Revlon, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Hello, and welcome to Revlon's Q2 2020 Earnings Call. My name is Rosy, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I will now hand you over to Eric Warren, Vice President and Treasurer, to begin today's conference.

[Eric Warren:]

Thank you, Rosie. Good morning, everyone, and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended June 30, 2020. If you've not already received a copy of the earnings release, a copy can be obtained on the company's website at revloninc.com. On the call this morning are Debbie Perelman, our President and Chief Executive Officer; Sergio Pedreiro, our Chief Operating Officer; and Victoria Dolan, our Chief Financial Officer. The discussion today might include forward-looking statements that are based on current expectations and are provided pursuant to the Private Securities Litigation Reform Act of 1995. Information on factors that could affect actual results and cause them to differ materially from such forward-looking statements as set forth in the company's SEC filings, including its Q2 2020 Form 10-Q. The company undertakes no obligation to publicly update any forward-looking statements except for the company's obligations under the U.S. federal securities laws. Remarks today will include a discussion of certain GAAP and non-GAAP results. Consistent with past reporting practices, non-GAAP results exclude certain nonoperating items that are not directly attributable to the company's underlying operating performance. These adjusted measures are defined in the earnings release and are also reconciled in the financial tables at the end of the release. Please also note that certain amounts provided throughout this call have been rounded. The call today should not be copied or recorded. And with that, we'll turn the call over to Debbie.

[Debra Perelman:]

Thank you, Eric. Good morning, everyone, and thank you for joining us. Let me start by saying, I hope everyone participating on the call is safe and healthy as we continue to navigate through this global pandemic. As experienced throughout the beauty industry, COVID-19 had a significant impact on our business. Our as-reported net sales in the second quarter of 2020 and were $348 million, a decline of $223 million or 39% compared to the second quarter of 2019. Substantially, all of this decline is attributed to COVID-19, and all segments and regions were negatively impacted. It is worth noting that excluding the impact of both COVID-19 and FX, our second quarter 2020 net sales would have remained essentially flat relative to the prior year period. Later in the call, Victoria will provide additional COVID details as she reviews our second quarter financial performance. Despite COVID-19's negative impact on the company's net sales, we moved very quickly to take significant actions to protect our profitability. We began the implementation of the Revlon 2020 restructuring program earlier this year, just as the pandemic was beginning to spread globally. And because of this, we have begun to realize meaningful cost reductions from this program. Specifically, in the second quarter of 2020, we captured approximately $38 million of cost reductions related to this program, primarily due to reductions in headcount. In mid-April 2020, we also took additional temporary employee actions, including furloughs, a reduced workweek and hiring freezes, all of which resulted in additional significant cost reductions in the second quarter. While these were very difficult decisions to make, they were necessary to protect the business, and our profitability during this unpredictable time. With the realization of these substantial cost reductions from the Revlon 2020 restructuring program and the COVID-19 measures, we delivered $45 million of adjusted EBITDA in the second quarter of 2020 compared to $47 million in the second quarter of 2019. Our adjusted EBITDA margin, as a percent of net sales, increased approximately 480 basis points to 13.1% in the second quarter of 2020. The strategies we have put in place and the decisions we have actioned have all been done with the objective of securing the company's future, preserving cash and ensuring that our liquidity remains sufficient. The company also moved very quickly to adapt the accelerated shifts in consumer behavior, notably to e-commerce. As we have shared previously with you, this channel has been a key strategic pillar for the company over the last 24 months, and the current COVID-19 environment has only served to further accelerate the importance of this channel, not only to Revlon, but to the industry as a whole. In the quarter, we rapidly adopted to meet the surge of online demand and we have proven that we are able to serve these consumers and their needs quickly and efficiently. As a key catalyst for the company's growth going forward, we will continue to invest aggressively to further build out our e-commerce capabilities and continue to strongly support the brands that perform well in the channel. In the second quarter, our e-commerce net sales grew approximately 58%, now representing approximately 18% of total company net sales more than doubling the 7% penetration from the second quarter of 2019. Elizabetharden.com, our largest owned direct-to-consumer site grew over 100% in the quarter. While all regions experienced very strong double-digit e-commerce growth in the second quarter, we experienced noticeably strong growth in the prestige channel in EMEA as well as with parts of our mass and professional business in North America. In China, where our business is predominantly online, we continue to see growth driven by our Elizabeth Arden, Prevage and Ceramide skincare businesses as well as our Green and White Tea fragrance collections. We continue to drive excitement online in this market as evidenced by the recent launch of hyaluronic acid ceramide capsules during China's important Hay box events on Tmall. In total, our China business grew 56% versus the prior year quarter on a constant currency basis. Additionally, we have seen consumers shift their product behavior. And given our brand portfolio, Revlon is well positioned to capture this change in consumer preferences. As many consumers remained at home, with salons and barbershops closed for much of the second quarter, we saw double-digit growth in our personal care brands, notably, our Revlon Beauty Tool, Creme of Nature and haircare, Cutex nail care products, and SinfulColors nail color. In the U.S., we also experienced growth in our hair color and haircare categories, in part driven by our newest product launch, Total Color, our first-ever clean and vegan permanent hair color. Revlon was also quick to enter the hand sanitizer business and we are now producing hand cleansing and sanitizer products across our Cutex, CND, Revlon Professional and hygienic brands. While we continue to live in challenging and uncertain times, beauty remains a resilient industry. Our ability to mitigate the significant top line impact due to COVID with aggressive cost-reduction measures, protecting our profitability and liquidity enabled the company to continue to focus on accelerating e-commerce to drive the business forward. Because of our leaner operational structure, strong e-commerce growth as well as our range of product offerings, we are confident that Revlon is well positioned to meet the needs of our customers and consumers. And now I will turn it over to Victoria to walk you through the details of the second quarter 2020 results.

[Victoria Dolan:]

Thank you, Debbie, and good morning to everyone on the call. Let me first detail our second quarter 2020 results. Second quarter, as reported net sales were $348 million compared to $570 million during the prior year period, a decline of 39%. As reported net sales includes approximately $214 million of estimated negative impacts associated with COVID-19. Excluding the COVID-19 impact, net sales on a constant currency basis were essentially flat to the prior year period. Second quarter operating loss increased to $59 million compared to a $9 million operating loss during the prior year period. The higher operating loss was driven primarily by the lower net sales due to COVID-19, $20 million of noncash intangible impairment charges, reflecting the financial impact of COVID-19, $17 million of higher restructuring charges primarily related to the Revlon 2020 restructuring program and lower gross profit margin, driven primarily by unfavorable sales mix, negative foreign exchange as well as higher manufacturing overhead absorption costs associated with COVID-19. These negative impacts were partially offset by $136 million in lower selling, general and administrative expenses, driven in part by the cost reductions associated with the company's restructuring program and additional actions specifically implemented to mitigate the adverse impact of COVID-19 on the company's operating results. Excluding our nonrecurring items in the quarter, second quarter adjusted operating income increased to $8 million from $5 million in the prior year quarter. Second quarter as reported net loss increased to $127 million versus a $64 million net loss in the prior year period. The higher net loss was driven primarily by the higher operating loss described previously and $13 million in higher interest expense, partially offset by a $9 million improvement in the benefit from income taxes. Finally, adjusted EBITDA was $45 million in the second quarter of 2020 compared to $47 million during the prior year period, driven primarily by the COVID-related lower net sales which were substantially offset by lower SG&A expenses and improved adjusted gross profit margin. Next, I would like to turn to our segment results. Revlon segment net sales in the second quarter of 2020 were $135 million, representing a 45% decrease on a constant currency basis. The segment's lower net sales were driven primarily by Revlon color cosmetics as well as lower international sales of Revlon-branded professional products and Revlon ColorSilk haircare products due primarily to continuing effects of COVID-19 on the mass retail channel and on salon activity. Revlon segment profit decreased to $12 million from $26 million in the prior year period driven by the segment's COVID-related lower net sales and lower gross profit margin, partially offset by lower brand support. Elizabeth Arden net sales were $81 million in the second quarter, representing a 30% decrease on a constant currency basis. The decline was mainly driven by certain Elizabeth Arden branded skincare products and color cosmetics and certain Elizabeth Arden branded fragrances due in part to the continuing effects of COVID-19 on foot traffic at department stores and in travel retail outlets, partially offset by higher net sales of Ceramide skincare products predominantly in the Asia region as well as strong growth in our e-commerce channel. Elizabeth Arden segment profit was $11 million compared to a $3 million in the prior year period, primarily due to the segment's higher gross profit margin and lower brand support, partially offset by the COVID-related lower net sales. Net sales for our portfolio segment were $89 million in the second quarter of 2020, a decrease of 24% on a constant currency basis, driven primarily by Almay color cosmetics, American Crew men's grooming products and C&D nail products. These declines were due in part to the continuing effect of COVID-19 on the mass retail channel and salons partially offset by higher net sales of Cutex nail care products, Creme of Nature haircare products and simple color cosmetics, primarily in North America. Portfolio segment profit was $15 million, an increase of $8 million versus the prior year period, driven by the segment's lower SG&A expenses as a result of cost reductions designed to mitigate the adverse effect of COVID-19 on the company's operating results as well as the Revlon 2020 restructuring program, partially offset by the segment's lower net sales and lower gross profit margin. Finally, our Fragrances segment net sales were $43 million in the second quarter of 2020, representing a 47% decrease on a constant currency basis. The segment's lower net sales were driven primarily by the continuing impact from COVID-19, especially in the Prestige channel due to the temporary door closures. Fragrances segment profit in the second quarter of 2020 was $8 million, a $5 million decrease compared to the prior year period, driven by the segment's lower net sales partially offset by higher gross profit margin and lower SG&A expenses. Next, turning to liquidity. Cash used in operating activities during the first half of 2020 was $164 million compared to $41 million used in the prior year period. The increase in cash usage was driven primarily by the COVID-19 related lower net sales. Free cash flow used in the first half of 2020 was $167 million compared to $53 million used in the prior year period. The increase in free cash flow usage was driven by the higher operating cash flow usage due to the COVID related impact on the business, partially offset by lower capital expenditures. During the first half of 2020, we spent $3 million in capital expenditures and $13 million on permanent displays. During the second quarter of 2020 and since the completion of our brand cofinancing in May, the company's liquidity position has been negatively impacted by a number of nonoperating items. First, we repurchased 5.75% senior notes in the open market at an aggregate cost of $51 million. Second, we settled tranche B under our 2016 revolving credit facility upon its maturity at a cost of $31 million. Third, we paid $21 million -- $20 million related to our foreign asset-based term facility due to a COVID-related decline in the borrowing base that secures the facility. Lastly, the available borrowings under our 2016 revolving credit facility declined by $14 million due to a drop in the facility's borrowing base driven predominantly by lower accounts receivable balances resulting from COVID-related lower net sales. Driven in part by these nonoperating items, as of June 30, the company had approximately $416 million of available liquidity, consisting of $339 million of unrestricted cash and cash equivalents, $51 million in available borrowing capacity under the revolving credit facility, $30 million in available borrowing capacity under the 2019 senior line of credit, less float of approximately $4 million. Please also note there is approximately $387 million, a 5.75% senior notes due February 2021, currently outstanding for which we recently -- we recently launched an exchange offer as disclosed in an 8-K we filed on July 27 with the SEC. The exchange was launched in order to extend our debt maturities and, more importantly, preserve liquidity over the short and long run, which will allow us to continue investing in our business and strategic growth priorities. And finally, as of July 31, 2020, the company had approximately $392 million of available liquidity, consisting of $318 million of unrestricted cash and cash equivalents, $51 million in available borrowing capacity under the revolving credit facility, $30 million in available borrowing capacity under the 2019 senior line of credit, less float of approximately $7 million. I'll now hand the call over to Debbie for closing comments.

[Debra Perelman:]

Thank you, Victoria. In closing, we continue to manage through the impact of COVID-19, including ensuring the safety and health of our employees. We remain focused on continuing our ongoing efforts to transform our company, including executing on the 2020 restructuring program and propelling our growth in e-commerce. With that, we will now open up the call for questions.

[Operator:]

[Operator Instructions]. And our first question comes from the line of Stephanie Wissink from Jefferies.

[Ashley Helgans:]

This is Ashley Helgans on for Steph Wissink. We were wondering if you've seen any changes in footage at retail, based on brand performance. And then just if you could give us a little color on how you quantified the impact from COVID.

[Debra Perelman:]

Thank you for the question. Let me start with addressing the first part of your question, and then Victoria can address the COVID part of the question. With regards to any changes in space, we see fluctuations, frankly, all the time. I would say that this quarter was really no different, except to note that a retailer within mass has really shrunk their space within the fragrance segment. So that had impacted the business. But other than that, it's really the normal course. Victoria, do you want to take the second part with regards to COVID?

[Victoria Dolan:]

Sure. So when we quantify the impact of COVID, it is a bottoms-up approach. With each of our markets and it's -- within each market is by channel as well as by customer. We're looking at our -- the impact relative to prior year, but also relative to current variables. So the external variables include store closures. It includes the change in foot traffic that we have seen, for example, it would also include changes in category growth. So it's a very detailed process again by market by channel, by customer.

[Operator:]

The next question comes from the line of Rosemary Sisson from Cowen.

[Rosemary Sisson:]

I just wanted to clarify, Victoria, you said that you spent $51 million to buy back the 5.75% in the open market. So there was $62 million or so that you bought back in safe?

[Victoria Dolan:]

Yes. Approximately.

[Rosemary Sisson:]

Okay. And the other question was in terms of working capital going forward, how should we think about that? How -- in terms of sources and uses over the course of the next couple of quarters?

[Victoria Dolan:]

The working capital is, obviously, as we are conserving cash and working on optimizing our liquidity, we are hyper-focused on our working capital as well to optimize each element of that. I don't provide forward guidance on that, but that factors into our liquidity equation to ensure that we have sufficient liquidity for us to continue to operate, to invest in our business strategies, both for today, the second half of the year as well as into 2021. Factoring in the 3 variables that are really important right now. One, the economic uncertainty we have; two, the uncertain trajectory of COVID; and three, the seasonality of our business.

[Rosemary Sisson:]

Okay. So in the -- is working capital generally a source or use of funds in the next 2 quarters?

[Victoria Dolan:]

It really depends on what's happening in the overall economics. Again, if we look at the seasonality of our business, and I think you can look back on that, we can see how the different variables play out, given the timing of our inventory builds, the timing of our payables, the timing of our receivables. As you know, the seasonality of our business would suggest that most of our cash generation is towards the end of Q3 and into Q4.

[Operator:]

[Operator Instructions]. And our next question comes from the line of Bill Kavaler from Litespeed Management.

[Bill Kavaler:]

And sort of broader question is you've got this exchange offer out there. You're clearly don't have enough cash to meet your covenants. Is there -- can you discuss sort of the broader plan for addressing the capital structure? I mean, just -- it seems like you're just kind of bouncing from one near crisis to the next?

[Victoria Dolan:]

So as I said, I think we need to put that in the context of the uncertain economic environment that we find ourselves in right now, the uncertain trajectory of COVID as well as the seasonality of our business. We are hyper-focused right now on our liquidity on ensuring that we have the operating cash that is sufficient for the balance of the year and into next year. We're also hyper-focused on consummating the exchange transaction, that's our primary focus right now. We're always in conversations with our other lenders relative to how we optimize that capital structure and deal with upcoming maturities as they come due. But right now, our focus is on ensuring operating cash flow given the uncertainty we have today as well as consummating the exchange transaction.

[Eric Warren:]

Being no additional questions. Let me say thank you to all who joined the call today and a special note to our team members around the Revlon world who are listening. Thank you for all the efforts you make every single day and stay safe. Thank you.

[Operator:]

Thank you for joining today's conference. You may now disconnect your lines. Host, please stay connected and await further instruction. Thank you.