt to EBITDA target that's been there, in the past was not mentioned, so is there any change to that? And then also just that you were willing to step up and kind of - you adjusted the full year guidance a little bit lower, but like you said, there is this implied significant acceleration, so why do that at this point, you're very new, you don't have to. So maybe just offer up your level of conviction, the drivers that really kind of get you to be comfortable, giving an outlook at this point in time. Thanks.

[Pierre-André Terisse, CFO]

So I'll start - it's a competent question actually. I'll start with the last one. It's true I've been here for a week, but the company has not started working for a week on me. And Pierre by the way joined 3 months ago and for that 3 months, there's been a lot of things happening, in particular in reassessing the short term performance of the business, gaining a more realistic view of what's beyond delivering and putting in place plans to support the profitability and the profit delivery and to support as well the delivery of cash.

So for the last one week and I must say a bit more than one week to be pretty frank, I've been wrapping on that work, meeting many people and getting to the conclusion that they're very solid plans and this is a reason why we feel comfortable in saying what we have been saying about the profit delivery, which means 950 million to 1 billion operating income target for the year and indeed an improvement in the second half, but it's pretty logical and very easy. You see that consumer beauty Q2 is already improving versus Q1. You see that, as we move forward, we are getting less impact from the supply chain issues and as a result of that, you can see what the trend is going to be in the second half. So this is why we are comfortable reassuring the market on that and somehow confirming the resilience of the business, which we have seen in the second quarter.

On your other question, which are a bit more long term, so on capital allocation and dividend, very simply, no intention to touch the dividend. My - sorry in the financial dividend and capital allocation, the return to shareholders is a very important matter and we take it very seriously. As we take very seriously de-leveraging and today I have no reason to question what's in place. We are focusing on free cash flow generation to match these two objectives of the financial policy.

On the net debt target change, I believe you're talking of the medium term guidance. As mentioned by Pierre, we are going to make a strategic assessment of the company in the coming months and obviously this will result in conclusion in the cash flow generation and what we want to do with it and therefore, I don't want to confirm before we have made this plan. Whatever target medium term will be, I just want - I simply want to note that we have a set of targets from a covenant perspective, which anyway leads us to net debt to EBITDA ratio which are gradually going down, as we move in time. So that remains in place of course. I hope I have covered your question with my answer.

[Operator]

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

[Wendy Nicholson, Citi]

Could you talk about your initial sense for the portfolio of brands? Do you have a feel for whether you just have too many brands to manage, too many different lines of business and I'm particularly curious if you have an initial take on the hair coloring business because that seems to be particularly challenge and maybe particularly a competitive category where it might be difficult to regain some momentum?

[Pierre Laubies, CEO]

Thank you, Wendy for this question. I think it is, we - indeed as you have said, we don't suffer from a lack of brands at Coty. But probably, we do suffer from the lack of portfolio structure, right. So I think this is what we are going to assess during this strategic plan. I believe that if you want to manage or to achieve a solid market share at any given market, yes, you do need to have brands, but you do need to have the well-structured portfolio of brands aligning with the price tiering of the marketplaces and unfortunately, I think that over the year, this has not been the strategy that Coty has followed, some of competitors have not followed this strategy, because it is a good one. All right. So, I think that this is something that we need to work on.

We will definitely come back to you when we evaluate our strategy and the share of strategy with that way of looking at the market and I do happen to believe that in that case, Coty is very well placed. We have a few hidden gems into the organization or into the business that we can capitalize on and to build, I would call it, structured portfolio, which has the capability to become global, providing we give it the focus that it deserves. That is my answer first with your question.

And I understand also that there are settled brands that we have, which are probably non-strategic. In this type of situation, I think you have to be pragmatic, all right. You can't - this brand generic cash flow, so we need that cash flow, so we will continue to manage them. Some of these might also going to be off storm, but are local. I don't mind that at all. I think you can have also a set of local bond, providing they are well managed and you manage them not as a global brand, but you manage them as you would manage a global brand at the local level. And again, this is what the value of a playbook give, which gives people to the methodologies and way of doing things, which are actually, whatever you apply it on the core of your brand, you could apply it on [indiscernible] in Germany. And so that's my approach to this sort of problem and I think that was your first question.

On hair calling, yes, we clearly - we had a great idea in the US market, definitely with the Clairol move, typically our execution has been a bit challenging and we have unfortunately, we have, in the case of Clairol, particularly in the US market, we have gained penetration with the relaunch of Clairol but we have upset some traditional users of the main partition of the market, as they call it and we have lost business. It is a glad example of why your playbook matters and then you avoid this sort of problem. I think it is a category where we have a right to win, we have capabilities, we have competences and we have potentially, we have some, I would call it, local brand with Clairol in the UK and in the US. I don't see any reason why we can't beat the global portfolio on this category, taking into consolation our success in professional hair color, I'm absolutely convinced that we can take this to the mass market and again it will be clearly part of our strategy. I will again see that as a great opportunity in terms of growth.

[Operator]

Our next question comes from the line of [indiscernible].

[Unidentified Analyst]

Earlier, you chose not to talk about a medium term leverage target, maybe you could talk even longer term than that. Philosophically, where do you believe that this company should be levered? And then I guess if I could just get an update on the P&G integration, we were expecting 225 million of savings in '19, do you know what was achieved in the first half and therefore what we might expect to see in the second half? That's all. Thank you.

[Pierre-André Terisse, CFO]

Just on the first part of your question and I'll let Ayesha answer the second part about synergy. I have no philosophy. I mean, it basically depends on the business and its ability to deliver cash flow. So entering the problem or the question with theoretical conviction, to me doesn't make sense. I want first to go through what is reality of this business to deliver cash flow, what is a need for investment, what is the ability to deliver sustainable earnings and growth and then depending on the outcome, we need to define what is the right level of leverage we want to put in place and what is one we can put in place from a realistic standpoint. So that's why I am not willing to go much further than that and we'll discuss that once we have numbers.

Ayesha, do you want to answer on?

[Ayesha Zafar, Group Controller]

Yes. So just the answer on synergies, we were expecting about 225 for the year and we are on track0. So I would say roughly half, but that's just to give you a sense, that's how we were expecting it to work out.

[Operator]

Our next question comes from the line of Mark Astrachan of Stifel.

[Mark Astrachan, Stifel]

Wanted to ask about the gross margin focus, so that suggests perhaps freeing some funds up for flexibility in the business, including reinvestment, whether it's incremental or just a continuation. I guess I'm curious if that's reasonable, if that's kind of how you view, the business and if so or even if not, how do you think about the EBIT margin longer term, as I think your predecessors seem to have what I think in the industry was viewed as a bit of unrealistic expectations about high single digit EBIT margins, do you think that that is still the right number, sort of directional, not looking for specifics, but what is the right level of margin for the business, what's the right level of reinvestment for the business, that would be helpful?

[Pierre-André Terisse, CFO]

I'll take the first part of the question and then I'll let Pierre elaborate on gross margin and the engine, but again I don't want to make the answer before we have entered the exact size, but what we are all clear about is that we think there is meaningful - there is room for meaningful improvement of the operating margin and this is ours actually. We want to take this company at the level of EBIT margin, which is going to be meaningfully higher than the one we have today and a substantial part of that is going to come from gross margin, another part of that is going to come from the simplification of the costs basically and from fixed costs and from fixed costs leverage by the way as well.

For gross margin, my only comment and Pierre will elaborate more is that if we want to be the business of quality, we need to have the ability to invest behind this and if we want to have the ability to invest behind this, we want to have available gross margin, which is higher and that is simple as that. So the question is already answered, we're just second.

[Pierre Laubies, CEO]

Exactly Pierre-André and Mark, thanks for the question. It's almost a point, a strong point of view that I've developed over the years is that and reinforce into this category, looking at this category in detail, beauty is an expensive business from an NCP standpoint, you need to be able to compete in to this area. You don't mean that you need to waste and we don't need to, we don't intend to, but clearly, we need to strengthen our ability to talk to our consumers or to build our brand with our consumers. And in that respect, deliver earnings, sustain gross margin and ever improving gross margin, I mean, it is, we need to make a step and that will go to a strategy of continuous improvement through many levers being strategic quality management, costing, simplification of our ACPs, simplification of formulation, prediction of our cost, I mean, we have to, in a strategy like that, you don't leave any stone unturned and we will just do that. But clearly, we are in the business of brand building and as Pierre-André said, that takes money and at the same time, we also want to deleverage our company, pay dividends and improve our profitability. So again, I see that as the place to go to and we will do that in the not-too-distant future.

[Operator]

Our next question comes from the line of Robert Ottenstein of Evercore.

[Robert Ottenstein, Evercore]

Great. Thank you very much and you kind of touched on my question just now, but maybe let me try to ask it again and knowing it's early days. So, again philosophically speaking, you made a couple of key big picture comments before the Q&A section. One, you want to earn the right to grow in consumer business. Two, you're not obsessed with market share and three, you are obsessed with gross margin. And I guess what I'm struggling with a little bit and again you touched on it here is what do you mean in terms of right to grow in consumer business, does it mean that you have the brands that the consumers want or does it mean that you have the profitability first, there's kind of a chicken and egg situation there and if you stand back and look at some of those comments, you're not obsessed with market share, but you are obsessed with gross margin, does that mean that you want to be more aggressive, perhaps in terms of pricing. So again, I know you touched on it a little bit before, but if you could just kind of help us think through those various objectives, particularly in the short term. I understand long term, you want to drive the gross margin long term, but over the next 12 months, how are those different priorities fitting together please?

[Pierre Laubies, CEO]

Thank you very much, Robert for this question. When I say I'm not obsessed with market share is, I mean by that that I'm obsessed with quality business, all right. And the good business, we all know that they are good business and they are in bad business. Well, we all need to do, we all need to focus on doing good business and we are going to forfeit very, very bad business and we are going to limit that business. So, I think we need to be pragmatic on this dimension, but it's really physically the guidance that we give to our people. I actually don't see any compatibility between doing that and having gross margin. Actually, I think it is the lifeblood of gross margin too and gross margin is in turn the lifeblood of building plants. All right, or building portfolios.

So I see that philosophically, sort of 2 times if I may say so or 3 times, 3 times strategy. Clearly spend the next 6 months assessing all points of difficulty, market by market, assessing our portfolio, market by market, where is the space to go, where are the opportunities. Immediately, at the same time, but that would take another couple of years I would say, focus on the quality of the business with the portfolio that we have today and optimizing its performance in terms of quality market share and not only in terms of total market share, I mean mostly in that case, I mean the market share of the base business and versus the incremental one.

And at the same time, once we have done all these, really build an innovation program or a transformation program from a portfolio standpoint that we will be able to deploy in a period of time, starting from I would say 18 months to the next - to the rest of our life or 18 months to 2 years. You need to extract it and see and consistency over that. We have too many markets where we only have one brand and we can find competitors, we have 2 or 3 brands, with only one brand, that's not going to work. And so we need to be to the opposition in the marketplace and again, you don't move - CoverGirl is a brand which has 17% penetration in the US market. It was launched 78 years ago, if I do remember when, all right. So I think that takes time, right, and of course I do not intend to wait that long and to see success, but clearly, I do see that series of events and we all - which all work concomitantly with different parts of the organization working on each specific agenda item.

[Operator]

Our next question comes from the line of Faiza Alwy of Deutsche Bank.

[Faiza Alwy, Deutsche Bank]

So Pierre, we seem to be hearing two things. So on the one hand, it seems that you want to invest to help build a better company and some of that can likely be sourced by lean initiatives, but given where you stand now versus competition, especially in consumer beauty, it also seems that that would require a good deal of upfront investment and I think that's implied by the lower operating profit outlook today. So I guess the first question is do you agree with that assessment.

And the second question is, how do you balance that desire to improve and the potential need to invest against your de-leveraging priorities and to what expand is elevated that sort of constraining, what you would otherwise like to do and how do you sort of break through those constraints?

[Pierre Laubies, CEO]

Yeah. Maybe Pierre-André will take the question first.

[Pierre-André Terisse, CFO]

I don't see the investment as anything to do with the profitability as you mentioned. The profitability incorporates a very important factor, which is the supply chain issue. So I think that's the main reason for the profitability of this year rather than profitability of last year.

On the constraints, that's basically what we have on the agenda. We have strong commitments on the leveraging standpoint. We have ambition from the profitability of this company and we know that we need to find ways to, at the same time, invest and deliver and do it in a balanced manner. So this is very much what we are going to try and work in the coming weeks and we are going to try and incorporate in the strategic review, we are doing that usual constraint business and you cannot invest everything upfront and because that would be taking too much risk, you need to do it in a gradual manner and have the delivery coming at the same time. So maybe Pierre, you want to complement on that.

[Pierre Laubies, CEO]

Faiza, good question. I think that I alluded to what I've said earlier in my initial statement, we have space to improve the performance of our business by working differently, all right. In our ANCP budget, yes, we are not short of ANCP, yes, we could have more, I mean, that's not a problem. But our balance between working media and non-working media has to be improved, our balance between reach and frequency has to be improved, our balance between the different type of media can be improved. So we have space in our P&L and we have space in our execution. We will see that space, those spaces and I think it will free up not only cash to be honest with you or money to be spent, but also it will save us from a lot of waste, all right. And I think with waste comes fatigue and with fatigues comes lower performance and our objective is actually to fundamentally eliminate waste and hence refocusing our organization and our people to really what makes the difference.

[Pierre Laubies, CEO]

Okay. With that, we thank you all and we will see you on the road. Thank you. Bye, bye.

[Pierre-André Terisse, CFO]

Thank you so much all for your time.

[Operator]

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