Revlon, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Welcome to Revlon's Third 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 call over to Ms. Siobhan Anderson, Revlon Chief Accounting Officer and Treasure. You may begin, Ms. Anderson.

[Siobhan Anderson:]

Thank you, Tracy. Good morning, everyone. And thanks for joining today's call. Earlier today we released our financial results for the quarter ended September 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 of a 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 third 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 and non-GAAP measures. Beginning in the second quarter of 2015, the company has identified certain unusual items 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 periods. 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:]

Good morning to all of you and thank you for joining our call today. These quarter results were very strong and in fact adjusted net sales grew 6.8% and adjusted EBITDA grew 8.7%, measured on an XFX basis. The 8.7% adjusted EBITDA growth was achieved despite an incremental $4.7 million of brand support investment in the quarter. In the first nine months of 2015 we have been in investment mode, with an incremental $35.8 million of brand support versus prior year. This investment as well as the continued execution of our strategy of value creation led to significant growth in the consumer segment net sales and segment profit, both in the U.S. and internationally. Specifically we've seen very strong growth in our distributor market. The professional segment was substantially flat, however, this is the result of strong performance across most of our professional assets being offset by CND domestic which has experienced some decline, particularly in the value segment. As for CBB, within our other segment we're in advanced discussion for new opportunities and we will update you on the progress as appropriate in the future. Overall we're broadly pleased with the return that we're seeing on our investment. In other news, in late September 2015 we launched a Revlon Love Is On $1 million Challenge. The challenge participants raised $2.8 million for women's health charities and Revlon is donating an additional $1.4 million to the winning charities. In total, the challenge achieved over $4 million in donations to women's health charities including those that tackle women's cancer, heart disease and diabetes. In addition, as part of the Revlon Love Is On campaign, we also launched a Love Test video which has had over 25 million views in less than two weeks. We believe that both the Revlon Love Is On $1 million Challenge and the Revlon Love Is On campaign have had positive impact on the Revlon brand equity attributable. On an administrative matter, as you may have read in the Form 10-Q that we filed with the SEC this morning, Roberto Simon has handed in his resignation as our CFO. Roberto has agreed to postpone his departure date until late February 2015 to assist us in effectively transitioning our finance, accounting and treasury functions and overseeing the close of our 2015 fiscal year end and filing our Form 10-K with the SEC. We thank Roberto for his commitment and especially the commitment to remain with us as we close out our annual financial cycle and for the professional relationship that we have had over the many years that he's been with us. Notably, we've already started the recruitment process to hire a new CFO. I will now turn over the call to Roberto.

[Roberto Simon:]

Thank you, Lorenzo and good morning, everyone. Here are the financial results for Q3 2015 on a GAAP reported basis which includes the impact of certain non-operating unusual items in both periods. Net sales were $471.5 million versus $472.3 million in Q3 2014. Operating income was $55 million compared to $54.2 million in Q3 2014. Net income was $6.2 million or $0.12 of diluted EPS compared to $14.6 million of net income or $0.28 of diluted EPS in Q3 2014. The decrease in net income was largely due to higher taxes spent as a result of the following tax items. Higher pretax income, certain favorable discreet items in 2014 that did not repeat in 2015 and an increase in the valuation allowance related to certain assets in the U.S. as a result of a change in law. Moving on to our segment results, in Q3 2015 consumer segment net sales were $348.1 million. On an XFX basis, consumer segment net sales increased 5.9%. This increase was mainly driven by higher net sales on Revlon color cosmetics, Revlon ColorSilk and Mitchum products partially offset by lower net sales of Almay. Consumer segment profit was $86 million in Q3 2015. On an XFX basis, consumer segment profit increased 17.6%. The increase is mainly due to higher gross profit as a result of the increase in net sales partially offset by $2.8 million of higher brand support for the company's consumer brands. In the professional segment, Q3 2015 net sales were $114.5 million. On an XFX basis, professional segment net sales increased 1%. This increase is mainly due to higher net sales of Creme of Nature, American Crew and Revlon Professional hair products, partially offset by lower net sales of CND in the U.S.. Professional segment profit was $23.4 million in Q3 2015. On an XFX basis, professional segment profit was essentially flat. Moving on to net sales by geography, in Q3 2015 net sales in the U.S. were $255 million 4.6% higher than in Q3 2014. This increase was driven by higher net sales of Revlon color cosmetics, Revlon ColorSilk and Creme of Nature partially offset by lower net sales of Almay and CND. Moving on to international results, in Q3 2015 international net sales were $216.5 million. On an XFX basis, net sales were up 8.6%. International net sales increased in the consumer segment primarily due to higher net sales of Revlon color cosmetics, Revlon ColorSilk and Mitchum. In the professional segment international net sales increased mainly due to higher net sales of American Crew and Revlon Professional. From a geographic perspective, the increase was primarily driven by certain distributor markets. Moving to total company results, adjusted EBITDA was $87.6 million in Q3 2015 compared to $85.4 million in Q3 2014. On an XFX basis, adjusted EBITDA increased $7.4 million or 8.7%. This increase was mainly driven by higher gross profit in the consumer segment partially offset by $4.7 million of higher brand support expenses in Q3 2015. The 8.7% increase on adjusted EBITDA, also included incremental severance for 2015 as we have been investing more in upgrading our people and talent following our strategy of value creation. Taking a look at liquidity, as of September 30, 2015 our unutilized borrowing capacity and cash on hand was $345 million. This was made up of available cash of $178.8 million and available borrowing on our revolver of $156.2 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 prompt the participants for questions.

[Operator:]

[Operator Instructions]. And we will go first to Carla Casella with JPMorgan.

[Carla Casella:]

You talked about the $4.5 million of additional brand support in the quarter. Can you give us just some details of what type of programs you're running there? And also do we expect the same for fourth quarter?

[Lorenzo Delpani:]

Okay. It's way too long to articulate in details very good but broadly speaking you need to get -- I'm going to go on overall concept. Overall we have since the end of the 2013 when we started the new strategy, we have significantly hampered our investments across the board because we needed to be more competitive. And the way you're competitive in the market is investing to achieve a higher share of voice when it comes down to media, higher share of activity when it comes down to trade activity and supporting merchandising investment as well. So, broadly speaking, the buckets where the money has gone and continues to go are media, in store activation and in store promotion of our product and merchandising. In addition, we use -- we have worked hard to expand our geographical presence. So, in some cases the increase is not so much in the existing geography but is in new geography. In fact, we're progressing at a very high rate internationally even if unfortunately it's offset by FX effects. And that growth comes from incremental investment, for example, in Japan or Australia or other countries. So, this incremental investment in geography is where we're launching new brands. For example, the Revlon ColorSilk requires incremental investment and so broadly speaking I would say that I don't have the exact math but the majority of the investment has taken place in existing markets and the minority but significant portion of it has gone to just feed geographical new market development, new brand rollouts and therefore requires investment. We have been very aggressive in amping investment in the past two years and I think we've reached a level that I will consider competitive. As far as concerns Q4, as we indicated before, this year we have somewhat the phasing of the initiative and the phasing of the investment has been a bit heavier in Q1, Q2. And a little bit in Q3. We expect Q4 to be much more moderate and therefore the quarter, Q4 is likely to have a lower amount of brand support. For the future and as far as concerns the future, we will I think as I said, we reach a competitive level as a percentage of sales but as we grow our sales and as we plan to do so, part of that plan, we may grow the absolute amount of investment. But in terms of investment as a percentage of sales I think we have reached a reasonable competitive level.

[Carla Casella:]

And then one other, the permanent display spending, do you still target $50 million for the year? Or should we -- and is that a good number going forward as well?

[Lorenzo Delpani:]

That is a good estimate of our investment for the year. And we're going to seek opportunities to become more efficient in this investment and that will require harmonization of assets across the world. That's a significant investment for the color cosmetic business. You know we have different businesses and the permanent display primarily effects the color cosmetics, is a significant investment as I said that is an important cash item. For the future we will try to become more efficient in harmonizing design and sourcing across the world. Having said that this is not an indication that we will achieve such an endeavor but it's an area definitely of focus for us.

[Operator:]

And we will take our next question from Kevin Ziets with Citi.

[Kevin Ziets:]

My first question was on Almay. It sounds like it didn't have as strong of a quarter as maybe you were hoping for. I'm just curious how you're evaluating the brand support that you're putting behind that in light of the fewer, bigger, better strategy.

[Lorenzo Delpani:]

Well, okay. Basically Almay, first of all, we normally don't give details but to give you a feeling, in terms of share position in the last four weeks we're substantially holding the same position as we had last year, as much as I'm talking past four weeks, last year four weeks. So, more or less we're in the same game and the same level. This by itself is somewhat an achievement because Almay has been on a declining trend for a long time. So, to say that we're keeping at least for this phase one, the brand somewhat stable. So, that, clearly because of the incremental investment we put behind the brand, it's an area where the return on investment is not the one we expected. But we will continue to feed this investment for the foreseeable future and because we believe in the possibility of Almay to turn around. It's a big asset in terms of revenue. As you can imagine we don't have brand P&Ls. We don't share them. But it's not so big in terms of profit. So, ultimately, as we don't have that many assets, we can definitely take the Almay challenge on and continue with it. And it's not a liability for us to continue to support Almay and it's not representing the focus. So, we'll continue to fight which has become very competitive, not just for Almay, in general it's become very competitive because as I mentioned before, the color cosmetic market, particularly in the United States, is very much effected by development of many value brands and many private labels. So, Almay is increasingly challenged but it's somewhat encouraging that we're holding position despite the significantly stronger competitive atmosphere offsetting.

[Kevin Ziets:]

I guess along those lines, you mentioned I think at the outset that you might be investing alongside the CBB acquisition. I was just curious if you could elaborate on that or maybe talk about the M&A environment in general given how important scale might be given what's going on competitively.

[Lorenzo Delpani:]

Okay. I'm not going to comment on CBB. There's no need of doing so because there's nothing material to share yet. We're obviously working as I mentioned before on acquiring new licenses and we like to follow a balanced portfolio. So, we're seeking both luxury brands as well as lifestyle and celebrity. So, as I said in my previous note, when I have something to share I will. And as you can imagine, disclosing my plans can actually interfere with them and therefore, sorry for not sharing. Now, as far as concerned the broader M&A, it makes the world more challenging and as I said last time, we're ready. We're competitive, we have a strong pipeline and we're ready to fight it. And as far as concerned our M&A projects we won't disclose that either. I regret that but it's appropriate for us not to do so.

[Kevin Ziets:]

Of course, I just meant in general, if you felt like you needed as a broader strategically to attain greater scale given that some of your competitors are scaling up.

[Lorenzo Delpani:]

The scale -- and this is my view at least, the scale is in general you appreciate is important but it's also a liability because it creates tremendous complexity. It's low down the organization, it make them less entrepreneurial, etcetera.\ I could go on and on. In fact, arguably for example, P&G that recently sold their assets. They had scale. They had the asset, invested on it for years and years and years. And yet they decided to divest it. That's an example indeed, that scale is not everything. And it's also a matter of strategic focus and deciding where to play, how to play, et cetera, et cetera. Now, in the specifics, I believe that the fight in the business happens at brand level and category and brand level. So, what we need to have is scale at category and brand level and I very much believe in the concept of fewer, bigger, better which for us means that we have certain assets that are global priorities, other that are in maintain mode and others that are reprioritize mode. If and when one day we buy an asset or we buy something, I will look at it like that. I will look at it at the category and brand level because that's where the rubber hits the road. Buying conglomerates of brands just for the sake of getting scale and then leaving the following two years just managing how to integrate them, how to dispose of them, how to -- it's not necessarily a winning move. Now, as far as I'm concerned, I have already the challenge of rationalizing our portfolio that in terms of relative -- it's quite complex in relative terms to others and therefore I'm not eager to add fragmentation and complexity. I more like the idea of adding fewer, bigger, better assets. And I just mention this as a general conversation. Okay? I'm not trying to imply anything. Nor am I making any forward-looking statements. You asked me to broadly comment what's going on in the industry and I did so. Now, I want to say that some companies that do these big acquisitions are very good at doing so. So, good luck to them and we don't hope anything but the best for everybody.

[Kevin Ziets:]

If I could just get one more question in, I'm just curious how you're thinking about sell in for the coming year, the coming sort of new planograms sets and how you're feeling about your shelf space in general and maybe if you had any commentary about changing supplier relationships from one of your largest U.S. retailers?

[Lorenzo Delpani:]

Look, there is not much I can comment on this. You're asking me forward-looking statements on my shelf? Let's say I don't see any dramatic or radical coming my way. And as far as concerned the big supplier, what do you refer to? Do you refer the consolidation of Walgreens and Rite-Aid? What are you referring to?

[Kevin Ziets:]

I guess specifically I was thinking about Walmart and changes that they're asking from their suppliers, if that would impact the timing or any shelf space at Walmart?

[Lorenzo Delpani:]

At this stage I really have nothing material to report on that.

[Operator:]

[Operator Instructions]. We will go next to Karru Martinson with Deutsche Bank.

[Karru Martinson:]

Just got a follow up on that question. In terms of the Rite-Aid-Walgreens merger, I realize it's early but is there any kind of material difference between your shelf space and positioning at the two retail chains?

[Lorenzo Delpani:]

We don't have to comment on that. It's early for different reasons. I just want some time to clarify the question but not necessarily to answer it. And so basically we're in reasonable strong standing with both retailers. I don't judge the difference of spending between the new retailers to be a liability for us but obviously I don't know the plans of Walgreens-Rite-Aid and therefore that is an element outside of our career. But our priority based on our standing, it's reasonably comparable and a lot will have to do with what they intend to do with the space and how they intend to rationalize it.

[Karru Martinson:]

Okay. When we look at the growth of value and private label brands, the other factor we've been hearing a lot about is smaller niche brands on the margin taking share. Do you see that as a challenge for the Almay brand? Or is that more of a competitor threat to the core Revlon?

[Lorenzo Delpani:]

So, in general it's not necessarily a challenge -- from a consumer standpoint it's not necessarily a challenge to the Almay brand because Almay doesn't have a value positioning, as a positioning of high quality product. I'm going to skip the marketing speech on Almay but from a consumer standpoint it's not a brand that's in an immediate price trade off. So, it's not more threatened than Revlon. In that sense, it's as threatened as Revlon. That's not to say there's not a threat. Because an increasing amount of consumers are focusing on niche value brands. On the retailer side, when the retailer needs space, obviously when the retailer needs space, they can always take a view, they need to take the space from brand A and take it from brand B. In that sense Almay is possibly more challenged than Revlon. But I don't see anything materially coming our way as far as concern on shelf space reduction. Not at least in the short term. Our continued investment and effort behind Almay will help us minimize that risk that exists and is there, i.e. to lose space to other brands. But not so much because they're in consumer tradeoff. It's more because the trade reallocated the space by planograms? Or by redefining the planograms. As far as is concerned these value brands, value niche, they're growing because they offer value and they offer value and I guess there are consumers that appreciate value above other elements, above performance, primary and secondary, above convenience factor, above the intangible that is built behind the brand. And that is unfortunate because we make a tremendous effort to ensure the quality of our product, to follow rules, laws, regulations. We manufacture specifically Almay largely in the United States and very soon we will be able to announce something interesting about it. We have done a lot of effort to bring manufacturing in-house in North Carolina and to really rely on local manufacturing. And that comes with paying minimum wages, that comes from following rules and regulations, that some of our competitors are not -- don't have to follow. So, the playing field is not level in this sense. And we hope that people will appreciate that not all products are created equal. And we will continue with these, resolve to produce high quality products that respond to consumer needs. And yet it is definitely a challenge and something that in some cases also we will need the retailer to have a category management view to the business meaning the old-fashioned -- I know it's old-fashioned but old-fashioned category management was designed to develop the value of a category in front of a limited amount of consumer and consumption opportunities. The development of value brands doesn't necessarily do so. But that's not our choice and with have to live with it. This last comment was more like to give you industry color and not so much a statement for our brands.

[Operator:]

And we will take our next question from Arthur Roulac with Three Court.

[Arthur Roulac:]

My first question would be on advertising and promotion. I know you said you were happy with the levels it's at today. In the first quarter next year, all else being equal, should we expect the same level of promotion of fourth quarter versus last year and then going forward or should we expect two more increments?

[Lorenzo Delpani:]

So, we noted in our second quarter of 2015 earnings call to expect the brand support for the second half of 2015 to be in line with the 2014 level. As the brand support was up in the third quarter, consequently we expect Q4 brand support investment to be lower versus last year. And because the statement we released previously remains accurate. The reason why we invested in a different timeline is because of phasing of initiative and also because last year in Q4 we launched the Love Is On repositioning campaign that took -- let's say unusually seasonality in the typically investment flow that we follow. So, to say that Q4 is likely to be more moderate versus last year and I didn't say I'm happy with the level of investment. I said that it's competitive. And happiness is a different story. For me it would be very desirable on a personal level to have a dominating level of investment but that's something that we eventually will get there sooner or later. But for the time being we have to carefully play our best and our investment focusing on return because we're a leveraged organization that requires to focus cash flow and free cash flow and therefore we're reasonably conservative in this incremental efforts. Now, the XFX has been a disrupting factor for us and I say it's been because hopefully the storm is behind us but as you can imagine, I don't want to make that statement because we don't control the exchange rate but if they stay more or less as they are right now, the storm should be kind of behind. And it's kind of a pity because it doesn't allow to see the real progress we've done. XFX basis versus 2013 we have invested significantly more behind the brand, more than $50 million more actually on a comparable basis and comparable FXF basis and yet we pay back that investment by delivering incremental comparable growth. And not only we did that, we generated incremental comparable profits. So, the plot has worked well from an operational standpoint. Then when it comes down to a transaction effect and translation effect, due to XFX, that unfortunately doesn't show. But you can see that better when you see that our competitors that have a strong international presence have declined and instead we're still making progress. So, all in all, you're right in saying that our progress is not so visible because of these XFX factors. Hopefully the exchange rates will remain at a certain level or eventually improve and we'll be able at that point, if that happens, to fuel more the growth rapidly and fuel the growth even more. And that's it.

[Arthur Roulac:]

My next question would be from more of a capital structure and sort of prioritization of cash, you're producing a lot of free cash flow obviously to be invested back in the business. Is the plan -- I guess what would be the priority? Is that repaying debt? Is it bolt-on acquisitions? Is it PDD? A - Roberto Simon We're continuously defining and evaluating ways to create value for the company. As you can image with this evaluation process we consider many different courses of action including potential business combination, debt repayment, debt refinancing and investment into the company's existing brands.

[Operator:]

And we will go nest to Carla Casella with JPMorgan.

[Carla Casella:]

I had a follow up. Inventory level was higher than it typically is in this quarter. I'm wondering if that was a timing issue or if it's just given the new makeup of the business?

[Lorenzo Delpani:]

It's accurate and we have a higher level of inventory than usual, than last quarter. That's driven by a couple of factors. One, definitely, we have more assets because of the CBB assets that are fairly seasonal and they sell a lot in Q4 season normally and therefore we have a buildup of assets. So, there's definitely a CBD component. Second driver of inventory increase is the increase in performance. I want to remind you that in consumer business we have increased our performance and due to the fragmentation of the portfolio, that leads to increased inventory. And last but not least, we wanted to make sure to keep good service level across our activity, intense activity period. And we've taken a conservative position in the level of inventory. And we would hopefully balance that in the year to go and I'm expected to reduce -- I expect to reduce the inventory in Q4.

[Carla Casella:]

And then can you just talk about you view inventory in the channel now?

[Lorenzo Delpani:]

In what sense?

[Carla Casella:]

I guess how is inventory at the drug stores and the mass merchants today or even in the professional channel? Is it -- are we heavy on the inventory side? Does that inhibit any of the sell in as you go into the fourth quarter? Or is inventory generally clean?

[Lorenzo Delpani:]

We have generally nothing special to report on that point. We, as a philosophy of the company and it's even introduced in our clear spelled out operating principle, we really don't do loading. And actually we in a company we have a philosophy that if people load and that's not considered business results, then we don't reward it. Eventually if loading practices happen, we even go as far as terminating the people that drive them. So, in general I don't expect and I don't see an issue of having an unusual level of inventory. Now, said that, the level of inventory in some of our categories is high and is high structurally because they are categories with low velocity, particularly color cosmetics and therefore even when you have a limited amount of SKUs on an aggregate level, multiply all SKUs by all stores it does represent a meaningful level of inventory. Now, it's a relative situation as opposed to an absolute in the sense that it doesn't, to the best of my understanding it does not increase in any meaningful way and definitely not in a way as to be a concern to us right now.

[Operator:]

It appears there are no further questions at this time. I would like to turn the conference back to Lorenzo Delpani for any additional or closing remarks.

[Lorenzo Delpani:]

Thank you for the call today and we'll see you next quarter.

[Operator:]

This does conclude today's conference. We thank you for your participation. You may now disconnect.