Revlon, Inc.
Q4 2014 Earnings Call Transcript

Published: 14 Mar 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to Revlon’s 2014 Earnings Conference Call. As a 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.

[Siobhan Anderson:]

Thank you, Eric. Good morning everyone and thank you for joining today’s call. Earlier today, we released our financial results for the year ended December 31, 2014. 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 CEO and Roberto Simon, Executive Vice President and CFO. 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 2014 Form 10-K 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 and pro forma measures to enhance the comparability of our results in light of the company’s October 2013 acquisition of the Colomer Group. These measures are defined in our earnings release and are also reconciled in the financial table at the end of the release. Just to note that pro forma results are not necessarily indicative of the operating results that would have occurred if the Colomer acquisition had been completed for the period presented. Also, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined company. As a reminder, the Company’s results of operations of its brands sold in retail channels, including retail brand acquired in the Colomer acquisition, are included in the consumer segment, and the results of operations of the brands sold in professional channels acquired as part of the Colomer acquisition are included in the professional segment. Finally, 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. 2014 was a year of significant change in transformation and these resulted in strong growth for the Revlon business. We integrated Colomer group into the company and deliver the expected synergies and related cost reductions. We also redesigned our organization and significantly increased our investment to build and support our key brands. Importantly, we repositioned Revlon under the Love Is On concept in November 2014 and also reposition Almay under the Simply American concept in January 2015. Initial market response is encouraging. With the Revlon Love Is On campaign, we have one mission to inspire love. The idea for Love Is On grew from our quest to find a universal inspiring emotion. Love is by far, the most powerful and most positive. From the moment, a women puts on the Revlon makeup, we want to captivate her imagination and to take her on a journey into the world of love. The Almay Simply American tagline, celebrate the spirit of American beauty, fresh, natural and authentic. Almay Simply American was built upon the core American value of ingenuity and authenticity, with an uplifting and pioneering spirit. Our new campaign for Almay, future brand ambassador Carrie Underwood whose effortless beauty and body is the essence of the brand. As I said before, this campaign, the Revlon one was launched November 18, 2014 and the Almay was launched in January and we prepare them over the second half of last year. And initial market result as I said are encouraging. Back to '14, thanks to our strategy of value creation and thanks to integration synergies, our 2014 financial performance was the best in many years. On a pro forma basis as a fact which is base for like-for-like comparability. Our 2014 net sales increased 4.7% and adjusted EBITDA increased 12.9%. This while we have substantially increased our brand support by 38.1 million, representing a 10.8 increased over 2013. So, increase of EBITDA basically as in the business has been able to more than offset the incremental investment in the very same year. We are pleased with these results and this motivates us to continue our effort to reposition our core consumer brand and to maintain and build on the strong momentum of our professional business. For 2015, we will continue to focus on our strategy of value creation which is based on the following four pillars. I want to give some color on it. Because of us it's really the past that guides our transformation efforts. The first pillar is that we manage the P&L driver for value creation. Second pillar is related to profitable growth. Third pillar is cash management and the fourth is people. So, concern the first pillar -- our actions are driven primarily in the following direction. Number one, we try to increase and optimize prices and take any opportunity we have to increase gross margin through pricing. Second, as far as concerned trade spending, we work harder to drive optimization and most importantly which doesn’t mean reduction, it means redirecting the trade spending from sell in effort to sell out effort, so to foster market share development. The third bucket is -- we call it squeeze and is about driving efficiency in the supply chain organization and in the product costs. The fourth bucket of the first pillar is the return on investment of our brand support. We spent a lot more in brand support this year but it’s very critical. It’s not just an amount of investment, is critical the return on the investment and that for this purpose we need to work on two areas. One is the impact that our investments creates in the market, and the second is the efficiency of the media channels or the trade channels in which we execute such investment. Last bucket is departmental trim and departmental reduction, which is basically the drive to keep cost of departmental evolution below inflation. These are the key pillars for managing the P&L and we have a focused discipline in doing so. But what really drives the difference of our strategy is actually more the pillar of profitable growth. When we come down to profitable growth, this is broken down in the following key pillar. Number one is developing fewer, bigger, better, incremental innovation. And this is something I've touched before expensively. It's a key endeavor for us, because we want to have less innovation but more successful innovation. This by itself drives efficiency across the whole organization. The second block is deep diffusion, we call it 3D three dimensional diffusion but it's a deep diffusion across our distribution channel in terms of consumer penetration and in terms of consumer repeat. So, essentially go deeper in driving consumer trial, but in driving customer distribution and in fostering repeat. The fourth bucket is about managing the mix and we have a renewed portfolio strategy for our brand, but we also have an elaborate country scorecard that drives the prioritization of our country efforts, as well as a portfolio, we manage a portfolio at customer level. Another bucket is the effort to expand our presence, and we call this presence expansion and mega growth. Presence expansion is about expanding and deepening the distribution in the country where we are already present and mega growth tends to be the project that we undertake in scenario where we are not present then we have to build the presence. Last but not the least and it’s very important for us, is the way we want to have a partnership with our distributors and we are present in many-many countries not directly but via distributors and we have started in 2014. We have done a major redesign, the way we manage distributor which is now centralized and we manage to them on a global basis under the principal of win-win distribution management and win-win profitable growth. This essentially means that we see our distributor as partners and we work and invest together to grow the business. The third core pillar as I mentioned before is cash management and here there is no science fiction but it's the solid work of that we need to do, to improve networking capital, minimize returns, improve the return on our CapEx invested and finally tax optimization where permitted. And last but not least, the pillar of people. Essentially that’s very important for us because all the strategy is implemented by the people, with the people and thanks to the people. So passionately, we believe in talent and we believe in commitment and our values are achievement, innovation, and drive and we want people that are achievers. We want innovators. And we want people that have the strength to really drive the business forward. And our motto here is a bit crude, possibly, but it is fewer better people. We need and we have driving people organizational changes so to have a better people. So, that summarizes I think quite well what we’re working on and I want to keep elaborating on this concept of talent. Talent is really necessary for our success at Revlon and Revlon employees are critical to the achievement of our mission and vision. As a reminder, we currently have 5,600 employees worldwide in approximately 25 countries. We have taken the spirit of Love Is On that is at the base of the repositioning of our core brand Revlon to guide also our culture and inspire the drive that we need in our execution. Our corporate love, when we say Love Is On internally is clearly not the interpersonal like the one of Revlon. And our corporate love is not unconditional. It's a sort of a credo, expressed in this way. The spirit of Love Is On is captured in the following ten tenants. Number one, we love to win and innovate in everything we do. Two, we love to create value for our shareholders. Three, we love to satisfy our customer. Four, we love to amaze and delight consumers. We love commitment to the work we do. We love talent. We love to inspire our people and challenge them to inspire us. We love to be global and multi-cultural. We love diversity in cultures, styles and personalities. And last but not the least we love [ruido] which is our -- let’s say my motto, which is to be relevant, to be unique, impactful, distinctive and honorable. I’ll turn the call over to Roberto.

[Roberto Simon:]

Thank you, Lorenzo and good morning everyone. Here are the financial results of full year 2014. On a GAAP reported basis, full year 2014 net sales were $1.94 billion versus 1.49 billion in 2013. Remember that our reported results for 2014 reflect the inclusion of the net sales of the brands acquired from the Colomer group with no comparable results in the prior year. Income from continuing operations, net of taxes, which includes the impact of certain non-recurring items in both periods was $39.6 million or $0.76 of earnings per diluted share, compared to $24.6 million or $0.47 of diluted EPS. As Siobhan mentioned, my commentary on the results for full year 2014 compared to 2013 will be on a pro forma basis adjusted for certain non-recurring and non-operating items. In this morning’s earning release you can find the details of these items and reconciliations of GAAP to adjusted and to pro forma adjusted results. Total company net sales in full year 2014 were $1.94 billion. On an XFX basis, net sales increased 4.7% compared to 2013. Moving on to the segments, in 2014 consumer segment net sales were essentially flat as compared to 2013. However on an XFX basis, consumer segment net sales increased 3.2%. This increase was mainly driven by higher net sales of Revlon color cosmetics, Revlon Color Silk and Mitchum product, partially offset by lower net sales of fragrances, Almay, SinfulColor and Pure Ice color cosmetics. In addition, in 2014 we had 15.1 million of favorable return reserve adjustments in the U.S. As a result of lower expected discontinued progress in the future. Consumer segment profit was also essentially flat as compared to 2013. However, on an XFX basis consumer segment profit increased 4.4%. The increase was largely due to higher gross profit as a result of the increase in net sales as well as price increases and variable mix, partially offset by 32 million of higher brand support for Company’s consumer branch. In the professional segment full year 2014 net sales were $502.7 million, an increase of 9.4% on an XFX basis versus 2013. This increase includes higher net sales of American Crew and Revlon Professional, CND nail products and Crèam of Nature. Professional segment profit was $104.8 million which on an XFX basis increased 49.5% versus 2013. This large increase was mostly driven by higher gross profit as a result of the increase in net sales and lower cost as a result of the integration program, partially offset by 6.1 million of additional branch report for the Company’s professional branch. Moving on to net sales by geography -- in 2014 net sales in the U.S. were $1.02 billion or 5.4% higher than in 2013. Within the consumer segment the U.S. deliver higher net sales or Revlon color cosmetic, Revlon Color Silk and Mitchum products, partially offset by lower net sales of Almay, SinfulColor and Pure Ice color cosmetics. In addition, we had favorable impact from the reverse adjustment that I spoke about earlier. Within the professional segment the U.S. deliver higher net sales of American Crew and Crèam of Nature. Moving onto the international results. In 2014, international net sales were $919.1 million which decreased 2.2 on a reported basis versus 2013. However, on an XFX basis net sales increased 4%. Within the consumer segment international net sales increased due to Revlon color cosmetic and Mitchum partially offset by lower net sales of fragrances. Within the professional segment international net sales increased due to CND nail product, American Crew and Revlon Professional. Moving to total company results, adjusted operating income in 2014 increased 7.2% versus 2013 to 267.1 million, or an increase of 14.2% on an XFX basis. Adjusted EBITDA increased 7.7% versus 2013 to 375.2 million or an increase of 12.9% on an XFX basis. Both adjusted operating income and adjusted EBITDA on an XFX basis were mainly impacted by the XFX net sales increase of 4.7% an approximately 17 million of synergies and organizational core reductions related to the integration program. These increases were partially offset by 38.1 million of higher brand support as well as increased general administrative expenses, mainly due to higher severance expense and incentive compensation in 2014. Taking a look at liquidity, as of December 31, 2014 our unutilized borrowing capacity and cash on hand was 435.7 million. This was made up of available cash of $269.7 and available borrowings on our revolver of 166 million. Now I will turn the call back over to Siobhan.

[Siobhan Anderson:]

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

[Operator:]

Thank you [Operator instructions] And we will take our first question from Grant Jordan with Wells Fargo.

[Grant Jordan:]

Good morning. Thanks for taking the questions. If you can help us quantify just how to look at FX going into 2015, that would be helpful.

[Roberto Simon:]

We cannot make projections of future payments. However as you know, in 2014 especially in the last six months, the U.S. dollar has been strengthening and Revlon is a global company with presence in various variable currency markets, including European countries, South Africa, Australia, Canada and Argentina.

[Grant Jordan:]

So, if I look at the EBITDA build up for 2014, there was $25 million add back for foreign currency, of which 6 of that was related to Venezuela. Am I looking at that right, that 19 million was a cash cost of FX that you added back to EBITDA?

[Roberto Simon:]

Yes.

[Grant Jordan:]

And based on current exchange rates, would that 19 million be higher at current exchange rates going forward?

[Roberto Simon:]

It’s an average. Obviously, it’s an average of 2014 year. Its accumulated impact over 2014 of the gap from our budget rate to the real rate has been, like you currently said 18.3 million. And there is another update for Argentina. There was a more unusual one-off. But as far as concerned the impact for this year -- at current rate, you can make your own projection. We don’t make forward statements. And we don’t control the exchange rate. 18.3 is the sum of the total impact for 2014. You know what the rates are and moving forward clearly we do expect an exchange rate impact but unless that the exchange rate changes. Therefore, the question is a little tricky because if we would know the exchange rate we would be in a different business. That is something we don’t control, it's reasonable to assume a deterioration. But remember that we have already captured a meaningful part of the exchange rate decline between our primary pool of currencies and our current value.

[Grant Jordan:]

Right. I understand that. It’s just, we don’t have all the moving pieces to do the analysis ourself, because we don’t see what your contracts are or whether you purchase in dollars, so just trying to get a magnitude of the potential headwind would be helpful. But I understand.

[Lorenzo Delpani:]

Yes. We don’t know, we don’t give that type of information and it creates only wrong expectation, especially on these mater that we don’t control at all and it's outside our control.

[Grant Jordan:]

Are you able to add that back per year bank agreement to the definition of EBITDA?

[Lorenzo Delpani:]

No.

[Grant Jordan:]

Okay. Next question is, can you talk about your planned usage of cash in 2015? Would you rather be focused on paying down debt or using it for acquisition?

[Roberto Simon:]

Yes. As you are probably aware, we have 675 million term loan due November 2017. We will be making a required debt repayment of 24.6 million on our amended term loan facility late this month. And obviously we are continuously identifying and evaluating ways to create values to the company. As part of this evaluation process, we consider many different course of actions including potential business combination, debt repayment, debt financing, and investment into the Company’s existing brands.

[Grant Jordan:]

Okay. Are there any M&A opportunities that you've seen, that seem attractive?

[Roberto Simon:]

No comments. We can no comment.

[Operator:]

At this time we have one question remaining in the queue. [Operator Instructions] We will take our next question comes from Connie Maneaty with BMO Capital.

[Pat Trucchio:]

Hello. Good morning. It's actually Pat Trucchio on the line for Connie. Just on the fourth quarter, how much of the gross margin expansion was driven by mix? And what was the key driver of the mix benefit? And then also, on the gross margin, how much of did FX drag in the quarter, and were there any other restructuring benefits in the gross margin? Thanks.

[Lorenzo Delpani:]

So, in the first question the gross margin and gross contribution improvement is driven by volume, price increases, mix on sales, specially because of the U.S. and obviously the integration program that are delivering also synergies in the gross contribution profit.

[Pat Trucchio:]

Okay. And then just in the Professional segment in the quarter, what drove the big 12% increase? And in your experience, is it possible to grow up that kind of an increase year-over-year?

[Lorenzo Delpani:]

You're talking about net sales?

[Pat Trucchio:]

Yes, in the professional segment. The XFX sales were up 12%, just wondering what were the key drivers of that and in your experience, can you grow up that kind of an increase?

[Lorenzo Delpani:]

We don’t give forward-looking statements. However, as I mentioned before, consistently what I said before, our Professional sales are quite volatile and fluctuating because we don’t sell directly into a channel that sells directly to consumer. We sell into -- primarily into distributor, it's not only but primarily into distributors as well as salons. And our timing and phasing of initiative and innovation is irregular and inconsistent over the year. So, sometimes we may have innovation in March and other times we may have -- the following year we may have it in April. So if it takes place in March or April, you have an unusual impact on the quarter. The Pro business in 2014 results were unquestionably exceptional and excellent results, and they are across the board in all assets. So, it's solid and the momentum is strong. Said that, if you want to go on the quarter observation, the quarter can and was affected by some strong pipeline sales, and you cannot therefore reasonably project that growth on a yearly basis. We have strong momentum but the environment in which we operate in the professional business is extremely competitive and very-very dynamic and therefore I’ll stick with the fact that we have strong momentum but I would suggest that extrapolation is inappropriate and could be inaccurate.

[Pat Trucchio:]

Okay. So I'm just wondering, on the restructuring integration, did I hear you correctly that you said you had $18 million of savings in 2014?

[Roberto Simon:]

17 million.

[Pat Trucchio:]

So in 2015, I thought you had said previously that you'd expected $23 million of savings. Is that still right?

[Roberto Simon:]

We are expecting 30 to 35 million accumulated.

[Pat Trucchio:]

Okay. And the rest of it's going to -- will accumulate in 2015?

[Roberto Simon:]

Yes.

[Pat Trucchio:]

So in 2014, it sounds like much of the benefit accrued to the Professional segment. Is that the right way to think of it? And if it is, why did that happen and would that be the way that we should think about the benefit from the integration in 2015, as well?

[Lorenzo Delpani:]

Okay. So, I don’t want to guide the way you read things, but clearly, there are two things to consider, so I’m going to stick to the fact. As I said that 2014 for professional was an excellent year. Excellent exceptional years are by default the definition of excellent and exceptional, not necessarily an every year occurrence. So was a very strong year, we have strong momentum and we will fight hard to keep the momentum going. However, from the way we read that the consumer results, we are very pleased with the consumer result, even if they may appear flat on sales or EBITDA level and that is because we have invested 38 million more in brand support that you don’t see any impact of that on EBITDA. Most importantly, if you see where we put that money and most of the incremental money consumer has gone in the United States. In the United States business units that receive this investment would increase the sale and EBITDA. That means that we have achieved feedback in the year. We are in this process of transforming our brand and putting a lot more support behind them and achieving feedback in year one, for us is a significant achievement. So we are encouraged by this result in consumer and we expect, we want to continue a positive progress. So in a nutshell -- that's basically the answer, the answer is Pro had strong momentum, continuing to do so is extremely challenging because the market is highly competitive and there are all the factors that I mentioned in our reportings that can actually affect the continuity of this performance. We have strong momentum but we will continue to face challenge and moving forward. On the other side consumer, we’re encourage by the initial result that we consider very positive and we are in the process of creating momentum in the consumer size as well.

[Pat Trucchio:]

Okay. Just one more. On the advertising, on the $38 million increase, how much of that was driven by the Love Is On campaign? And then I guess, what's the right rate of advertising for Revlon as a percent of sales, or is there a right rate? And how exactly are you measuring the efficiency of investment which you'd referenced earlier?

[Lorenzo Delpani:]

First question is how much is driven by Love Is On. And it's not -- Love Is On, was launched Love Is On repositioning, it was not a campaign, it's a repositioning. We have restructured the brand positioning so to become more emotionally relevant and we have decided to really embrace this love spirit. This was launched on November 18, 2014. So, most of the investment is in the combination of support of the total brand for the whole year. This was only a fraction of the investment for 2014. Now obviously in 2015, we’ll focus our investment whole around the Love Is On concept both at brand level and by also at the level of the initiative. Second question what is the right level of investment. Okay, the right level investment, there is no magic formula that we are following because if I would know exactly what that number, we would exactly invest at that number. But I really believe that it's not a matter of quantity as much it is matter of quality of investment and impact. So, it's not a guideline but we believe that investing at least 20% of sales or around 20% of sales is necessary and is not a very firm guideline but it's something that at least we aim to go to as step one. As far as I’m concerned, as I’m driven by growth and my objective is to deliver growth and to bring back the brand to really the quintessential status, it deserves to be -- we are going to go through a phase of investment and as we start this year and the most important effort now for 2015 is to optimize the return on these investment. And we measure it in many different ways depending of what kind of investment it is. For example, the biggest component that is probably media, media investment as much as we could use sophisticated modelling to figure out whether it works or not, I like to rely on a very simple measure, which is are we growing market share or we're not growing market share. So essentially looking at the consumption uplift, what it means for us in terms of financial contribution because we can reasonably convert that and compare that with our investment. So for example, on a macro level because that macro level is important. This year the extra investment in consumer was fully paid back, so is generated in our sales to set such investments. And now it has not generated financial growth but as first year or reinjection of gasoline to the machine, we are reasonably satisfied by these results. So macro level, the biggest and most significant measure is, are we growing market and are we doing sales. And then when you go down to other type of investment, like for example promotional activation at trade level, the matrix as you can imagine are more analytical and more detailed. And we can make assessment on whether we are getting on the efficiency of the promotional drop, whether it's coupon drop or an SSI or things of that nature. The analytics are available and they are common in the industry and one effort we do in that field for example is to make sure we do, again fewer better promotional activations. And the purpose of not just feeding our own user but with the purpose of generating new trial. Then there are other investment, like in store, in store investments are important to Revlon, in store, the wall, in store execution, merchandizing, secondary display, visual activations. Those are bit more hard to measure and in some of these we need to do experiments and test and get around the sensitivity of the result. So brand support its own investment and working on these return to improve it is a key pillar as I mentioned before of the strategy of value creation. So in some cases the measure is simple, in other is more sophisticated and we are quite -- we're getting progressively more analytical about this investment.

[Pat Trucchio:]

Yes, that's great. Thank you. That's it for me.

[Operator:]

It appears we have no further questions at this time. I’d like to turn the conference back to today's speakers for any additional and closing remarks.

[Lorenzo Delpani:]

Okay. As I said thank you for the call, and we'll continue our work. It's one of the challenging year as usual and we will hear you soon at the next earning call. Thanks a lot and have a nice day.

[Operator:]

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