Revlon Inc (REV) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Revlon second-quarter 2015 earnings conference call. At the request of Revlon, today's conference call is being recorded. (Operator Instructions). I would now like to turn the conference over to Ms. Siobhan Anderson, Revlon's Chief Accounting Officer and Treasurer. Please go ahead.

Thank you, Cecilia. Good morning, everyone and thanks for joining today's call. Earlier today, we released our financial results for the quarter ended June 30, 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 second-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. Beginning in the second quarter of 2015, the Company has identified certain unusual items impacting the comparability of the Company's period-over-period results as seen through the eyes of management. As a result of these unusual items, the definition of adjusted EBITDA has changed from that used in prior periods. The adjusted measures are defined in our earnings release and are also reconciled in the financial tables at the end of the release. Our discussion this morning should not be copied or recorded. And with that, I will turn the call over to Lorenzo.

Thank you. Good morning to all of you and thank you for joining our call today. This quarter was strong with adjusted net sales growth of 4.7% and adjusted EBITDA growth of 6.5% measured on an ex-FX basis and adjusted for comparability. During this quarter, we completed our acquisition of CBBeauty and exited our business operation in Venezuela moving to a distributor model. We also continued to execute our strategy of value creation investing $14.7 million of planned incremental brand support in the second quarter of 2015. The 6.5% adjusted EBITDA growth includes these incremental brand support investments and therefore, we believe that our additional investment in brand support is paying back.

This quarter also continued to be affected by currency headwinds in net sales, which reduced, as reported, net sales by $30.2 million. However, excluding Venezuela, our ex-FX sales have grown by $23 million, mostly offsetting the $30 million FX impact. The currency headwinds that started in August 2014 have remained strong in the second half of 2014 and the first half of 2015. However, if the exchange rate environment remains stable, we expect lower headwinds in the remainder of the year.

Notably, on an EBITDA level, the exchange rate impact has been minimal over the past two quarters. This is due to lower profit in countries where FX has had a significant decline and the value generation from synergy and other strategy value creation drivers, which have delivered offsetting value. I will now turn over the call to Roberto.

Thank you, Lorenzo and good morning, everyone. Here are the financial results for Q2 2015 on a GAAP reported basis. Net sales were $482.4 million versus $497.9 million in Q2 2014. Operating income was $60.7 million compared to $62.6 million in Q2 2014. Net income was $26 million, or $0.49 of diluted EPS compared to $18.1 million of net income, or $0.34 of diluted EPS in Q2 2014. These results include the impact of certain non-operating and unusual items in both periods.

Moving on to our segment results, in Q2 2015, consumer segment net sales were $354.7 million. On an ex-FX basis, consumer segment net sales increased 1.4%. However, excluding Venezuela, consumer net sales increased by 3.7% on an ex-FX basis in Q2 2015. This increase was mainly driven by higher net sales of Almay and Revlon Color Cosmetics partially offset by lower net sales of Sinful Colors.

Consumer segment profit was $83.8 million in Q2 2015. On an ex-FX basis, consumer segment profit increased 4%. Again, excluding Venezuela, consumer segment profit increased 11.6% on an ex-FX basis in Q2 2015. The increase was mainly due to higher gross profit as a result of the increase in net sales, as well as price increases, variable sales mix and core reduction within cost of sales, partially offset by $7.3 million of higher brand support for the Company's consumer products.

In the professional segment, Q2 2015 net sales were $123.4 million. On an ex-FX basis, professional segment net sales increased 4.1%. This increase is primarily due to higher net sales of American Crew and Revlon Professional Products. Professional segment profit was $24.3 million in Q2 2015. It is important to note that the phase-in of initiatives in 2015 is different than in 2014. The majority of our planned brand support for 2015 took place in Q1 and Q2.

The primary drivers for the professional segment profit results were $7 million of higher brand support expenses for the Company's professional brands, a favorable adjustment of $3.4 million in Q2 2014 related to a decrease in the (inaudible) and the increase in the professional net sales as was just discussed. As a result, on an ex-FX basis, professional segment profit in Q2 2015 decreased 21.3%.

Moving on to net sales by geography, in Q2 2015, net sales in the US were $267 million, or 4.6% higher than in Q2 2014. This increase was driven by higher net sales of Almay and Revlon Color Cosmetics, as well as Revlon ColorSilk, partially offset by lower net sales of Sinful Color and CND nail products.

Moving on to the international results, in Q2 2015, international net sales were $215.4 million. On an ex-FX basis, net sales were up 1.2%. International net sales in the consumer segment were impacted by Venezuela. Excluding Venezuela, international net sales increased 4.8% on an ex-FX basis. International net sales increased in the professional segment primarily due to higher net sales of American Crew and Revlon Professional.

Moving to top of Company results, adjusted EBITDA was $90.1 million in Q2 2015 compared to $85.7 million in Q2 2014. On an ex-FX basis, adjusted EBITDA increased $5.6 million, or 6.5%. This increase was probably due to higher net sales in both the consumer and the professional segment, as well as variable cost of sales in the consumer segment, partially offset by $14.7 million of higher brand support expenses in Q2 2015.

Taking a look at liquidity, as of June 30, 2015, our unutilized borrowing capacity and cash on hand was $358.8 million. This was made up of available cash of $192.6 million and available borrowings 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 questions. Operator, please prompt the participants for questions.

(Operator Instructions). Kevin Ziets, Citi.

My first question was on just the M&A environment. Obviously, a big acquisition announced by Coty in terms of the Procter brands and I am curious how you see the competitive landscape changing as a result of this both in the near term and in the longer term?

Basically it's premature to comment I think on the Coty deal. That is not concluded and operational yet. However, as you know, the beauty category has become -- and even more so in the last years -- extremely competitive due to the entrance of new brands that got activated, brands bought by some of our competitors that now are active players and the recent development of let's say private label type of players. These already make the environment very competitive and P&G is a company that, as everybody knows, invests in the development of their [African] brands, so at this stage, the move to Coty is unlikely to change what is already a very extreme competitive scenario.

In terms of consolidation, the consolidation does lead to benefit for the Company that can materialize them, but as you can imagine, this company has to pay for the acquisition. So not necessarily the consolidation benefits get translated in a stronger competitive attack. In our case, consolidating Colomer with Revlon generated synergies and we are using them to increase the brand support and the way we compete in the market. But to do the acquisitions, you have to really borrow a lot. You have to generate cash flow, so not necessarily depending on the price of the acquisition and dynamics of the acquisition, it's not obvious that such consolidation will lead to significant incremental investments on that side.

So anyhow, we will see. Time will tell and we are ready for the increased competitive environment and, as you know, we have -- versus 2015 -- versus 2013, end of 2013 -- our brand support has been increased significantly. We are more than $50 million in increased investment. The new Revlon is a Revlon that has a competitive level of investment and a strong pipeline for the future, so we are ready.

Okay, great. And then just in terms of the consolidation, does it in any way accelerate your desire to get bigger, to look for -- I know you did the CBBeauty acquisition, but is there, are there other properties that you are maybe thinking of accelerating your timeline on looking at?

We are not going to comment on that. We are, as we said before and I repeat, we are ongoing exploring opportunities that are feasible opportunities for our structure ownership financial and dynamics and that's an ongoing exercise and we won't comment on the details.

Okay. Could you comment on CBBeauty itself and sort of what your expectations are there either from a top line or EBITDA perspective over time?

As you know, guys, that we are not making forward-looking statements and we make an effort really not to. Obviously, as I said before, we bought CBBeauty. It's right now a work in progress. Fragrance business, we think it's an attractive segment despite -- I appreciate that analysts have a different point of view and they should have a view. But it's a very large fragmented segment and the [facts] may be counterintuitive. The competitive intensity is medium. It is not high because it's very, very fragmented.

There are lots of assets and lots of licenses that are in the market that can find a licensee like us that will take care of them and develop and grow them and that's basically our objective right now. We are working on analyzing potential licenses to develop and/or acquire, but it's work in progress and it's premature to give you detail.

Okay. And my last question was on Almay's performance in the quarter and whether that was driven by new product launches, sort of a sell-in of new products or whether there's been improvement in the underlying sales trend for the point-of-sale for that brand?

Almay is a core asset and is up in net sales in 2015. The growth of sales is not necessarily the results of -- there is some growth also at gross sales level, but we are benefiting in this quarter and in the (inaudible) by a reduction of -- in the flow of returns. The returns are in the color cosmetic industry, I just want to remind you and the others on the call, are a significant [pain] factor because we launched an initiative that goes on shelf and the first moment we do so displaces product that are on shelf. It's a significant pipeline that gets returned to us and eventually disposed of.

And we have, by implementing fewer, bigger, better innovation, we definitely did fewer and we are working on making them also better. We had significant return reduction in the past years and this is one of the drivers that is offsetting and helping us more than offset the FX impact. And Almay -- there is no one-off adjustment. There is not an adjustment of the reserve, but there is a lower rate of return that is impacting the quarter.

In addition, we have moved the brand mix from transactional to a pool -- consumer pool-based type of dynamic. So what do I mean is, in the market, people do FSI. FSI is like a typical promotion. You drop value coupons and those in the US, they work, but the increasing economic of an FSI, they are not necessarily good for the P&L. So you can grow business and share by dropping lots of FSI. That makes a lot of sense and just making if you want an [academical] digression here, but it makes a lot of sense to drop FSI when you have an innovation and you want to get people to try your product because it's one way to accelerate the diffusion of an innovation.

But if you have to keep that product sales constantly feeding it with FSI and FSI, that means that there is an issue in the underlying equity and strength of the brand and so we have reduced the level of FSI because we want Almay to walk on its own and we moved some investment from, if you want, FSI, or transactional as I call it, to equity pooling investment. So this process, you can see the results in the P&L. There is an uplift -- we didn't share the details -- but there is an uplift on gross sales. There is an uplift of net sales and that's due to reduced return, reduced FSI and increased gross sales.

Even despite moving away from transactional investments, you're seeing lower returns for the Almay brand?

Yes.

That's great.

I was completing the comment for accuracy that this [allowed] obviously is affected by the lack of FSI, but we are finding an equilibrium because whether people appreciate that or not, I want to put the resources on brands that can give me growth and cash. And in the case of Almay, we need to find that equilibrium. It's not growth for the sake of growth. It's growth for the sake of having a profitable business and operating cash flow. And therefore, we are trying to find this optimization for Almay and balancing the transactional investment to brand support.

Okay. Thank you so much for taking my questions.

Carla Casella, JPMorgan.

On Venezuela, you broke out the EBITDA for last year's second quarter and first half. Have you given what the annual EBITDA was for Venezuela so we can get a sense for LTM-adjusted EBITDA excluding it?

We don't give projections, but it will be completely material for the rest of the year.

Oh no. I mean for fiscal 2014 last year, how much of the EBITDA that was included in your prior reported EBITDA was from Venezuela?

So in the second half of the year, last year, we had the rate at 53 bolivar to the dollar, so as I said the numbers are going to be completely immaterial.

Oh, okay. And then you mentioned that you pulled forward some of the brand support into 2Q. Have you said how much that would reduce the brand support or SG&A year-over-year in Q3?

We are not going to disclose that because it would imply a forward-looking statement for you and our competitors, but, yes, as we've noted in the prior release, and that remains true, we said that we expect the brand support for the remainder of the year to be in line with 2014 levels. And now in Q1 was higher, in Q2 was higher, so you can pretty much get the qualitative indication from that statement.

Okay, great. Thank you. That's all I had.

(Operator instructions). Grant Jordan, Wells Fargo.

I had one question. Can you give us a little bit more in terms of why the American Crew and Revlon Professional are doing so well? Is its new product, additional distribution, more takeaway?

We don't comment typically by brand except that we call them out because there have been variations, but it's again implementing the driver of the strategy of value creation, and it sounds boring, my answer, but it's really the [comp]. And in the case of American Crew and Revlon Professional, so we have four drivers. One is P&L management, one is profitable growth, cash management and people. In the case of American Crew and Revlon Professional, it is the second block, which is profitable growth. We have been working on present expansion, that means expansion of our physical presence in existing countries because we always have room to grow by acquiring new salons and as well as expanded or entered new territories via distributors.

That's one of the driver of the growth of this business, which is still long room to grow before we tap it out and then there is a second which is the level of investment in brand support that we put behind the brand. Obviously, it's working in activating better flow of sales. And third, we have to reboot also in the case of American Crew our -- we've done a refreshed advertising plot that is proving effective and I don't want to go into too much detail on that, but it's proving effective and we have this new concept of groom to win campaign that is liked across the board.

And as far as concerned Revlon Professional, similar consideration. Expansion of doors. When we say door in the case of a professional business, we mean salons and it's very much a slow process because it's literally delivered by people, not by a salesforce. It's a slow process, but we are focused on it and we are expanding doors and in addition for Revlon Professional, it's worth calling out the launch that we are doing right now of a new color line that we call it the most beautiful color in the world and that is Revlonissimo Colorsmetique and that's working very well. And so essentially the second driver is present expansion, innovation, brand support, etc., etc. and these things are working well.

Okay.

That does conclude our question-and-answer session. I'll turn the call back over to our speakers for any additional or closing remarks.

Okay, that's it. No more questions. Thank you very much for attending the call and have a nice day. Thank you.

That does conclude our conference. We thank you for your participation.