Revlon Inc (REV) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to Revlon's second quarter 2013 earnings conference call. At the request of Revlon, today's call is being recorded. If you have any objections, you may disconnect at this time.

(Operator Instructions)

Now, your host for today's call, Ms. Elise Garofalo, Revlon's Senior Vice President, Treasurer and Investor Relations. Ms. Garofalo, please go ahead, mam.

Thank you, Rufus. Good morning, everyone, and thanks for joining today's call. Earlier today we released our results for the second quarter ended June 30, 2013. 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, and Chris Elshaw, Chief Operating 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 that are based on our current expectations. Information on factors that could effect our actual results from time to time, and cause them to differ materially from such forward-looking statements, is set forth in our SEC filings, including our 2012 Form 10-K and our 2013 second quarter Form 10-Q, which we filed earlier this morning. We undertake no obligation to publicly update forward-looking statements. 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. 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. We accomplished this by building our strong brands, developing our organizational capability, driving our Company to act globally, pursuing growth opportunities and improving our financial performance. Our net sales in the second quarter of 2013 were essentially unchanged year over year. We benefited from the inclusion of our 2012 Pure Ice acquisition, which was offset by continued softness in our Almay brands and a negative impact of business conditions in Venezuela. With respect to our recent acquisitions, Sinful Colors performed very well during the quarter and we are on track with our integration of our Pure Ice brand.

From a market-place perspective we continued to support our brands at appropriate levels and placed emphasis on innovation, effective brand communication and strong in-store execution. So far this year, we've introduced a number of successful, innovative, high-quality new products. From a financial perspective we delivered competitive operating income margins, generated positive free cash flow, and our financial profile remains strong. As always, we remain focused on our strategic goal of driving profitable growth.

Before I hand the call over to Chris, I'd like to briefly cover two significant changes with respect to our leadership team, which we announced this morning. Firstly, Bob Kretzman, who serves as our Chief Administrative Officer, has decided to retire at the end of September following a successful 25-year career at Revlon. Bob has been elected to join Revlon's Board of Directors effective until October 1, 2013 and I look forward to working with him as a member of our Board. Secondly, I'm delighted that Larry Alletto will join Revlon as Executive Vice President, Chief Financial Officer and will also assume the role of Chief Administrative Officer upon Bob Kretzman's retirement. Larry will join us and completes his obligations with his current employer and comes to us following 26-year career in the financial services industry. Most recently, Larry was Managing Director and Global Head of Financial Sponsors Group at JPMorgan Chase and Company, where spent the last 20 years. Larry is a seasoned business executive who brings a strong intellect, a high degree of financial acumen and strategic ability as well as strong leadership. I look forward to Larry joining our team.

So with that, I'll hand it over to Chris, who will talk about our market-place 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 Company net sales in the second quarter of 2013 were approximately $350 million, essentially unchanged year over year. Lower net sales in Venezuela and lower net sales of Almay color cosmetics were offset by higher net sales of Sinful Colors plus the inclusion of Pure Ice. The decrease in net sales of Almay color cosmetics was primarily driven by the reallocation of brand support in the US from advertising to promotional allowances, which are a deduction in arriving at net sales. In the United States, net sales were essentially unchanged year over year. Higher net sales of Sinful Colors plus the inclusion of Pure Ice were offset by lower net sales Revlon and Almay color cosmetics. As I just mentioned, the decrease in Almay net sales was primarily driven by the reallocation of brand support.

In Asia-Pacific, net sales were essentially flat year over year, with higher net sales of Revlon color cosmetics in Japan, Sinful Colors in Australia, Revlon ColorSilk hair color in certain distributor territories, which were all offset by Revlon color cosmetics in China and certain distributor territories as well as lower net sales of other beauty care products in Hong Kong. Moving onto Europe, Middle East, and Africa, net sales increased $1.6 million or 3.6%. This increase was primarily due to higher net sales of fragrances and Sinful Colors in both the UK and Italy, partially offset by lower net sales of other beauty care products in France. As we have previously discussed, in France we are in the process of completing our restructuring and in July we sold our manufacturing facility there. In the UK, we continue to be very pleased with the strong performance of the Revlon brand from a market-place perspective as well as the successful introduction of Sinful Colors. In Latin America and Canada, net sales decreased $2.7 million or 5.1%. This decline in net sales was driven by $6.3 million of lower net sales in Venezuela due to business conditions included in Venezuela's currency restrictions. Excluding Venezuela, net sales in the region increased primarily due to higher net sales of Revlon color cosmetics in Argentina, Mexico and certain distributor territories plus higher net sales of Revlon ColorSilk hair color across the region and the introduction of Pure Ice in Canada. These increases were partially offset by lower net sales of Almay color cosmetics in Canada.

With respect to Venezuela, as you know, it has historically represented approximately 2% of our total company net sales. In the second quarter of 2013, it represented approximately 1% of our total company net sales. As we mentioned last quarter, the country is going through a period of uncertainty as well as strict currency controls where our access to US dollars to purchase inventory has been virtually eliminated since February of this year. We did obtain approval from the local government for limited access to US dollars for the import of only certain approved products. However, this has not impacted our results or access to US dollars year to date through June. Our continued focus is to manage the business such that Revlon Venezuela is only taking delivery of imported products for which it can pay in US dollars. We are continuing to monitor the local currency market developments closely.

Now moving onto our performance by brand, starting with Revlon color cosmetics, net sales decreased modestly as compared to the prior year. With respect to new product performance, in face, our PhotoReady BB cream continues to perform well in the marketplace. However, our recently launched Nearly Naked franchise has encountered some challenges due to the strength and growth of the BB cream segments overall. In eye, we expended and built upon our successful Grow Luscious franchise. We are pleased with the recent introduction of Lash Potion mascara in the US, which contains strengthening proteins to drench lashes for volume.

Moving onto lip, earlier in the year, we extended our long-standing ColorStay franchise with Ultimate Suede lipstick, which continues to be exceptionally well received in the marketplace and is capitalizing on the growing lip trend. Continuing in lip and our Super Lustrous core franchise, which has been a mainstay of Revlon, we are pleased with the recent introduction of Super Lustrous shine lipstick, which contains Liquisilk, an exclusive lightweight formula with mega moisturizers that seal in color and softness, and the reintroduction of Super Lustrous lip gloss, a silky gloss that boosts hydration and moisture for a plumped, colorful, glamorous shine. This reintroduction featuring new packaging and an updated shade range is consistent with our approach of not just expanding our product range with new franchises but its also strengthening our existing franchises.

In nail, Revlon Nail Art continues to perform well in the marketplace and we are also pleased with the recent introduction of Revlon Brilliant Strength nail enamel in the US. This collection, which was previously launched around the world, consists of 24 on-trend shades that contain the strengthening formula with a built-in protective base and top coat. Additionally, in support of the strength of our Revlon brand in South Africa, we recently signed Ms. Bonang Matheba as Revlon brand ambassador. Bonang is a vivacious TV and radio personality, fashion icon, business mogul and philanthropist as well as being Glamour Magazine's 2012 Woman of the Year in South Africa. We believe she will help us to continue building meaningful connections with our core South African consumer.

Turning now to Almay, net sales decreased year over year primarily due to its performance in the US. As I've mentioned already, net sales of Almay color cosmetics were unfavorably impacted primarily by the reallocation of brand support from other advertising to promotional allowances, which are a reduction in arriving at net sales. During the quarter, we launched our next generation of new products including Almay's reentry into the lip category with Almay Color + Care liquid lip balm, which is a new type of lip balm in a liquid form that provides hydration as well as color in a range of 10 on-trend shades. This product was recently launched in the US and we are pleased with its market-place performance so far. Also new is our CC cream which provides skincare benefits as well as color correction and at our core Almay smart shade franchise. Almay was one of the first CC creams introduced into the mass markets and we are pleased with the early indications of market-place performance in the US.

Lastly, we extended our highly successful eye makeup remover business by bringing new benefits which we believe further differentiate our product offering. The entire range also featured new packaging with a fresher look and feel. While the early results from these new launches are positive, we remain dissatisfied overall with Almay's market-place performance and we continue to focus on ensuring a longer-term success of these brand.

Moving onto women's health hair color, net sales of Revlon ColorSilk were essentially unchanged year over year. However, ColorSilk continues to perform well despite softer demand in the US category overall. In Revlon beauty tools, net sales increased year over year. Consistent with our comments in the past, the beauty tools category remains soft. However, we continue to maintain our strong leadership position in the US and Canada. In 2013 we have new products that are performing very well in the marketplace, including our designer Diamond Collection. Finally, since acquiring Sinful Colors two years ago, we have gained new distribution in the US where we have are very pleased with our market-place performance. We have also successfully launched this brand in a number of our key international markets.

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

Thank you, Chris. Starting with gross margin performance, gross margin was 64.4% compared to 65.2% last year, a decrease of 0.8% or $7.4 million. The second quarter of 2013 was impacted by a few items. First, higher sales returns and mark downs, which had an unfavorable impact of 0.6% or $6.2 million. Second, higher promotional allowances, which reduced gross profit by 0.3% or $3.7 million. Third, the impact of foreign currency fluctuations, which reduced gross profit by 0.3% or $5.1 million. These unfavorable impact on gross margins were partially offset by higher volume, which increased gross profit by $6.4 million and had no impact on margin, and favorable product mix, which increased gross profit by 0.4% or $1.5 million. SG&A was $163.1 million in the second quarter of 2013 as compared to $189.9 million last year. Excluding the favorable impact of foreign currency fluctuations of $2.7 million, SG&A expenses decreased by $24.1 million.

This decrease was primarily attributable to the following items -- First, in the second quarter of 2013, we benefited from an $18.1 million gain on insurance proceeds from the final settlement of the business interruption and property claim related to the 2011, which destroyed our facility in Venezuela. This gain was partially offset by a $4.5 million charge for estimated cleanup costs related to that facility. Second, we had a $7.3 million of lower advertising expenses primarily due to the reallocation of brand support from advertising, which is included in SG&A, to promotional allowances, which are a deduction in the arriving at net sales. Third, general and administrative expenses were lower primarily due to the impact of the $6.7 million litigation loss contingency recognized in the second quarter of 2012 that did not recur this quarter. SG&A for the second quarter of 2013 also included $1.2 million of higher incentive compensation expense related to a modification of our structure of our long-term incentive plan to better align that plan with our long-term performance. While the new structure does not change the amount of the annual potential incentive awards, the transition is expected to result in higher expenses of $5 million in 2013 and $3 million in 2014 as compared to 2012.

Moving onto restructuring, during the second quarter of 2013 we recorded a $3.3 million of additional restructuring and related charges primarily for severance and other termination benefits associated with our September 2012 program. With regard to this program, we expect restructuring and related charges to total approximately $26 million. Through June 2013 we recorded approximately $28 million of expense and we expect to record a net benefit of $2 million in the remainder of the year primarily as the result of the sale of our France manufacturing facility in July. We expect to pay cash of approximately $24 million, $17 million of which has been paid to date. Overall the 2012 restructuring plan is still expected to achieve approximately $10 million of annualized cost savings, $7 million of which is expected to benefit 2013. The majority of the 2013 savings would benefit the second half of 2013.

Operating income in the second quarter of 2013 was $59.1 million compared to $48.2 million in the same period last year. Adjusted EBITDA was $76.1 million compared to $58.7 million in the same period a year ago. There was some meaningful currency moves in the second quarter of 2013 compared to the second quarter of 2012, so let me summarize the impact of these for you. The total unfavorable effect impact of operating income was $2.5 million, which included net sales which were negatively impacted by $6.4 million; gross profit, which was negatively impacted by $5.1 million; and finally SG&A, which was positively impacted by $2.7 million. Interest expense, which includes dividends on preferred stock, decreased by $3.8 million to $17.4 million primarily due to lower interest rates as a result of our refinancings in February 2013.

Moving on to taxes, the provision for income taxes was $17 million compared to $9.1 million in the same period last year. This increase was primarily attributable to the following items -- First, the second quarter of 2012 benefited from the favorable resolution of certain tax matters in a foreign jurisdiction, which did not recur in the second quarter of 2013. Second, we had higher pre-tax income this quarter compared to last year. These unfavorable items were partially offset by certain favorable discrete items that benefited the second quarter of 2013. Cash paid for income taxes in the second quarter of 2013 was $5.3 million compared to $7.5 million in the same period last year. Net income in the second quarter 2013 was $24.7 million or $0.47 per diluted share compared to net income of $11.1 million or $0.21 per diluted share in the same period last year.

Moving onto cash flows, net cash provided by operating activities in the second quarter was $28.2 million compared to a use of $1.3 million in the same period last year. Free cash flow in the second quarter was positive $21.6 million compared to negative $6.6 million in the same period a year ago. The following items impacted cash flow this quarter all of which can be derived from our reported cash flow statement and 10-Q's. Lower interest payments of $23 million, primarily due to the Company's senior notes refinancing in the first quarter of 2013, lower pension contributions of $8.3 million, and lower permanent display purchases of $3.9 million. These improvements were partially offset by restructuring payments of $8.7 million related to the actions announced in September 2012. As a general reminder with respect to operating cash flow, 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, 2013 was $261.1 million comprised of $130.9 million of available cash and $130.2 million available under our revolving credit facility. Our revolver was undrawn at the end of the quarter and we had $9.8 million of standby letters of credit issued under that facility. Moving onto the balance of 2013, regarding the cash flow guidance we previously provided for 2013, the following items remain unchanged -- capital expenditures of approximately $25 million, permanent display expenditures of approximately $50 million, and pension plan contributions of approximately $20 million. Lastly we're updating our guidance for cash paid for income taxes to be approximately $15 million a decrease from our prior guidance of approximately $20 million.

This concludes our prepared remarks. We would now like to open the line for your questions. Operator, please prompt the participants for questions.

Thank you, sir.

(Operator Instructions)

Karru Martinson, Deutsche Bank.

Given all the new product launches that we had in Revlon, now that we've outlined last quarter, I was a little bit surprised to see the sales there down modestly. Could you provide a little bit more color in the challenges that you're seeing on the Nearly Naked line?

It's Chris, here. As I said, we had some very encouraging results in our new product launches recently. Nearly Naked is a face franchise that we launched at the start of this year. At the same time the BB cream phenomenon really took off in the marketplace. They play in quite a similar place from the consumer's perception. So, I think we're being impacted by that. We've also benefited from it ourselves of course with the growth of our own PhotoReady BB cream. Conversely, our lip business continues to do well. Nail continues to be vibrant, and we continue to aim to build our eye category through launches like Lash Potion.

If we were to look at the Almay brand and strip out the promotional allowances, do you feel that the brand volume and market share is recovering here?

Well, during the quarter I would characterize it as stable, but I would go back to I said earlier. We are pleased with our new product launches for the second half, but we remain very focused on improving the other drivers. They are not all done overnight. We work on a three-year rolling portfolio plan. So, over the three-year horizon, we've got a lot of interesting products planned. We've been working on the repositioning of a brand, which also includes changes to our communication creative, changes to our in-store merchandising and changes to packaging. Packaging takes time to flow through. You'll see some of it in the store, now. You'll see a lot more of it in the store at the start of next year. We're working on all those drivers. We don't guide as to how each quarter goes. All I can tell you is we're very focused on building the long-term success of the brand.

Okay. When we look at Asia-Pacific, and I think we talked last quarter about reducing inventories in China in particular to match up with lower consumption trends, where do we stand on those inventory levels in that market?

As we said, they've been coming down. Our consumption, soft in China. There are a lot of changes in the marketplace. It is a very mixed picture in that marketplace. We're really focusing on our core customers there? How can we partner with them to drive productivity in-store? Because in China, it's really a question of productivity. If you want to expand distribution, that's fairly straightforward, but really the challenge is to raise productivity in the core distribution.

Do we feel that we still have a little ways to go in bringing those inventories down? Or are we going to be reaching a stable point here?

Well, we're monitoring it constantly of course. The inventories are the equation between the sales house to the consumer and the sales building, so it's something that takes time because over time, you're selling against your plan. Then, if your plan exceeds or misses, the inventory adjusts accordingly. They aren't managed on the total inventory number, they're managed on a number of days inventory. We're working on it constantly.

All right. Thank you very much, guys. Appreciate it.

Connie Maneaty, BMO Capital Markets.

It's actually Patrick Ho filling in for Connie. So a couple questions. First one is what's the impact of the end of the insurance payments in Venezuela on Latin America operations going forward?

As it relates to Venezuela insurance, let me cover a couple things, first of all. As of today, we have settled the business interruption of property claim as well as the inventory claims, so all insurance claims have been resolved and settled. Total proceeds from those claims, life to date, has been $43.8 million. We received the final installment of $14.1 million in July of this year. All of those proceeds have been reflected in our P&L as of the end of the second quarter. One thing that does remain on the balance sheet is a $4.5 million estimated accrual for the cleanup costs related to that facility. That's within SG&A. So, what you'd expect to see going forward as it relates to the insurance is, with the exception of the $4.5 million balance sheet item, there should be no impact on the P&L as it relates to insurance from this point forward. That's the first point.

Second point, which Chris talked about earlier, is clearly the business conditions in Venezuela continue to have a negative impact on our performance. We operate that business to the extent that we can sell product in and get US dollars out to pay for it. We will do that. To the extent that we're unable to get US dollars out of that country, which has been an issue we've experienced since February of this year, we're simply not shipping product in. So, we see the impact of that being about $6.3 million negative impact on net sales in the second quarter. As it relates to insurance, from this point forward you should see no impact in the P&L for Venezuela, but Venezuela will continue to be uncertain as it relates to the business conditions in that country.

Got it. Through what period did the insurance payments cover profits? Is it they covered them through first half of '13, or does it cover all of 2013?

I believe it was through September of '12. It was an 18 month period, 15 to 18 month period, so from June of '11 through around September of '12.

Is Argentina a bigger market than Venezuela?

Not currently, although of course Argentina is growing well. It's really depends on how many US dollars we can get out of Venezuela to pay for products. If Venezuela had a full supply, then Venezuela would be the bigger market.

In Venezuela, is your facility up and running again? As it relates to the currency restriction, any idea on when that country might turn back to normal or when business would return to normal there?

As it relates to the facility, so the facility is not up and running. The facility was destroyed by the fire and, as I said, we've got a $4.5 million accrual for the estimated cleanup of that facility. The facility is destroyed. We do not, at this point, have a manufacturing footprint in Venezuela nor do we plan to. We use our US business for sourcing products that can be easily sourced here or third-party manufacturers. So, at this point I wouldn't expect a manufacturing footprint that we would own to be established in Venezuela. As it relates to the currency restrictions, your guess is as good as mine. We constantly work with the local authorities and our local team down there to get the latest information on currency flows, but as of now it remains uncertain.

Last question is why has category growth in nails slowed from 18% in 2011 and 2012 to 2% on the latest quarter?

Well, I think purely the impact of the size of the category. As you've seen, over the last two or three years, nail has grown exponentially. There comes a point at which growth levels start to slow down. The important thing is the category is still growing, but growth is driven by penetration and usage. There are so many people that use nail color and then there's a frequency with which they use it. There has been an increase in people's repertoire of brands that they use, an increase in the number of vocations that they are using nail color, but it obviously can't go on forever. The growth rate is slowing down as a result of that. However, who knows what's going to happen in the future. At this stage, we don't see any decline in the category. But clearly, growth can't continue at high double-digit rates.

That's it for me. Thank you very much.

Thank you. I'll now turn the call over to Mr. Ennis for any additional or closing remarks.

Thank you all, and thank you, Rufus. Thanks for joining our call this morning. We look forward to speaking with you when we report our third quarter 2013 results. Thank you all.

You're welcome. Thank you, sir. Ladies and gentlemen, this will conclude today's conference. Thank you for your participation.