Revlon Inc (REV) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Revlon's first quarter 2014 earnings conference call. At the request of Revlon, this conference is being recorded. If you have any objections, disconnect at this time. I would now like to turn the call over to police Jessica Graziano, Revlon's SVP Chief Accounting Officer and Corporate Controller.

Thank you, Jake. Good morning, everyone, and thank you for joining today's call. Earlier today we released our financial results for the first quarter ended March 31, 2014. 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 monk are Lorenzo Delpani, Revlon's President and CEO, and Larry Alletto, EVP, CFO, and CAO. Before I turn the call over to Lorenzo, I would like to remind everyone 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 affect our actual results and cause them to differ materially from such forward-looking statements is set forth in our SEC filing, including our 2013 Form 10-K and our 2014 first quarter 10-Q, which we filed earlier this morning. We undertake no obligation to publicly update any forward-looking statements except for the Company's ongoing obligations under the US federal securities laws.

Next, our remarks today will include a discussion of certain GAAP, non-GAAP and pro forma measures to enhance the comparability of our results in light of the column or group acquisition that occurred in October, 2013. These measures are defined in our release, and are also reconciled in the financial tables at the end of our release. Just a note that the pro forma results are not necessarily indicative of the operating results that would have occurred if the column or acquisition had been completed for the period presented.

Also, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined Company. In addition, the results of operations have been adjusted to reflect the Company's exit of its business operations in China as a discontinued operation for all periods presented. As a reminder, the Company's results of operations of its brands sold in retail channels including retail brands acquired in the Colomer acquisition are included in the consumer segment and the results of operations of the brands sold in professional channels acquired as part of the Colomer acquisition are included in the professional segment.

Finally, our discussion this morning should not be copied or recorded. And with that, I will turn the call over to Lorenzo Delpani.

Thank you, Jessica and good morning to everyone on the call. Overall, Revlon first quarter has been very strong. As comparable, pro forma net sales were up by 6.4%, and segment profit was up by 11.6%. Adjusted EBITDA was up 15.2%.

Indeed, arguably, a very strong quarter. However, we will share the mix dynamics for the consumer and professional segment.

Consumer business was flat primarily as a result of market softness year-to-date. While in the professional segment had one of its best quarter ever. This is mainly due to past business inertia for the consumer business and strong momentum for the professional business. Larry Alletto will shortly go through details about the performance.

In addition, it's worth noting that the consumer segment, albeit flat, benefited from a favorable return adjustment as we are reducing the quantity of new product launches. This is the result of the implementation of our fewer bigger better innovation strategy. Our strategy focused on more quality and less quantity of innovation and therefore we should see a lower level of returns going forward. These will in part favor the P&L. However, at the same time, this may be partially offset and will partially offset the level of the pipeline flow.

The integration of the professional business is overall on track and a very significant project we're undertaking is the migration of our complex system to SAP. This is significant investment. This is required to create a strong and integrated platform and also is the base for working potential future synergies.

Finally, other transformational changes that we have undertaken are on track. For example, we are completing the elimination of our regional management infrastructure. We're going to manage our business only globally and locally. As opposed to globally, regionally and locally. This is because our scale does justify the efficient maintenance of regional organization. We focus the organization around segment of consumer and pro and we no longer look at regions because we no longer maintain regions. This has resulted in some of the changes that you're seeing in the early release.

Now I'll turn it over to Larry who will walk you through our results in details. Thank you.

Thank you, Lorenzo. Good morning, everyone. On a GAAP as-reported basis, our first quarter net sales were $469.8 million versus $325.9 million in the prior period. Results reflect the inclusion of net sales of the brands acquired from TCG in the first quarter of 2014 with no comparable results in the first quarter of 2013 as reported.

Income from continuing operations net of taxes of $8.7 million, or $0.17 per share, compared to a loss from continuing operations also net of taxes of $4.5 million or $0.08 per share.

As Jessica mentioned, for comparison purposes, my commentary on the results for the first quarter will be on a pro forma basis, adjusted for certain non-recurring and non-operating items. These pro forma results reflect the financial results of both the Company and TCG as if they were a combined company for all of 2013. The details of these non-recurring and non-operating items as well as recognize reconciliation to GAAP results to adjusted results, and to pro forma adjusted results, can be found in our earnings release we issued this morning.

Total Company net sales in the first quarter were $469.8 million. On an XFX basis, total net sales increased $6.4% primarily as a result of higher net sales from our professional segment.

Before I speak to each segment, just a note that the results for the consumer segment in 2014 and 2013 pro forma include the results of consumer brands acquired from TCG that were previously included in the professional segment. Specifically, net sales in the first quarter of 2014 for these consumer brands were $15.5 million, an increase of approximately 10%.

Consumer segment net sales decreased slightly to $339.5 million. On an XFX basis, they increased 2.8%. The primary drivers of this increase were a $6.3 million favorable returns adjustment in the US as a result of lower expected discontinued products related to the company strategy to focus on fewer, bigger and better innovations and higher net sales of Revlon ColorSilk hair color, partially offset by lower net sales of Sinful Colors.

Consumer segment profit decreased to $71.5 million, which was a 4% decrease on an XFX basis. The primary driver of this decrease was higher advertising expense to support the consumer brand of $8.4 million, partially offset by an increase in gross profit primarily due to the returns adjustment net of related inventory write-off charges.

Moving to net sales in the professional segment. Professional segment net sales were $130.3 million which increased 17.4% on an XFX basis. Primary drivers of the increase were higher net sales of CND Shellac and American Crew products as well as net sales in the first quarter of 2014 of CND Vinylux, which launched in the second quarter of 2013, and new products under the Cream of Nature brand which were launched in the second half of 2013.

We reported a $31.9 million professional segment profit which was a $77.9% increase on an XFX basis. The increase was primarily due to higher net sales as I have just discussed as well as lower advertising expense within the professional segment primarily due to the timing of advertising and other brand support in 2013 compared to 2014.

I want to give some color on the fact that it is important to look at the professional results of the first quarter in light of the fact that last year at the same time we didn't have Vinylux and we didn't have the multi-cultural products. The quarter has very strong momentum because these products were successful but we will soon hit the anniversary of the launch of this anniversary, mainly April and May for Vinylux and last quarter, Q4, for Cream of Nature, and therefore this initial performance cannot be automatically rolled on a yearly basis. Nonetheless, we appreciate that the momentum is strong.

Let's move on to the geography discussion for net sales. In the first quarter, combined US net sales were $250.2 million, and international net sales were $219.6 million. The $7.8% increase in the US compared to the first quarter of 2013 is primarily due to higher net sales of CND Shellac and American Crew products as well as net sales for CND Vinylux and the Cream of Nature brand as Lorenzo just spoke of. Also included is the $6.3 millionfavorable returns adjustment in the US I just spoke about.

For international sales, total Company net sales outside of the US increased 4.8% or an XFX basis as compared to the first quarter of 2013. This increase was primarily driven by higher net sales of CND Nail products throughout most of the international region, and higher net sales of Revlon Color cosmetics in Japan.

With respect to adjusted operating income, total operating adjusted income in the first quarter of 2014 increased 20.8% versus last year to $62.8 million this year, and adjusted EBITDA increased 15.2% in the year-over-year period to $87.8 million.

Both measures were impacted by higher gross profit as a result of increased net sales, partially offset by increased advertising expense within the SG&A line and approximately $2 million of negative FX.

Moving on to liquidity. As of March 31, 2014, our unutilized borrowing capacity as well as cash on hand was $349.9 million. Available cash was $184.4 million and available borrowings on a revolver was $165.5 million. Of note, on May 1, 2014 we will use available cash on hand to optionally prepay without penalty in full our $58.4 millionsenior subordinated term loan whose current interest rate is 8.5% and and would have otherwise matured on October 8, 2014.

One comment on integration and restructuring. We continue to execute our integration program and are on track with our previously disclosed charges, cash payments and cost reductions.

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

(Operator Instructions). We'll hear first from Connie Maneaty with BMO Capital Markets

Good morning. This is Ryan Gilligan on for Connie. My first question is on the Revlon and Almay brand. Can you talk about the sales trend in US and worldwide for each of the brands in the quarter?

Overall in Q1, Revlon color cosmetics and Almay were flat overall. As most of the business is in the US and the market has been softer in Q1, I would say that being flat doesn't make us happy but is directionally encouraging because it seems that the market has done worse than that.

Okay. That's helpful, thank you. Can you talk about the expected impact eliminating the regional management structure will have on the P&L?

Yes, let me take that. The regional infrastructure restructuring that Lorenzo had talked about is actually included in our January 13 program where we holistically talked about $45 million to $50 million of cost, $30 million to $35 million of savings of which have we expect $10 million to $15 million for 2014. So that specific project is inclusive of our previously disclosed cost savings and integration.

Got it. That makes sense, thanks. The rest of my questions are sort of housekeeping items. What was your EPS X items for the quarter and maybe you could provide your adjusted tax rate?

Don't have that detail right in front of us. Let us come back to you on that.

Okay. Thank you.

And next week ale hear from Carlas Casella with JPMorgan.

My question relates to the changing of strategy doing fewer but more impactful new launches. Has that affected your shelf space within each season? Or are you pleased with what space you're holding throughout the period?

Basically you appreciate that there's the beginning of a change of strategy. It will take up to one-and-a-half to two years to see the full deployment of it because we're not going to be hyper radical about it. So I just give an example that doesn't reflect our specific number because I don't want to give guidance. Let's say we introduce 50 new innovation a year, we're going to go maybe to 45, then to 40 and maybe end up at 30 and hopefully each of those 30 will pick up what we progressively lose. But it is important to understand that the key idea is indeed not to lose space because the current innovation in quantity we do, we put innovation on shelf but they become returns and we basically withdraw them. So it's not about doing less and therefore losing space. It's about doing less quantity and hopefully improving the quality so that what we do, stay on shelf. Because it is a characteristic of our business but as well as apparently of the industry to have an incredible churn. Some initiative stay on shelf less than a year, and other about a year and clearly this is not efficient and doesn't even give us the time to do proper innovation diffusion. Which is basically the process for which you build distribution on a global level and then you make people aware of your innovation. Then you persuade them about your product, they experience it, they hopefully enjoy it, and they come back with a repeat cycle without giving your marketing class, I just want to tell you that the repeat rate of the innovation is the key driver of the profitability of the business.

And if our product churn speed is very, very high, we really enjoy very few repeat if any. So it's a philosophical change that will driver exactly what I said, more quality, less quantity and at this stage we're not concerned about specific shelf space losses related to this strategy. Shelf space losses, I just want to say, are always possible, and are sometimes driven by customer strategy. In other cases, maybe obviously related to the performance of the innovation that we will put in play. But based on the concept of our innovation plot, I don't see a correlation between this strategy and shelf space loss.

We have time this morning for one more call, Jake.

That question will come from Grant Jordan, with Wells Fargo.

Good morning. Thanks for providing the pro forma data. That's very helpful. My first question when we look at the consumer segment, you mentioned given the state of the US market being flat there, is currently a big win but whenever you look at the stats we see for Nielsen, particularly for your products, it seems like you way outperform those. Can you comment on the difference there?

I'm not characterize it as you characterize it as a big win. I'm simply saying that overall the results were overall flatter and according to our data which may be different from yours, we perceive that the market has declined more than we've declined in sales. So I was talking sales versus market. And that's an overall color. More detail for me is difficult to provide it as I don't like at the data probably in the same way you look at them so it's difficult to reconcile this comment.

But, as Lorenzo said, when we look at the market in the first quarter, we look at the sales, we're generally trending slightly better than the market.

Okay.

And there's no denial about the fact that I would say the market share of Almay and Revlon Color Cosmetic has been declining in the past years. We are working really hard and investing really hard to make sure that we turn this around, and that's exactly where we are at and in this first quarter, while in the past we were having let's say a market that apparently was growing single-digit, it was relatively high single-digit, as of mid next year, the market seemed to have softened and the Q1 of this year is soft. And we don't want to comment on this because it opens endless discussion. Nevertheless, in this market in the resoftening, it becomes absolutely critical for us to grow market share in order to continue the growth of the Company. And that's what keep us here focused and that's what we're aiming to do.

Okay. So based on your data, you would say you did grow share in the first quarter?

I'm not going to give that data because we decided that we're not going to provide that.

Right.

Let's say that the way I characterize it is suggesting that we're flat is appropriate.

Okay. All right. And then just to help understand the strategy of doing fewer launches, can you give us some specifics in terms of what products you pulled back on. And then, it seems like maybe advertising was up in the quarter even though you did fewer launches, so just how that might play forward.

Advertising has been up and probably is going to be up for the year versus last year if everything goes in line with this position. I want to remind that any decision that we take from now on can be different and so we cannot project the future based on what we're discussing today, closed bracket. Yes, we are advertising more because it's part of the innovation plot. Like doing fewer quantity, more quality and supporting the innovation more. So, it is absolutely consistent by the idea, let's say instead of I go back to this number which is efficient, if let's say I do 50 innovation and I have 50 million and I put one million each and if one million is absolutely insufficient to break the threshold out there and is not enough to create a proper fusion, then let's say that the number you need it 2 million each. If I do 25 innovation, I spend 2 million each, I'm spending the same amount but I'm now all of a sudden creating a level of support that is capable of breaking the clutter and overcoming the threshold of relevance. So, the idea of fewer, bigger innovation is not just about the quantity and quality of innovation but is also of reallocating and refocusing the investment on the fewer things that we have so that they do become bigger and better. Because, being bigger and better is just not a function of design of the innovation, which we aim to improve, but is also function of the support levels and of the diffusion plans. The diffusion plan costs money. So, it's coherent and consistent. I don't just decide to do better with the decision. Coming up with better, it's about designing better innovation.

My last follow up to that, was there an area in the first quarter where you put more emphasis and was there an area where you put less emphasis as you go through that strategy?

I don't just decide to do better with a decision. Coming up with better is about designing a better innovation which requires understanding your consumer. What's unique, what's impactful from an emotional standpoint, what different shape is on shelf and what could be honorable. The focus of my very much the first quarter and will probably continue to be the case in the next months is indeed to design better innovation for the future. And that is what we're doing right now. And as far as concern the first quarter execution or diffusion, we need to concentrate resources on fewer initiatives and we'll see how we progress in the next months. We don't provide data but some specific initiative are working well and are benefiting from this focus. It's a bit soon to tell. It's a bit soon to come to conclusion. Maybe we can give more color in second quarter because it's early. So the execution in the first quarter we have implemented a bit these concentration of resources with the mindset of supporting a deeper diffusion.

Okay. It would be helpful to hear some of the examples of what is working, not necessarily the actual share data but what products you're seeing returns.

Appreciate that, Grant, we don't want to have to just from competitive standpoint, we don't want to give a product-by-product blow-by-blow of what's working and where we're focusing the resources. I think you can appreciate that.

Sure. Okay. Thank you.

Thank you.

Okay. So thank you very much for joining our call. We look forward to speak to you in our second quarter and thanks to my colleague for the perpetration of this.