Revlon, Inc.
Q1 2010 Earnings Call Transcript

Published: 29 Apr 2010

[Operator:]

Good morning, ladies and gentlemen, and welcome to Revlon's first quarter 2010 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 Miss Elise Garofalo, Revlon's Senior Vice President, Treasurer, and Investor Relations. You may begin, Miss Garofalo.

[Elise Garofalo:]

Thanks, Stephanie. Good morning, everyone, and thanks for joining today's call. Earlier today we released our results for the first quarter ended March 31, 2010. 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 Alan Ennis, Revlon's President and Chief Executive Officer; Chris Elshaw, Executive Vice President and Chief Operating Officer; and Steven Berns, Executive Vice President and Chief Financial Officer. Before I turn the call over to Alan, I would like to remind everyone of a few things. First, our discussion this morning might include forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Information and factors that could affect the company's results from time to time and cause them to differ materially from such forward-looking statements is set forth in the company's filings with the SEC including our 2009 Form 10-K and our 2010 first quarter 10-Q, which we filed earlier this morning. Next, our remarks today will include a discussion of adjusted EBITDA and free cash flow, which are non-GAAP measures that are defined in the footnotes to our release and are reconciled in the case of adjusted EBITDA to net income and in the case of free cash flow to net cash provided by operating activities. These are the most directly comparable GAAP measures in the accompanying financial table. Regarding market share information, as a reminder, during our 2009 fourth quarter earnings call in February, we indicated that beginning with the first quarter of 2010 we're no longer reporting ACNielsen U.S. market share information. ACNielsen data represents only a portion of our channels in only the U.S. market. We believe that consumption through all of our retail partners in our markets globally is best reflected by observing our net sales performance and trends over time rather than this partial market share information. In addition, effective for periods beginning January 1, 2010, in order to align our business with our typical geographical reporting, we have made some changes to how we report net sales. Specifically, Canada is being reported as a separate region where in prior periods it was included in the Europe region; and South Africa is now included as part of the Europe, Middle East, and Africa region where in prior periods it was included in the Asia-Pacific region. As a result, prior year amounts have been reclassified to conform to this presentation. For your convenience, we've included the reclassified numbers for each of the quarters in 2009 at the back of our earnings release. Also, I want to remind you that from a financial reporting perspective, promotional allowances are recorded as a deduction to arrive at net sales while advertising costs are recorded within SG&A on the income statement. Finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I'd like to turn the call over to Alan.

[Alan Ennis:]

Thank you, Elise, and good morning everyone. As we have discussed with you in the past, Revlon's vision is glamour, excitement, and innovation through high quality products at affordable prices. This underpins everything we do. We realize this vision by executing the five key elements of our business strategy

[Chris Elshaw:]

Thank you, Alan, good morning everyone. Today I will cover our net sales performance and comment more broadly on trends we are seeing around the world. Total company net sales in the first quarter were $305.5 million compared to $303.3 million in the first quarter of last year. Excluding favorable foreign currency fluctuations of $9 million, net sales decreased 2.2%, driven primarily by lower net sales of Almay color cosmetics and Revlon beauty tools. These declines were partially offset by higher net sales of Revlon ColorSilk hair color and Revlon color cosmetics. Let me now discuss some factors that impacted our net sales results in the first quarter. The first quarter of last year's net sales benefited from launches of Almay Pure Blends and Revlon Pedi-Expert and from higher pipeline shipments of second half 2009 new Revlon color cosmetics products principally ColorStay Ultimate liquid lipstick. We benefited from the launch of a number of key innovative new products across our brands for the first half of 2010 which I will expand upon later. As we've previously stated, our strategic goal is to profitably grow our business. Therefore, in looking at our promotional plans compared to 2009, we modified some promotional vehicles that, while successful in driving retail sales, had a negative impact on our gross profit margin in 2009. Lastly, although our total SG&A expenses decreased year-over-year, we maintained comparable levels of media pressure globally and have plans to increase our level of media pressure in the second quarter as compared to the same period last year. In summary, the main factors affecting our 2010 first quarter net sales as compared to the 2009 first quarter were the cycling of some prior year launches, timing of shipments, and changes in promotional activity while maintaining comparable media pressure. Moving on to some specific products, starting with Revlon color cosmetics, net sales increased during the quarter as compared to the prior year. In the face segment, Revlon PhotoReady makeup is doing well around the world where it has been launched. PhotoReady makeup contains innovative photochromatic pigments that bend and reflect light to give a flawless, airbrushed appearance. It is still early in its launch stage in some regions and is yet to be launched in a number of key markets, so we expect to see continued positive performance in this franchise. In the lip segment, Revlon ColorBurst lipstick is early in its launch stage with many markets yet to launch. ColorBurst is a luxurious lipstick with revolutionary Elasticolor technology that provides an instant burst of color that feels virtually weightless on the lips. Moving on to the Almay brand, while we have seen some positive momentum lately, performance was negatively impacted due to the cycling of the 2009 launch of Almay Pure Blends which affects the eye, lip, and face segments. However, Almay's core business is stable. We have and will continue to introduce products behind our two most successful franchises, Almay Smart Shade and Almay Intense i-Color. We saw continued strength in both of these franchises during the quarter. Almay Smart Shade makeup contains a patented technology with shade sensing microbeads that adjust to match a woman's skin tone. We continue to expand this franchise with the recent introduction of Smart Shade anti-aging, which instantly reduces the appearance of fine lines and wrinkles. As we broaden the assortment to meet additional consumer needs, we are seeing good growth in this franchise. In our Almay Intense i-Color franchise, we recently launched a new collection of expertly coordinated shades that instantly enhances the color of your eyes with a three-step system of mascara, eye shadow, and eyeliner. The new collection benefits from the inclusion of our light interplay technology which intensifies the user's natural eye color. In women's hair color, Revlon ColorSilk continues to grow solidly in each of the regions in which it is sold, mainly the U.S., Latin America, and Asia-Pacific. In 2010, we extended the franchise to include Revlon ColorSilk Luminista which is especially designed for naturally dark hair delivering vibrance and shimmering color. In anti-perspirant deodorants, global net sales of Mitchum in the first quarter 2010 were relatively flat year-over-year. Innovations in this franchise include new Mitchum Smart Solid clinical performance which expands the brand offering in the U.S. into the clinical strength segment of anti-perspirant for both men and women. Outside the U.S., restages of the Mitchum line including updated fragrances and packaging. Finally, the strength of our beauty tools business is centered on the strong heritage of the Revlon brand coupled with our high quality product offering. Revlon beauty tools performance in the first quarter of 2010 was impacted by the cycling of our successful Pedi-Expert launch in 2009. New beauty tool launches in 2010 partially offset this including Revlon Pedi-Expert Shower, an all-in-one pedicure kit which is specially designed for in-shower use, and Revlon True Precision tweezer which has been very popular early in its launch. Now let's move to the regional sales performance during the quarter. In the United States, net sales were $182.1 million, a decrease of $8.9 million or 4.7% compared to $191 million last year. As I mentioned earlier, the decline was driven by lower net sales of Almay color cosmetics and Revlon beauty tools due to the cycling of the 2009 launches partially offset by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. Net sales of Revlon color cosmetics increased primarily due to lower promotional allowances and the benefit of new product launches in the first quarter of 2010. In Asia-Pacific, net sales were $45.9 million, an increase of $4.3 million or 10.3% compared to $41.6 million in the prior year. Excluding the favorable impacts of foreign currency fluctuations, net sales decreased $1.2 million or 2.9%. This decline was due to the lower net sales of Revlon color cosmetics in both Australia and Japan where we have seen a softening of consumption trends in the color cosmetics category. Throughout the region, we are experiencing positive market performance with the first half 2010 new product introductions. However, their performance was not sufficient to overcome the difficult economic backdrop and declining retail sales trends in both Australia and Japan. These declines are partially offset by higher net sales of Revlon color cosmetics in China. In Europe, Middle East, and Africa, net sales were $42.9 million, an increase of $4.6 million or 12% compared to $38.3 million in the same period last year. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $1.8 million or 4.7%. This decline was primarily due to lower net sales of Revlon color cosmetics in the region and Revlon skin care in certain distributor markets. In Latin America, net sales were $20 million, an increase of half a million dollars or 2.6% compared to $19.5 million in the same period last year. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $5.8 million or 29.7%. Approximately half of this increase was due to higher selling prices in Venezuela as a result of market conditions and inflation in the region. From a brand standpoint, the increase was due to higher net sales of Revlon ColorSilk hair color, Revlon color cosmetics, and other beauty care products. In Canada, net sales were $14.6 million or an increase of $1.7 million or 13.2% compared to $12.9 million in the first quarter of 2009. Excluding favorable foreign currency fluctuations, net sales decreased $700,000 or 5.4%. This decline was primarily due to lower net sales of Revlon beauty tools. Now I will turn it over to Steven to walk you through the rest of our financial results for the quarter.

[Steven Berns:]

Thank you, Chris, good morning everyone. As we have already discussed our net sales performance, I will start with gross margin performance in the quarter. In the first quarter of 2010, our gross profit margin improved to 64.4% versus 63.4% in the first quarter of 2009. Gross margin in 2010 was positively impacted by five factors

[Operator:]

(Operator Instructions) Your first question comes from Reza Vahabzadeh – Barclays Capital.

[Reza Vahabzadeh:]

Good morning. You haven't provided the share data as usual. I was just trying to see if you have any color as to how your share trends worked out during the first quarter.

[Chris Elshaw:]

As we said, the reason we're not providing share data is it really only refers to a part of one of our markets. What I would take you back to is there are factors that we identified as affecting our sales in the first quarter. First, of course, we launched some new innovative products for our brands across the first half of 2010; and I mentioned a few of them as we talked. We also cycled last year's launches of Almay Pure Blends and Revlon Pedi-Expert. In addition, last year, 2009 net sales in the U.S. benefited from higher pipeline shipments of some second half new products, particularly ColorStay Ultimate liquid lipstick. From a media perspective, we maintained comparable levels of media pressure and then, as we also stated, we made some changes to our promotional plans. We modified some promotional vehicles that, while successful in driving retail sales last year, had a negative impact on our gross profit margin. Those are really the factors that affected our performance.

[Reza Vahabzadeh:]

Any thoughts on the Euro and how that could affect operating results and if there are any hedges in place or any costs versus divergences in terms of the currency that they are derived from?

[Alan Ennis:]

Let me talk about what we do in the market place first and then Steven will talk about our hedging strategy. In the market place, we deliver products to the market; and we price them based on market conditions irrespective of the currency that we operate in. We don't manage our business based on currency. That's an important factor. We do have a hedging program that's been in place for some time, but it's essentially a cash flow hedging program which minimizes the peaks and valleys of the impact of currency fluctuations. So, I certainly have no ability to predict the future of what exchange rates will do.

[Steven Berns:]

The only thing I would add to that, as Alan indicated, we are really looking at our cash flow, our net cash flows, and where we are purchasing product across border, whether it be from suppliers or from our Oxford, North Carolina, facility, we are looking to provide a continual level of degree of certainty so we're not subject to the step function nature of the currency markets.

[Reza Vahabzadeh:]

So does that mean that you will face more of a translation risk or a conversion risk?

[Steven Berns:]

It means we're subject certainly to both over time, both translation and transaction. We have a process of making sure that we settle our intercompany transactions timely; and, therefore, we are not subject to having intercompany payables or payables to outside parties that are, if you would, subject to just the vagaries of the foreign currency market. As you will see on page F-15 of our, or F-14 I should say, of our 10-Q which was filed, really the 10-K, it lists out all of the foreign exchange contract information and how we go about that. Each quarter we update what our outstanding FX contracts are and any mark to market that may exist. However, the contracts that are put in place are done so for specific purchases that are really net flows across border.

[Reza Vahabzadeh:]

Then for the year, I understand that there are more cost savings to be had in the SG&A line as well as the gross profit line. But what is the overall plan for advertising spending for the year? Is it going to be comparable to the prior year, higher than prior year, taking all the quarters together?

[Chris Elshaw:]

We're not commenting on the full year number. What we have said is the first quarter was comparable to last year and in the second quarter it's our intent to increase our media pressure.

[Reza Vahabzadeh:]

Okay. Thank you.

[Operator:]

Your next question comes from Carla Casella – JP Morgan.

[Carla Casella:]

Hi. One clarification question first. You mentioned in your cash flow discussion, I think you said working capital, pension, and other items would be a cash usage of $15 million. Is that correct?

[Steven Berns:]

Correct.

[Carla Casella:]

Do you say how much of that is the pension?

[Steven Berns:]

We gave guidance in our first quarter call. We talked about $25 million of pension cash contributions, and that's consistent for, and $15 million of pension expense, and that's consistent with this call, the guidance we just gave.

[Carla Casella:]

So working capital is the offset, it should be a source of cash for the year, right, for the year?

[Steven Berns:]

Correct.

[Carla Casella:]

And then in the cost savings, $30 million savings, you said you expect the second quarter to be about almost $9 million. How come the second quarter is so much greater than the first?

[Steven Berns:]

What I said was that there was $6.2 million in the first quarter as it related to the restructuring and a comparable amount, approximately $6 million, in the second quarter with the balance of $2 million to $3 million in the second half of 2010.

[Carla Casella:]

Okay. I missed that. And then one question on, you talked about the new launches of the face makeup. Can you mention any of the big regions that still have yet to launch and maybe the timing of them?

[Chris Elshaw:]

It varies. It's not by region. We look at it by country. It depends on our portfolio plans in each of those countries. It varies by region. We've already launched in some of our major markets around the world. So we've launched already, for example, obviously in the U.S. We've launched in Australia where we have a good market position. We've launched in South Africa. We've launched in the U.K. So quite a number of key markets but there are more to come.

[Carla Casella:]

Okay, great. Then on the Venezuelan front, I think Venezuela last year was 7% of the operating profit. Is it safe to assume that could be cut maybe in half this year or is that more or less than that?

[Alan Ennis:]

Couple of things. We're not going to give a forecast for what percent of profit would be. But your analysis is correct because the currency essentially was cut in half. All things being equal, you would expect that the results of that business would be half of what they were in 2009.

[Carla Casella:]

Okay. Great. Thank you very much.

[Operator:]

Your next question comes from Connie Maneaty – BMO Capital.

[Connie Maneaty:]

Good morning. Let's see. Back to the advertising question. I know you don't give guidance. But I think it was in last year's third quarter conference call where you said that you had been able to lock in such favorable media rates in the media calendar which was to have run from October 2009 through October 2010. In your comments this morning, you talked about the second quarter saying you are going to put more pressure behind advertising. So I am just trying to figure out, you know, media rates have come down so much that you called them out last year. But in the second quarter, will you be increasing on an absolute and percentage of sales weight your advertising?

[Chris Elshaw:]

Let's go back to what we said. You're right. The media rates that we negotiated are in place from October last year to September of this year. Those are fixed through all the quarters. In the second quarter of this year, we intend to increase the level of GRPs. Now obviously there are many factors that affect the absolute dollars that implies because it depends in which markets around the world we buy in, which form of media, which day part. But the point is at the end of all that, there will be more GRPs in front of the consumer in the second quarter.

[Connie Maneaty:]

And given what's going on with advertising rates, is it a conservative assumption to assume that for 2011 your media expense might be higher than in 2010?

[Chris Elshaw:]

It's difficult to say at this stage. The up-front process really starts next month and concludes in August-September. Again, it depends on the competition between the various media owners. One thing we did recently do is we appointed a new media agency, so MediaCom in the U.S. is a major player in the media market. So we're looking forward to getting the benefits of working with them.

[Connie Maneaty:]

Okay. Then I have a question on sales. The question is this. When do we start to see organic sales growth on a more consistent basis such that when you cycle through the introduction of a new product, you are not reporting year-over-year declines in organic sales growth?

[Chris Elshaw:]

In this category, speaking particularly of the cosmetics category, we are focused on the three things which are driving sales growth over time. We're not going to forecast when the sales growth occurs each quarter, but there are three areas we're really focused on. First of all, innovation. We know that in the color cosmetics category, 15% to 20% of annual sales are in new products. Our strong focus there with our R&D group, our packaging development group, and our product development group is crucial to delivering that over time. Having done that, the next area is advertising. We've talked in the past about how we have increased effectiveness of our advertising which we're testing with the consumers. We know that our advertising resonates more today than it did a couple of years ago. Add that to things like we'll be increasing our media pressure in the second quarter. Then finally the in-store execution and the competitive environment there hasn't changed. It remains an intensely competitive environment and everyone is competing very strongly. We're focused on those drivers which, over time, we believe will deliver the sales growth.

[Connie Maneaty:]

Then just finally, as Mr. Meyers has had a chance to assess Revlon's R&D capability, I think you mentioned some game-changing kind of prospects. Is he on the call? Could he comment on what his impressions are or can you summarize what he believes Revlon's strengths and weaknesses or opportunities to be?

[Alan Ennis:]

Sure. He's not on the call, but I can comment. First of all, Alan, as you know, joined us from L’Oreal. His initial observations are that our portfolio plans and the product innovations that we have in place are very strong. What he is bringing to the table, as I see, he is challenging some of the things that we haven't challenged in the past. He's looking for opportunities to further enhance the innovation pipeline. He's looking at bringing new formulas, new technology. He's only been here for four months, but already I see strong signs of him elevating our game to the next level.

[Connie Maneaty:]

Thanks.

[Steven Berns:]

Just with regard to the question on advertising in the second quarter, on page 33 of the 10-Q we filed this morning and consistent with the comments I made earlier in my prepared remarks, we see that consistent with our strategy, we currently intend to support our brands with increased advertising spending in the second quarter of 2010 as compared to the second quarter of 2009.

[Connie Maneaty:]

Okay. I will look at that. Thanks.

[Operator:]

At this time, there are no further questions. I would like to turn the conference back over to Alan Ennis for closing remarks.

[Alan Ennis:]

Thank you. I'd like to take this opportunity first and foremost to thank our employees around the world for their execution during the first quarter of 2010. I would like to thank you all for your continued interest and support of Revlon, thank you.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.