Revlon Inc (REV) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's 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. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin, Ms. Anderson.

Thank you, Eric. Good morning, everyone, and thank you for joining today's call. Earlier today, we released our financial results for the year ended December 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 morning are Lorenzo Delpani, Revlon's President and CEO; and Roberto Simon, Executive Vice President and CFO.

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 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 filings, including our 2014 Form 10-K which was 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 Company's October, 2013 acquisition of the Colomer Group. 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 the 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.

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.

Good morning to all of you and thank you for joining our call today. 2014 was a year of significant change and transformation, and this resulted in strong growth for the Revlon business. We integrated the Colomer Group into the Company and delivered the expected synergies and related cost reductions. We also redesigned our organization and significantly increased our investment to build and support our key brands.

Importantly, we repositioned Revlon under the Love Is On concept in November, 2014 and also repositioned Almay under the Simply American concept in January, 2015. Initial market response is encouraging.

With the Revlon Love is On campaign, we have one mission, to inspire love. The idea for Love Is On grew from our quest to find a universally inspiring emotion. Love is by far the most powerful and most positive. From the moment a woman puts on the Revlon makeup, we want to captivate her imagination and to take her on a journey into the world of love.

The Almay Simply American tag line celebrates the spirit of American beauty, fresh, natural and authentic. Almay Simply American was built upon the core American value of ingenuity and authenticity, with an uplifting and pioneering spirit. Our new campaign for Almay features brand ambassador Carrie Underwood, whose effortless beauty embodies the essence of the brand.

As I said before, this campaign -- the Revlon one -- was launched November 18, 2014, and the Almay was launched in January and we prepared them over the second half of last year. And initial market results, as I said, are encouraging.

Back to 2014. Thanks to our strategy of value creation and thanks to integration synergies, our 2014 financial performance was the best in many years. On a pro forma basis, XFX, which is a base for like-for-like comparability, our 2014 net sales increased 4.7% and adjusted EBITDA increased 12.9%. This while we have substantially increased our brand support by $38.1 million, representing a 10.8% increase over 2013. So the increase in EBITDA, basically, and the business has been able to more than offset the incremental investment in the very same year.

We are pleased with these results and this motivates us to continue our effort to reposition our core consumer brands and to maintain and build on the strong momentum of our Professional business. For 2015, we will continue to focus on our strategy of value creation, which is based on the following four pillars. I want to give some color on it, because for us, it's really the path that guides our transformation efforts.

The first pillar is that we manage the P&L driver for value creation. Second pillar is related to profitable growth. Third pillar is cash management, and the fourth is people.

So concern the first pillar, our actions are driven primarily in the following direction. Number one, we try to increase and optimize prices and take any opportunity we have to increase gross margin through pricing. Second, as far as concern trade spending, we work harder to drive optimization, but most importantly, which doesn't mean reduction, it means redirecting the trade spending from selling effort to sell-out effort, so to foster market share development. The third market is -- we call it squeeze, and it's about driving efficiency in the supply chain organization and in the product costs.

The fourth market of the first pillar is the return on investment of our branch support. We spent a lot more in branch support this year, but it's very critical. It's not just the amount of investment, is critical the return on the investment; and for this purpose, we need to work on two areas.

One is the impact that our investment creates in the market, and the second is the efficiency of the media channels or the trade channels in which we execute such investment. Last bucket is departmental trim and departmental reduction, which is basically the drive to keep cost of departmental evolution below inflation.

These are the key pillars for managing the P&L, and we have a focused discipline in doing so. But what really drives the difference of our strategy is actually more the pillar of profitable growth. When we come down to profitable growth, this is breaking down in the following key pillars.

Number one is developing fewer, bigger, better incremental innovation. And this is something I've touched before extensively. It's a key endeavor for us, because we want to have less innovation, but more successful innovation. This by itself drives efficiency across the whole organization.

The second block is a deep, deep diffusion -- we call it 3-dimensional diffusion -- but a deep diffusion across our distribution channel in terms of consumer penetration and in terms of consumer repeat. So essentially, go deeper in driving consumer trial, but in driving customer distribution and in fostering repeat.

The fourth bucket is about managing the mix. And we have a renewed portfolio strategy for our brand, but we also have an elaborate country scorecard that drives the prioritization of our country effort, as well as a portfolio -- we manage a portfolio at customer level.

Another bucket is the effort to expand our presence, and we call this presence expansion and mega growth. Presence expansion is about expanding and deepening the distribution in the country where we are already present, and mega growth tends to be the project that we undertake in scenarios where we are not present and we have to build a presence.

Last but not least, and it's very important for us, is the way we want to have a partnership with our distributors. We are present in many, many countries not directly, but via distributors; and we have started, in 2014, we have done a major redesign the way we manage distributor, which is now centralized, and we manage them on a global business, under the principle of win-win distribution management and win-win profitable growth. This essentially means that we see our distributor as partners, and we work and invest together to grow the business.

The third core pillar, as I mentioned before, is cash management. And here, there's no science fiction, but is the solid work that we need to do to improve net working capital, minimize returns, improve the return on our CapEx invested, and finally, tax optimization, where permitted.

And last but not least, the pillar of people. Essentially, that's very important for us, because all this strategy is implemented via the people, with the people, and thanks to the people.

So passionately, we believe in talent and we believe in commitment, and our values are achievement, innovation, and drive, and we want people that are achievers. We want innovators. And we want people that have the strength to really drive the business forward.

And our motto here is a bit crude, possibly, but it is fewer, better people. We need and we are driving people organizational change, so to have better people.

So that summarizes, I think quite well, what we're working on. And I want to keep elaborating on this concept of talent. Talent is really necessary for our success at Revlon, and Revlon employees are critical to the achievement of our mission and vision.

As a reminder, we currently have 5,600 employees worldwide in approximately 25 countries. We have taken a spirit of Love Is On that is at the base of the repositioning of our core brand, Revlon, to guide also our culture and inspire the drive that we need in our execution.

Our corporate love, when we say Love Is On internally, is clearly not interpersonal, like the one of Revlon, and our corporate love is not unconditional. It's a sort of a credo, expressed in this way.

The Spirit of Love Is On is captured in the following 10 tenants. Number one, we love to win and innovate in everything we do. Two, we love to create value for our shareholders. Three, we love to satisfy our customers. Four, we love to amaze and delight consumers.

We love commitment to the work we do. We love talent. We love to inspire our people and challenge them to inspire us. We love to be global and multicultural. We love diversity in cultures, styles and personalities. And last but not least, we love [ruido] which is our -- or let's say, my motto -- which is to be relevant, to be unique, impactful, distinctive and honorable.

I'll turn the call over to Roberto.

Thank you, Lorenzo, and good morning, everyone. Here are the financial results for full-year 2014.

On a GAAP reported basis for year 2014 itself were $1.94 billion versus $1.49 billion in 2013. Remember that our reported results for 2014 reflect the inclusion of the net sales of the brands acquired from the Colomer Group, with no comparable results in the prior year. Income from continuing operations net of taxes, which includes the impact of certain nonrecurring items in both periods, was $39.6 million, or $0.76 of earnings per diluted share, compared to $24.6 million, or $0.47 of diluted EPS.

As Siobhan mentioned, my commentary on results for full-year 2014 compared to 2013 will be on a pro forma basis, adjusted for certain nonrecurring and nonoperating items. In this morning's earnings release, you can find the details of these items and reconciliation of GAAP to adjusted and to pro forma adjusted results. Total company net sales in full-year 2014 were $1.94 billion. On an XFX basis, net sales increased 4.7% compared to 2013.

Moving on to the segments, in 2014, Consumer segment and sales were essentially flat, as compared to 2013; however, on an XFX basis, Consumer segment and sales increased 3.2%. This increase was mainly driven by higher net sales of Revlon Color cosmetics, Revlon ColorSilk, and Mitchum products, partially offset by lower net sales of fragrances, Almay, Sinful Color, and Pure Eyes color cosmetics. In addition, in 2014, we had $15.1 million of [variable] return reserve adjustments in the US, as a result of lower expected discontinued products in the future.

Consumer segment profit was also essentially flat as compared to 2013; however, on an XFX basis, Consumer segment profit increased 4.4%. The increase was largely due to higher gross profit as a result of the increasing net sales, as well as price increases and variable mix, partially offset by $32 million of higher brand support for Company's consumer brands.

In the Professional segment, full-year 2014 net sales were $502.7 million, an increase of 9.4% on an XFX basis versus 2013. This increase includes higher net sales of American Crew, Revlon Professional, CND nail products, and Cream of Nature.

Professional segment profit was $104.8 million, which on an XFX basis increased 49.5% versus 2013. This large increase was mostly driven by higher gross profit as a result of the increase in net sales and lower costs as a result of the integration program, partially offset by $6.1 million of additional branch support for the Company's professional brands.

Moving on to net sales by geography. In 2014, net sales in the US were $1.02 billion, or 5.4% higher than in 2013. Within the Consumer segment, the US delivered higher net sales of Revlon Color cosmetics, Revlon ColorSilk, and Mitchum products, partially offset by lower net sales of Almay, Sinful Color and Pure Eyes color cosmetics. In addition, we had the [variable] impact from the reverse adjustment that I spoke about earlier. Within the Professional segment, the US delivered higher net sales of American Crew and Cream of Nature.

Moving on to international results. In 2014, international net sales were $919.1 million, which decreased 2.2% on a reported basis versus 2013. However, on an XFX basis, net sales increased 4%.

Within the Consumer segment international net sales increased due to Revlon, Color Cosmetics and Mitchum, partially offset by lower net sales of fragrances. Within the Professional segment, international net sales increased due to CND Nail products, American Crew and Revlon Professional.

Moving to total company results, adjusted operating income in 2014 increased 7.2% versus 2013, to $267.1 million, for an increase of 14.2% on an XFX basis. Adjusted EBITDA increased 7.7% versus 2013, to $375.2 million, for an increase of 12.9% on an XFX basis.

Both adjusted operating income and adjusted EBITDA on an XFX basis were mainly impacted by the XFX net sales increase of 4.7% on approximately $17 million of synergies and organizational core reductions related to the integration program. These increases were partially offset by $38.1 million of higher brand support, as well as increased general administrative expenses, mainly due to higher severance expense and incentive compensation in 2014.

Taking a look at liquidity, as of December 31, 2014, our unutilized borrowing capacity and cash on hand was $435.7 million. This was made up of available cash of $269.7 million and available borrowings on our revolver of $166 million.

Now I will turn the call back over to Siobhan.

Thank you, Roberto. This concludes our prepared remarks and we would now like to open up the floor for questions. Operator, please open the line for questions.

(Operator Instructions)

Grant Jordan, Wells Fargo.

Good morning. Thanks for taking the questions. If you can help us quantify just how to look at FX going into 2015, that would be helpful.

We cannot make projections of a future statement. However, as you know, in 2014, especially in the last six months, the US dollar has been strengthening, and Revlon is a global company with presence in very variable currency markets, including European countries, South Africa, Australia, Canada and Argentina.

So if I look at the EBITDA build-up for 2014, there was a $25 million add back for foreign currency, of which $6 million of that was related to Venezuela. Am I looking at that right, that that $19 million was a cash cost of FX that you added back to EBITDA?

Yes

And based on current exchange rates, would that $19 million be higher at current exchange rates going forward?

It's an average. It's an average. Obviously, it's an average of the 2014 year.

It's the accumulated impact over 2014 of the gap from our budget rate to the real rate has been, like you currently said, $18.3 million. And there is another on deck for Argentina. There was a more unusual one-off. But as far as concern the impact for this year, at current rate, you can make your own projection.

As you know, we don't make forward statements. And we don't control the exchange rates. $18.3 million is the sum of the total impact for 2014. You know what the rates are and moving forward, clearly we do expect an exchange rate impact. But this, unless the exchange rate changes. Therefore, the question is a little tricky, because if we would know the exchange rate, we would be in a different business. That is something we don't control. It's reasonable to assume a deterioration. But remember that we have already captured a meaningful part of the exchange rate decline between our primary pool of currencies and our current value.

Right. I understand that. It's just, we don't have all the moving pieces to do the analysis ourself, because we don't see what your contracts are or whether you purchase in dollars. So just trying to get a magnitude of the potential headwind would be helpful. But I understand.

We don't give that type of information, and it creates only wrong expectation, especially on this matter that we don't control at all, and it's outside our control

And are you able to add that back per your bank agreement to the definition of EBITDA?

No.

Okay. Next question is, can you talk about your planned uses of cash in 2015? Would you rather be focused on paying down debt or using it for acquisitions?

As you are probably aware, we have $675 million term loan due to November, 2017. We will be making our required debt repayment of $24.6 million on our amended term loan facility late this month. And obviously, we are continuously identifying and evaluating ways to create value to the Company. As part of this evaluation process, we consider many different course of actions, including potential business combination, debt repayment, debt refinancing, and investment into the Company's existing brands.

Okay. Are there any M&A opportunities that you've seen that seem attractive?

No comment.

We cannot comment.

Okay. Thank you.

At this time, we have one question remaining in the queue.

(Operator Instructions)

Connie Maneaty, BMO Capital.

Hello. Good morning. It's actually Pat Trucchio on the line for Connie. Just on the fourth quarter, how much of the gross margin expansion was driven by mix? And what was the key driver of the mix benefit? And then also, on the gross margin, how much of did FX drag in the quarter, and were there any other restructuring benefits in the gross margin? Thanks.

So in the fourth quarter, the gross margin and the gross contribution improvement is driven by volume, price increases, mix on sales, especially because of the US, and obviously, the integration program that are delivering also synergies in the gross contribution profit at cost of goods level.

Okay. And then just in the Professional segment in the quarter, what drove the big 12% increase? And in your experience, is it possible to grow off that kind of an increase year-over-year?

You're talking about net sales?

Yes, in the Professional segment. The XFX sales were up 12%, just wondering what were the key drivers of that and in your experience, can you grow off that kind of an increase?

As you know, we don't give forward-looking statements. However, as I mentioned before, consistently what I said before, our Professional sales are quite volatile and fluctuating, because we don't sell directly into a channel that sells directly to consumers. We sell into primarily into distributors -- not only, but primarily into distributors -- as well as salons. And our timing and phasing of initiative and innovation is irregular and inconsistent over the year. So sometimes, we may have an innovation in March, and other times, we may have, the following year, we may have it in April. So if it takes place in March or April, you have an unusual impact on the quarter.

The Pro business in 2014 results were unquestionably exceptional and excellent results, and they are across the board in all assets. So it's solid and the momentum is strong. Said that, if you want to go on the quarter observation, the quarter can and was affected by some strong pipeline sales, and you cannot therefore reasonably project that growth on a yearly basis. We have strong momentum, but the environment in which we operate in the Professional business is extremely, extremely competitive and very, very dynamic. And therefore, I'll stick with the fact that we have strong momentum. But I would suggest that extrapolation is inappropriate and could be inaccurate. Does that respond?

Yes, that's helpful. So 'm just wondering, on the restructuring integration, did I hear you correctly that you said you had $18 million of savings in 2014?

$17 million. Yes, $17 million.

So in 2015, I thought you had said previously that you'd expected $23 million of savings. Is that still right?

We are expecting $30 million to $35 million, accumulated.

Okay. And the rest of it's going to -- will accumulate in 2015?

Yes.

Okay. So in 2014, it sounds like much of the benefit accrued to the Professional segment. Is that the right way to think of it? And if it is, why did that happen and would that be the way that we should think about the benefit from the integration in 2015, as well?

Okay. So I don't want to guide the way you read things, but clearly there are two things to consider, so I'm going to stick to the facts. As I said, 2014 for Professional was an excellent year. Excellent, exceptional years are, by default, the definition of excellent and exceptional not necessarily an every year occurrence. So was a very strong year. We have strong momentum and we will fight hard to keep the momentum going.

However, from the way we read the Consumer results, we are very pleased with the Consumer results, even if they may appear flat on a sales or EBITDA level. And that is because we have invested $38 million more in brand support that you don't see any impact of that on the EBITDA. Most importantly, if you see where we put that money -- and most of the incremental money in Consumer has gone in the United States -- in the United States business units that received this investment, we have increased sales and EBITDA. That means that we've achieved payback in the year.

We are in this process of transforming our brand and putting a lot more support behind them. And achieving payback in year one, for us, is a significant achievement. So we are encouraged by these results in Consumer, and we expect and we want to continue a positive progress. So in a nutshell, that's basically the answer.

The answer is Pro had strong momentum. Continuing to do so is extremely challenged, because the market is highly competitive and there are all the factors that I mentioned in our reportings, detail reporting, that can actually affect the continuity of this performance. We have strong momentum, but we will continue to face challenges moving forward. On the other side, Consumer, we are encouraged by the initial results that we consider very positive, and we are in the process of creating momentum in the Consumer side, as well.

Okay. Just one more. On the advertising, on the $38 million increase, how much of that was driven by the Love Is On campaign? And then what's the right rate of advertising for Revlon as a percent of sales, or is there a right rate? And how exactly are you measuring the efficiency of the investment which you'd referenced earlier?

So first question is how much is driven by Love Is On. Love Is On was launched -- the Love Is On repositioning, because it's not a campaign, it's a repositioning. We've restructured the brand positioning so to become more emotionally relevant, and we decided to really embrace this love spirit. This was launched on November 18, 2014. So most of the investment is in the conventional support of the total brand for the whole year. These was only a fraction of the investment for 2014. Now obviously, in 2015, we'll focus our investment all around the Love Is On concept, both at brand level, but also at the level of the initiative.

Second question, what is the right level of investment? The right level of investment, there's no magic formula that we are following. Because if I would know exactly what that number, we would exactly invest at that number. But I really believe that it's not a matter of quantity, as much as it is a matter of quality of investment and impact. So it's not a guideline, but we believe that investing at least at 20% of sales, or around 20% of sales, is necessary. And it's not a very firm guideline, but it's something that at least we aim to go to as a step one.

As far as I'm concerned, as I'm driven by growth and my objective is to deliver growth and to bring back the brand to be the quintessential status it deserves to be, we are going to go through a phase of investment and as we started this year. The most important effort now for 2015 is to optimize the return on this investment. And we measure it in many different ways, depending of what kind of investment it is. For example, the biggest component that is probably media, media investment, as much as we could use sophisticated modeling to figure out whether it works or not, I like to rely on a very simple measure, which is are we growing market share or are we not growing market share? So essentially looking at the consumption uplift, what it means for us in terms of financial contribution, because we can reasonably convert that, and compare that with our investment.

So for example, on a macro level -- because that macro level is important -- this year, the extra investment in Consumer was fully paid back, so it generated enough sales to offset such investment. And now it does not generate financial growth, but as a first year of injection of gasoline into the machine, we are reasonably satisfied by these results. So macro level, the biggest and the most significant measure is are we growing market share and are we growing sales.

And then when we go down to other type of investment, like for example, promotional activation at trade level, the matrix, as you can imagine, are more analytical and more detailed, and we can make assessment on whether we are getting, on the efficiency of the promotional drop, whether it's a coupon drop or an FSI or things of that nature. The analytics are available and they are common in the industry. And one effort we do is in that field, for example, is to make sure we do, again, fewer, better promotional activations, with the purpose of not just feeding our own user, but with the purpose of generating new trial.

And then there are other investments, like in-store. In-store investments are important to Revlon. In-store, the wall, in-store execution, merchandising, secondary display, visual activations, those are a bit more hard to measure. And in some of these, we need to do experiments and test and get around the sensitivity of the results.

So brand support its own investment, and working on these return to improve it is a key pillar, as I mentioned before, of the strategy of our [recreation]. So in some cases, the measure is simple, in others, more sophisticated. And we are quite, we are getting progressively more analytical about this investment, all right?

Yes. That's great. Thank you. That's it for me.

It appears we have no further questions at this time. I'd like to turn the conference back to today's speakers for any additional or closing remarks.

Okay. As I said, thank you for the call and we'll continue our work. It's going to be a challenging year, as usual, and we will hear you soon at the next earnings call. Thanks a lot and have a nice day

This concludes today's call. Thank you for your participation.