Revlon, Inc.
Q4 2018 Earnings Call Transcript

Published: 19 Mar 2019

[Operator:]

Welcome to Revlon’s Q4 2018 Earnings Call. My name is Patrick and I will be your operator today. At this time all lines are in a listen-only mode, but later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Eric Warren, Vice President, Treasurer and Head of Investor Relations.

[Eric Warren:]

Thank you, Patrick. Good afternoon, everyone, and thank you for joining the call. Earlier today, the company released its unaudited financial results for the quarter ended December 31, 2018. If you have not already received a copy of the earnings release, a copy can be obtained on the company’s website at revloninc.com. Also today the company filed in a Form 12b-25 that have required additional time to complete the audit of the effectiveness of its internal control over financial reporting. The Company expects to disclose in its 2018 Form 10-K that it identified a material weakness in its internal control, primarily related to the lack of design and maintenance of effective controls in connection with the implementation of its new SAP ERP system in the U.S. The Company will file its 10-K by no later than March 29, 2019, within the 15 calendar-day extension afforded by Rule 12b-25. The Company expects that these matters will not result in any changes to its financial results. On the call this morning are Debbie Perelman, our President and Chief Executive 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 is set forth in the company’s SEC filings. The Company undertakes no obligation to publicly update any forward-looking statements, except for the company’s obligation 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 excludes certain non-operating 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.

[Debbie Perelman:]

Thank you, Eric, good afternoon everyone and thank you for joining us. We are very proud of the enormous amount that we’ve accomplished in 2018 and believe we have built a better, smarter and more efficient business to drive our future growth. This quarter we saw a significant improvement in operating income, which increased 65% versus prior year period and adjusted EBITDA, which increased 13%, both driven by strong growth in key strategic areas and our work to operate our business more efficiently. The progress we’ve made so far to reduce our operating costs, along with the launch of our 2018 optimization program, gives us a strong foundation to drive profitable growth in 2019. Before we review our fourth quarter financial performance, I’d like to talk about a few key strategic areas where we succeeded in fourth quarter and full year 2018. We continue to believe in the power of our iconic brands and are excited that in 2018 Elizabeth Arden approached $0.5 billion in net sales for the first time since the 2016 acquisition. We achieved this milestone by continuing to build on our equity as a brand that consumers love and trust by developing products that are grounded in our expertise in skin care and by ensuring these products are accessible to our consumers. Our fourth quarter, Elizabeth Arden reported net sales were approximately $156 million, an increase of 21% on a constant currency basis over the prior year period. This growth was driven in part by our skin care segment, which represents 63% of the total Arden business and grew 40% over fourth quarter 2017 on an as reported basis. We continue to see momentum in our anti-aging franchise of Prevage led by our Daily Serum product and Ceramide led by our mono-dose capsule. We recently introduced innovation in both of these franchises, launching Prevage Progressive Renewal Treatment in the fourth quarter, as well as Retinol Ceramide Line Erasing Night capsules in the third quarter, which drove significant growth in the fourth quarter. Our China business also remains very strong, with fourth quarter net sales growth at 56%, and we are seeing growth in both bricks-and-mortar and e-commerce channel. The China business continues to be fueled by skincare growth but we are also pleased with the growth we are seeing in our Elizabeth Arden Fragrances in this market, which were up 7%, driven in part by strong results from our Green Tea collection. As we discussed in November, we launched our new My 5th Avenue collection in many countries and are excited to have just shipped this into China last month. Additionally, our Ceramide Retinol Line is also performing very well in China and contributing to our strong growth. Our Travel Retail business continues to be a strong growth driver for us. Our Travel Retail net sales grew 19% in the fourth quarter and we believe this speaks to the strong consumer demand for our brands and products. We are continuing to develop this channel across our portfolio, specifically by launching American Crew and key European efforts and expanding our Revlon brand Travel Retail exclusive offerings. Next, I would like to provide an update on our digital strategy. This strategy we laid out in the beginning of 2018 is working. We continue to focus on growing our e-commerce sales by partnering closely with our e-tailers and ensuring our products are available where and when the consumer is shopping. This concludes a strong focus on our own D2C e-commerce sites, now represented with elizabetharden.com both in the U.S. and UK, americancrew.com and juicycouturebeauty.com. We also spent 2018 building our internal capabilities in order to create best-in-class content to keep our brands and products top of mind with our target consumers. This includes the creation and integration of Red House, which has generated considerable savings across our brand support spend, the addition of social teams embedded within our brand marketing teams and back-end infrastructure upgrades to support our digital growth. We remain encouraged by the initial results we are seeing. Overall, our e-commerce sales in the fourth quarter grew 46% over the prior year period and represented 9% of total sales for the quarter. On a full year basis, e-commerce sales now constitute 6% of our total company sales. We are seeing growth with our retailer.com partners globally with our e-commerce pure-play partners and with our own D2C e-commerce sites. As an example, elizabetharden.com in the U.S. grew 84% in the fourth quarter. Let me also touch on two consumer events that were very successful in the fourth quarter that highlight our continued momentum in the digital space. First, we are extremely proud of our Singles Day results in China, where we grew net sales approximately 90%. Secondly, in the U.S., we had an extremely successful Black Friday, during which we grew net sales 154% relative to the prior year period. And finally, I want to touch on our efforts we have made to increase the efficiency of our business operations and spend. Importantly, as we think about driving further efficiency in 2019, the launch of our 2018 Optimization Program will allow us to streamline the company’s operations, reporting structures and business processes and will support achieving profitable sales growth. We are investing smartly and focused on allocating spend in those areas that are visible to the consumer in order to drive top line growth as well as the highest return on investment. We feel encouraged that our second half 2018 innovation that is currently in market continued to perform well, including Revlon Full Cover Foundation, the number six U.S. mask face launch in 2018, as well as two Fragrances

[Victoria Dolan:]

Thank you, Debbie, and good afternoon to everyone on the call. Let me start by highlighting our fourth quarter results. On an as reported basis, net sales for the fourth quarter of 2018 were $742 million, a decline of 5.7% versus prior year quarter. On the constant currency basis, net sales decline $29 million or 3.7%, primarily driven by our Revlon segment, which was negatively impacted by a shift in timing of a large customer display reset from Q4 2018 to late first quarter 2019, as well as our Fragrances segment due in part of several expired brand licenses in 2018. The sales decline was offset by strong double-digit growth within our Elizabeth Arden segment, which grew 21% in the quarter on a constant currency basis, fueled by growth in e-commerce, Travel Retail and China. As Reported operating income for the quarter increased 65% to $32 million compared to the prior year quarter. Included in as reported operating income is the impact of an $18 million non-cash goodwill impairment charge related to the mass portfolio reporting unit and $19 million of accelerated amortization related to the Pure Ice brand intangible assets, resulting from the ending of a business relationship with the brand’s sole customer. The higher operating income was driven by lower selling, general and administrative expenses due to lower overhead costs and lower brand support for our Elizabeth Arden, Fragrances and Portfolio segments, driven in part by a rephrasing of certain marketing initiatives to align with product launches and customer well resets. Specific to brand support, in total across all brands, we increased spending in-working media versus prior year period, while non-working media declined driven primarily by savings from the transition to our internal agency, Red House. As reported net loss for the quarter was $70 million, an improvement of 9% versus prior year. The lower net loss was driven primarily by higher operating income, partially offset by higher interest expense. Included in the as reported net loss was the impact of a $49 million non-cash increase in tax valuation allowances and the previously noted impairments and accelerated amortization item. These non-cash after tax items totaled $81.5 million. Finally, adjusted EBITDA improved 13% for the quarter to $125 million compared to $111 million in the prior year quarter. Next, I would like to turn to our segment results. Our Revlon segment net sales in the fourth quarter of 2018 were $261 million, which represents a 13% decline on an as reported basis. This decline was driven in part due to lower net sales of Revlon color cosmetics due to declines in the North America mass color cosmetics category and the shift in the timing of a large customer display reset, partially offset by higher net sales in Revlon branded professional and hair care product line. Revlon segment profit decreased by 34% over the prior year quarter, driven primarily by the segment’s net sales decline and increased investment in brand support. For Elizabeth Arden, net sales in the fourth quarter of 2018 were $156 million, representing an 18% increase on an as reported basis or 21% increase on a constant currency basis. This improvement was mainly driven by higher net sales of Elizabeth Arden skin care products, including Ceramide and Prevage, principally in our international territory. Elizabeth Arden segment profit increased to $22 million from $5 million in the prior year period driven by higher net sales and lower brand support expenses. Sales for our Portfolio segment were $144 million in the fourth quarter 2018, a decrease of 7% on an as-reported basis. This decrease was primarily driven by lower net sales of our regional brands as well as CND, partially offset by higher net sales of Almay, American Crew and Mitchum. Portfolio segment profit was $14 million versus $400,000 in the prior year quarter, primarily as a result of lower brand support expenses, partially offset by the segment’s lower net sales. Finally, net sales of our Fragrances segment were $180 million in the fourth quarter of 2018, representing a 9% decrease on an as reported basis. This decline was driven primarily by several expired brand licenses in 2018 and lower net sales of other licensed Fragrances due to weakness in the mass retail channel, partially offset by new product launches. However, as a result of cost reductions associated with in-sourcing production capabilities as well as lower brand support due to rephrasing of certain marketing initiative, Fragrances segment profit increased by 48% despite the lower net sales. As highlighted previously, the company has identified a material weakness in it’s internal controls, primarily related to the lack of design and makings of effective controls in connection with the implementation of its new SAP ERP system in the U.S. We have already developed and begun to implement a remediation plan to address this finding and we’ll continue to enhance our internal control environment as we move forward. The company expects that this matter will not result in any changes to its financial results. Turning to liquidity, cash used in operating activities during full year 2018 was $171 million or an increase of $32 million versus prior year period. Primarily attributed to lower net sales and $54 million of direct costs associated with remediating the SAP disruption at the company’s Oxford, North Carolina manufacturing facility. Free cash flow used in 2018 was $228 million compared to $248 million in the prior year. The improvement in free cash flow usage was primarily driven by lower capital expenditures, partially offset by increased use of cash in operating activity. For the full year 2018 we spent $57 million in capital expenditures and $81 million on permanent displays. As of December 31, the company had approximately $160 million of available liquidity an increase of $73 million versus the third quarter consisting of $87 million of unrestricted cash and cash equivalents, $96 million in available borrowing capacity under the revolving credit facility, less float of $23 million. As of February 28, the company had approximately $118 million of available liquidity, consisting of $75 million of unrestricted cash and cash equivalents, $50 million in available borrowing capacity under the revolving credit facility, less float of $7 million. Lastly, as previously reported in Form 8-K filed with the SEC on March 6, 2019, we extended the maturity of our $41.5 million first in, last out Tranche B under our revolving credit facility through April 17, 2020. I’ll now hand the call over to Debbie for closing comments before we begin Q&A.

[Debbie Perelman:]

Thank you, Victoria. In closing, we are very pleased with our fourth quarter results including the strong adjusted EBITDA growth, which continued our momentum from the third quarter. We feel that with this momentum, the launch of our 2018 optimization program, market leading innovation and investments we are making in our key growth areas, we are very well positioned for 2019 to continue transforming our business in order to drive long-term sustainable growth. With that, we will now open up the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Grant Jordan [Wells Fargo]. Grant, please go ahead.

[David Eller:]

Good afternoon, this is David Eller for Grant. I wondered if you could talk a little bit more about the decline in the Revlon brand in North America. You said it was due to the mass segment as well as the one customer. Could you just break out, how much of the decline was from the overall category versus the timing of the one customer?

[Debbie Perelman:]

So David, thank you for the question. With regard to the decline of the Revlon brand in North America. If we focus for a minute on the U.S. right, I’d like to spend a minute speaking about the category and then we can spend a minute talking about the shift. So, to address the question with regards to the category, the mass category for color cosmetics ended the year down about 1.5% in 2018. Fourth quarter the decline accelerated to be 4.5%, and we’re seeing that the decline in the first two months of the year in the category is about 5%. So there are challenges with regards to the category, which is impacting our results. We also had the shift of a large customer wall reset, which had impact on the numbers from the fourth quarter 2018 into the latter part of the first quarter 2019, which is now just been complete in the U.S. So with that, those are the main contributors to the decline of the Revlon brand in North America, primarily within the U.S.

[David Eller:]

Okay. So is it safe to assume that Q4 decline a 4.5% for the category? Maybe you were somewhere in line with that and then the remainder of decline was primarily driven by the customer reset? Or are there other factors?

[Debbie Perelman:]

I wouldn’t break. I’m not going to breakout the numbers for you. But what I will say is that the shift had, I would say significant impact on the numbers.

[David Eller:]

Okay. And then thinking forward into Q1, obviously that was pushed into Q1. Can you give us any degree of magnitude for what kind of bump we might expect in Q1? And then are there any other kind of timing shifts either with customers or the later Easter holiday that might affect 2019 are kind of near term results?

[Debbie Perelman:]

So David, I appreciate the question, but I’m not going to comment on any forward-looking guidance with regards to our numbers.

[David Eller:]

Okay. And then, as we look at the recent Nielsen data for February, it was a pretty steep decline compared to recent performance, kind of eye cosmetics, facial cosmetics, lipstick and nail polish. Is that also a reflection of – maybe some resets going on? Or are you losing share? Or maybe as that, just the continued pressure on the category?

[Debbie Perelman:]

So it is definitely continued pressure on the category. As I mentioned, the category was down for those first two months that you mentioned 5%, as well as our timing shift as the resets have just been complete within the U.S. I’ll also add there that there has been a shift in promotion strategies within the category, where we’re seeing higher promotion and more layers with regards to price off, where we have pulled back on promotion.

[Operator:]

Our next question comes from the line of Mary Gilbert [Imperial Capital]. Mary, please go ahead.

[Mary Gilbert:]

Yes. Thank you very much for the clarity on the call. I had a few questions. One is what the status of the resets are for Revlon and Almay brands. You did speak about the timing and the reset, but also wanted to know if you’ve gained or lost any shelf space generally in 2019 for Revlon and Almay. And then how should we think about brand support spend this year? And then if you could give us an update on the performance of Flesh and opportunities that you see there with regard to new innovation, expansion, et cetera. Thank you.

[Debbie Perelman:]

Okay. Thank you, Mary. Why don’t we start with the first one, the status of the reset for Revlon and Almay. So the resets are primarily complete in the U.S., let’s call it 99% complete for both of those brands. With regards to space, as you know, our retailers and our customers are always evaluating space, but at this not time, those significant space loss or gain. With regard to brand supports spend, could you just elaborate on the question there?

[Mary Gilbert:]

Yes, so I just wanted to find out or get an idea. Well, I guess two-fold actually. One would be, in terms of permanent display. And then as we think about the rephrasing of brand support spend, because you’re timing it around, but I also wanted to get an idea of quantity, sort of the magnitude, I should say. So in other words, it sounds like there is two things going on. One, you’re making sure that when the spend occurs that it’s occurring to be commensurate with maybe new innovation. And then number two, that you’re getting the ROI and that it’s actually being received by the consumer appropriately. So I wanted to understand that in the context of the magnitude as you think about that you’ve maybe identified reduction and that’s what I wanted to understand better? Thank you.

[Debbie Perelman:]

Okay. So, let me start with permanent displays as Victoria mentioned, we spent $81 million in permanent displays in 2018. We continued to invest in the in-store experience for our customers as well as our consumers. With regards to brand support, Victoria mentioned particularly on the Revlon brand, that we actually increased – we increased support in the fourth quarter. When you think about brand support, we have a very stable amount of brand support across the brands. We look to support the brands that we have and believe in driving brand equity. In terms of re-phasing, you addressed it yourself we’re always looking at ways in which we can maximize and a little bit top-line growth of the return on investment when we look to support our brands.

[Mary Gilbert:]

Okay. Yes. I was wondering if it’s – if that’s the amount of spend is going down. And then if you could talk about Flesh?

[Debbie Perelman:]

Yes. With regards to Flesh, Flesh is doing well. Flesh was actually named the number one Indie brand in second half – launched in second half 2018. We garnered over 2 billion PR impressions, which prove that we’re resonating with the consumer. We continue to be optimistic about the brand. It does remain exclusive right now to Ulta and ulta.com. So, in terms of expansion, we’re focused on being partners with Ulta and with regards to new innovation, we’re always looking at new innovation and we will be putting up the 2019 shortly.

[Mary Gilbert:]

Okay, great. Thank you very much.

[Debbie Perelman:]

Thank you.

[Operator:]

Our next question comes from the line of William Reuter [Bank of America Merrill Lynch]. William, please go ahead.

[William Reuter:]

Good afternoon. My first question is Elizabeth Arden; the growth was pretty phenomenal in the quarter. I was wondering whether this was reflective of what you think the underlying growth rate is in those international markets. And I guess if not, what are the one-time timing shifts that may have contributed to that strong sales growth?

[Victoria Dolan:]

The sales growth that we’re experiencing with Arden is in line with the strategy and tactics that we put into market in 2018. So, we remain optimistic about the brand and continue to believe in the brand.

[William Reuter:]

Okay. So, does this seem to imply that I guess that underlying international growth rate was more or less reflective of I guess brand strength and timing shifts between the third quarter, the first quarter?

[Victoria Dolan:]

That’s correct.

[William Reuter:]

Okay. And then with regard to you mentioned fragrance licenses that fell off, I guess when during the year did those fall off. And I guess where those significant enough that as we think about next year, there’s going to be I guess any substantial drag to that?

[Victoria Dolan:]

So, with regards to the brand licenses they rolled off at various times throughout the year. And I’m not going to comment in terms of the 2019 impact today. But what I will say is that we are always exploring new businesses and new licenses to sign for our company.

[William Reuter:]

Okay. And then just lastly for me, as we think about next year, are you currently in the midst of restructuring programs that are going to have substantial restructuring cash costs next year associated with them? And I guess do you have any estimates of those?

[Victoria Dolan:]

So, we announced the – our 2018 optimization program in November and we announced both expected savings, which we’re going to be $125 million to $150 million on an annualized basis. We expected those programs to be completed by the end of the year. We also announced that the time – the amount of the cost to achieve – to achieve those programs, and we are on track to deliver those programs and a substantial portion of the savings will be included in our 2019 numbers.

[William Reuter:]

Okay. Yes, I guess just to make sure I understand first of all, that was – that’s helpful, but just to make sure I understand the most of those cash costs would have already been paid at this point with the restructuring. Is that correct?

[Victoria Dolan:]

No. We estimated $30 million to $40 million plus an incremental $10 million of capital and they will be paid as the program is executed throughout 2019.

[William Reuter:]

Okay. That’s helpful. Thank you.

[Operator:]

next question comes from the line of Carla Casella [JPMorgan Chase & Co.]. Carla, please go ahead.

[Carla Casella:]

Hi. I have a couple of questions. On the shifts in timing from the one customer and so all have been shipped as of March now.

[Debbie Perelman:]

So, the resets have been complete.

[Carla Casella:]

Okay, great. And the move in the reset into first quarter from fourth quarter, we’ll shift display spending more into next year as well to the 2019?

[Debbie Perelman:]

It should remain – it should remain stable.

[Carla Casella:]

Okay, great. It’s using display spend next year should be about the same as this year.

[Debbie Perelman:]

And that’s forward-looking guidance and I think we’re constantly evaluating what our display spend is to ensure that we get the right ROI on that spend by customer.

[Carla Casella:]

Okay. And then do you say how much of your cash is sitting in the international business versus domestically?

[Debbie Perelman:]

Mostly, all of it is sitting there and then we actively work to bring that cash back.

[Carla Casella:]

Okay, great. And then any thoughts in terms of time when you need to consider refinancing the bonds of the terminal and that springs ahead of the bond.

[Debbie Perelman:]

So that that’s a really good question. As we look at our 2021 maturities, we’ll continue to focus on improving our operating results as we go through 2019 and delevering throughout the year. And our plan is to be in a position finance for 2021 maturities by the end of the year.

[Carla Casella:]

Okay, that’s great. And one more a business question on the fragrances, the North American fragrance decline accelerated from third into fourth quarter of it. Is there – can you just talk a little bit about that category if there’s any major change in trend or at the retailers or strategy in that category?

[Debbie Perelman:]

So with regards to math fragrances, we are seeing more headwinds in that category. There have been changes with regards to some retailers in terms of the strategic priority of fragrances, some reducing space as well as some eliminating the category. As we go forward though with regards to the category, we’re optimistic with regard that mass fragrance has a place within the retailer set as well as top of mind for the consumer.

[Carla Casella:]

Okay, great. Thank you.

[Operator:]

Our next question comes from the line of Hale Holden [Barclays Capital, Inc.]. Hale, please go ahead.

[Hale Holden:]

Thank you for the time. I just have two quick ones. The first one is the delayed 10-K filing. Do you have any covenant restrictions that would require you to do that in a certain amount of time?

[Victoria Dolan:]

Well, as we stated, we will file within the 15-day SEC guidelines by March 29 and that’s what’s required.

[Hale Holden:]

Okay. Thank you. And the second question I have is, your travel retail results were much better than I’ve seen from really any peers. So, I was wondering if you could give us a sense of what was driving that or maybe just contextualize how large the basis that it grew off of?

[Victoria Dolan:]

I’m not going to break out the base to thank you for the question, but I will tell you it’s primarily driven by Elizabeth Arden and our strength within the skin care segment and the offerings that we’re putting forth within that market is resonating with those consumers.

[Hale Holden:]

Thank you so much. I appreciate it.

[Operator:]

Our next question comes from the line of Karru Martinson [Jefferies LLC]. Karru, please go ahead.

[Karru Martinson:]

[Technical Difficulty] business now that we’ve got 2018 behind us. Where do we stand in terms of the size and the growth rate for that business in particular?

[Victoria Dolan:]

I’m sorry, Karru, we couldn’t hear the question. Could you repeat the question please?

[Karru Martinson:]

Just in terms of China for Elizabeth Arden, where is that business today in terms of size? And where do you see that going?

[Victoria Dolan:]

With regards to the Elizabeth Arden Business in China, we’re obviously very optimistic. The results that we’ve had to-date have been very strong and we continue to see growth for our brand in that market.

[Karru Martinson:]

But could we perhaps drill down just a little bit in terms of the size of the business today and its contributor to the overall company?

[Victoria Dolan:]

Currently, today we do not break out that number.

[Karru Martinson:]

Okay. And then when we think about the disruptions that you guys were plagued with from Oxford, North Carolina. How much of a tailwind do you think that can be for you guys going into 2019? Or is that kind of number already figured into that cost savings you expect to realize?

[Victoria Dolan:]

So as you see in the fourth quarter results, the Oxford impact was very small and so we were basically saying that, that it is behind us. Our Oxford manufacturer facility is currently operating under normal conditions and SAP is not stopping us from producing what we need to produce today. And in fact, most of the pipelines around the world had been filled and I’d like to take that opportunity to thank our customer and partners for their patience throughout 2018.

[Karru Martinson:]

Okay. And just lastly, you guys have had success with the Flesh and the exclusivity with Ulta. I think the other big retailer that has always been talked about with you is Sephora. How do you guys approach them in terms of their position in the market?

[Victoria Dolan:]

Okay. So as you may know today, in Sephora, we currently sell some fragrances. We’re always looking at ways in which we can engage with the Sephora with the brands that we have within our portfolio.

[Karru Martinson:]

Thank you very much. Appreciate it.

[Victoria Dolan:]

Thank you.

[Victoria Dolan:]

Seeing no additional questions, let me say thank you to all who have 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, especially your contributions in driving our strong results this quarter. I am proud of all that we’ve accomplished together and excited about our future as we strive to build an even stronger global business operation that will be our foundation for achieving long-term profitable growth. Thank you.

[Operator:]

This does conclude the conference call for today. Please disconnect your lines, and thank you for participating.