Revlon Inc (REV) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's third-quarter 2014 earnings conference call. At the request of Revlon, today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Jessica Graziano, Revlon's Chief Accounting Officer and Treasurer. You may begin, Ms. Graziano.

Thank you, Joe. Good morning, everyone, and thanks for joining today's call. Earlier today, we released our financial results for the third quarter ended September 30, 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 morning are Lorenzo Delpani, Revlon's President and Chief Executive Officer; and Roberto Simon, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Lorenzo, I would like to remind everyone of a few things. First, our discussion this morning might include forward-looking statements that are based on our current expectation. 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 third-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 Colomer Group acquisition that occurred in October 2013. These measures are defined in our earnings release and are also reconciled in the financial tables at the end of the release. Just a note that pro forma results are not necessarily indicative of the operating results that would have occurred if the Colomer 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 are -- 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.

Thank you, Jessica. Good morning to all of you, and thank you for joining our call today. Overall, I would characterize this quarter as essentially flat. We've had some ups and downs in net sales across the consumer and professional division. The consumer division, on a XFX basis is up 2%, essentially in a category that is showing a small single-digit decline. Revlon color cosmetics had positive momentum in the United States, but this has been offset by declines in the distributor markets outside of the United States. Almay had a soft quarter, yet we remain focused on the preparation of its turnaround. SinfulColors has declined slightly, due to category declines and fewer promotions this quarter versus last year. On a brighter note, Mitchum is growing behind its brand relaunch and increased focus and brand support, and marketing support.

On an XFX basis, the professional business is also up 2% for the quarter. While the professional division has posted close to double-digit growth on a year-to-date basis, the growth in the third quarter was modest, as higher net sales of American Crew, Revlon Professional, and Crème of Nature were partially offset by lower net sales of CND nail products that, in this quarter, are compared against a very strong 2013 new-product pipeline and the timing of certain promotions. However, the customer data we've seen on CND nail sellout remain positive.

As I've mentioned in previous calls, we continue to spend more in marketing, more than last year, mainly for our consumer division and brand. Year to date, we have spent approximately $24 million more than the prior-year period. This spending has been largely financed by net sales growth, cost reductions, and integration synergies. Speaking of synergies, the integration of the Colomer business remain a priority for us, and we continue to be focused on the integration program, which is on track to deliver annualized cost reduction of $30 million to $35 million by the end of 2015. As a final point, as far as adjusted EBITDA concern, year to date, we are up 6.7% on a pro forma XFX basis, outpacing the incremental investment in the business this year.

Before turning the call over to Roberto Simon, Revlon new CFO, I wanted to note that I am very pleased to again work directly with him. As you may know, Roberto was the CFO of The Colomer Group, and, in his three years in that role, he contributed to the successful implementation of our strategy of value creation. Roberto adds significant hands-on international experience in managing the financial aspect of the consumer and professional businesses, having developed his career across a variety of financial role in multiple countries, including serving in local, regional, and global roles.

Since Roberto -- since the Revlon October 2013 acquisition of The Colomer Group, Roberto has served as Revlon SVP for Global Finance, which included responsibility for the strategic financial support of both the commercial business and supply chain in the consumer and professional segments. Position also included responsibility for the oversight of the SAP implementation. Now, as we look to strengthen market performance, grow our business profitably, and manage effectively our financial driver, I'm confident that Roberto experience, leadership, and hands-on style will be a critical contribution to Revlon value creation moving forward.

And with that, I will turn the call over to Roberto.

Thank you, Lorenzo, and good morning, everyone. Here are the financial results for the quarter. On a GAAP (technical difficulty) result basis, third quarter 2014 net sales were $472.3 million, compared to $333.1 million in the comparable period last year. I want to remind you that our reported results through the quarter three of 2014 reflect the inclusion of the net sales of (inaudible) acquired from the TCG with no comparable results in the prior period. Income from continuing operations, net of taxes, which includes the impact of certain non-recurring items in both periods, was $14.2 million, or $0.27 of earnings per diluted share, compared to $11 million, or $0.21 of earnings per diluted share.

As Jessica mentioned, my commentary on the results for the third quarter of 2014, compared to Q3 2013, will be on a pro forma basis, adjusted for certain non-recurring and non-operating items. These pro forma results reflect the financials of both Company and The Colomer Group as if they were a combined company for all 2013. The details of these non-recurring and non-operating items, and reconciliations of GAAP results to adjusted and pro forma adjusted results, can be found in this morning's earnings release. Total Company net sales during the quarter were $472.3 million. On an XFX basis, net sales increased 2% compared to third quarter of 2013.

Moving now on to the segments, in the third quarter of 2014, consumer segment net sales decreased 0.9%, to $348.2 million, as compared to same period last year. However, on an XFX basis, consumer segment net sales increased 2%. This increase was primarily driven by $8.8 million of favorable returns reserve adjustment in the US as a result of lower expected discontinued products in the [future]. These adjustments were partially offset by increased return expense for current-year returns that were based on innovation previously launched. Finally, these net sales also include lower net sales of Almay and SinfulColors, partially offset by higher net sales of Mitchum.

The consumer segment profit decreased 2.9%, to $78.1 million, which, on an XFX basis, increased 1.6%. The increase was largely due to higher gross profits as a result of the return adjustment I just mentioned, offset by $3.8 million of higher marketing support for the Company's consumer brands.

Moving on to the professional segment, the report of 2014 net sales were $124.1 million, which increased 1.2% on an (technical difficulty) basis, and on XFX basis, (technical difficulty) [as through] quarter three, 2013. As Lorenzo mentioned, this increase includes higher net sales of American Crew, Revlon Professional, and Crème of Nature, partially offset by lower net sales of CND nail products. Professional segment profit was $25.2 million, which on an XFX basis, was essentially flat.

Turning in to sales by geography, in this quarter, net sales in the US were $243.8 million, 3.8% higher than same quarter last year. Within the consumer segment, US net sales increased mainly due to the impact of the returns adjustment I spoke about earlier. In addition, there were higher net sales of Revlon color cosmetics and Mitchum products, partially offset by lower net sales of Almay and Sinful. The professional segment delivered higher US net sales of Crème of Nature, which was more than offset by lower net sales of CND nail products (technical difficulty).

Outside the US, net sales of $228.5 million, were essentially flat on an XFX basis (technical difficulty) 2013. In the consumer segment, net sales decreased, partially due to lower net sales of Revlon color cosmetics in certain distributor markets, partially offset by higher net sales of Revlon color cosmetics in Venezuela, Japan, and South Africa. Within the professional segment, the Company's had higher international net sales of American Crew and Revlon Professional.

Moving to adjusted operating income and adjusted EBITDA, the Company adjusted (technical difficulty) decreased 13.8%. Adjusted EBITDA decreased 5.3%, to $85 million, in the same comparative period. Both adjusted operating income and adjusted EBITDA were largely impacted by higher marketing support of the Company consumer brands, higher incentive compensation expense that was driven by a lower accrual in Q3 2013, and inflatable foreign currency fluctuations of approximately $4 million.

Finally, taking a look at our liquidity as of September 30, 2014, our [annualized] borrowing capacity and cash on hand was $338.5 million. It was made up of available cash of $172.5 million and available borrowings of $166 million on our revolver.

Now, I will turn the call back to Jessica.

Thank you, Roberto. This concludes our prepared remarks, and we would now like to open up the call for your questions. So, if you would please prompt the participants for questions.

(Operator instructions)

And we do have a question from, looks like Connie Maneaty from BMO Capital Markets.

Good morning, everybody. I have a couple of questions.

First of all, the $8.8 million in the favorable returns adjustment -- is this a one-time adjustment for 2014, or will we see these adjustments quarter by quarter? And do you imagine that, as you get your more impactful new products on the market, that the size of the adjustments will decrease?

Okay. I will take this response.

Now, the adjustment that we made, if you remember in the first quarter, we made one for Almay of $6.3 million, and now made one that is a combined one for Revlon and Almay in total for $8.8 million, which is in this case primarily Revlon. These are an adjustment of a [reserve] that takes into account future returns. This calculation is quite complex and takes into consideration the future expected returns spending from our future expected SKU discontinuation. So we don't give future guidance, so I can't give you exact details of what is driving it. But you can expect by what I just said that we are expecting lower discontinuation. And this is somewhat [beh] by the factor of our strategy of fewer, bigger, better innovation.

Now, it's not the objective of our strategy of fewer, bigger, better innovation. The objective of our strategy of fewer, bigger, better innovation is to deliver market share growth, and subsequently, net sales growth. [Think] data and [CPI] have not been achieved, if you want, for the past 10 years. And part of the reason that it is -- this Management Team believes that, that's the key reason, is that we have also innovated in quantity as opposed to quality.

The change that is taking place, and what sometimes people that are not part of this process don't fully appreciate, it takes time for this change to take place because we have [two resacteria], so we effectively make changes twice a year only. And a new product can take between, best scenario, one year to up to three, depending on the complexity to develop. So this strategy of fewer, bigger, better innovation is going to take 1 1/2 to 2 1/2 years to start to be deployed.

In the short-term and what we have been doing this year, let's say this strategy is essentially we do fewer and we aim to do better, and by doing so, we will be able to focus on what's left in a better way, and therefore, it will become bigger and deliver sustainable growth. So with this logic, we are executing for next year, right now, mainly the fewer, and we are working on developing the better. Okay? And there are lots of other factor of doing these. Fewer is better. We have to adjust for returns because it in accounting for fewer innovation, next year, we are looking at lower returns.

Now, at a certain point in time in the future, which is over the next -- I can't predict exactly -- but over the next couple of years, two or three years, something like that -- which is, I give you is just a conceptual range, because it pretty much will depend on our speed of execution of the strategy -- we'll probably reach our desired new rate of innovation in terms of quantity and quality. And at that point, our ongoing level of returns will adjust to a new level that is different from our historical level. And from now to that moment, we can expect, possibly, a series of adjustments -- series is inaccurate -- but let's say, some adjustments like the one that we've been experiencing this year.

I am not in a condition right now; I am lacking the quantity of details to give you an estimate or an accurate forecast; and especially, I wouldn't want to do that because it's also very much guidance for the future. But in a nutshell, it's reasonable to expect another couple of adjustments like this one going forward, and until we reach it, the ongoing level.

Okay. That's helpful.

Could you explain what the non-operating foreign exchange was in the quarter? Was that a hedging loss, below the line, the -- I forget the number. It looked like $9.3 million. What was that? (Multiple Speakers) Sorry?

This adjustment was due to a balance sheet devaluation of our [euro] (technical difficulties) intercompany loans.

Balance sheet devaluation of intercompany loans. Okay. Why did capital spending increase so much year to date versus last year?

There is a big component, which is the move from the old office to the new office. The main reason for that, the last investment on the SAP.

So to give you a bit more color, let's say the standard operation of CapEx is directionally in line with the history, but on top of it, we have two extra items that are completely incremental, and the most meaningful of which are SAP investment, which is a multi-year investment to create advanced professional integrated system in the organization that really needs them. You have multiple legacies that are integrated in the Company by normal processes, and we are in the process of upgrading all of it. And these will improve the way our people process and system deliver value in the organization.

Right now is the moment of investing, and you see the cost. We obviously do this because we believe that in the future these will generate value. We have the same experience in the previous company and process of implementation. The processes and the combination of people processing system deliver more effectiveness and more efficiency, and that's what we look for, for the future.

The second is the office move. Hopefully, this is something you do every 15 years, which is exactly the term of our lease. But this year has been a very expensive exercise because we had to recondition completely our headquarter here in New York. And in addition, just to mention on this topic, we have a quarter charge -- extra extraordinary quarter [charge] of $1.7 million, which is related to a double rent for the month that we had to take the move. So we had to pay double rent. So that's an item that is also unusual in the quarter. Then there are some other topics that are extra that are somewhat related to the integration of Colomer, but those are minor and are not worth answering in detail right now.

Okay. Just let me follow-up SAP, and then I will let somebody else ask a question. Is the SAP implementation for The Colomer Group -- was it already in the Revlon Consumer? Or is this an upgrade for the total combined entity?

Roberto, you answer this one.

So what we are doing is just taking the Colomer template of their position of the Company and just implementing it in the consumer division, which obviously is a minor adjustment to [replace] them between the two segments; but 95% is exactly the same as (technical difficulties).

And in the process, we are moving to the last version for -- but essentially for the consumer division is new.

Okay. Great.

And it looks like we will move along to our next question from Carla Casella with JPMorgan.

I had two clarifying questions.

One, on the display spend, it's a little lower than what we had expected for the year. Are you still thinking you'll hit the $50 million target?

Yes.

Okay. So the spending will tick up in the fourth quarter.

That's not (multiple speakers) --

And then the other question was, the $8.8 million difference in the reserve -- how long do you normally take reserve out for? Is that something that you'll know what the actual -- whether it is an accurate number to predict -- accurate number as of the end of fourth quarter? Or is that something that could roll into 2015? I'm wondering how far out in the future you take reserves?

(Multiple speakers) by quarter to assess the reserve.

Okay, but --

We have a consistently methodology that we review quarter by quarter.

Okay great. But I'm wondering is, do you have -- is it three months of reserves, six months of reserves? And does that vary?

It varies.

It's not about months. It's about us submitting --

Of the future.

The returns we're going to get. And so when the returns take place, we decide to take away an SKU, a specific one. That SKU would have been an SKU launched, in theory, can happen, five year ago, four year ago, three year ago, two year ago, one year ago, or this year, if we decide to replace it, and then maybe give a [resept]. Can even happen that we replace something we launched in the first half of the year.

Now so, it's not really three months of what. This is not an inventory issue. And these are products that are having a slow sale on the retailer's shelf. So it seems like that, behind your question you are thinking in an analogical term to inventory, but this is not the way this works. This works on us estimating.

We have, for example, 10 new SKU stemming from new innovation and we need to make space for those. And depending on the amount of the SKU we need to introduce, we decide which one we take out, and dynamically service created. And as the information becomes clearer, because the innovation plan becomes clearer on a quarterly basis, there is a specific methodology that we use to make such determination. As I said before, it's a bit complex, and it's really not of the forum to go in details about it.

Okay. Great. That's helpful. Thank you.

Do we have time for one more question?

Certainly. And we'll take our final question from Kevin Ziets with Citi.

Good morning. My question is on the increase in advertising spend. I am curious which brands you targeted with that? I know it I've seen a lot of the Mitchum commercial, and I am curious if there are others that you have targeted and how you feel about the success of it.

Kevin, we're having some technical problems. You were breaking up throughout your question.

Oh. I'm sorry. I was just -- can you hear me now, or no?

Not really, to be honest.

Okay, I'm sorry about that. I will try to --

Let me try and confirm. I think I got your question. Did you say something -- did you ask where did we spend our money in marketing support? Is that a question?

Yes. Which brands?

You want brand detail? That's the question?

Normally, we don't provide that detail, and we don't want to start doing so. But I know it sounds obvious, my response, but we obviously invested through our focus assets, and the Consumer division doesn't have many. They have few. And so it's Revlon color cosmetics being a core fighting category for us. And it's Almay because we are supporting and hanging in there in preparation of our turnaround. It's Mitchum because -- and this year, it's actually significantly more resources than last year because we were relaunching it. And it is actually, we are seeing an encouraging sign.

So those are the key assets. And then we have other brands like ColorSilk and Beauty Tools that also receive support, but that's not so much top line. It's more in the direction of promotional support and other, other. So the top-line support is primarily the one I mentioned.

Okay, great.

And it's difficult to give you -- because we started this actual investment somewhere in February and we are in October, and it would be absolutely unreasonable to expect a payback in such a short period, also because we are going to work on improving the assets that we use to support the brand.

Said that, as I mentioned in my introductory notes, I did make a reference to the fact that on a year-to-date basis, XFX pro forma, EBITDA is up 6.7%, and that outpaced the incremental investment. So all in all, we are not unhappy about the financial return of the overall model, which is still delivering more EBITDA while investing in the business, which is a bit of a [sister rashes debuck]. And we still need to, and we need patience and time. And I have patience and time for this because we do not work as a Company for the month or for the quarter. We work for the medium term. And we need to see several items fully deployed to see the medium-term impact all of our strategy.

And I go back to the fewer, bigger, better innovation club, the improvement of the assets, the positioning of our brands, and all those things will come together in the next couple of years. And some sooner than others, and that will be visible to you, but we don't provide future guidance.

So initially, from a financial standpoint, we are reasonably satisfied that the investment at least is coming around, and in fact, as I said, these incremental investments has been -- we have at least enough EBITDA coming from sales that this can -- to offset incremental investments. So then we have other components in the drivers. But it's a good sign. Okay? It's a good sign.

I appreciate that.

My other question is on the returns. Is the (multiple speakers) -- okay. I'm sorry. I'll try back.

You need to go on a good phone.

Sorry, Kevin.

No. My fault. Thank you.

Wait, Kevin. Hey, Kevin, this is Jessica. You can follow with me separately after the call, and I can help clarify any other questions you may have.

Thanks.

And that concludes today's question-and-answer session. I would like to turn the call back over to our speakers for any additional or closing remarks.

Okay. Thank you very much for joining our call, and we look forward to speaking to you on year end and on our year-end 2014 call. So good morning to all of you. Thank you.

And that concludes today's conference call. We thank you for your participation.