Revlon Inc (REV) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's second-quarter 2012 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.

Operator Instructions )

I would now like to turn the call over to Ms. Elise Garofalo, Revlon's Senior Vice President, Treasurer and Investor Relations. You may begin, Ms. Garofalo.

Thank you, Karena. Good morning, everyone, and thanks for joining today's call.

Earlier today we released our results for the second quarter ended June 30, 2012. 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, Chief Operating Officer; and Steven Berns, Chief Financial Officer.

Before I turn the call over to Alan I'd 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. 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 2011 Form 10-K and our 2012 second-quarter 10-Q, which we filed earlier this morning.

Next, our remarks today will include a discussion of adjusted EBITDA and free cash flow, both of which are non-GAAP measures. These non-GAAP measures are defined in the footnotes to our release and are also reconciled to their most-directly comparable GAAP measure in the financial tables at the end of our release. And finally, as a reminder our discussion this morning should not be copied or recorded.

With that, I'll turn the call over to Alan.

Thank you, Elise, and good morning, everyone.

As we have discussed for some time, our strategic goal is to profitably grow our business. Overall we had a positive quarter and I am pleased with our performance so far this year.

From a net sales perspective we grew 4.2% in the quarter and 2.4% year-to-date. Our Revlon brand performed very well in the marketplace again this quarter. We are pleased with both new and core product performance during the period and are excited about our recent new product introductions.

From a regional perspective we grew in the US, Canada and Latin America. However, we experienced some softness in Europe, greater China and Australia. As we move forward we will continue to manage our resources carefully, given the uncertain global economic environment.

While we continue to drive growth organically we are also growing through acquisitions and are excited about the recent addition of Pure Ice to our brand portfolio. Pure Ice is a wide range of value-priced nail color products, which have been in distribution for over 20 years in the US mass retail channel. This acquisition complements our brand portfolio and builds on the successful acquisition of the SinfulColors brand in 2011.

From a financial perspective we had a positive quarter as we continued to deliver competitive operating income margins and our financial profile remains strong.

So with that I'll hand it over to Chris, who will talk about our marketplace performance.

Thank you, Alan, and good morning, everyone. Today I will review our net sales performance, excluding the impact of changes in foreign currencies.

Total Company net sales in the second quarter of 2012 were $357.1 million, an increase of 4.2% as compared to the second quarter of last year. The increase is primarily driven by higher net sales of Revlon and Almay color cosmetics and Revlon ColorSilk hair color.

In the United States, net sales increased $9 million, or 4.6%, primarily driven by higher net sales of Revlon color cosmetics. In Asia-Pacific, net sales decreased $1.7 million, or 2.9%, primarily driven by lower net sales of Revlon color cosmetics in China and Australia and lower net sales of other beauty care products in Hong Kong. These lower net sales were partially offset by higher net sales of Revlon Color cosmetics and Revlon ColorSilk hair color in certain distributor territories.

Moving on to Europe, Middle East and Africa, net sales decreased $1.8 million, or 3.5%. The decrease was primarily due to lower net sales of fragrances in the UK and certain distributor territories, as well as lower net sales of Revlon Color cosmetics in France, Italy and certain distributor territories. This was partially offset by higher net sales of Revlon Color cosmetics in the UK where we continue to be very pleased with the strong marketplace performance of the Revlon brand.

In Latin America, net sales increased $7.3 million, or 27.8%, primarily due to higher net sales of Revlon and Almay Color cosmetics and Revlon ColorSilk hair color throughout the region. Venezuela's increase in net sales was primarily due to the absence of sales in June 2011 as a result of the fire that destroyed the Company's facility there last year. Net sales in the region also benefited from higher selling prices in Venezuela and Argentina, which accounted for approximately one-third of the $7.3 million net sales increase in the region.

Finally, with respect to our Canada region, net sales increased $2.1 million, or 10.8%, primarily due to higher net sales of Revlon and Almay Color cosmetics.

Now moving on to the performance by brand. Starting with Revlon Color cosmetics, total Company net sales increased as compared to the prior year. In face, earlier this year we extended our PhotoReady franchise with the introduction of Airbrush Mousse Makeup, which contains innovative photochromic pigments that bend and reflect light to give a flawless airbrushed appearance. PhotoReady Airbrush Mousse is performing well in the US and Canada. Also in face, we recently introduced Revlon ColorStay Whipped Creme makeup, a foundation with a mousse-like texture with time-release technology that provides up to 24 hours of wear without feeling heavy.

In lip, our ColorBurst Lip Butter continues to perform exceptionally well in the marketplace and has now been launched in all of our major markets. This buttery balm that instantly hydrates lips while providing color with a high-shine finish is an extension of our established ColorBurst franchise. And also in lip, building up on our successful Revlon Just Bitten franchise, we recently introduced Kissable Balm Stain, a balm infused with a light-weight lip stain packaged in a retractable chubby crayon that gives women softer, smoother lips with a perfect flush of color. To date this product has been extremely well received in the marketplace and in these early days shows every sign of being as successful as our ColorBurst Lip Butter.

In eye, we restaged and upgraded our Revlon ColorStay eye shadow quads with 16-hour wear and new premium design and packaging. This restaging is consistent with our approach of not just expanding our product range with new products, but also strengthening our existing products with new technology. These new quads have performed well in the marketplace. Also in eye, we recently introduced ColorStay Overtime Lengthening Mascara, formulated to create long, intensely-dark lashes for 24 hours of wear.

And lastly in nail, we introduced ColorStay Longwear nail color containing our exclusive ColorStay light-curing technology, which cures in natural light versus a salon UV light, providing a gel-like shine and 11 days of high-impact color. To date ColorStay nail color is performing well in the marketplace.

Finally, with respect to the Revlon brand, earlier this month we launched the Revlon Expression Experiment, a unique digital engagement platform designed to spark a social movement of makeup experimentation. Accessible through Revlon's Facebook page, this new platform provides women with monthly challenges, beginning with the red lipstick challenge. The launch of the new platform will be supported by digital advertising, as well as promotions on Twitter, Facebook and YouTube.

Moving on to the Almay brand, net sales increased during the quarter as compared to the prior year. However, we remain dissatisfied with the marketplace performance of the brand. The higher net sales in the quarter were driven by lower returns and allowances and the cycling of the fire in Venezuela.

As I mentioned last quarter, we are very focused on improving all elements of Almay's marketing mix. We have made changes to future advertising promotional plans, which we believe will improve their combined effectiveness over time. We continue to place emphasis on refining the brand positioning, as well as improving the overall merchandising of the brand. Additionally, we remain focused on innovative new product development, which is an essential driver of net sales performance.

With respect to both our Revlon and Almay Color cosmetic performance, we have recently received a number of awards in recognition of our competitive levels of innovation from magazines such as a Total Beauty, Self Magazine and Redbook. We believe these awards demonstrate the strength of our new product portfolio and we are very pleased to receive recognition that we are meeting the needs of consumers with so many of our products in 2012.

In women's hair color, net sales of Revlon ColorSilk increased versus the second quarter of 2011. Building on the success of ColorSilk and ColorSilk Luminista, we introduced Root Erase by ColorSilk, which erases roots and grays with ease for beautiful seamless color in 10 minutes. Year-to-date we are pleased with the performance and expansion of both Root Erase and our core ColorSilk franchise, including our recent introduction in Canada.

In antiperspirant deodorants, net sales of Mitchum in the second quarter were essentially unchanged year-over-year.

And finally, with regard to Revlon beauty tools, net sales were essentially unchanged year-over-year. While the category remains soft, we continue to maintain our strong leadership position, and in 2012 we have new products that are performing exceptionally well in the marketplace.

Now I'll turn it over to Steven to walk you through the rest of our financial results for the quarter.

Thank you, Chris, and good morning, everyone. As we have already discussed our net sales performance I will begin with our gross margin performance in the quarter.

In the second quarter of 2012 our gross profit margin was 65.2% versus 65.3% in the second quarter of 2011, essentially unchanged year-over-year as the unfavorable impact of product mix was offset by the favorable impact of lower allowances and lower manufacturing and freight costs.

SG&A in the second quarter of 2012 increased approximately $8.4 million to $189.9 million versus the second quarter of 2011, primarily attributable to two items. First, a net charge of $6.7 million with respect to estimated costs of resolving previously-disclosed pending litigation related to our 2009 exchange offer. And second, higher incentive compensation, primarily due to the timing of expense within 2012 as compared to the same period last year. These increases were partially offset by the favorable impact of foreign currency fluctuations within SG&A as compared to the same period last year.

Operating income in the second quarter of 2012 was $42.8 million compared to $47.8 million in the same period last year, and adjusted EBITDA was $58.7 million compared to $63.3 million in the same period a year ago. Interest expense decreased $2.1 million to $21.2 million, primarily due to refinancing the Company's bank term loan credit facility in May 2011 at lower interest rates.

The provision for income taxes was $9.1 million compared to $2.6 million in the same period last year, primarily due to increased pretax income, which was partially offset by the favorable resolution of tax matters in a foreign jurisdiction. Cash paid for income taxes in the second quarter of 2012 was $7.5 million compared to the $10.1 million in the same period last year.

Net income in the second quarter of 2012 was $11.1 million, or $0.21 per diluted share, which included a net charge of $6.7 million after tax related to the pending litigation mentioned earlier in my remarks. Net income in the second quarter of 2011 was $6.5 million, or $0.12 per diluted share, which included $6.9 million of charges, after tax, related to the refinancing of the Company's credit facilities.

Moving on to cash flows, net cash used in operating activities in the second quarter of 2012 was $1.3 million compared to a use of $20.8 million in the same period last year. Free-cash flow in the second quarter of 2012 was a negative $6.6 million compared to negative $24.2 million in the same period a year ago. Cash flow in the second quarter of 2012 benefited from favorable changes in working capital and lower cash interest paid, which were partially offset by higher pension contributions. As a reminder, with respect to operating cash flow in general, the timing of cash flows from working capital can vary significantly from quarter to quarter based on a number of factors. We continue to closely manage our key working capital accounts, including receivables, payables and inventory.

On the liquidity front our unutilized borrowing capacity and cash on hand as of June 30, 2012 was $194.1 million, which was comprised of $68.6 million of available cash and $125.5 million available under our revolving credit facility. Our revolver was undrawn at the end of the quarter and we had $10.3 million of standby letters of credit issued under this facility. Subsequent to the end of the second quarter, we funded the July 2nd acquisition of Pure Ice with $45 million of cash on hand and $21.2 million of borrowings from our revolving credit facility.

Moving onto the balance of 2012, regarding the cash flow guidance we previously provided for 2012, the following items remain unchanged; capital expenditures of approximately $25 million, pension plan contributions of approximately $35 million, and cash paid for income taxes of approximately $20 million. Lastly, we are updating our guidance for permanent display expenditures to be approximately $45 million for 2012, an increase from our prior guidance of $40 million.

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.

Thank you. (Operator Instructions) And first we'll go to Grant Jordan with Wells Fargo.

Good morning, thanks for taking the question. My first question, you talked a little bit about inventory, but on a year-over-year basis your inventory was down 6%, how do you see that moving over the course of the rest of the year?

A couple of things, Grant -- it's Alan here. One of the objectives that we have as the Company's to improve profitability and cash flow and clearly inventory management is a key element of working capital and, obviously, the lower our inventory levels, the better our cash flow. So over the last number of years we've done a wonderful job of reducing inventory and improving turns. Three or four years ago our turns were about 2.5 times and now they're north of four. And so what we're doing is, through a combination of more effective portfolio planning, which means having greater visibility to what we're going to launch in the future and when, a more strict approach to how we manage stop shipments, and a better approach to forecasting new products, we're able to effectively maintain effective in-store levels and service levels while at the same time reducing our inventory. So it's all very much within a managed process of improving cash flow.

On the acquisition, I think in the Q it says you used a combination of cash and revolver borrowings to fund that in July, do you expect to be out of your revolver by the end of Q3?

Yeah, we -- it's Steven, Grant. We don't forecast, as you know, any of these numbers, but certainly as you know in the past years we've generated a significant portion of our free cash flow in the back half of the year and we don't see any change in the balance of this year relative to prior periods.

Okay, and then my last question. You guys have done a couple of smaller acquisitions over the past year, year-and-a-half and now the new one. When should that start to really roll into the earnings line, or have we seen that and it's offsetting something else? Just trying to get an understanding for the timing.

No. So the Pure Ice acquisition we closed that on July 2 so there's -- in the financial results for the second quarter there's nothing in there, obviously, because we didn't own the business, but you will see essentially a full quarter of performance in the third quarter and from then on.

And then the other acquisitions that you've completed, are you seeing a full benefit from those in terms of what you'd expected when you did the acquisition?

Yes. So SinfulColors is the one that we did in March of last year so that's clearly now on an annualized basis. It's in the numbers for all periods and it's performing very well, consistent with our expectations.

Hi, Karena, can you take the next question, please?

Yes, we'll go to Carla Casella with JPMorgan.

Hi, I had one question on the finance structure and then a business question. If you were to refinance your bonds, the 9.75% bonds, would you -- is there some restriction, would you have to address the Mafco term loan first?

Carla, it's Steven. As you know -- or as you may know, earlier this year the loan that was payable to MacAndrews & Forbes was assigned pursuant to the terms of that loan by MacAndrews & Forbes to unaffiliated third parties, so that loan is now payable to third parties. And there's no requirement in the 9.75% bonds of 2015, there's no requirement in those that we deal with the subordinated loan in advance or any restrictions associated with that.

Okay, and is that term loan to third parties, is that callable or is there any prepayment penalty?

There is a prepayment penalty but the final maturity date is still in the fall of 2014 and that loan has been filed as an exhibit to our previous filings so we're happy to answer any questions with that specifically. If you have that file where you can take a look at it we can work through that at an appropriate time.

Okay, that's great. And then on the display spend, the increase is it related to timing of new products or is it retailer demands or is this a reaction to the competitive environment?

Carla, it's Chris here. We're constantly looking at how we improve our in-store experience, so as you know, particularly in the US, every year there is a twice-yearly reset in which we change the products on the display. We often take the opportunity then to upgrade our in-store graphics or our kind of merchandising. Around the world it happens on a more ongoing basis. But what we're really doing is focusing on improving the in-store experience for the consumer. But there's nothing really unique. It's not a big change we're making, it's just that constant continuous upgrade.

Okay, great. And then in the UK, is the Olympics actually good or bad for business there?

Well, as of yet we haven't seen any impact of that. Obviously the Olympics only just started this week. I've read the same as you've read, which is a number of newspaper reports that Central London is pretty empty and visitors have been avoiding it because of all of the traffic congestion, but we haven't seen anything out on this as of yet.

Okay, great. And then on the nail care, with these acquisitions, are the -- is nail tending to be a stronger margin or in-line margin with the color cosmetics?

I think if you look across the portfolio, new product launches, they vary by segment in terms of margin and nail tends to be a higher-margin business for us relative to the likes of face, which tends to be a lower margin. It's less expensive to produce so you do see some benefits there. But, again, we are investing in innovation and technologies, which are costly, obviously, to us and investing in new package design across our portfolio, which is a cost to us. So overall, the margins tend to neutralize each other. And again, a very highly competitive margin, as you know.

We'll now go to Connie Maneaty with BMO Capital.

Good morning.

Connie Maneaty, please go ahead. There is no response. We'll move on to Brian Schinderle with BAM.

Just to expound on Carla's question on the 9.75% notes, I believe those become callable in the fall, is that right?

That's correct.

Do have any present intention on dealing with those? I believe those trade north of par, right?

Yes, I believe they are trading at a premium and have historically done so over the past several months. We evaluate our capital structure on a regular basis and that includes, of course, the 9.75% notes and we're cognizant of the marketplace and we'll continue to look at opportunities to refinance when and as appropriate.

Right, but is that a way of saying that if you find an attractive option you'll look at it then or -- obviously, all of your options are open, but any reason if there was an attractive opening in the market why you wouldn't want to do that and extend out your maturity wall?

We evaluate both the maturity, as well as the notional amount of the securities and make sure that the capital structure's in line to support the strategic objectives of the business. So certainly, your expectations of us continuing to look at that are appropriate.

We'll now go to Ania Wacht with SEIX.

Hi, this is Ania Wacht from SEIX Advisors. It seems like sales in Europe and Asia deteriorated sequentially a bit, is it due more to the consumer weakness in those regions, or was there any timing of shipments?

No, if you talk about each of those regions in turn. So first of all, in China as you have seen there's a slowdown in China, our sales have been running still positive there, but the growth has definitely moderated versus both our expectations and much higher levels last year, and as that's moderated with the local economy slowing, our net sales have declined as a result. In Europe, across Europe it's mainly driven by our fragrance business, which impacted all across Europe. And again as you're well aware, there are many countries where GDP is down and the economic environment's tough for the consumer.

We have no further questions. I'll now turn the call back over to Mr. Ennis for any additional or closing remarks.

Thank you all very much for joining our conference call and for your continued support of our Company. We look forward to speaking with you when we release our third-quarter results later this year. Have a good day.

This does conclude today's conference, we do thank you all for joining us.