Revlon Inc (REV) 2016 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Revlon's second-quarter 2016 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 hand the call over to Ms. Siobhan Anderson, Revlon's Chief Accounting Officer and Treasurer. You may begin Ms, Anderson.

Thank you. Good morning everyone and thanks for joining today's call.

Earlier today we released our financial results for the quarter ended June 30, 2016. 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 Fabian Garcia, our Chief Executive Officer; Juan Figuereo, our Chief Financial Officer; and Scott Beattie, Chairman, Chief Executive Officer and President of Elizabeth Arden.

Before I turn the call over to Fabian, 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, and are provided pursuant to the Private Securities Litigation Reform Act of 1995. Information on factors that could affect our actual results and cause them to differ materially from such forward-looking statements as set forth in our SEC filings, including our Q2 2016 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. The Company has identified certain unusual items impacting the comparability of period-over-period results. As a result of these unusual items, the definition of adjusted EBITDA 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.

In addition, unless otherwise indicated, our discussion today will be an on a XFX basis, excluding the impact of foreign currency fluctuations on the period-over-period variances. Our discussion this morning should not be copied or recorded.

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

Thanks Siobhan. Good morning to all, and thank you for joining our call today.

Before I share with you highlights from our second-quarter performance, I wanted to summarize the three strategic objectives we aim to achieve going forward. First, build a foundation for sustainable growth that outpaces the market. Second, harness the power of our iconic brand portfolio to delight our consumers wherever and however they shop for beauty. And three, develop a cost structure to deliver world-class profitability.

As stated in this morning's earnings release, I am happy to report that we ended the second quarter strong, with net sales up 3.5%, adjusted for foreign currency. This growth was fueled by new product innovation and strong performance across most of our brands in both the Consumer and Professional segments, and in most of our International territories.

Revlon color cosmetics continues to deliver strong growth behind the successful launches of the Revlon mascara collection and the Ultra HD Matte lip color line, both of which were in the top five new product launches as measured by Nielsen so far this year. Revlon consumption is up 3.9% year-to-date in the US, outperforming the mass color cosmetic category. Our innovation in our flagship brands is working as intended.

In the second quarter, growth was also driven by Kylie SinfulShine Collection, a brand with a robust digital following, by Mitchum Anti-Perspirant Deodorant's new Dry Advanced Control Spray, and by Cutex nail products in our Consumer segment.

In our professional business, American Crew's line of special edition grooming products honoring style icon Elvis Presley has continued to demonstrate strong sales, as also have the Revlon professional hair products.

Also, as you know during the second quarter we announced that Revlon signed an agreement to acquire Elizabeth Arden. We are very excited about the strategic long-term growth platform that this acquisition will provide. It will allow us to significantly improve our growth prospects in faster-growing categories, channels and territories, while making us a more diversified and stronger top-20 global beauty player. My leadership team and I are very excited about our future after this transaction closes.

We are not the only ones excited about the Elizabeth Arden acquisition. Last week we were on the road meeting with investors, and the feedback was overwhelmingly positive about the potential value creation opportunity this merger provides. As of today, we have secured total financing commitments of $2.7 billion, with favorable terms. Juan will provide details for you later.

Our team is excited by the news of the pending Elizabeth Arden acquisition and the potential opportunities for growth and professional development. As previously discussed, we expect to close this acquisition by the end of 2016, subject to regulatory clearance and customary closing conditions.

As you can expect we are moving forward on multiple fronts. In the past two weeks we kicked off integration planning jointly with the Arden leadership team, and are working on the execution-level planning of synergy capture, as well as the future operating model of the combined organization. Our aim is to hit the ground running on day one, the moment we close this transaction.

As I approach my hundredth day at Revlon, let me share some further observations about our Business and our strategic approach to sustain our growth further. To build off of what I said in the first quarter, we are continuing to evolve the strategic value creation framework, now to include Arden. Our flagship brand Revlon is healthy and growing, and our International business is up both in Consumer and Professional. We feel good about a strong innovation pipeline in the second half, and our teams are focused on excellence in execution. That said, there are specific opportunities to further accelerate our growth and we are working diligently to address them.

First the CND business, which has been focused on the premium, long-lasting nail polish segment, continues to compete against value brand in the salon channels. In the short term we have plans to launch an entry-priced brand under the CND banner, while finalizing a more strategic response to these new market dynamics.

Second, we are working to make Almay more relevant to younger consumers, and more truthful to its core position. This is a priority for our business and our team is focused on getting it right.

Third, and on a more tactical level, our ColorSilk hair color brand has been challenged by recent value brand entries in one of our largest customers in the US. We have plans to launch several innovations in the hair color segment to revitalize that franchise, starting in the third quarter.

As I mentioned earlier, International continues to be a strong growth lever for us and I wanted to provide you with some additional dimension on that. Our Consumer International business grew net sales 12.5% -- 12.6% -- in the second quarter on an ex-ForEx basis, with particularly strong growth in Japan, Argentina and the UK. This increase was driven by Revlon color cosmetics, Revlon ColorSilk, and SinfulColors.

Our Professional International business also had positive results, with net sales growth of 2.5% in the quarter, driven by Revlon Professional and the new Elvis-branded line of American Crew.

As we are well into the third quarter already, we are encouraged by our continued recent strong performance, optimistic about our future, and excited about the growth potential from the acquisition of Elizabeth Arden. I will now turn the call over to Juan, who will walk you through a summary of our financial performance.

Thank you Fabian and good morning everyone. Before I discuss our financial results, I would like to provide an update on the financing of the Elizabeth Arden acquisition.

The Company received a very strong and positive reaction from the debt market, and has secured total financing commitments of approximately $2.7 billion, all with favorable terms. Last week, we completed the roadshow for our senior unsecured notes. Given the significant demand, we up-sized the offering to $450 million. We also have secured commitments for our term loan and ABL for $1.8 billion and $400 million respectively. So our funding for the acquisition is now secured. We continue to expect the deal to close by the end of 2016, subject to regulatory approval and customary closing conditions.

We will now review our segment results. Starting with our Consumer segment, consumer segment net sales were $359.5 million in Q2, representing a 3.9% increase on an XFX basis. This was driven by an increase in Consumer International sales of 12.6% XFX, as discussed by Fabian. Our consumer US net sales decreased 1.3% versus the prior-year quarter, primarily driven by lower consumption of Almay and Revlon ColorSilk, partially offset by higher net sales of Cutex and Revlon Beauty Tools. Consumer segment profit was $81 million in Q2, a decrease of 2.5% on an XFX basis, mainly due to higher cost of sales as a result of product and country mix, and the impact of FX transaction within cost of sales.

Switching now to the Professional segment. Professional segment net sales in Q2 were $123.3 million, essentially flat versus the prior-year quarter. Internationally, Professional grew 2.5%, driven by higher net sales of Revlon Professional, as well as American Crew due to the continued expansion of the Elvis-branded products. These increases were partially offset by lower net sales of CND nail products, primarily as a result of microeconomic conditions in Russia.

In the US, Professional net sales decreased 2.6% as a result of lower net sales for CND nail products, due to the market dynamic that Fabian discussed earlier, as well as the lapping of strong product launches in the prior-year quarter.

Professional segment profit was $24.1 million in Q2, which was essentially flat versus the prior-year quarter. As for our Other segment, we increased net sales 48.8% on an XFX basis versus the prior-year quarter; however, I would like to remind you that CBB was acquired in late April of 2015.

Moving now to total Company results, we reported consolidated net sales of $488.9 million in Q2, an increase of 1.3%, or 3.5% on an XFX basis over the prior-year quarter. Consolidated adjusted EBITDA was $89.1 million, a decrease of 1.1%, or flat on an XFX basis as compared to the second quarter of 2015. The impact of increased net sales in the quarter was offset by higher cost of sales as a result of product and country mix, and the unfavorable impact of transaction FX from cost of goods sold. FX transaction unfavorably impacted adjusted EBITDA by approximately $3 million in the quarter, and approximately $8 million year to date through Q2.

Consolidated adjusted net income in Q2 was $14.7 million, a decrease of $14.3 million driven by $16.4 million increase in foreign currency losses on inter-company loans as compared to the prior-year quarter.

Taking a look at cash, we continue to feel good about our liquidity position. As of June 30, 2016 we had approximately $343.9 million of gross liquidity, consisting of $177.2 million of cash on hand, plus available borrowing capacity of $166.7 million on our revolver. In closing, our core Revlon business has good momentum and we are very excited about the growth potential of our combined business, including the pending acquisition of Elizabeth Arden.

Now I'll turn the call back over to Siobhan.

Thank you, Juan.

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)

Kevin Ziets, Citi.

Hello everyone, good morning. My first question is on the guidance that you had previously put out for, I think it was a midpoint of around $410 million of EBITDA. I am wondering if you could confirm that guidance based on the pipeline that you talked about for the second half, and let's just start with that.

Absolutely, yes.

Okay. You mentioned that you thought you were losing some share and you had some value offerings that were coming out in the second half. I noticed that there is a good bit of margin pressure this quarter. Some of it is FX, some of it is mix. Is that a headwind that we should expect to continue, and therefore the driver of the $40 million-odd improvement in the back half of the year, is it more topline or is it more on the margin side?

Well Kevin, let's clarify a couple of points you have made. We are not losing share. The Revlon brand continues to grow share and has done so for the past 52 weeks. That came out yesterday, great news, and I take the window to congratulate our team for achieving that. Almay is the one that has lost some share over time. So let's clarify that point.

Sure.

We feel very good about the innovation that is coming in the second half, and that we have confirmed our plans on the three segments. And that makes us feel positive about affirming the guidance. From a gross margin point of view, we live in a world of ForEx pressures that will continue to exist. But we feel good about the numbers that we have going forward for the second half.

So, as you know, this business is very US-centric, and we feel very good about the current trends of our business in the US, so we expect the gross margin pressures to abate as we improve performance in the US.

With that I will just say that achievement of $410 million of adjusted EBITDA is exactly as we planned based on our second half innovations, and the fact that we have better innovations for the half compared to what we had last year.

Okay. I know the fourth quarter in particular can be impacted by the timing of when retailer's take inventory for January resets. Is that -- I guess my question is, is the improvement more 4Q than 3Q or is it pretty balanced across the two quarters?

I think it's balanced. Obviously we cannot predict what our retailers are going to do. The visibility we have is based on the innovation and the welcome they have given to that innovation as we have sold it through, which is very positive. At this point in time we are quite confident on achieving our numbers.

Okay. Great. While Scott is on the line I was wondering if you could maybe provide an outlook for the back half on Elizabeth Arden, or at least on fragrances in general.

First of all I'd just refer you our 8-K July 18, we have our earnings call August 10 so I'm a bit limited in terms of going into much detail beyond what we have said in the 8-K. But what I can say consistent with the 8-K is that we ended our fiscal year June 30 very strongly. Our North American business -- again this is constant currency -- our North American business increased by approximately 3%, International was increased 4.5%, and particularly encouraging in our fourth quarter, the Arden brand its sixth consecutive quarter of growth, and it was up 14% in constant currency. So that was very positive.

We are seeing accelerated growth in the Arden brand. That is combined with increase -- pretty significant increase in gross margin both for the year and the quarter. As we go into FY17, again, we don't have outstanding guidance and don't intend to provide guidance on our conference call. But the momentum of both our retail sell-through as well as the performance of our key strategic initiatives around Arden and improved innovation on fragrances are showing positive improvement.

Okay. That's great. And then maybe just lastly for either one of you, just sort of a sense of, we have heard from others about, that inventory reductions in retail have been constraining them. I'm curious how you feel about inventory in the channel, and then I'll pass it on.

So Kevin, we commented on that in first quarter. At the time we said it was going on, and we were expecting that to abate early in the second quarter. It abated relatively late into the quarter, more toward May than in April. So we started slow but we picked up the pace, and I go back to something I said, which is we feel very good about the pace we have right now in the US business. So again there is a lot of different dynamics by different companies, but we are telling you what has happened here.

In terms of our business our inventory is in good shape, with the retailers, particularly the US-based retailers are very conscious of matching selling with sell-through, and you can see from our rate of growth internationally that the performance of our business is pretty strong. So we were very comfortable with inventory levels.

Thank you guys. Good luck.

Thank you, Kevin.

Grant Jordan, Wells Fargo

Great. Thanks, I think a lot of those covered mine. A couple of follow-ups. You mentioned on the CND product bringing in a lower price point, has there been pressure there, is that related to the overall category and product, or do you think there has been pushback on price point?

The way we see it is more about the category and the changing dynamics in the nail salons for volume. Not just the high-quality shellac treatment. So we are going to start our plan to recover with an entry-priced brand from CND, and as I said we will come back with a more strategic response later on. But the market dynamics have changed.

Okay. And then with regards to Elizabeth Arden, since you've got Scott there, are you guys continuing to work on post-close plan and cost saves and that sort of thing?

Absolutely. So first of all we have the privilege of having Scott here, and we have had the benefit of his team's partnership with us for integration planning, which is what we can do between signing and closing. We had, as I mentioned in the call, a terrific press planning session jointly with the two management teams.

We are preparing for planning such integration so on day one we can proceed with the synergy capture. We can proceed with making sure that the teams are focused on delivering the third and fourth quarter sales on both ends. We can proceed with making sure that the Revlon side learns about the Arden business, and we can proceed to form teams on both ends that will help us grow the business going forward. So, we are very active in that area and quite delighted with the partnership that the team in Arden has warranted us.

Okay. Great. That's all I had, thank you very much.

Carla Casella, JPMorgan.

Hello. I have one housekeeping item on the business. As you look at Revlon, can you give us a sense of what percentage of your sales are coming from mass merchants food and drug versus specialty retail. And if you are seeing any opportunities in specialty retail? Something like ULTA and the salons, and the other --

I understand. We would not disclose the ratios, but what we can tell you is that we are focused on driving growth in our retail environment. We are very interested in a balance and we also need to be competitive everywhere the consumer shops. Obviously by retailer, by channel, online, and brick and mortar. In a way the percent split does not drive our interest. What drives our interest is the reach to the consumer.

Okay. Great. And then, are you seeing -- you mentioned that ColorSilk has a new competitor out there on the value side. I am wondering if you are seeing any further increases in either private brand, or focus on value lines coming out in your channels? Are retailers seeing more private-branded cosmetics?

We haven't seen private brand in hair coloring. What we have seen is that some of our international competitors want a piece of our pie. Obviously, with our very strong, leadership positions we have here in the United States these competitive interests are logical in a way. And of course there will be a response.

Okay. Great. Thank you.

William Reuter with Bank of America Merrill Lynch.

Morning guys. It sounds like the innovation pipeline in the second half the year is obviously pretty strong. I was wondering if you could talk a little bit about how the second half results, I guess if you could break it down in terms of the drivers being innovation versus increased sales of your existing product lines.

I don't think we will provide a numerical breakout of growth base versus innovation. What I can comment on it is that first statement that you made, we have very exciting plans on innovation for the second half. It is more of a fewer, bigger, better. But when you compare the fewer, bigger, better for this second half (this year) versus the (second) half of last year, the amount and the quality of the innovation is stronger. So we feel good about that. It's across Consumer and Professional. There is also in the CBB segment some innovation coming down the line. So we feel very good about that.

Okay. And then with the new products that you guys are introducing, are most of these products replacing existing shelf space, or have you guys expanded the space that you have at some of your bigger customers?

In cosmetics we have replaced, that is the dynamic of the trade. In the personal care category, many of them are expansions.

Okay. There was a comment in your prepared remarks about your third-quarter results. Was it meant to imply that the trends that you guys are seeing in the third quarter are similar to those which you saw in the second?

I will not comment on the third quarter until we close.

Okay. I guess lastly for me, obviously there are some brands that have been doing better and some brands have been a little bit softer. Would you guys consider divesting brands, would this be part of your strategy? How should we think about that?

We always assess opportunities to create value for the Company, and rationalizing the portfolio is part of that strategy. But we will not comment on these matters until we have something to communicate.

Okay. I will pass it along to others. Thank you.

David Diamond.

Hello good morning. I have two questions. The first, Fabian, is you've mentioned that digitalization is a top first priority for you. With fresh eyes on the Company now, can you give us a sense of where the Company stands today in terms of that area? And what sort of granularity can you give us in terms of what the financial impact could be in terms of progress in that area.

My second question relates to the recent strategic review of the Company. I think it's fair to assume that --

Sorry, David could you speak up I'm losing you.

The first question was in relation to the digitalization of the Company. The second one is, if we assume that the recent strategic review means that the Company is more of a consolidator in terms of M&A versus a consolidatee, I am interested in your views on your equity currency given that the shares traded a very depressed multiple relative to their peers, and that M&A transactions in the beauty space generally have gone on at much higher multiples to where Revlon is.

How important is it for you to improve that equity currency valuation so that you can -- so that deals can be more accretive in terms of using cash, and that's my second question.

We will give you an answer to the first question, and then we will short comment on the second question. For the first question, yes digitalization is a priority for us. We have undertaken an evaluation of where we stand in the digital space. We have hired a couple of experts in this area. And indeed this week we had a review of their assessment of our current capabilities, and their plan to continue to advance our digital capabilities. And you know, this is an area that is of great interest to many of our competitors who have come forward and speak about what they are doing.

So I would prefer to not get into more granularity than to say that we are really excited about the difference that these digital experts are starting to make in the way the Company is engaging with the consumer. So this is the new world in which we live. All of us, we look at our phones 150 times a day. Some people of younger age profiles don't watch TV anymore.

So, what we want to be sure of is that we connect with them where they are, and we engage with them with the content and the authenticity that they demand from brands today. So expect more from us in this area, we are very excited about this in fact, we are having a town hall in the next hour after we're done with this, and the two digital leaders in the operation will brief our teams internally of the specifics of what I am highlighting for you. So expect more here, make sure you check your phone.

On the recent strategy review, I will not comment on this notion of consolidator versus -- acquirer versus seller. I think the facts speak for themselves. There was a strategic review, and we have announced the purchase of Elizabeth Arden. So we will be very focused on creating value by capturing the synergies that the Elizabeth Arden acquisition affords us, and growing the combined company to become a top 20 global player and beyond.

So, how we are going to finance any future moves is something we will address at the time that those present themselves, but our priority right now is to make sure that the acquisition is completed first. Then that the integration is done flawlessly. And the market will respond to that in the way we will deliver our results.

Great. Thanks very much.

Thank you David

Karru Martinson, Jefferies.

Good morning. When you guys look at the feedback from retailers on the merger with you and Arden, when do you kind of feel that you can start leveraging your scale now as a global leadership portfolio brands?

Well, we have had very positive feedback from retailers. And that has added to excitement internally. And I have to point out, that those retailers who see the future see a clear picture of more access to categories that drive growth in beauty with very iconic brands that respond to brand support. And for many of the global customers, the power for us to expand our presence with these two brands around the world.

So perhaps not the right forum today to comment on specific retailers, but suffice it to say that the big ones have been very supportive. We have plans with many of them this fall after the closing. We will be presenting joint business planning. We find ourselves in the privileged position of the strength of Elizabeth Arden business, both fragrance and the brand Elizabeth Arden, that combined with the resurgence of Revlon's results is giving us a seat at the table with the big players and the big retailers. So we are very happy with the feedback, and looking forward to those meetings

And just on Almay, this is a brand that has kind of struggled for many, many years. It has been reset many, many times. I mean what is different about the reset that you are doing with the brand today versus the prior? And when you feel that we should be looking for traction with that reset?

I will comment on the reset when we announce it publicly. And what we -- the timing for that is, we will be having conversations with our trade partners at the end of this year to start to see the impact of -- I don't call it a reset, but a clarity on the position of this brand that you will see in the market early in 2017. We feel very good about this work, we saw the work this week for what to launch literally within four weeks into the second quarter.

We are working with an outside partner that is one of the one of the best in the trade when it comes to brand equity buildup. So we are very happy with what we are seeing, and the expectation is that we would potentially do a trade at the end of this year. I will comment more to you and to the rest of investors as we have more specifics, but we are excited about getting it right finally.

Thank you very much. I appreciate it.

Thank you, Karru.

Hale Holden, Barclay.

Good morning, thank you for taking the call. On the CND business. I have two questions around it. The first is, how easy is it to shift those nail salons back to your product after they have gone in one direction?

This is an interesting question, because, they have gone to value, but the answer to value brands in any category is always innovation and premium offerings that deliver better value to the consumer with better performance. So that is the solution to the problem. To remind the consumer that you get longer-lasting nail polish with our product that is worth the price. And also working with our nail salon partners to remind them that the margin opportunity with our products is attractive and competitive and sustainable. So beyond that, what we need to be is commercial very savvy to ensure that we communicate the benefits of our brands in a way that is compelling to not only their clients but also our customer.

Got it. I should know this, I apologize, but how large of the US Professional revenue line is the nail CND business, in terms of percentage?

It is large. I don't believe we disclose the split by brand. But materially it is an important business for us and that is why we are so focused on restoring growth in that line.

Okay. You called out growth in the UK, Argentina and Japan. I was wondering if you could give us a sense of how much larger that growth percentage was versus the International that you reported, or how much above the mean those three countries were?

Significant. Multiples of 3, 4?

Thank you very much.

Carla Castella, JPMorgan for a follow-up question.

Hi, you talked about fewer, bigger, better launches for the back half. I'm wondering how that could affect your trade -- sorry, display spending and if you, if we should expect display spending to stay in the same range as last year?

Recall that every year we have a strong second half, so we don't see any different strengths for the trade spend for the second half. What we do see is great acceptance to the innovation as we are presenting it, so we feel good about the support we will obtain from the trade partners. I would not comment beyond that. But it is good to see that the initial reactions are as positive as we expected

Okay great. Thanks.

Thank you Carla.

We have no additional questions in the queue at this time.

Thank you to everyone who joined the call, for your support and attention to our business, and I want to also thank all the Revlon teams around the world for their drive to continue to grow our company. Have a good weekend.

Ladies and gentlemen that does conclude today's conference. Thank you all for joining.