Revlon Inc (REV) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Revlon 2015 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 Mr. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin, Ms. Anderson.

Thank you, Jennifer. Good morning, everyone, and thanks for joining today's call. Earlier today, we released our financial results for the year ended December 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 2015 form 10-K, 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. The Company has identified certain unusual items impacting the comparability of the Company's period-over-period results. 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.

Good morning to all of you, and thank you for joining our call today. Overall, 2015 ended with a very successful fourth quarter for both our consumer and professional segments.

Net sales were $521.9 million in Q4 2015, a growth of 4.2%, or 9.8% on a XFX basis. On a full-year basis, the net sales were $1.91 billion in 2015, a decline of 1.4%, yet a growth of 4.9% on a XFX basis. Adjusted EBITDA was $125.6 million in Q4 2015, a growth of 16.4%, or 21.8% on a XFX basis. On a full-year basis, adjusted EBITDA was $377.5 million in 2015, a growth of 3.4%, or 7% on a XFX basis.

As reported, net income was $24.8 million in Q4 2015, including the impact of $37.5 million of nonoperating items, net of taxes. On a full-year basis, as reported, net income was $56.1 million in 2015, including the impact of $47.3 million of nonoperating items, net of taxes.

The non-operating item for both periods included a pension lump-sum settlement charge of $20.7 million, and the non-cash goodwill impairment charge of $9.7 million, which was $6 million after taxes. Importantly, excluding these nonoperating items, adjusted net income was $61.3 million in Q4 2015, an increase of $56 million, and was $103 million in 2015, total year, an increase of $43 million, or 71.5%.

During 2015, the Company has re-invigorated its key brands, and increased our profitability. At the same time, we successfully integrated the Colomer business into the combined Company, and reduced our cost structure. The Company has built strong momentum. We are in a more competitive position, and we have more resources to invest in our brands. I will now turn the call over to Roberto.

Thank you Lorenzo, and good morning everyone. We will now review our segment results. In 2015, consumer segment net sales were $1.41 billion. On a XFX basis, and excluding Venezuela, consumer net sales increased by 4.4% in 2015. This increase was mainly driven by higher net sales of Revlon color cosmetics, Mitchum, Revlon ColorSilk and Cutex, partially offset by lower net sales of Almay.

Consumer segment profit was $360.2 million in 2015. On an XFX basis, and excluding Venezuela, consumer segment profit increased by 11.1% in 2015. The increase is mainly due to higher gross profit as a result of increasing net sales, partially offset by $8.7 million of higher brand support for the Company's consumer brands.

In the professional segment, 2015 net sales were $471.1 million. On a XFX basis, professional segment net sales increased 2.4%. This increase is primarily due to higher net sales of American Crew, Revlon Professional products, and Creme of Nature, partially offset by lower net sales of CND.

Professional segment profit was $103.9 million in 2015. On a XFX basis, professional segment profit increased 2.7%. The increase is mainly due to the increasing gross profit as a result of higher net sales, partially offset by $5.1 million of higher brand support for the Company's professional brands. Affecting the comparison, 2014 included a favorable adjustment of $3.4 million related to our decrease in the inventory obsolescence reserve. Excluding this, on a XFX basis, professional segment profit would have increased by 6.1% in 2015.

Moving on to net sales by geography, in 2015, net sales in the US were $1.04 billion, or 2.1% higher than in 2014. US net sales increased $33.4 million in the consumer segment, primarily driven by higher net sales of Revlon color cosmetics, Mitchum and Revlon ColorSilk, partially offset by lower net sales of Almay. US net sales decreased $11.6 million in the professional segment, primarily due to lower net sales of CND nail products.

Moving on to international results. In 2015, international net sales were $870.6 million. On a XFX basis, net sales were up 7.9%.

International net sales increased $20.6 million in the consumer segment, primarily due to higher net sales of Revlon color cosmetics and Mitchum. International net sales also increased $23.7 million in the professional segment, primarily due to higher net sales of American Crew and Revlon professional.

From a geographical perspective, the increase in the consumer and professional segment was throughout most of the Company's international regions. Additionally, the other segment had net sales of $28.4 million in 2015, with no comparable net sales in 2014. Excluding Venezuela, international net sales increased 9% on a XFX basis.

Moving to total Company results, on a XFX basis, adjusted EBITDA increased $25.4 million, or 7%. This increase was primarily due to higher gross profit in both the consumer and professional segments, partially offset by $16.2 million of higher brand support expenses, as well as higher general and administrative expenses.

Driving the increase in general and administrative expenses was $14.7 million of severance cost. Adjusted net income increased $43.1 million, or 71.5%. This increase was primarily due to the growth in adjusted EBITDA, as well as a $24.2 million decrease in the provision for income taxes in 2015. The income tax provision decrease is mainly due to a net reduction of our valuation allowance in certain foreign jurisdictions in 2015, compared to the establishment of such valuation allowance in 2014.

Taking a look at liquidity, as of December 31, 2015, our unutilized borrowing capacity and cash on hand was $473.6 million. This was made up of available cash of $307.4 million, and available borrowing on our revolver of $166.2 million. Now, I will turn the call back over to Lorenzo.

Thank you, Roberto. As a final remark, I also want to announce that I have informed the Board of my intention to step down as President and CEO, effective March 1. I do this for personal reasons. It has been a pleasure and a privilege to lead this extraordinary Company during a period of transformation and growth. It has been my mission to continue Revlon industry-leading commitment to quality and innovation, and it is the Revlon team's relentless drive toward those goals that has paved the way for our current and future success.

I want also to thank all of my good friends and colleagues at Revlon and MacAndrews & Forbes for their hard work and support. I'm pleased to be staying on with the organization, as a member of the Revlon Board and as an advisor.

I also want to congratulate my good friend, Gianni Pieraccioni, on his well-deserved promotion to Revlon Chief Operating Officer. I look forward to continuing my partnership with Revlon to grow the Company. I will now turn over the call to Siobhan.

Thank you, Lorenzo. 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)

We will go first to Kevin Ziets from Citigroup.

Thanks for taking my questions.

I wanted to start off by wishing Lorenzo good luck, and congratulations on all of that you have achieved in the years that you were at Revlon.

Thank you.

Of course.

I guess along those lines, I was curious if there are -- what are the plans to fill the CEO position at this point? And will you be assisting in that effort? And whether you could say if there is anything related to the MacAndrews & Forbes filing, regarding exploring strategic options that maybe prompted this decision?

Okay. So I'm going to start breaking it down in two. First of all, I'm leaving for personal reasons, and it has nothing to do with the announcement that MacAndrews & Forbes has made. And essentially, I've been working in a workaholic fashion since I started when I was 21, nonstop. I've gone through a very intense turnaround in the Colomer group, and then moved on, integrating the Company here. And we have done a successful job both in integrating and rebuilding momentum in Revlon. And I think I've completed this cycle, and I want to take a break, and focus on myself and my family, and essentially engage in new challenges in the future. That's the reason why I'm leaving.

Now, as far as concerning the new CEO, the Company expects to have an announcement soon. And that's basically where we stand.

Okay. Can you talk about the process at all, in terms of exploring strategic options, and what kinds of things are being evaluated?

We don't comment on an announcement that we have not made. And if we would have had anything material to release, we would have. And there is nothing material that Revlon needs to release at this stage. And the announcement is a MacAndrews announcement, and we won't comment on that.

Okay, fair enough.

Just diving into the business, I noticed in the fourth quarter, international sales were up quite significantly. Is there something regarding timing, product launch, or maybe distribution gains that you could speak to, that may be driving that?

Yes. So the question reflects a little bit of a misperception that is probably out there in the market. That we are -- it says we are flat in sales. And indeed, on an as-reported basis, the Company has been flattish in the past quarters. But on an XFX, we have been growing, quarter after quarter, for quite some time now. And you can go and track it back in all the announcement. We have built strong momentum, thanks to the strategy of value creation. Namely, we have increased prices, we have increased margin. And increased margin also for cost of goods improvement; and then we obtained more resources, which we reinvested back into the business.

In fact, the brand support levels, which would support the business now, are competitive. We deem them to be competitive. That was not the case in 2013. In 2013, they were insufficient. The strategy of value creation created resources that we invested in the brand, investing behind our brands with a focused strategy behind fewer, bigger innovation, has yielded improvement in the results. And that's -- we have good results in, I would say, around -- it's difficult to give a number in specifics -- but approximately 80% of our business units are clearly up. And some double-digit versus the past, thanks to this renewed investment and focus.

So what's driving that, in the consumer business, it's driven by these -- let's say, essentially, investment increase and investment focus, because it's not just increase. It's the fact that we have launched less innovation, and yet yielded more sales. That may sound counterintuitive, but I want to re-clarify, that's the reason of the [fewer bag of] strategies that we were launching. So many things that it was difficult to focus on any of them. So we select our bets, we focus on that, on fewer initiative, and by doing so, we get better results. So that's essentially what is driving the consumer business.

As far as concern the professional, professional had, in 2015, on a like-for-like basis, okay, excluding the XFX impact. If this would be a company reporting in euro, we wouldn't have this strange misperception and storytelling. So on a like-for-like basis, the professional business has done its best year ever internationally, because Revlon Professional has built a strong momentum behind the launch of successful innovation, like [they're releasing] more color, and American Crew has also reported double-digit growth internationally. It is due to increased investment and sharper positioning. Now, to complete the picture, also CND, internationally, has performed well, even if domestically CND has struggled a bit in the value market.

So all in all -- and I know it sounds like a long story. And -- but all in all, the bottom line is, on a like-for-like basis, we have posted very significant growth, and that's not the first quarter we do so. It has been a while. Unfortunately, we faced FX impact that was totally unprecedented and totally significant. And that has basically offset the perception we talked about.

I appreciate all that color. (multiple speakers)

For example, this year, the net sales FX impact is $121 million. So you can appreciate that if we are substantially flat, but we have offset $121 million of FX impact, and in EBITDA, we are actually growing, that the underlying fundamentals of the Company are very solid.

Absolutely, and I appreciate all that color.

I should have been clearer, and just saying that I was -- the fourth quarter, excluding FX international sales, grew 20%, and that seemed to be a little bit higher. And maybe I can ask the question a little bit differently. Do you think your sell-through rates are consistent with the level of sales that you've reported on a XFX basis? Or is there any kind of timing between your distributions and what's happening at the point of sale?

No, there's absolutely nothing to report in this sense. In that sense, I want to address indirectly, it seems like you're asking if there's been any sort of loading practices. Loading is forbidden in our operational practices. We actually punish it. And if someone does loading, we actually fire them. And we built a business -- and for us, business is sell-out and not sell-in -- and I'm very comfortable that there has not been any distribution or trade loading of any sort.

Right, I wasn't suggesting that. (multiple speakers) I wasn't suggesting that. I was just curious if there was any product launch-driven types of timing differences, not any loading issues.

The only thing that -- it is a small detail, but for the sake of transparency -- that we need to call out, but is immaterial, is in Australia. Because we launched SAP roll out. We have anticipated a little bit of sales of approximately a month of sales. But that's just Australia, and it is very minor.

I appreciate that.

If I could ask one last question, it sounded like you are were comfortable with the level of advertising and brand support going forward, that it would be roughly equal to 2015 levels. Is there any timing on that? I seem to recall the first half of this year being a little bit heavier than the second half, on a year-over-year basis. Just didn't know if there was anything, timing-wise, we should expect, in terms of 2016?

So basically, let's say that our level of investment is now deemed to be competitive, and we are going to be more or less in line with last year. As far as timing, I don't want to disclose that, because it is sensitive for competitive reasons.

Okay. And a very last housekeeping item is -- just, do you have the restrictive payments capacity limitations handy, with regards to either the bank data or the bonds? If not, I can follow up.

Yes, we can follow up.

Okay, thank you, guys. Good luck.

We will go next to Grant Jordan from Wells Fargo.

Great, thanks for taking the questions. I'd also like to say, job well done, as you are leaving, Lorenzo.

I just wanted to follow up a little bit on Kevin's question on the international sales -- that was -- been growing all year, but particular strength here in the fourth quarter, at almost 20%. Was that mainly taking share within existing markets? Or did you have new distribution or new geographies you went into?

Okay. So on a broad stroke basis, I would say we need to separate the story between consumer and pro. So on consumer, we have -- I would say generally, we have been taking share, but as well as expanded distribution. So your question is, we have done both. And in some cases, we have, by expanding distribution, we expanded share. So for example, in Japan and Korea, we have expanded distribution, hence business and share. So part of the strategy of our [liquidation] pillars is the roll-out of our key categories in all the geographies.

And last year, we have initiated the roll-out, for example, of ColorSilk. ColorSilk, it is our hair color business. And we launched it in various markets, and it had very encouraging initial results. And as well as re-invigorating, as I mentioned before, the support between our core category, color cosmetics, which has gone from, let's say, being a little bit under-invested to being properly invested. And these have generated consumption pick-up.

And also worth mentioning -- another dimension -- we have grouped the distributor management business behind one person, and not in a regional way. We centralized it. And also, our distributor business is -- because we now focus the business on building the sell-out and not building the sell-in, it has been reactivated with a plan and investments. And that is showing very good momentum. So that's for consumer.

And as far as (inaudible) pro, Revlon Professional, I would say, is essentially driven by innovation. That work that we have done some very important re-launches, like the re-launch of Revlonissimo color, that has been very successful. And American Crew, by marketing plans and marketing focus and distribution, also expansion. And CND has performed a bit better, because of the investment level, at least internationally. So you can appreciate that we did focus a lot on the international market, hence [the tireless] trips and travels. And the reason is because we had to offset the FX.

As I mentioned before, and just to give you some perspective, in (inaudible) 2003, when I started, the euro is down 20%. The Canadian dollar, 22%. The Australian dollar, 20%, South African, 30%, Mexican peso, 20%, Argentinian peso, 40%-plus. These are approximate numbers, okay? But since we bought Colomer, since Revlon integrated with Colomer, the footprint was no longer a US footprint. Revlon was already international, but it became even more global, and therefore, unfortunately, more exposed to the FX impact.

And I would've loved that to be like some other French company reporting in euro, so that we wouldn't have this misperception out there, because we would have had -- instead of headwinds we would've had tailwinds in a very big way. But nevertheless, we created our own tailwinds, creating momentum for the business, and therefore offsetting -- largely offsetting, in sales -- not completely, but largely offsetting these headwinds. And in the process, improving the fundamentals of our brands, of our business, and we improved also our profitability. So the headwinds could've caused, also, the client profitability. Instead, there, our work has been able to more than offset that. And that is why we are more profitable.

Okay, that's helpful, and certainly, the FX has been a very high hurdle for a number of years. Obviously, we don't know which way currencies are going to go this year. But based on current rates, do you expect FX to be a headwind for Revlon in 2016?

So as you know, without this being a forward-looking statement -- because I don't control the FX. If we would control the FX, we would have another job. And without doing that, we expect, at this rate, if the current rate remains the same, the headwind to be minor -- very minor. So maybe in the range of -- a little bit in Q1, and half of Q2, max, but we deemed it to be minor, okay? And -- yes, that's basically -- the problem is that the volatility of the exchange rate is significant, and we can't really bank it.

Yes, no question, okay.

My last question -- that was a very helpful response. But can you help us think through the gross margin rate change in Q4? It was down 300 basis points. I think your commentary indicated that gross profit was up, XFX, for both. If you could just tell us how much FX hurt the gross margin rate in Q4, that would be helpful to think through that.

Yes, one second. We had two impacts in the -- yes? We have two impacts in the quarter. One is the gross to net activity, during the first nine months of the year, was much lower than in 2014. And in the Q4, we had a significant increase in the gross to net allowances. It was just a timing issue. And the second one, as I commented, the FX transactions that had impacted in the Q4 significantly. Those are the two main drivers.

Okay, so just so I can make sure I understand that -- the gross to net, you are saying that the true-up through the first three quarters was underestimated? And so the fourth quarter, there was a catch-up for the --

No. So the timing of the activities on the gross to net activities on that rate, in the consumer business, were lower than 2014 during the first three quarters of this year. And in the Q4 2015, were higher than that year. It's a matter of activity at [trade] level.

To give you some color, we launched last year, in quarter four, 2014, we launched the Love is On campaign. So we focused quite a bit of resources in brand support. And we were a bit, I guess, lower than usual in gross to net support, which is trade activity, FSI, coupons, and the like. And this year, instead, we had a lower level of brand support. And below the line, and a higher level of gross to net. And that is because we -- among other things, we have been promotionally more active during the holiday period.

We have special kits and gifts that, as a business, that, as you probably know -- if you don't I will give you some color. The beauty category in general becomes very seasonal. And during -- there is a period of four or five weeks where you almost double. And so -- in general, the beauty category, in the holiday period. And traditionally, we were not very active. And this year, we have been active. And we have been active, and that is also one of the reasons we gained share during this period, and we have now a reasonably good share momentum.

Great, okay, yes -- that piece of information is very helpful, as we think about the margins. Thank you.

But there was also a transactional impact on COGS.

Almost $3 million of FX.

In the quarter.

In the quarter, almost $3 million.

And almost $12 million of gross to net activity.

Okay. Great, thank you.

(Operator Instructions)

We will go next to Carla Casella from JPMorgan.

Most of my questions have been answered.

But did you say we should look for permanent display spending [to face] similar to this year, in the year ahead? Or how are you looking at spending behind the brands, either between permanent display versus consumer advertising?

We expect the investment brand support, and in display, to be comparable with the one that we had this year. And that is an expectation to make the statement. In reality, also, we are trying to become more efficient. So what we would like to do as a Company, is to create the same impact, spending less. And in fact, we have projects in place to become more efficient, especially on the permanent display.

You asked, permanent display. A lot of that, it comes from procuring them from third parties. So we have projects in place to -- we actually recruited even a specific person on that. So that ideally, we create the same in-market pressure, but hopefully, we save some money. But that is more a qualitative indication. On a quantitative indication, I will say to you that they would be comparable, because that is a cat that has not been skinned yet. And I didn't mean to imply that we normally skin cats here but hopefully, but (laughter) hopefully that -- I will get a pass for it, because --

Okay, that's great. And are you seeing much competition on that front? Are your competitors changing the way they support brands, either between permanent display spending or consumer advertising, print or media?

There is nothing material, really, to report on this front right now. It would be too long of an answer, and I would need to go into details for our competitors, and we don't do that.

(laughter) Okay, great. Thank you.

Thank you. We will go next to Arthur Roulac from Three Court.

Good morning, and congratulations on some fine work this year, gentlemen.

My first question is an easy one. In the third quarter Q, you guys called out a new restructuring plan, and I was wondering what the potential cost savings from that restructuring plan might be in 2016?

Internally, we refer to this project as a [post] global efficiency, which was launched as a (inaudible) in Q3 2015, and will continue through the end of 2017. The project is aimed at reducing headcount across several markets, in an effort to drive organizational efficiencies. We expect a total of approximately $10 million in one-time cost, and we expect to achieve a total of approximately $10 million to $15 million of core reduction, fully implemented by the end of 2018.

Got it. And in the release, you called out, I guess in the fourth quarter, there was higher cash compensation expense, year over year. Can you say what that was, just from a comparability perspective, for us?

Can you repeat the question, please?

Sure. I think in the press release, I was reading out today that the cash compensation expense was higher. And I guess you were accruing for maybe more management bonuses in the fourth of this year versus last year's fourth quarter. And I was wondering how much higher that was, so we can have some comparability?

It is just pure timing in 2014. We had a higher increase on the bonuses in the Q3 of 2014. And this year, it happened in the Q4 2015. So it's purely a timing issue, comparing Q4 last year with Q4 this year. And it is an immaterial amount.

Got it. And then I know -- I think you called out severance expense being higher in the fourth quarter. And I know that's not added back to EBITDA, and I believe there was fairly significant severance expense for the entire year of 2015. Can you let us know how much cash severance expense there was that wasn't added back to EBITDA in 2015?

Yes, it was significant, and it was $14.7 million. Now, you can appreciate that every company has a turnover of people that is somewhat physiological, and there's always severances. And -- but this year, in 2015, we started, early on in the year, executing what we call a [Renova] project. Renova. And that Renova means an upgrade of talent. So we've gone, starting from the top two layers down, trying to replace underperformers with better performers. And this exercise has been systematic, and across all geography, all functions. And this led to an incremental $14.7 million of severances.

At this stage, I cannot make a statement for 2016, especially in light of the management changes that are coming. You never know what the new position will be taken by new management. But as far as we're concerned, with the existing visibility, we can say that, that amount was unusual and possibly non-recurrent. Said that, you appreciate that I'm not making a forward-looking statement, because things can change with the new management. So the $14.7 million has impacted our as-reported results, and it's one of those unusual items that we correct, when we talked about adjusted EBITDA. It's not your typical restructuring. It's not your typical restructuring, because your typical restructuring drives a saving. And this one doesn't drive a saving. It is just a cost. It's just a cost, and the payback is an upgraded talent pool.

So do you want to say something, Roberto?

No, it's fine.

Okay.

And then my final question would be the -- I guess the pension, you bought some people out. And I haven't had a chance to look at your 10-K that just came out, but how much is that reducing cash pension costs going forward?

It doesn't have any impact on the cash pension payments going forward.

And then obviously, I guess, there's going to be some sort of announcement coming up, and there's a lot of moving parts. But obviously the Company -- Lorenzo, you have done a great job, so congratulations. Sorry to see you go. The CFO is moving on, as well and you have a COO running the business. I guess the idea is, at some point fairly soon, there is going to be some sort of announcement with regard with what is going on in the C Suite of the Company?

Yes, okay. As I mentioned before, and -- we expect to have an announcement soon on the CEO. And subsequently, the search of the CFO was well in advanced stage. And we have identified several candidates, which I believe that now would be assessed by the new management. So all in all, without giving a specific date, I believe that we will soon -- and I say soon -- address these announcements. And in the meanwhile, the organization is well-covered. We have Gianni, which is an extremely capable and talented manager, running all the operation. Siobhan leading all the accounting and finance at the interim, plus the very strong Financial Controller we have for the professional and consumer division.

And this is a matter of soon, okay? I don't want to make a specific statement, because I don't control it. So we realize that the timing is a little bit what it is, but we think that this matter will be addressed shortly, and therefore, I wouldn't see that as a concern.

Thank you.

There are no further questions at this time. I will turn it back over to our speakers for any additional or closing remarks.

Okay. So thanks for the questions. And with this, we conclude our call today. Thanks a lot.

That does conclude today's conference. Thank you for your participation.