Revlon Inc (REV) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's first-quarter 2015 earnings conference call. At the request of Revlon, today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to Ms. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin, Ms. Anderson.

Thank you, Doug. Good morning, everyone, and thanks for joining today's call. Earlier today we released our financial results for the quarter ended March 31, 2015. 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 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 first-quarter 2015 Form 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 and non-GAAP measures to enhance the comparability of our results. These measures are defined in our earnings release and also reconciled in the financial tables at the end of the release. Our discussion this morning should not be copied or recorded.

With that, I will turn the call over to Lorenzo.

Good morning to all of you and thank you for joining our call today. On an XFX basis, in this quarter we were essentially flat in sales and down 13.3%, or $11.7 million, in adjusted EBITDA.

These results were affected by different phasing of initiative versus Q1 2014 and significant incremental brand support in the quarter. We incurred an additional $16.6 million in brand support as we continued to invest more competitively behind the relaunch of our key brands. The remainder of the year brand support investment is expected to be more in line with 2014 level.

Additionally, on an as-reported basis, the first quarter of 2015 was significantly impacted by foreign currency exposure from our international markets, resulting in a reduction of our as-reported net sales by $31 million and adjusted EBITDA by only $1.8 million. FX in the quarter impacted our P&L from a translation and transaction standpoint.

The impact of FX was partially mitigated by price increases, mix of sales, and cost of goods savings. If the current rates continue as they were in Q1 2015, we expect unfavorable foreign currency variances at least in Q2 and part of Q3.

In summary, this was a solid quarter where we continued to work hard to implement and deploy our strategy of value creation and to invest for growth. I will now turn the call over to Roberto.

Thank you, Lorenzo, and good morning, everyone. Here are the financial results for Q1 2015.

On a GAAP as-reported basis, Q1 2015 net sales were $438.5 million versus $469.8 million in Q1 2014. Operating income was $45.2 million, a 5.6% increase, compared to $42.8 million in Q1 2014.

Net loss was $900,000 or $0.02 of loss per diluted share, compared to $5.5 million of net income or $0.11 of diluted earnings per share. This includes the impact of certain nonrecurring items in both periods.

As I just mentioned, total Company net sales in Q1 2015 were $438.5 million, a decrease of 6.7% on an as-reported basis. However, on an XFX basis net sales were essentially flat compared to Q1 2014.

Moving on to the segments, in Q1 2015 Consumer segment net sales were $324.3 million. On an XFX basis, Consumer net sales increased 1.4%.

This increase was mainly driven by higher net sales of Revlon color cosmetics and Mitchum products, partially offset by lower net sales of Almay color cosmetics. Additionally, net sales in Q1 2014 included a $6.3 million favorable return reserve adjustment in the US that didn't recur in Q1 2015.

Consumer segment profit was $62.2 million in Q1 2015. On an XFX basis, Consumer segment profit decreased 10.6%. The decrease was mainly due to $11.5 million of higher brand support for the Company's Consumer brands, partially offset by higher gross profit as a result of increases in net sales as well as price increases, favorable sales mix, and cost reductions within cost of sales.

In the Professional segment, Q1 2015 net sales were $114.2 million. On an XFX basis, Professional segment net sales decreased 3.8%. This decrease includes lower net sales of CND nail products, partially offset by higher net sales of American Crew and Revlon Professional products.

Professional segment profit was $29.2 million in Q1 2015. On an XFX basis, Professional segment profit decreased 7.8%. This decrease was mostly driven by $5.1 million of higher brand support expenses for the Company's Professional brands and lower gross profit due to the decrease in net sales, partially offset by favorable sales mix and cost reductions within cost of sales.

Moving on to net sales by geography, in Q1 2015 net sales in the US were $244.4 million, or 2.3% lower than Q1 2014. The US delivered lower net sales on CND nail products and Almay color cosmetics, mostly offset by higher net sales of Revlon color cosmetics, Revlon ColorSilk, and Mitchum products.

Moving on to international results, in Q1 2015 international net sales were $194.1 million. On an XFX basis, net sales increased 2.5%. The Company had higher net sales of Revlon color cosmetics and American Crew throughout most of the international region and Revlon Professional products in Spain, partially offset by lower net sales of Revlon ColorSilk.

Moving to total Company results, adjusted operating income in Q1 2015 decreased 23.9% on an XFX basis to $47.1 million. Adjusted EBITDA decreased 13.3% on an XFX basis to $74.3 million. Both adjusted operating income and adjusted EBITDA on an XFX basis were mainly impacted by $16.6 million of higher brand support expenses and higher general and administrative expenses, primarily due to the higher severance costs, incentive compensation expenses, and legal fees, partially offset by higher gross profit in the Consumer segment as discussed earlier.

Taking a look at liquidity, as of March 31, 2015, at our unutilized borrowing capacity and cash on hand was $366.9 million. This was made up of available cash of $200.7 million and available borrowing on our revolver of $166.2 million.

Now I will turn the call over to Siobhan.

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

(Operator Instructions) Carla Casella.

Hi, this is May dialing in for Carla. Thanks for taking my question. Can you remind us of the timing of when you put in place your price increases on the Consumer side and whether you've seen any pushback? And did you increase across all channels of retailer, or only select? And over which products?

We have increased prices. We started in the second half of last year. We have an increasing optimizing pricing opportunity, which generally means an increase, but not always.

It's part of our strategy of value creation. We do that and we intend to do that regularly, let's say, on a yearly basis. The increases that we strive to do are pretty much in line with inflation, and that's what we aim.

And occasionally, like it happened last year, we had a price increase that, in the United States for example, that was higher than inflation and -- because it was a while that we were not resorting to systematic price increases. Increasing prices is a part of the way to generate value, and -- but is also part of the way, in the case of the Revlon brand, for example, to realign the different price levels, seeking consistency by segment and by -- in line with our, let's say, brand positioning.

All right? So we do it geographically. We try to do it in as many geographies as possible.

Obviously, this philosophical price increase sometimes is counter -- receive the consideration that for competitive reasons we may not do that in given geographies.

Okay, thank you. Just another quick question. Have you seen any changes in the competitive stance from P&G, given that it's selling CoverGirl?

I prefer not to respond to this question; it would be a speculative answer. Let's say that on a broad basis the only thing I can say, that the market of color cosmetics is very, very, very competitive and continues to be very, very, very competitive.

There is entrance of new players; there is existing players that are investing more; quite a few value players sponsored by the retailers, especially in the United States, that are making inroads. And I can't -- we don't notice at all any flex of intensity from our competitors.

Okay. Thank you so much.

(Operator Instructions) Kevin Ziets, Citi.

Hi, good morning. Thanks for taking my questions. I guess I first wanted to touch on the CBBeauty acquisition and just understand your strategy with fragrance going forward.

Okay. As you probably appreciate, we operate in primarily two segments: one we call the Consumer segment, one we call the Professional segment. Our Consumer segment is primarily color cosmetics, so that's the biggest part of it, even if we have more, let's say, a typical personal-care play in that -- in the Consumer segment as well.

In seeking opportunity for growth in the future, I am and we are obviously keen to diversify our options for growth and also to diversify our risk. Therefore, we, after investigation, after deep investigation, we considered that being active in the fragrance segment is an opportunity for us.

The fragrance business is showing organic growth. It's very, very, very fragmented. Many players in it are doing a job that we believe is improvable; and therefore we investigated a platform for growth.

We bought CBBeauty, which is indeed a small company, but CBBeauty for us is indeed that platform. CBBeauty has an incredibly, incredibly talented pool of people that have long-standing experience in the fragrance business.

As you know, they are a UK-based company, so there is -- primarily they manage fragrance licenses. But we also bought that in this specific case the UK -- we acquired the UK distributor, which is called SAS.

Now the primary move for us is the one of entering the fragrance license business. We believe that we have a competitive advantage in doing so, and that is in the fact that for the Revlon Group the fragrance segment will be a priority.

We will focus on it in the future. And because we start from a very low base, we will be also very selective on the type of fragrances and licenses that we will pursue and develop. So, with the logic of fewer, better fragrances and that's the strategy behind the acquisition.

Okay. They have the rights to -- One Direction is the celebrity fragrance? Is that the area you think you will be targeting, or could it be other types of brands as well?

Also just wanted to understand the distribution strategy. I think, if I'm not mistaken, they use Elizabeth Arden to distribute, at least in North America.

It's a bit more complex than that and it's premature for us to give you distribution detail. However, let's say that we are not going to focus on celebrities only, okay? We foresee, again, a diversification between luxury brands, celebrities, lifestyle, and others.

So once we will be more advanced and once we will have executed it, we will notify you in details. Because at this stage, we don't want to provide forward-looking expectation.

And any other distribution, CBBeauty enjoys a significant distribution network. They have it already, and that's primarily through distributors. We'll review that as a matter of operational businesses, and we will consider any option available.

Okay, great. Then just in general with respect to acquisitions, can you articulate your comfort level with using the balance sheet and taking leverage higher? I guess I am curious if there is a maximum leverage you wouldn't go beyond for an acquisition.

I don't expect -- I think whatever we are going to do, we are going to be in a situation where we have a safe level of leverage, and a level of leverage that will allow us to continue to be flexible in our operational workflow. At the same time you appreciate that we are a Company that uses leverage for acquisition growth, and that could continue.

There is no specific statement or announcement to make on this front at this stage.

Okay, great. I'll get back in queue. Thank you.

Grant Jordan, Wells Fargo.

Good morning. Just one for me. Can you talk about the increased level of advertising I believe you said you spent in the quarter? Was that behind new product launches? Was it a change in strategy? Just give us a little more color on that.

Yes. We determined that the investment levels at Revlon as per last year were, let's say -- including 2014 and before 2014, 2013 -- were required to be amped to be more competitive. That's true both in quantity and in quality.

So that's what we started to do last year. Last year we have increased, as you know, brand support significantly. We have announced that in the year-end results.

And last year we managed to pay back the incremental investment within the year. This year we'll continue to invest more in brand support. We have a certain level of investment in mind that we want to reach, and we are getting there, okay?

We are very much in a phase, and that's why I define this quarter a solid quarter, because it's performing in line with what we were expecting at this stage. We are -- first you seed, then you water, then you harvest, okay? So right now we have put seeds and we are watering the soil.

We see the primary destination of this investment is indeed the Consumer business, and specifically the Revlon asset and Almay asset. The bulk of the Q1 investment was behind the brand repositioning; so for Revlon it's Love Is On, and for Almay the Simply American platform.

As we spoke before, we are determined to relaunch these brands and create an emotional connection with our own consumer -- so to make them a bit less transactional or a bit -- and to have a more emotional equity and personality. The bulk of the investment of Q1 is somehow directed to this equity revitalization.

In the balance of the year, I foresee that the bulk of our investment will be a bit more product-related and initiative-related. But there is always a mix, and that's what we're doing right now.

Okay. Just to confirm, you said that the balance of the year should be fairly similar in terms of a level to last year?

Yes. Directionally yes. But we reserve the right, pending market condition, share evolution, competitive dynamics, to change that.

Yes, okay. Thank you.

Kevin Ziets, Citi.

Hi. Just wanted to ask about your ability to mitigate FX. Is that something you see being able -- you obviously did a great job this quarter, and I'm curious if that's something you think you will be able to do in the -- ? I think you said the next couple quarters might still see some of that FX impact.

So while I won't comment on what is my expectation of future quarter, because also we don't know the exchange rate in the future quarter and the two things are correlated, I will deflect your question slightly, but answer it by saying that we have in place in the Company as part of the strategy of value creation various programs that are designed to increase the gross margin, among those, price increase.

Price increase is not going to generate -- doesn't generate a permanent gross margin improvement, because occasionally it's not necessarily a continuous program. But clearly we still rely for this year on price increase opportunities.

Second, we have a very robust cost of goods improvement programs in place that is part of our new focus on what we call the [squeeze] project. It's not our new focus. It's always been a focus in Revlon.

But for us it is a project that is delivering, is delivering synergies and is delivering cost savings. We invested last year and we're investing now in CapEx to drive operational efficiency.

Then, last but not least, we are managing the mix of countries, brands; and this is also a factor that could help expand further our gross margin.

Now all these programs are in place. As you've seen, they delivered the last year. They delivered in Q1.

I cannot confirm that they will continue to deliver in the future. But let's say that these are active projects and active programs that are in place.

Okay. Thank you very much. I guess I just wanted to explore the returns line for a little bit. I know I think the last several quarters or a few quarters last year you took -- you had the expectation that returns would come in lower, given the shift in strategy to fewer, bigger, better. I'm curious if that has in fact been the case, or if there is enough data to judge it at this point.

So, yes, the flow -- the rate as we call them -- is getting lower. So consistently with our reserve adjustment that last year created in the quarter important one-off. If you remember in this quarter last year, Almay took a $6.3 million adjustment.

So comparing this quarter with last quarter, indeed we have that gap. So our essential flat sales are comparing with a quarter with that adjustment in place.

However, those adjustments are done because we expect lower returns, and we are seeing a lower level of returns. The math doesn't equalize on a quarter basis, because the lower level of returns is proportional to the number of new introductions.

So we have basically two key moments of the year where these things comes in. And one was indeed at the beginning of the year, and we are going to have another reset of the wall. And now let me pass a second Roberto that may give you a bit more detail on this.

Thank you.

Yes, we mentioned in prior earnings call the change in this strategy of fewer, bigger, better innovation generated in the past favorability in our expected return reserves, as our historical rates of returns and markdowns were no longer indicated of our current business model. And as Lorenzo just mentioned, we are continuing monitoring the level of the returns with changes in the planograms.

Okay. Thank you for that. Last question was just on inflation in general. Is that part of the -- is that a significant benefit for you, with maybe some packaging and oil-based commodities coming down?

We won't provide that detail, but you said it, and clearly we have -- let's say, while we have a headwind on exchange rate, we have tailwinds on the price of commodity. So we buy them in dollar, though, so in depending what plant we buy them for, the effects kind of offset each other.

Right.

Somehow, somehow.

Sure, sure. Are you making strides in more balancing the production, so that you can buy more locally or produce more locally?

Well, we are trying. But the reallocating production is a complex operational process that takes time.

In the measures for which we don't need CapEx to do so, we are trying to do that a little bit. But if it needs CapEx, we are not doing it, because we don't bet on currency. Because if I would know what the future level of currency -- and I don't, and we don't, it's an uncertainty -- if we would know it, we could plan that.

But we don't know and so we can't make an investment against an uncertainty, or we don't believe we should. So unfortunately, these are winds that we are trying to mitigate as much as we can.

But we don't play on currencies. That's not our business. We play in the beauty business.

This concludes today's question-and-answer session. I'd now like to turn the conference back to our speakers for any additional remarks.

Okay. Thank you very much for joining our call today, and we look forward to speaking to you on our Q2 2015 call. Thanks a lot.

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