Revlon Inc (REV) 2012 Q3 法說會逐字稿

Please standby. Good morning, ladies and gentleman and welcome to Revlon's third quarter, 2012 earnings conference call. (Operator Instructions). I would now like to turn the call over to Ms. Elise Garofalo, Revlon Senior Vice President, Treasurer and Investor Relations. Ms. Garofalo, you may begin.

Thank you, Yolanda. Good morning, everyone. Thanks for joining today's call. Earlier today we released our results for the third quarter ended September 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 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 Provision 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 third quarter 10Q, 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 measures 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 will 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 another very positive quarter as we grew net sales by 4.8%. On a year-to-date basis, our net sales are up 3.2%.

From a regional perspective, we grew net sales in the U.S., Canada, Asia-Pacific and Latin America. However, we continue to experience softness in Continental Europe and consumer uncertainties persist in several other countries outside of Europe, including China and Australia.

From a brand standpoint, our Revlon brand continued to perform well in the marketplace and we are pleased with the performance of Sinful Colors and our recently acquired Pure Ice brand.

From a financial perspective, we maintained highly competitive operating income margins and improved cash flow.

During the quarter we announced certain actions to drive operating efficiencies throughout our Company, including the exiting of certain manufacturing facilities and streamlining our organization in France, Italy and Latin America. Once fully implemented, these actions, some of which are subject to consultation, are expected to generate annualized cost reductions of approximately $10 million and will further enable us to invest in the execution of our strategy.

So taking a look at our performance so far this year, we have grown the top line, we have sustained highly competitive margins, and we are generating positive cash flow, all of which reflect the effectiveness of our strategy.

While we remain focused on delivering profitable growth, we are keenly aware of the challenging global economic environment, and so we continue to manage our resources carefully, with a balanced perspective on our long term growth and profitability.

As we mark our 80th Anniversary, I would like to comment on our recent Public Service Campaign, focusing on the message "Your Lips Can Save Lives". This campaign features Revlon's Global Brand Ambassadors Halle Berry and Emma Stone, and encourages women to talk about cancer, emphasizing the importance of early detection. Philanthropy is a cornerstone of our heritage and we're proud that this campaign celebrates beauty and depicts the power each individual has to positively impact the lives of others.

So, with that I will 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 by region and by brand, excluding the impact of changes in foreign currencies.

Total net sales in the third quarter of 2012 were $347 million, an increase of 4.8% as compared to the third quarter of last year. This increase was primarily driven by higher net sales of Revlon color cosmetics, as well as the inclusion of Pure Ice net sales since its acquisition on July 2nd.

In the United States, net sales increased $7.3 million, or 4%, primarily due to higher net sales of Revlon color cosmetics and the inclusion of Pure Ice net sales, which were partially offset by lower net sales of Almay color cosmetics, Revlon Color Silk and Mitchum. Net sales in the U.S. region grew in the quarter excluding the results of Pure Ice.

In Asia-Pacific, net sales increased $3.2 million or 5.5%, primarily driven by higher net sales of Revlon color cosmetics in Japan and certain distributor territories, partially offset by lower net sales of Revlon color cosmetics in China. As you are aware, the economy in China has been slowing down. We have also seen a slowdown in consumption. We continue to ensure that we have the appropriate product portfolio for the consumer in China, while working closely with our retail partners and focusing on the execution of our marketing plans.

Moving on to Europe, Middle East and Africa, net sales decreased 5.5% or $2.8 million. Of the $2.8 million decrease, $1.6 million was due to a higher returns accrual associated with the previously announced restructuring in France and Italy. The remaining decrease of $1.2 million, or 2.3% in net sales, was primarily driven by lower net sales of fragrances in the U.K. and certain distributor territories and lower net sales of Revlon color cosmetics in Italy. These declines were partially offset by higher net sales of Revlon color cosmetics in South Africa.

In Latin America net sales increased $6.3 million or 24.6%. This increase was primarily driven by higher net sales in Venezuela, due to the absence of sales for a portion of the 2011 third quarter, as a result of the fire that destroyed the Company's facility there last year. Net sales in Venezuela and Argentina also benefited from higher selling prices, reflecting market conditions and inflation, which accounted for approximately one quarter of the $6.3 million net sales increase in the region.

Finally, with respect to our Canada region, net sales increased $2.2 million, or 12.4%, primarily due to higher net sales of Revlon color cosmetics.

Now, moving onto 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 continues to perform well in the U.S., Canada and Australia.

Also within the PhotoReady franchise, we introduced Perfecting Primer, which recently received an Allure Magazine 2012 Best of Beauty Award. In Lip, ColorBurst Lip Butter, an extension of our established ColorBurst franchise, continues to be extremely well received by Consumers in all of our major markets.

And also in Lip, building upon our successful Revlon Just Bitten franchise, we introduced Kissable Balm Stain, a balm infused lightweight lip stain, packaged in a retractable, chubby crayon that gives women softer, smoother lips with a perfect flush of color. To date, this product is performing extremely well in the U.S., and we are launching this successful product in other major markets.

In Eye this year, we restaged and upgraded our Revlon ColorStay Eye Shadow quads, with 16-hour wear and new premium design and packaging. These quads were used to create the latest runway looks for several shows during the New York and London fashion weeks. The restage of these quads has built upon our established ColorStay franchise on a year-over-year basis. We believe this positive performance is a result of our continued emphasis on developing innovative new products, as well as keeping our existing franchises on trend and relevant. And lastly, in Nail, trend setting and innovation are driving our growth in the category in all key markets. Our most recent new product, ColorStay Long Wear Nail Color, which provides a one step gel-like shine, is performing well in the marketplace. Overall, net sales of the Revlon nail business increased in the quarter, and overall in 2012.

Finally, with respect to the Revlon brand, this summer we launched the Revlon Expression Experiment, a unique digital platform accessible through Revlon's Facebook page. We are delighted with the significant level of consumer engagement achieved by this platform, which is an important indicator of favorable consumer connection with the Revlon brand.

Moving onto the Almay brand, net sales decreased during the quarter, as compared to the prior year. As we have stated in prior quarters, we have been dissatisfied with the marketplace performance of the brand and are focused on improving Almay's performance.

So far this year we have made changes to advertising and promotional plans, seeking to improve their combined effectiveness over time. Changes include increased media support across a wider range of products, and incremental promotional support. We're also refining our brand positioning and implementing changes to merchandising. We believe these changes are having a positive impact on our performance in the marketplace. However, Almay net sales were down in the quarter.

Furthermore, we aim to continue to build Almay's brand affinity through innovative new products and effective brand support, which together will be essential in driving the long term success of Almay. So, as you can see, we are focused on the drivers of success for the Almay brand.

In women's hair color, net sales of Revlon ColorSilk were essentially unchanged year over year. We continue to be pleased with the marketplace performance of ColorSilk.

In Antiperspirant Deodorants, net sales of Mitchum in the third quarter of 2012 decreased as compared to the prior year.

And finally in Revlon Beauty Tools, net sales were essentially unchanged year-over-year. Consistent with our comments year to date, the Beauty Tools category remains soft, however, we continue to maintain our strong leadership position, and in 2012 our new products are performing exceptionally well in the marketplace.

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

Thank you, Chris. Starting with gross margin performance in the quarter. Gross margin was essentially unchanged year-over-year at 63.4% versus 63.5% in the third quarter of 2011.

The third quarter of 2012 gross margin benefited from lower manufacturing and freight costs, as a result of our supply chain cost reduction initiatives, as well as lower allowances in the period. These were offset by the unfavorable impact of product mix, inventory obsolescence and restructuring charges.

SG&A was $179.9 million in the third quarter, as compared to $169.3 million in the same period last year. The $10.6 million increase is primarily attributable to three items.

The first item impacting SG&A was a lower benefit from insurance recoveries related to the June, 2011 fire in Venezuela. We recognized $1.7 million of benefit from insurance in the third quarter of 2012, which was $4.4 million less than the $6.1 million recognized in the third quarter of last year. Throughout 2012, we have more fully resumed operations in Venezuela, resulting in a decrease in the benefit from insurance recoveries.

The second item impacting SG&A was a $2.2 million charge in the third quarter with respect to the estimated costs of settling previously disclosed litigation related to the Company's 2009 exchange offer. Together, the impact of insurance recoveries and the litigation charge, total $6.6 million of the $10.6 million increase in SG&A on a year-over-year basis.

The balance of the increase in SG&A in the third quarter was primarily due to higher advertising expenses in the period, mostly due to the timing of advertising campaigns, as compared to the same period last year. Operating income in the third quarter of 2012 was $19.1 million, compared to $44.8 million in the same period last year, and adjusted EBITDA was $36.2 million, compared to $60.3 million in the same period a year ago. Operating income and adjusted EBITDA in the third quarter of 2012 were negatively impacted by $24.1 million of restructuring and related charges, associated with the actions announced on September 5th. The quarter was also impacted by the aforementioned charge of $2.2 million related to estimated costs of settling previously disclosed litigation related to Company's 2009 exchange offer.

As Alan mentioned earlier on the call. Restructuring actions are expected to generate annualized cost reductions of approximately $10 million, with 2013 expected to benefit by $9 million as a result of the timing of implementation of the restructuring actions.

Restructuring and related charges, related to the September 5th actions are expected to total approximately $25 million, $24.1 million of which was recorded in our Income Statement for the third quarter of 2012. The charge was recorded as follows.

$21.0 million was recorded as restructuring charges.

$1.6 million was recorded as a reduction to net sales.

$1.1 million was recorded as an increase in cost of goods sold, and lastly;

$400,000 was recorded in Selling, General and Administrative expenses.

Of the total expected charges of $25 million, $23 million are cash charges which will be paid over the next 18 months.

Moving on to interest in the period, interest expense decreased $500,000 to $21.5 million due to lower weighted average borrowing rates.

The provision for income taxes was $11.5 million in the third quarter of 2012, compared to $22.1 million in the same period last year. The decrease was primarily attributable to decreased pre-tax income, as well as the absence of a number of discrete items that in total negatively affected the provision for income taxes in the third quarter of 2011. These items did not recur in the third quarter of 2012.

Cash paid for income taxes, net of refunds, in the third quarter of 2012 was $2.9 million, compared to $1.7 million in same period last year.

Net loss in the third quarter of 2012 was $15 million, or $0.29 per diluted share, compared to net income of $100,000 or nil per diluted share in the same period last year. Our net loss this quarter included the after-tax impact of the previously noted restructuring and litigation charges.

Moving onto cash flows. Net cash provided by operating activities in the third quarter of 2012 was $39.6 million, compared to $16.9 million in the same period last year and free cash flow was $34.2 million, compared to $13.3 million in the same period a year ago. Cash flow in the third quarter of 2012 benefitted from favorable changes in working capital and lower pension contributions as compared to the same period last year. Net cash used in investing activities in the third quarter of 2012 was $71.6 million primarily due to the Pure Ice acquisition, compared to $3.6 million in the same period last year.

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.

On the liquidity front, our unutilized borrowing capacity and cash on hand as of September 30, 2012, was $160.3 million, comprised of $33.9 million of available cash and $126.4 million available under our revolving credit facility. Our revolver was undrawn at the end of the quarter and we had $10.4 million of undrawn stand-by letters of credit issued under this facility.

Now moving on to cash flows for the full year of 2012. Regarding the guidance we previously provided, the following items have remained unchanged.

Capital expenditures of approximately $25 million,

Permanent display expenditures of approximately $45 million dollars, and,

Cash paid for income taxes of approximately $20 million.

Lastly we are updating our guidance for pension plan contributions to approximately $30 million, revised down from our prior guidance of $35 million, due to the impact of U.S. pension legislation passed earlier this year.

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). We will go first to Carla Casella with JPMorgan.

Good morning, Carla

Good morning, I had you on mute. Just a couple of questions here. Given the weakness internationally, is that giving you any additional acquisition opportunities or do you think it will free up some brands or properties that may not have been available before, and what is your interest in terms of further acquisitions?

Just in terms of the international market, clearly there's a lot of uncertainties out there, particularly when you look at the likes of Continental Europe and most notably and recently China, which is going through its own issues. In terms of acquisitions, you know, we remain interested in looking at opportunities that can complement our brand portfolio. We've made two very nice bolt on acquisitions in the last 18 months with Sinful Colors and with Pure Ice. Our goal is to profitably grow net sales and we're doing that through a combination of both organic growth and through acquisitions, and so we will continue to look at opportunities that are additive to our growth objective and extend our brand portfolio.

Ok, and with your bonds callable very soon, any thoughts on refinancing plans yet?

Carla, it's Steven. Yes, as you know, we evaluate our debt securities and our capital structure on a regular basis. We want to make sure that the capital structure is in line to support the strategic objectives that we have outlined in detail in the past. This of course, includes the 9 3/4% notes, which as you indicate are callable in November. And we are very cognizant of the marketplace and we evaluate the conditions, and when and as appropriate we will address any and all of those opportunities.

Okay. Great. Just one brand question on Almay. What do you think was the main problem with it? Is it that there's too much competition in that same kind of natural segment or was it just not positioned well from a price point standpoint. Is there anything you can point to that might have been the driver for the weakness there, not just this quarter, but over the recent past?

Hi, Carla, it's Chris. So, as you know, this is a very competitive category. The drivers of performance are the things that we have outlined that we are dealing with, so, as I said, we're very focused on the changes we're making to advertising and promotional plans. We think they're going to improve our performance over time. We changed and increased our media support, we supported a wider range of projects and then we also increased our promotional support. We're doing some work on refining the brand positioning. We're also implementing some merchandising changes. All together, we believe those are going to be the drivers of improvement in the Almay brand. We are extremely focused on it, as you can imagine, and we are working very hard to improve that performance.

Ok, where are you priced in Almay verses the most direct competition.

Well, the middle of the mass market with Almay .

Okay. Great. Thank you.

Thanks, Carla

Our next question will come from Connie Maneaty with BMO Capital Markets.

Good morning, this is actually Patrick Trucchio filling in for Connie.

Hi, Patrick, good morning.

First on Venezuela. If the insurance proceeds have ended, should we assume that it's being made up in the actual operating profit being generated in the country. If it isn't being offset by profit generated in the country when do you lap the difficult comparisons from the Venezuela Insurance proceeds?

Pat, this is Steven, thanks for the question. Two items. One is the insurance proceeds that ended in October of this year, ended as related to business interruption insurance. We have a claim to our insurance company of course for both business interruption, as well as the property damage that we sustained. So just to make clear that that remains outstanding and there's no timing or ultimate understanding as to the resolution of when that will happen, but it's in process. You're correct. The business in Venezuela has recovered, and therefore we only were recognizing business interruption insurance relative to an amount to make that business effectively whole during the period. So did that answer your question?

Okay. Yeah, so the $4.4 million, that was made up in the quarter from better performance in the country?

Correct

In the U.S., would sales have increased without Pure Ice?

Yes, they would. As I said in my remarks, they increased excluding Pure Ice.

On the trend in Europe in the quarter, were sales weaker in September, as compared to August or July, or just weak all the way?

Well, as you know, we don't break out the months we report in the quarter here. Bear in mind in Europe $1.6 million of the $2.8 was related to that returns accrual which was associated with the restructuring activities. So, net of that, the decrease was $1.2 million, or 2.3%. As we said, that was really related to lower net sales of fragrances in the UK and certain distributor territories, plus lower sales of Revlon color cosmetics in Italy. So, as you know, the European region remains uncertain from an economic point of view, and hence, we're very focused on making sure that we're executing in the marketplace where we are having success. We pointed to South Africa where our sales are up. Of course, at the same time as all that, we're taking these actions to restructure our operating model in both France and Italy.

Thanks so much.

And we will hear next from Jeff Kobylarz with Stone Harbor Investments.

Good morning. Just curious about the restructuring effort and saving $10 million. Can you comment just how that $10 million will be, how it will play out in the income statement and cash flows? Will it be reinvested, say in brands or will you let it drop down to profits? Any general color there?

Yes, so a couple of things. You know, so the actions we announced specifically included exiting a plant that we held in France, moving out of a leased facility in Maryland, and then some organizational streamlining, primarily in Italy, France and Latin America. Most of the actions that we took are people related in terms of the savings. You see those savings start to materialize in the beginning of 2013. Obviously some of the actions are subject to consultations, so it will take some time to work through the process. You know, in terms of the cost reductions, listen, we look at all of our resources and all of investment priorities and we make decisions about what we need to spend and where. So there's no specific formula that says X amount will drop to profit, X will be reinvested. It's really a combination of all the priorities that we have, resources that we have available, making sure that we are investing appropriately behind the brands while maintaining highly competitive margins and we look at the entire pool of resources collectively.

All right. Fair enough. And then about this most recent acquisition you made in July. Can you comment on any general color about how accretive this is going to be to earnings or how you intend to improve this business.

Well, similar to the business that we acquired in March of last year, the Sinful Colors business, Pure Ice is predominantly a nail color business that has meaningful distribution in a major retailer in the U.S. Both the businesses, both Sinful Colors and Pure Ice, fit very well into our portfolio. Clearly our heritage as a Company has a strong position in nail. We know how to do nail, and we're capitalizing on the trends that we're seeing. Both are very complementary to our existing portfolio. Obviously, the opportunity for us is to take both of those brands and to deploy them to additional geography, either additional retailers where they aren't today, or different geographies where they aren't today, and so we are in the process of doing that. And with both of those brands, we're looking at ways to potentially extend the brands beyond just nail color to see if there is an opportunity in the different segments of the color cosmetics market. It's not simply buy the brand and let it do what it does, it's buy the brand and find ways to grow it aggressively. We're doing that.

And then just lastly on China. Can you just comment on the slowdown that you are seeing, is this kind of the start of the slowdown? Is it getting worse throughout the quarter as the quarter went on?

As you know, everyone has read what's going on in China for many months now. Of course they have been reporting their own slowdown in GDP. As I said, as they have reported their economic slowdown, we've also seen a slowdown in our consumption. It's impossible for us to forecast the future Chinese economy, of course there's a leadership change coming up. We will have to see what action is taken in the economy there. We will focus on what we can do. The Chinese consumer is different. We are very focused on continuing to ensure that we have the appropriate product portfolio. We work very closely with the retailer partners there, because obviously they are experiencing a reduction of foot traffic so we're making sure we're very effective in the store and focusing on the execution of the marketing plans with those retail partners. The key is, it's important to have a healthy and sustainable business in China. China is large market with lots of distribution opportunity, but that's very different from pursuing a sustainable, profitable business and that is our aim over time.

Okay. Can you comment about sell-through in China? Was it down, I assume sell-in is down but was sell-through down also?

As we said net sales were lower in the quarter. In terms of sell-through, we have seen decelerating sell-through trends as the economy has suffered.

I see, thanks very much.

Thank you, Jeff.

Thank you. At this time I will turn the call over to Mr. Ennis for any additional or closing remarks.

Thank you, Yolanda. And thank you all for joining our conference call this morning. We look forward to speaking to you when report our fourth quarter 2012 results early next year. Thank you.

That will conclude today's conference. Thank you all for your participation and have a wonderful day.