Revlon, Inc.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Please standby, we’re about to begin. Good morning ladies and gentlemen and welcome to the Revlon’s Second Quarter 2015 Earnings Conference Call. At the request of Revlon, today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Ms. Siobhan Anderson, Revlon’s Chief Accounting Officer and Treasurer. Please go ahead.

[Siobhan Anderson:]

Thank you Cecelia. Good morning everyone and thanks for joining today’s call. Earlier today, we released our financial results for the quarter ended June 30, 2015. If you have not already received a copy of the earnings release, you can obtain one on our website at Revloninc.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 second quarter 2015 Form10-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 and non-GAAP measures. Beginning in the second quarter of 2015, the company has identified certain unusual item, impacting the comparability of the company’s period over period results as seen through the eyes of management. As a result of these unusual items, the definition of adjusted EBITDA has changed from that used in prior period. The adjusted measures are defined in our earnings release and are also reconciled in the financial tables at the end of the release. Our discussion this morning should not be copied or recorded. And with that, I will turn the call over to Lorenzo.

[Lorenzo Delpani:]

Thank you. Good morning to all of you and thank you for joining our call today. This quarter was strong with adjusted net sales growth of 4.7% and adjusted EBITDA growth of 6.5%, measured on an XFX basis and adjusted for comparability. During this quarter, we completed our acquisition of the CBBeauty Group and exited our business operations in Venezuela, moving to a distributor model. We also continued to execute our Strategy of Value Creation, investing $14.7 million of planned incremental brand support in the second quarter of 2015. The 6.5% adjusted EBITDA growth includes this incremental brand support investment. And therefore we believe that our additional investment in brand support is playing back. This quarter also continue to be affected by currency headwind in net sales, which reduced as reported net sales by $30.2 million. However, excluding Venezuela, our XFX net sales have grown by $23 million, mostly offsetting the $30 million FX impact. The currency headwinds that started in August of 2014 have remained strong in the second half of 2014 and the first half of 2015. However, if the exchange rate environment remained stable, we expect lower headwind in the reminder of the year. Notably, on an EBTIDA level, the exchange rate impact has been minimal over the past two quarter. This is due to lower profit in countries where FX had a significant decline and the value generation from synergy and other value – strategy value creation driver, which have delivered offsetting value. I will now turn over the call to Roberto.

[Roberto Simon:]

Thank you Lorenzo and good morning everyone. Here are the financial results for Q2 2015 on a GAAP reported basis. Net sales were $482.4 million versus $497.9 million in Q2 2014. Operating income was $60.7 million, compared to $62.6 million in Q2 2014. Net income was $26 million, or $0.49 of diluted EPS, compared to $18.1 million of net income, or $0.34 of diluted EPS, in Q2 2014. The results includes the impact of certain non-operating and unusual items in both periods. Moving now on to our segment results. In Q2 2015, Consumer segment net sales were $354.7 million. On an XFX basis, Consumer segment net sales increased 1.4%. However, excluding Venezuela, consumer net sales increased by 3.7% on an XFX basis in Q2 2015. This increase was mainly driven by higher net sales of Almay and Revlon color cosmetics, partially offset by lower net sales of SinfulColors. Consumer segment profit was $83.9 million in Q2 2015. On an XFX basis, consumer segment profit increased 4%. Again excluding Venezuela, consumer segment profit increased 11.6% on a XFX basis in Q2 2015. The increase was mainly due to higher gross profit as a result of the increase in net sales as well as price increases, favorable sales mix, and cost reductions within cost of sales, partially offset by $7.3 million of higher brand support for the company’s consumer brands. In the Professional segment, Q2 2015 net sales were $123.4 million. On an XFX basis, Professional segment net sales increased 4.1%. This increase is primarily due to higher net sales of American Crew and Revlon Professional products. Professional segment profit was $24.3 million in Q2 2015. It is important to note that the phasing of initiatives in 2015 is different than in 2014. The majority of our plan brand support for 2015 took place in Q1 and Q2. The primary drivers for the Professional segment profit results were $7 million of higher brand support expenses for the company’s Professional brands, a favorable adjustment of $3.4 million in Q2 2014 related to a decrease in the inventory obsolescence reserve and the increase in the Professional net sales, we just discussed. The results on an XFX basis, Professional segment profit in Q2 2015 decreased 21.3%. Moving on to net sales by geography, in Q2 2015, net sales in the U.S. were $267 million, or 4.6% higher than in Q2 2014. This increase was driven by higher net sales of Almay and Revlon color cosmetics as well as Revlon ColorSilk, partially offset by lower net sales of SinfulColors and CND nail products. Moving on to the international results; in Q2 2015, international net sales were $215.4 million. On an XFX basis, net sales were up 1.2%. International net sales in the Consumer segment were impacted by Venezuela. Excluding Venezuela, international net sales increased 4.8% on an XFX basis. International net sales increased in the Professional segment primarily due to higher net sales of American Crew and Revlon Professional. Moving to total company results, adjusted EBITDA was $90.1 million in Q2 2015 compared to $85.7 million in Q2 2014%. On an XFX basis, adjusted EBITDA increased $5.6 million or 6.5%. This increase was primarily due to higher net sales in both the Consumer and the Professional segment as well as favorable cost of sales in the Consumer segment, partially offset by $14.7 million higher brand support expenses in Q2 2015. Taking a look at liquidity, as of June 30, 2015, our utilized borrowing capacity and cash on hand was $358.9 million. This was made up of available cash of $192.6 million and available borrowings 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 questions. Operator, please prompt the participants for questions.

[Operator:]

Thank you. [Operator Instructions] I’ll go first to Kevin Ziets of Citi.

[Kevin Ziets:]

Hi, good morning. My first question is on – just the M&A environment obviously big acquisition announced by Coty and in terms of Procter brands. And I am curious how you see the competitive landscape changing as a result of this both in the near-term and in the longer-term?

[Lorenzo Delpani:]

Okay. Basically, it’s premature to comment I think on the Coty deal that is not concluded and operational yet. However, as you know, the beauty category has become and even show – more show in the last year’s extremely competitive due to the entrance of new brand that got activated. Brands bought by some of our competitors that now are active players. And the recent development of let’s say private label type of players. These already makes the environment very competitive and P&G is a company that, as everybody knows, invest in the development of their African brands. So at this stage the move to Coty is unlikely to change what is already, a very extreme competitive scenario. In terms of consolidation, the consolidation does lead to benefit for the company that can materialize them but as you can imagine, this company they have to pay for the acquisition. So not necessarily the consolidation benefits get translated in a stronger competitive attack. In our case consolidating Colomer with Revlon generated synergies and we are using them to increase the brand support and the way we compete in the market. But when you – to do the acquisitions, you have to really borrow a lot, you have to generate cash flow, so not necessarily depending on the price of the acquisition and dynamics of the acquisition, it’s not obvious that that such consolidation will lead to significant incremental investments on their side. So anyhow we’ll see. The time will tell and we are ready for the increased competitive environment and as you know we have – versus 2015 – versus 2013, end of 2013, our brand support has been increased significantly. We are more than $50 million, okay dollars, in increased investment. The new Revlon is Revlon that has competitive level of investment and a strong pipeline for the future. So we are ready.

[Kevin Ziets:]

Okay, great. And then just in terms of the consolidation, does it in any way accelerate your desire to get bigger to look for I know either the CBBeauty acquisition, but is there – are there other properties that you’re maybe think of accelerating your timeline on looking at?

[Lorenzo Delpani:]

We’re not going to comment on that. We are – as we said before and I repeat we’re ongoing exploring opportunities that are visible opportunities for our structure, ownership, financial and dynamics and that’s an ongoing exercise and we won’t comment on the details.

[Kevin Ziets:]

Okay. Could you comment on CBBeauty itself and sort of why your expectations are there – are there from top-line or EBITDA perspective over time?

[Lorenzo Delpani:]

Well, I’m not going to – as you know guys that we’re not making forward-looking statement and we make an effort, we did not do. Obviously, as I said before, we bought CBBeauty. Its right now work in progress, fragrance business, we think its an attractive segment despite and I appreciate that some analyst have a different point of view and they should have the view. But it’s a very large fragmented segment and as such maybe country intuitive the competitive intensity is medium, is not high because it’s very, very fragmented. There are lots of assets and lots of licensees that are in the market that can find a licensee like us that would take care of them and develop and grow them. And that’s basically our objective right now. We are working on analyzing potential licensees to develop and/or acquire. But its work in progress and its premature to give you detail.

[Kevin Ziets:]

Okay. And my last question was on Almay’s performance in the quarter and whether that was driven by new product launches in sort of selling of new products or whether there’s been improvement in sort of the underlying sales trend for a point of sale for their brand?

[Lorenzo Delpani:]

Almay is a core asset and is up in net sales in 2015. The growth of sales is not necessarily the results of – there is some growth – also a growth sales level. But we are benefiting in this quarter and in the last by reduction of – in the flow of returns that the returns in the color cosmetic industry, I just want to remind you and the others on the call, are significant print instructor, may because we launch an initiative. It goes on shelf. And the first moment we do so display this product that are on shelf that it’s significant pipeline that get return to us and eventually disposed of. And we have by implemented fewer, bigger and better innovation or as we definitely did fewer and we are working on making the more so better. We had significant return reduction in the past years and this is one of the drivers that is offsetting and helping our more than offset that be FX impact. And I will may in there is no one-off adjustment there is not an adjustment of the reserve data there is a lower rate of return that is impacting the quarter. In addition, we have moved the brand mix from transactional to a pool consumer pool based type of dynamics. So what do I mean is in the market people FSI more FSI is like typical promotion you drop a value coupons and those are in the U.S. they work but the increasing economic over FSI they are not necessarily good for the P&L. So you can grow business and share buying would dropping lots of FSI okay that makes a lot of sense and just making if you want an academically direction here but the they makes a lot of sense to drop FSI when you have an innovation and you want to get people to try your product because it’s one way to accelerate the diffusion of an innovation. But if you are to took that products sales constantly feeling it we’ve FSI and FSI that means that there is initial in the underlining equity and strength of the brand. And so we have reduced the level of FSI because we want Almay to walk on its own. And we move some invest from if you want the FSI or transactional as I call it, to equity pooling investment. So, this process you can see the results in the P&L, there is an uplift within the detail, but there is an uplift on gross sales, there is an uplift of net sales and that’s due to reduced return, reduced FSI and increased gross sales. As far as it is concerned...

[Kevin Ziets:]

The actual reduce. Sorry go ahead.

[Lorenzo Delpani:]

No please.

[Kevin Ziets:]

I was just concerned it’s actually even despite moving away from transactional investment you are seeing lower returns for the Almay brand?

[Lorenzo Delpani:]

Yeah.

[Kevin Ziets:]

That’s great.

[Lorenzo Delpani:]

I was completing the comment for accuracy that this allowed obviously is affected by the lack of FSI. But we are finding an equilibrium because whether people appreciate that or not, I want to put the resources on brands that can give me growth in cash and in the case of Almay we need to find equilibrium if not growth for the sake of growth, it’s growth for the sake of having a profitable business and operating cash flow. And therefore, we are trying to find these optimizations for Almay and balancing the transactional investment to brand support.

[Kevin Ziets:]

Okay. Thank you so much for taking my questions.

[Operator:]

We will go next to Carla Casella of JPMorgan.

[Carla Casella:]

Hi, on Venezuela, you broke out the EBITDA for last year, second quarter on first half, have you give what the annual EBITDA was for Venezuela, so we can get a sense for LTM adjusted EBITDA excluding it?

[Roberto Simon:]

We don’t give projections, but it will be completely material for the rest of the year.

[Carla Casella:]

And then in for fiscal 2014 last year, how much of the EBITDA that was included in your prior reported EBITDA was from Venezuela?

[Roberto Simon:]

So on the second half of the year, last year we had the rate at 53 modular to the dollar. So as I said the numbers are going to be completely immaterial.

[Carla Casella:]

Okay. And then you mentioned that you pulled forward some of the brand support into 2Q, have you said how much would that reduce the brand support or SG&A year-over-year in Q3?

[Roberto Simon:]

We are not going to disclose that because it would imply forward-looking statements for you and our competitors. But yeah, as we’ve noted in the press release and that remains through, we said that we expect the brand support for the remainder of the year to be inline with 2014 levels. And now in – Q1 was higher and Q2 was higher, so you can pretty much get the qualitative indication from that business.

[Carla Casella:]

Okay, great. Thank you. That’s all I had.

[Operator:]

[Operator Instructions] We’ll go next to Grant Jordan of Wells Fargo.

[Grant Jordan:]

Good morning. I had one question. Can you give us a little bit more in terms of why the American Crew and Revlon Professional are doing so well? Is it new product, additional distribution, more take away?

[Lorenzo Delpani:]

All right. We don’t comment typically by brand expect that we call them out because there have been variations. But it’s – its again implementing the driver of the strategy of value creation. So, and may sounds boring my answer, but it’s really the compact. And in the case of American Crew and Revlon Professional, so we have four drivers, one is P&L managements, one is profitable growth, cash management and people. In the case of American Crew and Revlon Professional is the second – is the second block, which is profitable growth. We have been working on presence expansion that means expansion of our physical presence in existing countries because we always have room to grow by acquiring new saloons and as well as expanded or enter the new territories via distributors. That’s one of the driver of the growth of this business, which is still long room to grow before we tap it out. And then there is a second, which is the level of investment in brand support that we put behind the brand. Obviously, it’s working in activating better flow of sales. And further, we attribute also in the case of American Crew – our – we’ve done a refreshed advertising plot that is proving effective. And it will be – I don’t want to go in too much detail on that, but it’s proving affective and we have this new concept of groom-to-win campaign that is liked across the board. And as far as concern Revlon Professional, similar consideration, expansion of doors. When we say door in the case of a Professional business, we mean salons. And it’s very much is low process because it’s literally delivered by people not by sales force. There is low process, but we are focused on it and we are expanding doors. And in addition for Revlon Professional its worth calling out the launch that we are doing right now of a new color line that we call it the most beautiful color in the world and that is Revlon color cosmetics, and that’s working very well. And so, essentially, the second driver is present; expansion, innovation brand support, et cetera, et cetera. And these things are working well.

[Grant Jordan:]

Okay.

[Operator:]

That does conclude our question-and-answer session. I will turn the call back over to our speakers for any additional or closing remarks.

[Lorenzo Delpani:]

Okay. That’s it. No more questions. Thank you very much for attending the call and have a nice day. Thank you.

[Operator:]

That does conclude our conference. We thank you for your participation.