Revlon, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to Revlon's First Quarter 2015 Earnings Conference Call. At the request of Revlon today's conference call is being recorded. If you have any objections you many disconnect at this time. I would now like to turn the call over to Ms. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin. Ms. Anderson.

[Siobhan Anderson:]

Thank you, Doug. Good morning everyone and thank you for joining today's call. Earlier today, we released our financial results for the year ended March 31, 2015. If you have not already received a copy of the earnings release, you can obtain one on our website at reveloninc.com. On the call with me this morning are Lorenzo Delpani, Revlon's President and Chief Executive Officer and Roberto Simon, Executive Vice President and Chief Financial Officer. Before I turn the call over to Lorenzo, I would like to remind everyone about few things. First, our discussion this morning might include forward-looking statements that are based on our current expectations. Information on factors that could affect our actual results and cause them to differ materially from such forward-looking statements is set forth in our SEC filings, including our first quarter 2015 Form 10-Q which we filed earlier this morning. We undertake no obligation to publicly update any forward-looking statements except for the Company's ongoing obligations under the U.S. Federal Securities Laws. Next, our remarks today will include a discussion of certain GAAP, non-GAAP measures to enhance the comparability of our results. These measures are defined in our earnings release and are also reconciled in the financial table at the end of the release. Our discussion this morning should not be copied or recorded. And with that, I'll turn the call over to Lorenzo.

[Lorenzo Delpani:]

Good morning to all of you and thank you for joining our call today. On a XFX basis in this quarter, we were essentially flat in sales and down 15.3% or $11.7 million in adjusted EBITDA. These results were affected by differences of initiatives versus Q1, 2014 and significant incremental branch support in the quarter. We incurred an additional $16.6 million in branch support as we continued to invest more competitively behind the re-launch of our key brands. The remainder of the year, branch support investment is expected to be more in line with 2014 level. Additionally, on an As Reported basis, the first quarter of 2015 was significantly impacted by foreign currency exposures from our international markets resulting in a reduction of our As Reported net sales by $31 million and adjusted EBITDA by only $1.8 million. FX in the quarter impacted our P&L from a translation and transaction standpoint. The impact of FX was partially mitigated by price increases, mix of sales and cost of good savings. If the current rates continue as they were in Q1, 2015. We expect unfavorable foreign currency variances at least in Q2 and part of Q3. In summary, this was a solid quarter where we continue to work hard to implement and deploy our strategy of value creation and to invest for growth. I'll now turn the call over to Roberto.

[Roberto Simon:]

Thank you, Lorenzo and good morning, everyone. Here are the financial results for Q1, 2015. On a GAAP, our reported basis Q1, 2015 net sales were $438.5 million versus $469.8 million in Q1, 2014. Operating income was $45.2 million or 5.6% compared to $42.8 million in Q1, 2014. Net loss was $900,000 or $0.02 of loss per diluted share compared to $5.5 million of net income or $0.11 of diluted earnings per share. This includes the impact of certain non-recurring item in both periods. As I just mentioned total Company net sales in Q1, 2015 were $438.5 million a decrease of 6.7% on As Reported basis. However, on an XFS basis, net sales were essentially flat compared to 2014. Moving onto the segments, in Q1, 2015 consumer segment net sales were $324.3 million. On an XFX basis, consumer net sales increased 1.4%, this increase was mainly by higher net sales of Revlon color cosmetics and Mitchum products. Partially offset by lower net sales of Almay color cosmetics. Additionally, net sales in the first quarter of 2014 included a $6.3 million favorable returns reserve adjustment in the U.S. that didn't recover in Q1, 2015. Consumer segment profit was $62.2 million in Q1, 2015. On an XFX basis, consumer segment profit decreased 10.6%. The decrease was mainly due to $11.5 million of higher branch support for the Company's consumer branch partially offset by higher growth profit as a result of increases in net sales, as well as price increases, favorable sales mix and core reductions within cost of sales. In the professional segment, Q1, 2015 net sales were $114.2 million. On an XFX basis professional segment net sales decreased 3.8%. This decrease includes lower net sales of CND nail products partially offset by higher net sales of American Crew and Revlon Professional products. Professional segment profit was $29.2 million in Q1, 2015. On an XFX basis, professional segment profit decreased 7.8%. This decrease was mostly driven by $5.1 million of higher branch support expenses for the company's professional branch and lower gross profit due to the decrease in net sales. Partially offset by favorable sales mix and core reductions within cost of sales. Moving onto net sales by geography, in Q1, 2015 net sales in the U.S. were $244.4 million or 2.3% lower than Q1, 2014. The U.S. deliver lower net sales on CND nail products and Almay color cosmetics. Mostly offset by higher net sales of Revlon color cosmetics, Revlon ColorSilk and Mitchum products. Moving onto international results, in Q1, 2015 international net sales were $194.1 million. On an XFX basis, net sales increased 2.5%. The Company had higher net sales of Revlon color cosmetics and American Crew throughout most of the international region and Revlon Professional products in Spain. Partially offset by lower net sales on Revlon ColorSilk. Moving to total Company results, adjusted operating income in Q1, 2015 decreased 23.9% on XFX basis to $47.1 million. Adjusted EBITDA decreased 13.3% on an XFX basis to $74.3 million. Also adjusted operating income and adjusted EBITDA on XFX basis were mainly impacted by $16.6 million of higher branch support expenses and higher general and administrative expenses, primarily due to the higher severance cost, incentive compensation expenses and legal fees. Partially offset by higher gross profit driven by the Consumer segment as discussed earlier. Taking a look at liquidity, as of March 31, 2015 our utilized borrowing capacity and cash on hands were $366.9 million. This was made up of available cash of $207 million and available borrowing on our revolver of $166.2 million. Now I will turn the call over to Siobhan.

[Siobhan Anderson:]

Thank you, Roberto. This concludes our prepared remarks and we would now like to open up the call for your questions. Operator, please [indiscernible] questions.

[Operator:]

[Operator Instructions] we will now take our first question from Carla Casella

[Unidentified Analyst:]

Hi, this is May [ph] dialling for Carla. Thanks for taking my questions. Can you remind us of the timing of when you put in place your price increases on a consumer side and whether you're seeing any pushback and did you increase across all channels of retail or only select and over which products?

[Lorenzo Delpani:]

We have increased prices, we started in the second half of last year. And we have increasing optimizing pricing opportunity which generally means an increase, but not always is part of our strategy of value creation. We do that and we intend to do that regularly on, let's say on a yearly basis. The increase that we strive to do on pretty much in line with inflation that's what we aim and occasionally like it happened last year, we had price increased at in the United States for example that was higher than inflation. And because it was while, that we were not resorting to systematic price increases. Increasing prices is part of the way to generate value and but is also part of the way in the case of Revlon brand for example to realign the different price level seeking consistency by segment and by in line with our let's say brand positioning. All right, so we do it geographically. We try to do it in as many geographies as possible. Obviously, these philosophical price increase sometimes is counter receive the consideration that for competitive reason we may not do that in given geographies.

[Unidentified Analyst:]

Okay, thank you and just another quick question. Have you seen any changes in the competitive stands from P&G given that it's selling CoverGirl?

[Lorenzo Delpani:]

I prefer not to respond to this question, it would be a speculative answer. Let's say that on a broad basis, the only thing I can say that the market of color cosmetic is very, very competitive and continues to be very, very competitive. There is entrants of new players, there is existing player that are investing more quite a few value player sponsor by the retailers especially in the United States that are making new roads [ph] and I can't - we don't notice at all any flex of intensity from our competitors.

[Unidentified Analyst:]

Okay, thank you so much.

[Operator:]

[Operator Instructions] and we will take our next question from Kevin Zeist with City

[Kevin Zeist:]

I guess, I first wanted to touch on the CBBeauty acquisition and just understand your strategy with fragrance going forward?

[Lorenzo Delpani:]

Okay, so as you probably appreciate. We operate in primarily two segments one we call it a consumer segment, one we call it a professional segment. Our consumer segment is primarily color cosmetic so that's the biggest part of it, even if we have more let's say typical person care plain in the consumer segment as well. In seeking opportunity for growth in the future. We are obviously keen to diversify our options for growth and also to diversify our risk. And therefore, we after deep investigation we consider that being active in the fragrance segment is an opportunity for us. The fragrance business is showing organic growth is very, very fragmented. Many players in it are doing a job that we believe is improvable and therefore we investigated a platform for growth and we bought CBBeauty which is indeed a small company, but CBBeauty for us is indeed that platform and CBBeauty has an incredibly talented pool of people that have longstanding speed and seen the fragrance business. And as you know, they're an U.K. based company, so there is that primarily the managed fragrance licenses, but we also bought in this specific U.K. acquired the U.K. distributor, which is called SAS. Now the primary move for us is the one of entering the fragrance license business. We believe that we have a competitive advantage in doing so and that is in the fact that for the Revlon Group the fragrance segment will be a priority. We will focus on it in the future and because we start from a very low base, we will be also very selective on the type of fragrances and licenses that we will pursue and develop. So with the logic fewer [indiscernible] fragrances and that's the strategy behind acquisition.

[Kevin Zeist:]

Okay and they have the rights to one direction is the celebrity fragrance is that the area you think you'll be targeting, could it be other types of brands as well and also just wanted to understand the distribution strategy, I think if I'm not mistaken, they use also with [ph] ardent to distribute at least in North America.

[Lorenzo Delpani:]

It's a bit more complex than that and it's premature for us to give you distribution detail. However, let's say that we are not going to focus on celebrities only and we foresee again a diversification between luxury brand celebrities lifestyle and others. So once we will be more advanced and once we will executed it, we will notify you in details because at this stage, we don't want to provide forward-looking expectation and any other distribution CBBeauty enjoys significant distribution network. They have it already and that's primarily through distributors and will review that in as a matter of operational business and we will consider any option available.

[Kevin Zeist:]

Okay, great and then, just in general with respect of acquisitions, can you articulate sort of your comfort level with using the balance sheet and taking leverage higher? I guess, if there is a maximum leverage you wouldn't go beyond for an acquisition.

[Lorenzo Delpani:]

I don't expect, I think whatever we're going to do, we're going to be in a situation where we have a safe level of leverage and a level of leverage that will allow us to continue to be flexible in our operational workflow and the same time you appreciate that we are, the company that use leverage for acquisition and growth and that could continue and there is no specific statement for announcement that I have to make on this front at this stage.

[Kevin Zeist:]

Okay, great. I'll get back in queue, thank you.

[Operator:]

We will now take a question from Grant Jordan with Wells Fargo

[Grant Jordan:]

Just one from the, can you talk about the increase level of advertising. I believe you said, you spent the quarter. Was that behind new product launches, was it change in strategy just give us a little more color on that?

[Lorenzo Delpani:]

Yes and so, we determined that the investment level of Revlon as per last year. Where let's say including 2014 and before 2014, 2013. Where required to be [indiscernible] to be more competitive and that's true both in quantity and in quality. So that's what we started to do last year. Last year, we have increased as you know branch support significantly and we have announced that in year end result and last year, we managed to pay back the incremental investment within the year. And this year, we continue to invest more in branch support. We have certain level of investment in mind that we want to reach and we are getting there. Okay, we are very much in a phase and that's why I define this quarter a solid quarter because is performing in what we were expecting at this stage. We are first you seed, then you water, then you harvest. Okay, so we are right now, we put seeds and we are watering the soil. And we see the primary destination of this investment is indeed the consumer business and specifically the Revlon asset and Almay asset. The bulk of the Q1 investment was behind the brand repositioning. So for Revlon is Levizon [ph] and for Almay is the simply American platform and as we spoke before, we are determined to re-launch this brand and create an emotional connection with our own consumer. So to make them a bit less transactional or a bit and to have a more emotional equity and personality. And that the bulk of investment of Q1 is somehow directed to these equity revitalization. In the balance of the year, I foresee that the bulk of our investment will be a bit more product-related and initiative related. That there is always a mix and that's what we're doing right now.

[Grant Jordan:]

Okay and just to confirm, you said that the balance of the year should be fairly similar in terms of levels to the last year.

[Lorenzo Delpani:]

Yes, directionally yes. But we reserve the right, we reserve the right pending market condition. Share evolution competitive dynamics to change that.

[Grant Jordan:]

Yes, okay. Thank you.

[Operator:]

And we'll now take a follow-up question from Kevin Zeist with City

[Kevin Zeist:]

Hi, just wanted to ask about your ability to mitigate FX, is that something you see being able, you obviously did a great job this quarter and I'm curious of that something you think you'll be able to do in the, I think you said the next couple quarters might still see some of that FX impact?

[Lorenzo Delpani:]

So while, I won't comment on what is my exceptional future quarter because also we don't know the exchange rate in the future quarter and two things are correlated. I will, deflect your questions lightly but answer it, but saying that we have in place the company as part of the strategy value creation various programs that are design to increase the gross margin. Among those price increase is not going to generated, it doesn't generate permanent gross margin improvement because of occasionally it's not a necessarily continuous program, but clearly we still rely for this year on price increase opportunities. Second, we have a very robust cost of goods improvement programs in place that are is part of our new focus on what we call the Squiz [ph] project and is not our new focus. It's always been a focus in Revlon, but for us is project that is delivering, is delivering synergies and is delivering cost savings and we invested last year and we're investing now in CapEx to drive operational efficiency. Then last but not least, we are managing the mix of countries, brands and this is also a factor that could help expand further our gross margin. Now all this programs are in place as you've seen they've delivered the last year, they've delivered in Q1. I cannot confirm that they will continue to deliver in the future but let's say that these are active projects and active programs that are in place.

[Kevin Zeist:]

Thank you very much and I guess, I just wanted to explore the returns line for a little bit I know, I think the last several quarters or a few quarters last year you took, you had the expectations that returns would come in lower given the shift in strategy to fewer bigger better and I'm curious, if that has in fact in the case or if there is enough data to judge at this point?

[Lorenzo Delpani:]

So, yes the flow, the rate as we call them is getting lower and so consistently with our reserve adjustment that last year created in the quarter important one-off, if you remember in this quarter last year. Almay took a $6.3 million adjustment so comparing this quarter with last quarter indeed, we have that gap and so our essential flat sales are comparing with the quarter, with that adjustment in place. However, those adjustments are done because we expect lower returns and we are seeing a lower level of returns, they must doesn't equalize on a quarter basis because the lower level of returns is proportional to the number of new introductions. So we have basically two key moments of the year, where this things come in and one was indeed at the beginning of the year and we're going to have another reset of the work [ph] and now let me pass, Roberto that may give you a bit more detail on this.

[Roberto Simon:]

Yes, we mention in prior earnings call, the change in this strategy of fewer, bigger, better innovation generated in the past for our ability and our expected return reserve. As our historical rates of returns some are down were no longer indicated of our current business model and as Lorenzo just mentioned, we are continuing the monitoring the level of the returns with changes in the planographs [ph].

[Kevin Zeist:]

Okay, thank you for that. Last question was just on inflation in general is that part of the, is that a significant benefit for you with maybe some packaging and oil based commodities coming down?

[Lorenzo Delpani:]

We won't provide that detail, you said it and clearly we have, let's say why we have a headwind on the exchange rate. We have tailwinds on price of commodity job. We buy them in dollar though, so in depending what plant, we buy them for, the FX kind of set each other. Somehow.

[Kevin Zeist:]

Okay, sure, sure. Are you making strides in sort of more balancing the other productions, so that you combine more locally or produce more locally?

[Lorenzo Delpani:]

Well we're trying but the reallocating production is a complex operational process that takes time and in the measures for which we don't need CapEx to do so, we're trying to do a little bit, but if you need CapEx, we are not doing it because we don't bet on currency because if I would know, what the future level of currency and we don't, it's an uncertainty, if we would know, we could plan that. That we don't know and so, we can make an investment against an uncertainty or we don't believe, we should. So unfortunately these are wins that we are trying to mitigate as much as we can, but we don't play on currencies that's not our business. We play in the beauty business.

[Operator:]

And this concludes today's question-and-answer session. I'd now like to turn the conference back to our speakers for any additional remarks.

[Lorenzo Delpani:]

Okay, so thank you very much for joining our call today and we look forward to speaking to you on our Q2, 2015 call. Thanks a lot.

[Operator:]

This concludes today's conference. Thank you for your participation.