Revlon Inc (REV) 2018 Q4 法說會逐字稿

Welcome to Revlon's Q4 2018 Earnings Call. My name is Patrick, and I will be your operator today. (Operator Instructions) As a reminder, this conference is being recorded.

Okay. I'd like to turn the conference over to your host, Eric Warren, Vice President, Treasurer and Head of Investor Relations.

Thank you, Patrick. Good afternoon, everyone, and thank you for joining the call. Earlier today, the company released its unaudited financial results for the quarter ended December 31, 2018. If you have not already received a copy of the earnings release, a copy can be obtained on the company's website at revloninc.com.

Also today, the company filed in a Form 12b-25 that it requires additional time to complete the audit of the effectiveness of its internal control over financial reporting. The company expects to disclose in its 2018 Form 10-K that it identified the material weakness in its internal control, primarily related to the lack of design and maintenance of effective control in connection with the implementation of its new SAP ERP system in the U.S. The company will file its 10-K by no later than March 29, 2019, within the 15-calendar day extension afforded by Rule 12b-25. The company expects these matters will not result in any changes to its financial results.

On the call this morning are Debbie Perelman, our President and Chief Executive Officer; and Victoria Dolan, our Chief Financial Officer.

The discussion today might include forward-looking statements that are based on current expectations and are provided pursuant to the Private Securities Litigation Reform Act of 1995. Information on factors that could affect actual results and cause them to differ materially from such forward-looking statements is set forth in the company's SEC filings. The company undertakes no obligation to publicly update any forward-looking statements, except for the company's obligation under the U.S. Federal Securities Laws.

Remarks today will include a discussion of certain GAAP and non-GAAP results. Consistent with past reporting practices, non-GAAP results exclude certain nonoperating items that are not directly attributable to the company's underlying operating performance. These adjusted measures are defined in the earnings release and are also reconciled in the financial tables at the end of the release. Please also note that certain amounts provided throughout this call have been rounded. The call today should not be copied or recorded.

And with that, we'll turn the call over to Debbie.

Thank you, Eric. Good afternoon, everyone, and thank you for joining us. We are very proud of the enormous amount that we have accomplished in 2018 and believe we have built a better, smarter and more efficient business to drive our future growth. This quarter, we saw a significant improvement in operating income, which increased 65% versus prior year period and adjusted EBITDA, which increased 13%, both driven by strong growth in key strategic areas and our work to operate our business more efficiently. The progress we have made so far to reduce our operating costs, along with the launch of our 2018 Optimization Program, gives us a strong foundation to drive profitable growth in 2019.

Before we review our fourth quarter financial performance, I'd like to talk about a few key strategic areas where we succeeded in fourth quarter and full year 2018. We continue to believe in the power of our iconic brands and are excited that in 2018, Elizabeth Arden approached $0.5 billion in net sales for the first time since the 2016 acquisition. We achieved this milestone by continuing to build on our equity as a brand that consumers love and trust, by developing products that are grounded in our expertise in skincare and by ensuring these products are accessible to our consumers.

Our fourth quarter Elizabeth Arden reported net sales were approximately $156 million, an increase of 21% on a constant currency basis over the prior year period. This growth was driven in part by our skincare segment, which represent 63% of the total Arden business and grew 40% over fourth quarter 2017 on an as-reported basis. We continue to see momentum in our antiaging franchise of Prevage, led by our daily serum product, and Ceramide, led by our monodose capsules. We recently introduced innovation in both of these franchises, launching Prevage Progressive Renewal Treatment in the fourth quarter, as well as Retinol Ceramide Line Erasing night capsules in the third quarter, which drove significant growth in the fourth quarter.

Our China business also remains very strong with fourth quarter net sales growth at 56%, and we are seeing growth in both bricks-and-mortar and e-commerce channel. The China business continues to be fueled by skincare growth, but we are also pleased by the growth we are seeing in our Elizabeth Arden Fragrances in this market, which were up 7%, driven in part by strong results from our Green Tea collection.

As we discussed in November, we launched our new My Fifth Avenue collection in many countries and are excited to have just shipped this into China last month. Additionally, our Ceramide retinol line is also performing very well in China and contributing to our strong growth.

Our Travel Retail business continues to be a strong growth driver for us. Our Travel Retail net sales were 19% in the fourth quarter, and we believe this speaks to the strong consumer demand for our brands and products. We are continuing to develop this channel across our portfolio specifically by launching an American Crew in key European airports and expanding our Revlon brand Travel Retail exclusive offering.

Next, I would like to provide an update on our digital strategy. The strategy we laid out in the beginning of 2018 is working. We continue to focus on growing our e-commerce sales by partnering closely with our e-tailers and ensuring our products are available where and when the consumer is shopping. This includes a strong focus on our own B2C e-commerce site, now represented with elizabetharden.com both in the U.S. and U.K., americancrew.com and juicycouturebeauty.com.

We also spent 2018 building our internal capabilities in order to create best-in-class content to keep our brands and products top of mind with our target consumers. This includes the creation and integration of Red House, which has generated considerable savings across our brand supports spend, the addition of social teams embedded within our brand marketing teams and back-end infrastructure upgrades to support our digital growth. We remain encouraged by the initial results we are seeing.

Overall, our e-commerce sales in the fourth quarter grew 46% over the prior year period and represented 9% of total sales for the quarter. On a full year basis, e-commerce sales now constitute 66% of our total company sales. We are seeing growth with our retailer dot-com partners globally, with our e-commerce pure play partners and with our own B2C e-commerce site. As an example, elizabetharden.com in the U.S. grew 84% in the fourth quarter.

Let me also touch on 2 consumer events that were very successful in the fourth quarter that highlight our continued momentum in the digital space. First, we are extremely proud of our Singles Day results in China, where we grew net sales approximately 90%. Secondly, in the U.S., we had an extremely successful Black Friday, during which we grew net sales 154% relative to the prior year period. And finally, I want to touch on our efforts we have made to increase the efficiency of our business operations and spend.

Importantly, as we think about driving further efficiency in 2019, the launch of our 2018 Optimization Program will allow us to streamline the company's operations, reporting structures and business processes and will support achieving profitable sales growth. We are investing smartly and are focused on allocating spend in those areas that are visible to the consumer in order to drive top line growth as well as the highest return on investment. We feel encouraged that our second half 2018 innovation that is currently in market continue to perform well, including Revlon's Full Cover Foundation, the #6 U.S. mass phase launch in 2018, as well as 2 fragrances OUI by Juicy Couture and JV x NJ, the #4 and #6 fall fragrance launches, respectively.

I am very excited about all the new innovative products we are bringing to market and am confident that we are well positioned as we enter 2019.

I'll now hand the call over to Victoria who will share details on our fourth quarter results before we begin Q&A.

Thank you, Debbie, and good afternoon to everyone on the call. Let me start by highlighting our fourth quarter results. On an as-reported basis, net sales for the fourth quarter of 2018 were $742 million, a decline of 5.7% versus prior year quarter. On the constant currency basis, net sales decline $29 million or 3.7%, primarily driven by our Revlon segment, which was negatively impacted by a shift in timing of a large customer display reset from Q4 2018 to late first quarter 2019, as well as our Fragrances segment due in part to several expired brand licenses in 2018. The sales decline was offset by strong double-digit growth within our Elizabeth Arden segment, which grew 21% in the quarter on a constant currency basis, fueled by growth in e-commerce, Travel Retail and China.

As-reported operating income for the quarter increased 65% to $32 million compared to the prior year quarter. Included in as-reported operating income is the impact of an $18 million noncash goodwill impairment charge related to the mass portfolio reporting unit and $19 million of accelerated amortization related to the Pure Ice brand intangible assets, resulting from the ending of a business relationship with the brand's sole customer. The higher operating income was driven by lower selling, general and administrative expenses due to lower overhead costs and lower brand support for our Elizabeth Arden, Fragrances and Portfolio segments, driven in part by a rephrasing of certain marketing initiatives to align with product launches and customer wall resets.

Specific to brand support, in total across all brands, we increased spending in-working media versus prior year period, while nonworking media declined driven primarily by savings from the transition to our internal agency, Red House.

As-reported net loss for the quarter was $70 million, an improvement of 9% versus prior year. The lower net loss was driven primarily by higher operating income, partially offset by higher interest expense. Included in the as-reported net loss was the impact of a $49 million noncash increase in tax valuation allowances and the previously noted impairments and accelerated amortization item. These noncash after-tax items totaled $81.5 million.

Finally, adjusted EBITDA improved 13% for the quarter to $125 million compared to $111 million in the prior year quarter.

Next, I would like to turn to our segment results. Our Revlon segment net sales in the fourth quarter of 2018 were $261 million, which represents a 13% decline on an as-reported basis. This decline was driven in part due to lower net sales of Revlon color cosmetics due to declines in the North America mass color cosmetics category and the shift in the timing of a large customer display reset, partially offset by higher net sales in Revlon-branded professional and haircare product line. Revlon segment profit decreased by 34% over the prior year quarter, driven primarily by the segment's net sales decline and increased investment in brand support.

For Elizabeth Arden, net sales in the fourth quarter of 2018 were $156 million, representing an 18% increase on an as-reported basis or 21% increase on a constant currency basis. This improvement was mainly driven by higher net sales of Elizabeth Arden skincare products, including Ceramide and Prevage, principally in our international territory. Elizabeth Arden segment profit increased to $22 million from $5 million in the prior year period driven by higher net sales and lower brand support expenses.

Sales for our Portfolio segment were $144 million in the fourth quarter 2018, a decrease of 7% on an as-reported basis. This decrease was primarily driven by lower net sales of our regional brands as well as CND, partially offset by higher net sales of Almay, American Crew and Mitchum. Portfolio segment profit was $14 million versus $400,000 in the prior year quarter, primarily as a result of lower brand support expenses, partially offset by the segment's lower net sales.

Finally, net sales of our Fragrances segment were $180 million in the fourth quarter of 2018, representing a 9% decrease on an as-reported basis. This decline was driven primarily by several expired brand licenses in 2018 and lower net sales of other licensed fragrances due to weakness in the mass retail channel partially offset by new product launches. However, as a result of cost reductions associated with in-sourcing production capabilities as well as lower brand support due to rephasing of certain marketing initiatives, Fragrances segment profit increased by 48% despite the lower net sales.

As highlighted previously, the company has identified a material weakness in its internal controls, primarily related to the lack of a design and maintenance of effective control in connection with the implementation of its new SAP ERP system in the U.S. We have already developed and begun to implement a remediation plan to address this finding, and we'll continue to enhance our internal control environment as we move forward. The company expects this matter will not result in any changes to its financial results.

Turning to liquidity. Cash used in operating activities during full year 2018 was $171 million or an increase of $32 million versus prior year period, primarily attributed to lower net sales and $54 million of direct costs associated with remediating the SAP disruption at the company's Oxford North Carolina manufacturing facility.

Free cash flow used in 2018 was $228 million compared to $248 million in the prior year. The improvement in free cash flow usage was primarily driven by lower capital expenditures, partially offset by increased use of cash in operating activity.

For the full year 2018, we spent $57 million in capital expenditures and $81 million on permanent display. As of December 31, the company had approximately $160 million of available liquidity, an increase of $73 million versus the third quarter, consisting of $87 million of unrestricted cash and cash equivalents, $96 million in available borrowing capacity under the revolving credit facility, less float of $23 million.

As of February 28, the company had approximately $118 million of available liquidity, consisting of $75 million of unrestricted cash and cash equivalents, $50 million in available borrowing capacity under the revolving credit facility, less float of $7 million.

Lastly, as previously reported in the Form 8-K filed with the SEC on March 6, 2019, we extended the maturity of our $41.5 million first in, last out tranche B under revolving credit facility through April 17, 2020.

I'll now hand the call over to Debbie for closing comments before we begin Q&A.

Thank you, Victoria. In closing, we are very pleased with our fourth quarter results, including a strong adjusted EBITDA growth, which continued our momentum from the third quarter. We feel that with this momentum, the launch of our 2018 Optimization Program, market-leading innovation and investments we are making in our key growth areas, we are very well positioned for 2019 to continue transforming our business in order to drive long-term sustainable growth.

With that, we will now open up the call for questions.

(Operator Instructions) And our first question comes from the line of Grant Jordan.

This is David Eller on for Grant. I wondered if you could talk more about the decline in the Revlon brand in North America. You said it was due to the mass segment as well as the one customer. Could you just break out how much of the decline was from the overall category versus the timing of the one customer?

So David, thank you for the question. With regard to the decline of the Revlon brand in North America, if we focus for a minute on the U.S., right, I'd like to spend a minute speaking about the category and then you can spend a minute talking about the shift. So to address the question with regards to the category, the mass category for color cosmetics ended the year down about 1.5% in 2018. Fourth quarter, the decline accelerated to be 4.5%, and we're seeing that the decline in the first 2 months of the year in the category is about 5%. So there are challenges with regards to the category, which is impacting our results. We also had the shift of a large customer wall reset, which had impact on the numbers from the fourth quarter 2018 into the latter part of the first quarter 2019, which has now just been complete in the U.S. So with that, those are our main contributors to the decline of the Revlon brand and North America, primarily within the U.S.

Okay. So is it safe to assume that Q4 decline of 4.5% for the category, maybe you are somewhere in line with that and then the remainder of decline was primarily driven by the customer reset? Or are there other factors?

I wouldn't break -- I'm not going to break out the numbers for you. But what I will say is that the shift had a significant impact on the numbers.

Okay. And then thinking forward into Q1, obviously, that was pushed into Q1. Can you give us any degree of magnitude for what kind of bump we might expect on Q1? And then are there any other kind of timing shifts either with customers or the later Easter holiday that may affect 2019 or kind of near-term results?

So David, I appreciate the question, but I'm not going to comment on any forward-looking guidance with regards to our numbers.

Okay. As we look at the recent Nielsen data for February, it's a pretty steep decline compared to performance, kind of eye cosmetics, facial cosmetics, lipstick and nail polish. Is that also a reflection of maybe some resets going on? Or are you losing share? Or maybe is that just the continued pressure on the category?

So it is definitely continued pressure in the category. As I mentioned, the category was down for the first 2 months that you mentioned, 5%, as well as our timing shifts as the reset have just been complete within the U.S. I'll also add there that there has been a shift in promotion strategy within the category where we're seeing higher promotion and more layers with regards to price off, where we have pulled back on promotion.

Our next question comes from the line of Mary Gilbert.

I had a few questions. One is what the status of the resets are for Revlon and Almay brands. You did speak about this timing in the reset. But I also wanted to know if you've gained or lost any shelf space generally in 2019 for Revlon and Almay. And then how should we think about brand support spend this year? And then if you could give us an update on the performance of Flesh and opportunities that you see there with regard to new innovation, expansion, et cetera.

Okay. Thank you, Mary. Why don't we start with the first, on the status of the reset for Revlon and Almay? So the resets are primarily complete. In the U.S., let's call it 99% complete for both of those brands. With regards to space, as you know, retailers and our customers are always evaluating space but, at this time, no significant space loss or gain. With regard to brand supports spend, could you just elaborate on the question there?

Yes, so I just wanted to find out or get an idea -- well, I guess, twofold, actually. One would be in terms of permanent display and then as we think about the rephasing of brand support spend because you're timing it around, but I also want to get an idea for quantity, sort of the magnitude, I should say. So in other words, it sounds like there's 2 things going on. One, you're making sure that when the spend occurs that it's occurring to be commensurate with maybe new innovation. And then number two, that you're getting ROI and that it's actually being received by the consumer appropriately. So I wanted to understand that in the context of the magnitude as you think about that, you've maybe identified a reduction, and that's what I wanted to understand better.

Okay. So let me start with permanent display. As Victoria mentioned, we spent $81 million on permanent displays in 2018. We continue to invest in the in-store experience for our customers as well as our consumers. With regards to brand support, Victoria mentioned, particularly on the Revlon brand, that we the increased -- we increased support in the fourth quarter. When you think about brand support, we have a very stable amount of brand support across the brand. We look to support the brands that we have and believe in driving brand equity. In terms of rephasing, you addressed it yourself. We're always looking at ways in which we can maximize not only the top line but also the return on investment when we look to support our brand.

Okay. Yes, I was wondering if that -- the amount of spend is going down. And then if you could talk about Flesh.

Yes. With regards to Flesh, Flesh is doing well. Flesh was actually named the #1 indie brand in second half -- launched in second half '18. We garnered over 2 billion PR impressions, which proves we are resonating with the consumer. We continue to be optimistic about the brand. It does remain exclusive right now to Ulta and ulta.com. So in terms of expansion, we are focused on being partners with Ulta. And with regards to new innovation, we are always looking at new innovation, and we will be putting up the 2019 shortly.

Our next question comes from the line of William Reuter.

My first question is, Elizabeth Arden, the growth was pretty phenomenal in the quarter. I was wondering whether this was reflective of what you think the underlying growth rate is in those international markets. And I guess, if not, what are the onetime timing shifts that may have contributed to that strong sales growth?

The sales growth that we're experiencing with Arden is in line with the strategy and tactics that we put into market in 2018. So we remain optimistic about the brand and continue to believe in the brand.

Okay. So does this seem to imply that, I guess, that the underlying international growth rate was more or less reflective of, I guess, brand strength and not timing shifts between the third quarter or the first quarter?

That's correct.

Okay. With regard to -- you mentioned fragrance licenses that fell off. I guess, when during the year did those fall off? And I guess, were those significant enough that as we think about next year, there's going to be, I guess, any substantial drag to that?

So with regards to the brand licenses, they rolled off at various times throughout the year. And I'm not going to comment in terms of the 2019 impact today. But what I will say is we are always exploring new businesses and new licenses to sign for our company.

Okay. And then just lastly for me, as we think about next year, are there -- are you currently in the midst of restructuring programs that are going to have substantial restructuring cash costs next year associated with them? And I guess, do you have any estimates of those?

So we announced the -- our 2018 optimization program in November, and we announced both expected savings, which were going to be $125 million to $150 million on an annualized basis. We expect that those programs to be completed by the end of the year. We also announced that the time -- the amount of the cost to achieve those programs. And we are on track to deliver those programs, and a substantial portion of the savings will be included in our 2019 numbers.

Okay. Yes. But I guess, just to make sure I understand. First of all, that's helpful. But just to make sure I understand the -- most of those cash cost would've already been paid at this point with the restructuring. Is that correct?

No, we estimated $30 million to $40 million plus an incremental $10 million of capital, and they will be paid as the program is executed throughout 2019.

Our next question comes from the line of Carla Casella.

Just a couple of questions. On the shift in timing from the one customer, and so all have been shifted as of March now?

So the resets have been complete.

Okay, great. And the move in the reset into first quarter from fourth quarter, will it shift display spending more into next year as well, to the '19?

It should remain stable.

Okay, great. So you think display spend next year should be about the same as this year?

That's forward-looking guidance, and I think we're constantly evaluating what our display spend is to ensure that we get the right ROI on that spend by customer.

Okay. And did you say how much of your cash is sitting in the international business versus domestically?

Mostly all of it is sitting there, and then we actively work to bring that cash back.

Okay, great. And then any thoughts in terms of when you need to consider refinancing the bonds, the term limits that springs ahead of the bonds?

So that's a really good question. As we look at our 2021 maturities, we'll continue to focus on improving our operating results as we go through 2019 and delevering throughout the year. And our plan is to be in a position to finance the 2021 maturities by the end of the year.

Okay. That's great. And one more business question on the fragrances. The North American fragrance declined -- accelerated from third -- in the fourth quarter a bit. Is there -- can you talk a little bit about that category if there any major change in trend or the retailers' strategy in that category?

So with regards to mass fragrances, we are seeing more headwinds in that category. There have been changes with regard to some retailers in terms of the strategic priority of fragrances, some reducing space, as well as some eliminating the category. As we go forward, though, with regards to the category, we're optimistic with regards that mass fragrance has a place within the retailer set as well as top of mind for the consumer.

Our next question comes from the line of Hale Holden.

I just had 2 quick ones. The first one is the delayed 10-K filing. Do you have any covenant restrictions that would require you to do that in a certain amount of time?

We, as we stated, we will file within the 15-day SEC guideline by March 29, and that's what's required.

Okay. And the second question I have is your Travel Retail results were much better than I've seen from, really, any peers. So I was wondering if you could give us a sense of what was driving that. Or maybe just contextualize how large the base is that it grew off of.

Well, I'm not going to break out the base, but thank you for the question. But I will tell you it's primarily driven by Elizabeth Arden and our strength within the skincare segment. And the offerings that we're putting forth within that market is resonating with those consumers.

Our next question comes from the line of Karru Martinson.

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business now that we've got 2018 behind us. Where do we stand in terms of the size and the growth rate for that business in particular?

I'm sorry, Karru, we couldn't hear the question. Could you repeat the question, please?

Just in terms of China for Elizabeth Arden, where is that business today in terms of size? And where do you see that going?

With regards to the Elizabeth Arden business in China, we are obviously very optimistic. The results that we've had to date have been very strong, and we continue to see growth for our brand in that market.

But could we perhaps drill down just a little bit in terms of the size of the business today and its contributor to the overall company?

Currently today, we do not break out that number.

Okay. And then when we think about the disruptions that you guys were plagued with from Oxford, North Carolina, how much of a tailwind do you think that can be for you guys going into 2019? Or is that kind of number already figured into that cost savings you expect to realize?

So the -- as you'll see in the fourth quarter results, the Oxford impact was very small. And so we are basically saying that it is behind us. Our Oxford manufacturing facility is currently operating under normal conditions, and SAP is not stopping us from producing what we need to produce today. And in fact, most of the pipelines around the world have been filled. And I'd like to take that opportunity to thank our customer partners for their patience throughout 2018.

Okay. And just lastly, you guys have had success with the Flesh and the exclusivity with Ulta. I think the other big retailer that has always been talked about with you is Sephora. How do you guys approach them in terms of their position in the market?

So as you may know today, in Sephora, we currently sell some fragrances. We are always looking at ways in which we can engage with Sephora, with the brands that we have within our portfolio.

Thank you. Seeing no additional questions, let me say thank you to all who have joined the call today and a special note to our team members around the Revlon world who are listening. Thank you for all the efforts you make every single day, especially your contributions in driving our strong results this quarter. I am proud of all that we have accomplished together and am excited about our future as we strive to build an even stronger global business operation that will be our foundation for achieving long-term profitable growth. Thank you.

This concludes the conference call for today. Please disconnect your lines, and thank you for participating.