Revlon Inc (REV) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's First Quarter 2008 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. Abbe Goldstein, Revlon's Senior Vice President, Investor Relations and Corporate Communications. You may begin, Ms. Goldstein.

Thank you. Good morning, everyone, and thanks for joining our call. Earlier this morning, we released our results for the first quarter 2008. If you have not already received a copy of the earnings release, you can obtain one at our website at www.revloninc.com.

Here with me today are David Kennedy, President and Chief Executive Officer; and Alan Ennis, Executive Vice President and Chief Financial Officer. On today's call David will prevent highlight the first quarter results provide a strategic update on the business. Allen will review our financial results for the quarter in detail. I will then introduce our extensive new product lineup for the second half of 2008.

Before we get started I would like to remind everyone that 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 on 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 2007 Form 10-K which we filed on March 5th and our first quarter 2008 10-Q which we expect to file next week.

Our remarks today will include a discussion of adjusted EBITDA which is a non-GAAP measure that is defined in the footnotes to the release we issued this morning and is reconciled to net loss, the most directly comparable GAAP measure in the accompanying financial table.

In relation to U.S. share results, unless otherwise noted, our discussion this morning of mass retail share and consumption data is that of U.S. mass retail dollar volume according to A. C. Nelson which excludes Wal-Mart as well as regional mass volume retailers, prestige department stores, Internet, door-to-door, television shopping, perfumeries, and specialty stores, all of which are outlets for cosmetics sales.

The A. C. Nelson data is an aggregate of the drug channel, Target, Kmart and food and combo stores and represents approximately two-thirds of the Company's U.S. mass retail dollar volume.

Finally, as a reminder, our discussion this morning should not be copied or recorded. With that I would now like to hand it over to David.

Thank you, Abbe, and good morning, everyone. First I'd like to briefly review our financial results for the first quarter of 2008 compared to last year.

Net sales were $320.4 million compared to $328.6 million. Operating income was $32.5 million compared to $3 million. Net loss was $2.5 million compared to net loss of $35.2 million. Adjusted EBITDA was $58.1 million compared to $32.3 million.

Our strong financial results for the first quarter of 2008 continued to build upon our performance throughout 2007. Our results continued to validate our strategy and we remained focused on increasing the value of our Company by building the Revlon brand and generating profitable sales growth and positive free cash flow. Later in the call Alan will review the financial results for the first quarter in more detail.

In the U.S. according to AC Nielsen, the Color Cosmetics category group 2.6 percentage points in the first quarter of 2008 compared to the same period last year. In the first quarter of 2008 Revlon Color Cosmetics share declined 0.6 percentage points year-over-year which reflected a decrease in share by products launched prior to 2007, offset in part by positive performance from new products launched throughout 2007 and in the first half of 2008.

Revlon's positive performance in the Eye category which was driven primarily by Luxurious Color Eyeliner and 3-D Extreme Mascara -- both of which were launched in 2007 -- was offset by declines in face lift and nail categories.

In the first quarter of 2008 Almay Color Cosmetics share declined 0.3 percentage points year-over-year. In the first quarter of 2008 Almay's positive performance in the Face category which was driven by Smart Shade Makeup, Blush and Bronzer was offset by declines in the Lip and Eye category.

While our first half 2008 new products are still clearly in the launch cycle, we are pleased to report that in the first quarter of 2008, in the U.S., Revlon Custom Creations Foundation and Revlon's Color Stay Mineral Foundation were ranked in the A. C. Nelson top 10 new products by retail dollar sales.

In addition three new Almay product launches were in the top 20. Mainly Almay TLC, Truly Lasting Color makeup and Almay Intense Eyecolor Mascara and Eyeshadow. As Abbe will discuss later we believe we have a strong lineup of new products for the second half of 2008; and the majority of this pipeline will be shipped to our retail customers in the second quarter.

In the first quarter, we continued to support our brands worldwide with comparable dollar spending versus the same quarter last year, excluding the brand support in the first quarter of 2007 related to the launch of Revlon Colorist Care Color. Since the fourth quarter of 2006, the Revlon brand has maintained an approximate 13% dollar share each quarter; and the Almay brand has maintained an approximate 6% dollar share each quarter.

Our business strategy, we continue to execute our business strategy first building and leveraging our strong brands. Second, improving the execution of our strategies and plans in providing for continued improvement in our organizational capability through enabling and developing our employees. Three, continue to strengthen our international business. Four, enhancing operating profits, margins in cash flow and, five, improving our capital structure.

We have taken the following recent actions in this connection. Following the extensive lineup of Revlon and Almay Color Cosmetics introduced in the first half of 2008, and as a part of our portfolio strategy of continuous introduction of new products across brands and categories, we are launching for the second half of 2008 a very strong and comprehensive lineup of new innovative Revlon and Almay Color Cosmetics products. Abbe will review these later in the call.

We signed Elle McPherson to represent the Revlon brand worldwide and Gucci Westman, world-renowned makeup artist, to serve as Revlon brands' global artistic director. And in April 2008, we announced a plan to affect a reverse split of our Class A and Class B common stock at a 1 for 10 split ratio. The plan has been approved by the Board of Directors and MacAndrews and Forbes, the Company's principal stockholder. We expect to consummate the reverse stock split later this month or in June.

As we look forward, our strategy focuses on the following key drivers to build our brands and generate sustainable profitable sales growth. First, innovative high-quality consumer preferred new products; effective integrated brand communication; competitive levels of advertising and promotion; and superb execution with our retail partners.

As part of our strategy to build our brands and generate profitable growth, we have developed in our implementing a multiyear product portfolio strategy for all our key brands across the categories in which we compete. For Revlon and Almay Color Cosmetics, we will be consistently introducing new innovative high-quality products every year across our categories face, lip, eye and nail. New products will continue to be a significant percentage of our sales each year.

Along with this focus on new product development, we are supporting our brands with consistent measurably effective brand communication. This communication will use our global celebrity brand ambassadors in advertising and for in-store communication. As always, we will be working with our retail partners to continue to improve the shopping experience for our consumers.

Importantly, we are also continuing to support our brand with advertising and promotions at spending levels that we believe are competitive. We believe the implementation of our brand and strategy will drive our expected mid single digit growth in annual net sales over time.

Along with our intention to drive sales growth, we will continue to control our costs and take full advantage of margin improvement opportunities in all areas of the business. We have delivered improved margins and demonstrated our ability to control costs and improve cash usage.

We have also demonstrated with our 2008 new product launches that we have reinvigorated our new product development processes. We believe that strong new product development will result in sustainable sales growth which, given our margin structure, will be profitable. Our plan therefore is based on growing our sales, continued control of our cost. We believe these factors, along with other efficiencies, will lead to further margin expansion.

All combined, we expect to generate sustainable profitable sales growth and positive free cash flow.

So with that let me hand it over to Alan who will take you through the financial results for the first quarter in detail.

Thank you, Abbe and David, and good morning, everyone. As we normally do, I would like to build upon David's introductory financial comments and take you through a more detailed review of the financial results.

So starting with the P&L for the first quarter of 2008, net sales of $320.4 million declined 2.5% compared to $328.6 million in the first quarter of last year. Excluding the favorable impact of foreign currency fluctuation, net sales decreased by 5.5% versus year ago. Net sales in the first quarter of 2007 benefited significantly from initial shipments related to the launches of Revlon Colorist Hair Color and Mitchum Smart Solid Antiperspirant & Deodorant.

Although net sales in the first quarter declined, it is important to note that we remain focus on generating profitable sales growth. We have and will continue to make careful return on investment decisions regarding how we generate net sales growth. As David just said we believe that our Revlon and Almay Color Cosmetics comprehensive new product launches in 2008 will positively contribute to net sales growth.

In the United States, net sales decreased 8.3% to $177.2 million compared to $193.3 million in the first quarter of last year. As I just mentioned, in the U.S., net sales in the first quarter of 2007 benefited significantly from initial shipments related to the launch of the Revlon Colorist Hair Color and Mitchum Solid Antiperspirant & Deodorant. Net sales of color cosmetics in the U.S. were slightly lower in the first quarter of this year compared to the year ago period.

In our international operations, net sales increased 5.8% to $143.2 million, compared to $135.3 million in the year ago quarter. Excluding the favorable impact of foreign currency fluctuation, international net sales decreased 1.5% compared to the same period last year.

In our Asia-Pacific region, which is comprised of Asia-Pacific and Africa, net sales increased 8.8% to $64.1 million compared to $58.9 million in the first quarter of last year. Excluding the favorable impact of foreign currency fluctuations, net sales in Asia-Pacific grew 3.2% primarily due to higher shipments in South Africa, Hong Kong, Taiwan and our duty-free businesses, partially offset by somewhat lower shipments in Japan.

In our Europe region, which is comprised of Europe, Canada and the Middle East, net sales declined by 1% to $49.1 million compared to $49.6 million in the first quarter of last year. Excluding the favorable impact of foreign currency fluctuation, net sales in Europe declined 10.9% primarily due to lower shipments in the UK and Italy, partially offset by higher shipments in France.

I would like to point out that in the first quarter of 2007, net sales in the UK were positively impacted by retail space gains related to the Revlon brands and higher closeout sales, when compared to the first quarter of this year.

In our Latin American region, which is comprised of Mexico, Central America and South America, net sales grew by 11.9% to $30 million compared to $26.8 million in the first quarter last year. Excluding the favorable impact of foreign currency fluctuation, net sales in Latin American grew 5.6%, primarily driven by higher shipments in Venezuela and, to a lesser extent in Brazil, partially offset by lower shipments in Mexico.

Importantly, our international business is sound and growing. International operating profits and operating margins in each region continued to improve in the first quarter compared to the same period last year.

Moving down the rest of the P&L for Revlon, Inc., in terms of our gross margin in the first quarter of 2008, our gross margin improved by 180 basis points (technical difficulty) 63.4%, from 61.6% in the first quarter of last year. 50 basis points of this improvement was due to lower returns and allowances. 40 basis points of the improvement was due to favorable product mix. 30 basis points of the improvement was due to lower charges for estimated excess inventory and 30 basis points of the improvement was due to proceeds from an insurance claim, relating to lost products shipments.

SG&A expenses of $176.7 million improved by $18.4 million or 9% from $195.1 million last year. The first quarter of 2007 included significant brand support expenses related to the launch of Revlon Colorist Hair Color and this was the primary driver of the improvement in SG&A expenses year-over-year.

Operating income for the first quarter of 2008 was $32.5 million representing an OI margin of 10.1% of net sales compared to $3 million in the same quarter last year. Included in the first quarter of 2008 operating income and adjusted EBITDA is a $6 million net gain related to the sale of a noncore trademark, which is classified on the face of the income statement on the restructuring costs and other net line.

Interest expense for the quarter was $32.1 million, an improvement from $33.8 million last year due primarily to lower average borrowing rates on comparable average debt levels.

Net loss was $2.5 million compared to a net loss of $35.2 million in the first quarter of last year. Adjusted EBITDA was $58.1 million compared to adjusted EBITDA of $32.3 million in the same period last year. As David noted earlier, while we've made progress, we fully recognize the need to continue to further improve our performance. This remains a key focus.

Moving on to cash flows, operating cash flow in the first quarter of 2008 was $11.6 million compared to $24.7 million in the first quarter of last year, primarily due to changes in net working capital related to the timing of payments partially offset by a lower net, net loss and lower permanent display spending.

In April 2008, in order to reduce our exposure to interest rate volatility, we entered into a $150 million two-year floating-to-fixed interest rate swap transaction which effectively fixed the interest rate on $150 million of our term loan at 6.66%. This swap in addition to the $150 million fixed floating to fixate interest rate swap transaction that we entered into in September of 2007, effectively fixed our interest rate on another $150 million of our term loan at 8.692%.

After giving effect to these two swap transactions, approximately 30 -- $300 million of our $840 million term loan is at fixed interest rates during the two-year term of the respective swap and the remainder is floating. So therefore in terms of our total debt, approximately 60% is currently at fixed interest rates and 40% is at floating interest rates.

As I indicated on our call with you in March, while we are not providing specific guidance for adjusted EBITDA for 2008, we did give you certain information to assist you in understanding the factors that will impact our expected full year 2008 cash flows.

I would now like to update you on that information. Capital expenditures are still expected to be approximately $25 million. Permanent display expenditures are expected to be approximately $50 million which is lower by $5 million from our prior expectations of $55 million. With respect to interests, in 2007, interest paid was $137.6 million. Our total debt remains at approximately $1.4 billion as I mentioned 60% of which is currently at fixed interest rates and 40% is at floating interest rates, mostly at LIBOR plus 400 basis points.

Taxes are expected to be approximately $20 million, which is higher by $5 million compared to our previous expectation, due to changes in taxes internationally. Finally, all other cash flows including changes in working capital are still anticipated to result in cash usage of approximately $15 million.

Therefore, you can reach your own conclusion about full year expected 2008 cash flows based on these factors collectively in conjunctions [to] your own expectations for adjusted EBITDA.

Our unutilized borrowing capacity and cash as of March 31st, 2008, was $139.5 million comprising of $92.8 million available under the revolving multi currency facility and $46.7 million of cash and cash equivalents.

With that I would like to turn it over to Abbe to introduce our second half 2008 new products.

Thanks, Alan. I want to focus on building and leveraging our strong brands and, as David mentioned, we believe that consistent development and communication of innovative new products is a key driver for building brand equity and profitable growth.

Throughout 2008, we are introducing an extensive lineup of new products for Revlon and Almay core cosmetics. These new product launches include innovative, differentiated and unique offerings for the mass retail channel and extensions within the Revlon and Almay franchises. We intend to continue our strategy of supporting new product with advertising and promotion at competitive levels, using our talented brand ambassadors.

For the second half of 2008, our Revlon Color Cosmetics introductions are as follows. Revlon Beyond Natural is a new makeup collection which includes eight products that create a naturally glamorous never overdone look and works with all skin tones. The collection for face, eye and lips include, one, a smoothing primer which is a lightweight, gel like formula that provides a smooth base for lasting foundation and flawless skin. Two, a unique skin matching makeup which is a lightweight foundation with breakthrough exclusive ingredients that adjust to match your skin tone. Just five shades cover a wide range of skin tones from light to deep. Most of Beyond Natural advertising will focus on this skin matching makeup. Three is a concealer and highlighter in a single compact containing depends two pens. Four, a cream to powder eyeshadow which goes on like cream, blends easily and dries to a soft powder finish. This eyeshadow is beautifully embossed and each compact contains four shades. Five is a defining eye pencil with a wider width pencil that creates soft lines of natural color for eyes that look defined but not overly made up. Six, Defining Mascara with a molded brush and a nonclumping formula coats each lash for a natural look and the Ever Lash Mascara brush has two types of bristles to apply the mascara and create definition. Cream lip gloss provides creamy color and soft shine for naturally lush lips and, eight, protective lip tint with SPF 15 tints lips with color while providing moisturizing shine and sun protection.

Next is Revlon Color Stay Mineral Lip Glaze, which is the first mineral lip gloss with long-wearing color stay technology that lasts up to eight hours. Color Stay Mineral Lip Glazes' 12 shades have a unique mineral complex that is good for your lips and provides a glossy seal of conditioning color with a one step application. This lip glaze is an extension of the Color Stay Mineral Face and Eye Collection launched in the first half of 2008.

Revlon Lash Fantasy Total Definition Mascara is a relaunch of our successful Lash Fantasy Mascara. This mascara is the first dual ended molded brush with a vitamin-enriched primer on one side that nourishes and lifts lashes. The other side delivers rich intense color with beautiful definition.

And, finally, for the Revlon brand, Crush On Color which is a summer 2008 collection of 13 new and on-trend shades that will be introduced into Revlon's Super Luscious lipstick and lip gloss, Revlon Color Stay 12 Hour Eyeshadow Quad and Revlon Nail Enamel. These new shades will enhance our shade selection by offering the hottest new shades of the season in several of our core Revlon products.

Our second half 2008 Almay Color Cosmetics introductions are as follows.

Almay Bright Eyes Collection is a three product, innovative, and coordinated collection made up of eye base and concealer in one, eyeshadow and a liner highlighter duo. The collection instantly makes eyes look refreshed and radiant due to Almay's expert formulas which contain a unique blend of marine extract, white tea and peptides that work with light reflectors to naturally brighten, de-puff, and refreshed the look of the entire eye area. The three collections of the Bright Eyes products are coordinated by skin tone.

Almay's Smart Shade Concealer is yet another extension of the highly successful Smart Shade line of products which already include makeup, blush and bronzer. The Smart Shade Concealer uses the same Smart Shade unique shade system technology to conceal skin imperfections. Almay TLC -- Truly Lasting Color -- Pressed Powder is where long wear meets skin care. Almay TLC pressed powder is a long wear makeup which lasts for up to 16 hours and is infused with a nourishing blend of natural ingredients, namely, antioxidants, green tea to protect, lemon extract to brighten and vitamin E to help smooth.

Pressed Powder is a complement to the extension to the TLC makeup that was launched in the first half of 2008. We have received positive feedback from our retail customers about the launch of our second half 2008 new product.

Finally, before we open for your questions, we would like to inform you that the Annual Revlon Run/Walk for Women will be held in New York City on May 3rd and in Los Angeles on May 10th. We are very proud of our long-standing and continued philanthropic support for women's health initiatives and the fight against women's cancers. If you would like to donate to this cause or register to participate in the Revlon Run/Walk please go to the website, www.revlonrunwalk.com.

With that, we would now like to open up the call for your questions. Operator, please begin.

(OPERATOR INSTRUCTIONS) Carla Casella of JPMorgan.

I have one small technical question on Depreciation and Amortization. In your EBITDA adjustment chart, you show different D&A than is in the cash-flow statement. What is the difference there and where does it come from on the income statement?

You're looking at the cash-flow statement, then you are looking at the reconciliation between net loss and adjusted EBITDA. Is that right?

Right there's only about $1 million difference but depreciation and amortization is about $1 million different.

If you look at the cash-flow statement you'll see -- sorry. If you look at the reconciliation CDMA you will see D&A of 25.6. You will also see above that you'll see amortization of dead issuance [toss] of 1.3. So together that is about $27 million.

Then on the cash-flow statement you will see D&A of 24 6. You'll see USA amortization debt discount at 0.2 and then stock comp of 2.2 (inaudible) 27. It is just the way they are classified.

Then on the display spending the forecast for the year about $5 million lower. Why is that? Is it that retailers are requiring less display spending for new products? Is it your own pulling back given cash-flow situations?

No, it's actually a product of our improved efficiency at delivering displays for the world. We have been able to reduce the costs of permanent display spending over the last couple of years because we've gotten better at managing overall, ensuring that our -- the new products that we launched where possible can fit into the existing wall.

In addition the number of retailers we've converted over to what they cost the universal walls and the ongoing display cost associated with maintaining universal walls over time is somewhat lower. So it is really internal efficiencies that have resulted in that improvement.

And then you talked about in the first quarter it was up somewhat due to shipments but down on the core. Can you say how much the shipments were or whether they were anniversarying any for the next quarter?

Can you clarify when you say it was up) Are you referring to (multiple speakers)?

The domestic you mentioned. Domestic shipments of new product. We know -- what amount that was?

I think what you're saying is -- are you asking the question about what the shipments were in the 2007 quarter?

No. This quarter. You were saying that there were some shipments in first quarter 2008. Do we know the magnitude of them?

I was referring to the fact that the first quarter of 2007 included initial shipments related to the launch of Revlon Colorist Hair Color and Mitchum Smart Solid deodorants.

So we are hurdling those -- those introduction pipelines for those products.

Yes. I heard backwards. Okay. Well, would that have been finished then in Q1 or do you have a hurdle in Q2 as well?

Q1 is where we would have had most of the initial shipments.

Connie Maneaty of BMO Capital Markets.

Good morning. I came in a little bit late so I don't know if you've covered this. But what would U.S. sales growth have been I guess it was reported down 8% if we exclude the sell in of Colorist a year ago?

We didn't actually cover that exactly but the ship in of related to Colorist and Mitchum Smart Solid was the single biggest driver of the change year-over-year. And Color Cosmetic shipments were slightly lower in 2008 compared to last year, but the biggest -- the single biggest driver was the beauty care side.

So would U.S. sales growth then still have declined excluding those two because Color Cosmetics declined year-over-year?

Yes. Color Cosmetics was down, but only very slightly.

What impact are you seeing on your hair color market shares from Perfect Ten?

We aren't seeing any impact. You know our brand Colorsilk, which is driving our share growth in hair coloring, does not really compete directly with the premium end of the market where Perfect Ten would be. (inaudible) gain share in the quarter I think about 0.8 share in the quarter. [Any of the gainshares.]

All right. When would you expect your international businesses to -- as the group trends positively excluding currency?

As you know we haven't called anything out on that. We've said clearly that our business is sound. It's growing. We continue to improve our margins' profitability and we believe that as we build and develop the Revlon brand, that that will also have a very positive impact on our international business as well.

Are there a lot of onetime events going on in these different regions?

I think each quarter where we've had a significant onetime event we've called it out just like in the UK, where we were hurdling some space gains in prior year, as well as some very low margin closeout sales in the first quarter of last year as compared to the first quarter of this year. If you go back and look at each quarter, where we've had a decrease of something out of trend on international (inaudible) we've called out the onetime items.

Then, finally, what's the official date for the reverse split?

There is not an official date at this point. We would expect to complete it sometime either end of this month or some time in June.

Okay so no change there.

Right.

Kevin [Zeiss] of Goldman Sachs.

Just wanted to talk about your inventory positions at retail and how you think, I guess how much of the Color Cosmetic decline do you think was due to any inventory destocking moves versus sellthrough?

As we've said in the past we haven't seen any general trend towards any change in inventories in the U.S. at retail. The retailers predicted the large retailers continue to manage their retail -- their inventories very, very closely. This has been an ongoing trend for some time. We've seen no significant impact from that.

And so you're comfortable (multiple speakers)

Always pluses and minuses and changes in inventories at retail, but again nothing, nothing significant.

And then I just wonder if you could comment on your market share trend, sort of as the quarter progressed and as the new products started to hit the floor?

It's pretty early days on the new products and as you know in the U.S. the resets which, in some retailers, are not complete as of this date. So the resets roll out in an uneven pattern for the various retailers over time. So when you start to look at share results in the first quarter, it is very difficult to come to any conclusions about those.

We are very pleased to say that two major launches in the Revlon are in the top 10 list of products. So that was very pleasing for us, but again it is early days.

So what percentage would you estimate is sort of set at this point?

I don't have a number. I'm not -- I haven't done an estimate on that. So it's very -- I just don't have any accurate information on that.

But more than 50%, less than 50%?

I don't know. Really.

Okay and just talking about your comment about long-term growth in the mid-single digit range. I guess when you look at the historical trends of the category, you look at all of the competing elements that have come into mass cosmetics as well as other channels that are maybe stealing customers away, I'm just wondering if you could kind of comment? I guess it would imply that you are going to gain a significant amount of share. I just wanted to know if that's --.

That number also includes our international operations as well.

Fair enough.

Which is over 40% of our business and has historically grown much faster than the U.S. So you've got to take that into account as well.

Okay. Fair enough. And then lastly, just -- Alan, you were kind of running through the gross margin inputs, I guess pretty quickly. Just wondering if you could go over them quickly like (inaudible) 50 basis points for returns, 40 from mix, 30 for excess inventory and 30 for insurance claims. Did I capture everything?

You got all of them.

(OPERATOR INSTRUCTIONS). This ends the question-and-answer session of today's call. We will now turn things back over to Mr. Kennedy for closing remarks.

Thank you for your interest in Revlon and for your questions today. We know that we need to further improve our performance. We will continue to execute our strategy and we are moving through 2008 with a continued focus on increasing the value of our Company by building the Revlon brand and our key brands around the world and driving towards both profitable sales growth and positive free cash flow. Thank you.

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