Revlon Inc (REV) 2019 Q1 法說會逐字稿

Hello, and welcome to the Revlon earnings call. My name is Molly, and I'll be your coordinator for today's event. (Operator Instructions) I'm now handing you over to your host, Eric Warren, Vice President, Treasurer and Head of Investor Relations, to begin today's conference. Thank you.

Thank you, Molly. Good morning, everyone, and thank you for joining the call.

Earlier today, the company released its financial results for the quarter ended March 31, 2019. If you've not already received a copy of the earnings release, a copy can be obtained on the company's website at revloninc.com.

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, including its Q1 2019 Form 10-Q. The company undertakes no obligation to publicly update any forward-looking statements, except for the company's obligations 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 morning, everyone, and thank you for joining us.

We are very pleased with the first quarter results we released this morning that reflect the continued momentum in our business.

For the quarter, we've reported top line growth in our 2 largest brands, with Revlon net sales increasing 12% and Elizabeth Arden growing 9%, both on a constant-currency basis.

Our total company net sales grew 2% on a constant currency basis or $13 million above the prior year period.

Adjusted EBITDA increased $35 million to $39 million versus the prior year period. This is our third consecutive quarter of year-over-year adjusted EBITDA growth and the sixth consecutive quarter of top line growth in the Elizabeth Arden segment.

We are encouraged with the net sales we saw in the first quarter within our Revlon brand, both in North America and in our international markets. I'm particularly encouraged by the growth in Revlon color cosmetics, which grew double digits over the prior year period on a constant-currency basis. In North America, our customer resets have been completed, and we continue to invest behind our new product launches, both with media and in-store support.

Internationally, Revlon color cosmetics also grew in the first quarter with strong growth in Australia as well as some key European markets.

The Revlon brand had a number of top launches within U.S. mass color cosmetics in the first quarter, including our ColorStay Brow Creator and PhotoReady Rose Glow primer.

In February, our limited edition lip kit, in collaboration with Ashley Graham, saw incredible consumer response, and our initial shipment quickly sold out on Amazon.

Our PhotoReady Candid Collection continues to perform well, and we are very excited to see consistent positive consumer reaction since the launch. For the first quarter, Candid Foundation is the #3 foundation launch in the market.

Our Elizabeth Arden brand continues to resonate with consumers. Elizabeth Arden's skincare remains strong, driven by our anti-aging franchises of Prevage and Ceramide. Our Elizabeth Arden business in China remains a growth driver with net sales growing 62% on a constant-currency basis. Momentum also continues in the Travel Retail channel for Elizabeth Arden with net sales increasing 8% versus prior year period.

With regard to our Fragrance segment, our business declined in the first quarter versus prior year, driven by a number of factors, including overall weakness in the U.S. mass fragrance category, a key retailers' removal of fragrance brand from their assortment as well as a retailer bankruptcy within their prestige channel.

Despite the overall decline, we still maintain top leadership position within the U.S. mass fragrance category. Additionally, within the prestige channel, we had the #1 women's launch in the first quarter with Viva La Juicy Bowdacious. Following the strength of last year's Oui Juicy Couture launch, this reaffirms the importance and strength of the Juicy Couture brand in the market.

Regarding our Portfolio brands, we saw strong growth with our American Crew brand, particularly in North America where as reported net sales increased 22% versus prior year period, driven in part by strong new product performance. This year marks the 25th anniversary of the American Crew brand, and we have some key marketing initiatives planned to celebrate this milestone throughout the coming months.

Our CND business in the quarter declined versus prior year, primarily due to the underperformance of last year's Shellac Luxe launch. Despite the softness, we are excited that this year marks the 40th anniversary of the CND brand, a milestone we will be commemorating with limited-edition shades, brand partnership and color collections, which we anticipate will be well received by our customers and consumers.

We are encouraged by double-digit constant-currency net sales growth in both our Mitchum and Cutex brands, which grew 10% and 25%, respectively, with the strongest growth coming from international markets.

With regard to Almay, our business declined versus prior year quarter in part due to a strong comparable period. For context, in the first quarter of 2018, we launched the Almay Reveal The True You campaign together with Almay store resets and upgraded wall fixtures.

We are looking forward to sharing an exciting Almay update later in the year.

The e-commerce business remains a source of strength for us. Net sales grew 42% globally versus the prior year period and represented approximately 7% of total company net sales.

Momentum continued with our elizabetharden.com sites both in the U.S. and the U.K., and we had a number of very strong activations in Asia, notably our Queen's Day campaign and Super Category Day, all of which drove impressive net sales growth over 2018.

In summary, we are pleased with the continued momentum in our business and the growth within our key strategic pillars. We are also particularly encouraged with the top line growth in the first quarter from our 2 largest brands as well as the positive consumer response to our new products in the market.

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

Thank you, Debbie, and good morning to everyone on the call.

Let me start by highlighting our first quarter results.

On an as-reported basis, net sales for the first quarter of 2019 were $553 million, a decline of 1.3% versus the prior quarter. On a constant-currency basis, net sales increased $13 million or 2.3%, driven by strong growth within our Revlon and Elizabeth Arden segments, partially offset by net sales declines in our Portfolio and Fragrances segments.

As reported, operating loss for the quarter was $23 million, a $38 million improvement compared to the prior year quarter.

The improvement in operating loss was driven by lower selling, general and administrative expenses as well as lower acquisition and integration costs.

The lower SG&A is mainly attributable to lower overhead costs and planned lower brand support versus prior year to align marketing initiatives with in-store customer resets and new product launches.

Specific to brand support, we did not anniversary expenses from our March On and Live Boldly campaigns that occurred in the prior year quarter.

In addition, our nonworking media spend declined versus prior year, driven primarily by cost reductions from the transition to our internal agency, Red House.

As-reported net loss for the quarter was $75 million, an improvement of 17% versus the prior year period. The lower net loss was driven by the lower operating loss described previously, partially offset by higher interest expense.

Finally, adjusted EBITDA improved by $35 million to $39 million in the first quarter of 2019 compared to $4 million during the prior year period.

Next, I would like to turn to our segment results.

Revlon segment's net sales in the first quarter of 2019 were $247 million, representing an 8% increase on an as-reported basis or 12% increase on a constant-currency basis. This increase was driven by higher net sales of Revlon color cosmetics and hair care products as well as higher net sales of Revlon professional products.

Revlon segment profit increased by $23 million over the prior year quarter to $26 million, primarily driven by the segment's net sales growth and planned lower brand support.

First quarter 2019 Elizabeth Arden net sales were $111 million, representing a 5% increase on an as-reported basis or a 9% increase on a constant-currency basis. This improvement was mainly driven by higher net sales of Elizabeth Arden's skin care products, including Ceramide and Prevage principally in our international territories as well as Elizabeth Arden-branded fragrances.

Elizabeth Arden segment's profit was $2 million compared to $1 million in the prior year period, primarily due to the segment's higher net sales.

Net sales for our portfolio segment were $117 million in the first quarter of 2019, a decrease of 13% on an as-reported basis or a 9% decrease on a constant-currency basis. This decrease was primarily driven by lower net sales of CND, local and regional brands, SinfulColors and Pure Ice after the termination of a key business relationship, partially offset by a higher net sales of American Crew and Mitchum.

Portfolio segment's profit was $5 million, an increase of $8 million versus the prior year period as a result of lower brand support and distribution expense.

Finally, net sales of our Fragrances segment were $77 million in the first quarter of 2019, representing a 15% decrease on an as-reported basis or 13% decrease on a constant-currency basis. This decline was driven in part by overall mass fragrance category weakness and store closures in the prestige retail channel.

Fragrances segment's profit in the first quarter of 2019 was $7 million, a $4 million increase compared to the prior year period primarily as a result of lower overhead expenses, brand support and distribution costs, partially offset by the segment's lower net sales.

Turning to liquidity. Cash used in operating activities during the first quarter of 2019 was $28 million or an improvement of $69 million versus the prior year period primarily attributed to the lower net loss in the quarter and an improvement in working capital.

Free cash flow used in the first quarter of 2019 was $34 million compared to $111 million in the prior year period. The improvement in free cash flow usage was primarily driven by decreased use of cash in operating activities and lower capital expenditures.

For the first quarter of 2019, we spent $6 million in capital expenditures and $10 million on permanent displays.

As of March 31, the company had approximately $104 million of available liquidity consisting of $68 million of unrestricted cash and cash equivalents, $42 million in available borrowing capacity under the Revolving Credit Facility, less float of $7 million.

I'll now hand the call over to Debbie for closing comments.

Thank you, Victoria. In closing, we are very pleased with our first quarter results, including the strong adjusted EBITDA growth, which continues our momentum from the second half of 2018 as well as the strong net sales growth from both our Revlon and Elizabeth Arden segments. We feel that with this momentum and continued market-leading innovation and the investments that we are making in our key growth areas, we are very well positioned for the remainder of 2019 as we continue to transform our company.

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

(Operator Instructions) The first question comes from the line of Karru Martinson calling from Jefferies.

This is Jacqueline on for Karru. And I was hoping, could you just talk more about the strength in Revlon and maybe provide some more color as to what that was related to, be it new displays or product launches as well as impact from the timing of a customer long resets?

So it was a little bit hard to hear you, but if I understand the question, you would like to understand the strength within the Revlon brand, is that correct?

That is correct. And just if you could provide some more color as to what that was related to.

Absolutely. So with regard to Revlon, as stated, we did have the resets completed. We did -- were able to fulfill our new product promotions that are currently in market, and we are seeing, as mentioned, strength within the new products. They are having a halo within our core products as well, and that is driving the momentum that we're seeing on Revlon.

Great. And just as we look to the second half of the year, are there any new product launch introductions that you're expecting? And then more broadly, if you could speak to how you're looking at your portfolio overall today and if you would consider any divestitures moving forward.

So thank you. With regards to the second half, we don't provide forward guidance in terms of the specific products that we would be launching. But with the cadence of the market and the category, we continuously look to launch new products. At this time, we are not exploring any divestitures.

Okay. And then just last one, can you provide an update on your Optimization Program, both in terms of timing for the realization of those cost savings and the cash costs to complete them? And if any of these are reflected in your first quarter results?

Thank you for the questions. So as you know, we announced the 2018 Optimization Program in Q3, and we talked about targeting annualized run rate savings of between $125 million and $150 million once the program is completed. We are on track to deliver those savings. A portion of those savings are reflected in our expectations for 2019, and we do expect though, given the nature of the savings and the timing of when we kicked off those programs as we discussed before, that those savings would -- the majority of the savings for 2019 would be realized in the second half of the year.

The next question comes from the line of Jenna Giannelli calling from Goldman Sachs.

I just wanted to get an update on your thoughts around your upcoming maturity, as I know you said -- last quarter you said you'd be comfortable addressing the '21 potentially by year-end. So if you could just give an update on your thoughts around the capital structure, that would be great.

So we're constantly looking at our capital structure and ways to optimize our capital structure from the operating decisions that we are making and the investment posture that we're taking in the disposition of cash. We are looking at refinancing our capital structure based on the outcome of our 2019 results.

Okay. Great. And then if you could just give us an update on your thoughts on what the potential impact of tariffs might be and remind us both at the 10% level and the 25% level. Any color would be helpful.

So certainly, the 10% tariffs are in place now, and they are not material to our results. We are monitoring the situation with regard to the 25% tariff. We have -- we are working with our procurement organization and our supply chain organization to develop contingency plans in mitigating actions should those tariffs go into effect.

Okay. Great. And then I know you don't break them out separately anymore, but I just kind of want to get a sense particularly in North America of how the Professional segment is trending relative to the U.S. mass channel for the Revlon brand. Are they both seeing that renewed strength? Or have we -- is there a little bit of bifurcation between the 2 channels?

Just to clarify your question, with regards to the actual category or with regards to Revlon -- with regards to our Professional business?

Really professional business. The Revlon brands and the Professional business.

We are continuing to see momentum both in the color cosmetics as well as the Revlon Professional business. As per Victoria's comments, it continues across the brand, including our haircare within the mass category as well.

Okay. And then just finally one more, if I may. Just on your performance, your relationship with Ulta, if you could give us an update on that relationship with performing in line with your expectations and if there is any potential further opportunity to expand there.

So we remain committed to the Ulta relationship as we do with all of our retail partners, and we're always looking at ways in which we can further that relationship through new opportunities.

(Operator Instructions) The next question comes from the line of Carla Casella calling from JPMorgan.

I am wondering on the gross margin front, if you could give us a little more color on how much of the deterioration might have been the mix shift to Revlon from Arden or give us some color on the various margins between the segments if that drives -- if that drove it.

Okay. Certainly. So our -- on an as-reported basis, our margin increased 30 basis points. When we, however, take out the adjustments relative to the prior year Oxford impact, it actually decreased 170 basis points. Mix, however, was actually positive about 110 basis points. What really impacted us were foreign exchange impact of about 270 basis points and some impact of the tariffs that we referred to earlier.

Okay. Great. That's helpful. And then on the brand support, can you give -- can you quantify at all the increase in brand support either in Revlon or the Portfolio brands? It sounds like those are the 2 segments that saw the most -- sorry, decrease in brand support.

So I don't think we're going to break out brand support by segment, but I will say that we have put in the financial discipline around looking at the choices about where we spend brand support across segments, across markets, across channels, and that we are constantly looking at the highest rate of return relative to that spend, which drives our investment posture across the portfolio.

Okay. Great. And then have you changed your display spend? It was a little bit lower in the quarter than we expected. Have you changed your outlook for display spend or CapEx for the year?

Yes, we have, and that's in our Q. So we did bring the ranges down for both CapEx and for permanent displays to between $50 million and $60 million each for the year.

Okay. Great. And just one last one. The Portfolio brand, you talked about a number of different specific wins and misses in different brands. Can you just give a little bit more context to what are the biggest drivers in that category? Or is that a category where 3 brands drive 30% to 50% of the business?

So thank you for the question. Portfolio brand is made up of numerous brands, including American Crew, CND, Almay as well as regional brands and Sinful. So depending on which brand hits which category, the drivers would change. But as mentioned, with American Crew, we're seeing momentum on the brand with Mitchum, we're seeing momentum on the brand as with Cutex. So with regards to the wins that we've had, we feel very confident. With regards to our Almay brand, we remain very committed to the brand. We believe that it holds a -- it really fills whitespace within the mass market being hypoallergenic. And we are seeing momentum in the brand going forward.

The next question comes from the line of Mary Gilbert calling from Imperial Capital.

With regards to Almay, it sounded like you expect to launch something new. Is it in the second half of the year? And would this be kind of like a line extension?

Thank you, Mary. So with regards to Almay, we will be announcing in the coming months some exciting news on the brand.

Okay. All right. No more clarity on that. And then one other thing with regard to the Portfolio brands and CND and weakness that we saw there with CND and SinfulColors. What opportunities do you see there to rightsize it? Was it just temporary in terms of CND? And are there any strategy shifts with regard to some of the brands there in terms of improvement?

So we are always looking at ways in which we can improve our brands and grow our brands. With regard to CND, we believe that we have a very strong product in market with Shellac and continue to improve that brand and perform very well, both with regard to Shellac long wear and the gel segments as well as with regard to having healthier nails with regards to our competitive set. We believe that, that has been and continues to be our platform for growth within CND.

So sort of temporary in Q1 in terms of the weakness. So we don't expect that weakness to continue?

Mary, thank you for the question, but I'm not going to provide forward guidance. But thank you.

Okay. Can you give us an update on Flesh Beauty in terms of its performance and the shift to a consulting arrangement with Linda Wells and opportunities within Flesh Beauty either for expansion into additional doors and maybe other channels and innovation?

So we remain very committed to the Flesh brand and the success of Flesh. As you know, it continues to remain exclusive relationship with Ulta being sold in-store as well as online. And we recently launched our new innovation in the Lip Gloss segment, which is receiving very positive reviews from the consumers as well as from Ulta. With regard to Linda, she remains very committed to the brand and as she stated publicly that she remains committed to the success of Flesh.

Okay. Great. And then with regard to the Revlon segment sales increased in North America, how much of it is related to the shift in shipments from Q4 and to Q1? Would there be any reversal in Q2?

So Mary, with regard to the resets and the shipments for resets, the resets have been complete. If you were to -- I'm not going to break out the number for the resets, but if you were even to strip out the resets, we would be -- we would have increased our sales in the quarter.

Okay. Great. So an increase, regardless. All right. That's very helpful. And then how should we think about the regional brands and the weakness there? Do we have some initiatives that are going to be launched that will rightsize that? And also, when can we see stabilization in fragrance, given the category weakness in mass channel? Are there opportunities that could reverse that this year?

So with regard to regional brands, we are always looking at ways in which we can grow those brands. We have new innovation that's out in the market with regards to Natural Honey as well as Llongueras, which are performing well. So we remain committed to those brands and the opportunities that exist with them. With regards to your fragrance question, we remain very committed to the fragrance category. As mentioned, we remain the top position with regard to U.S. mass category in fragrance, and we remain committed to maintaining that position. We are always looking at new opportunities and working with our retail partners in ways in which we can continue to improve category performance.

The next question comes from the line of Colin Ducharme calling from Sterling Capital.

I had a couple for Debbie and then a quick follow-up or 2 for Victoria. Debbie, congratulations on the results. I just wanted to get your color, if you will. Can you characterize the strength in Revlon in North America in the context of the mass channel, generally speaking? Do you foresee or observe a potential strengthening overall in the mass category? And then separately, I would just love to hear with the Oxford facility ERP implementation now complete, what sort of new business flexibility does that implementation now give you going forward that perhaps you didn't have in prior periods?

So thank you for the question. I'd just like to clarify the question with regard to Revlon: in terms of commentary on category for mass color cosmetics or in terms of Revlon brand or both?

Really just top level. I think you've already well-covered kind of the strength in Revlon, which was great, and kind of your view that, that momentum could possibly continue. But overall, the mass space, generally, do you anticipate or feel a strengthening there? Because we've had weakness in that space for some time now.

So with regards to the category of mass color cosmetics, I wish I knew. As you can see from the numbers, it's a bit of a rollercoaster. I think year-to-date, the category is down about 4.5% with highs and lows during that period. We continue to monitor it. We continue to monitor our retailers as well as our competitive set as well as what we put into the market. Do I believe in the mass category for color cosmetics? Absolutely, and we're committed to it, and we're committed to growing it.

Okay. And if you could just touch on that business flexibility question with the ERP in Oxford facility.

So this is Victoria. On the ERP in the Oxford facility, we are back up and running to levels that are as good as if not better than what we were before that. And now we are working through to get the business benefits of having an ERP system within our Oxford plant in terms of the kinds of efficiencies that it drives in bringing that business case to fruition. So that is work in progress.

Okay. And then separately for you, Victoria, just on the refi, you touched a little bit already on it. Can you just -- are you looking at any indications in terms of what the market is showing from a cost of financing versus your existing arrangements today? And then if you could also just remind us what steps will need to be taken as you potentially pursue refinancing over the next 12 to 18 months.

Okay. Thank you. So again, we're looking at the refi relative to the finishing our 2019 results and thinking about that in the beginning of 2020 coming off of our 2019 results. And obviously, we're constantly talking to -- looking at the market, talking to our banks to understand what is going to be required and what those rates would look like. So it's something that we are -- especially with Eric Warren here, our Treasurer, constantly evaluating what that's going to be.

With no additional questions, let me say thank you to all who 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 I'm excited about our future as we strive to build an even stronger global business that will be our foundation for achieving long-term profitable growth. Thank you.

Thank you for joining today's call. You may now disconnect your lines.