Revlon Inc (REV) 2021 Q3 法說會逐字稿

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revlon Third Quarter 2021 Earnings Conference Call. (Operator Instructions). Thank you, and I will now turn the call over to Jeff Kennel, Vice President, Treasury. Please go ahead.

Thank you, Ashley. Good morning, everyone, and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended September 30, 2021. If you have not already received a copy of the earnings release, a copy can be obtained on the company's website at Revlon inc.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 Q3 2021 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 will turn the call over to Debbie.

Thank you, Jeff. Good morning, everyone, and thank you for joining this morning's call. I am very pleased to share another quarter of improved financial results, which demonstrate the positive momentum in our business and that our strategy is working.

The top line growth in our brands and strong EBITDA performance are evidence of our continued ability to execute against our key strategic pillars even as we navigate the macro challenges inherent in the current environment. We are focused on driving growth in our core iconic brands and for the second consecutive quarter, all our reporting segments grew compared to the prior year.

Importantly, our digital acceleration continues as the consumer has found e-commerce to be a viable and convenient channel for beauty purchases as evidenced by double-digit e-commerce growth for this quarter. From an ESG perspective, we remain committed to making a positive impact on the world around us and are leveraging partnerships to expand our reach. And finally, we are well into the implementation phase of our Revlon Global Growth Accelerator program, which we announced earlier this year and will support our long-term profitable growth.

Like many other companies, we have been focused on the global supply chain challenges that continue to impact both our business and the broader macro environment. Specifically, we are seeing pricing pressures and shortages on key ingredients and components, logistics challenges across all modes of transportation and persistent labor shortages. We are taking the appropriate steps to address these issues, including managing costs and implementing select price increases and we'll continue to dynamically manage our business until the situation stabilizes.

Turning to our third quarter performance. As reported net sales were $521 million, representing growth of 9% or $44 million versus prior year quarter. Foreign exchange positively impacted our business. When removing this impact, our net sales were $53 million, representing growth of 8% or $36 million versus the third quarter of 2020.

This growth was driven by the continued reopening of markets with consumer activity resuming. Growth was tapered from our strong second quarter results due to broader market impacts, including significant negative COVID-19 impact in the second quarter of 2020 as well as global supply chain challenges in the third quarter of 2021.

Our adjusted EBITDA was $82 million versus $55 million in the prior year quarter, growing over 50% or $28 million. This reflects our highest level of third quarter EBITDA in 5 years relative to previously reported third quarters, both in terms of dollar and margin. This growth underscores that our strategy focused on sustainable profitable growth, continues to yield results.

Victoria will take you through the detailed financial results shortly. And now I will provide an update on our key strategic pillars. Our first pillar is to maximize the global strength of our iconic brands of Revlon and Elizabeth Arden as well as those brands where we have scale or unique positioning in the market.

We continue to focus on executing our global brand strategies in key markets such as China and the U.S. In the third quarter, all of our segments grew over prior year with double-digit growth in our Elizabeth Arden and Portfolio segments.

Touching on a few key brand highlights. Net sales in our Revlon segment grew approximately 3% in the third quarter with our Revlon color cosmetics business in North America remaining steady with year-over-year growth of approximately 4%. Revlon color cosmetics consumption remains very strong in the U.S., growing double digits and outpacing the market for the second consecutive quarter.

Our innovation in the market, including our Satin Ink lip color, Big Bad Lash Mascara and Brow fiber filler continued to support our performance. Our Revlon Professional business remained strong with net sales growth of approximately 6%. Our Color Sublime launch has been very successful, particularly in EMEA as consumers and air dressers are responding to the vegan formula and reduced packaging footprint, which uses 60% less plastic and 25% less paper.

Additionally, 2021 marks the 10th year anniversary of our UniqOne franchise, which we celebrated with the relaunch of the collection and a special anniversary edition. Turning to Elizabeth Arden. Globally, this segment's net sales grew approximately 12% over the prior year quarter with robust growth of over 30% in the fragrance category.

For the second consecutive quarter, all of our Elizabeth Arden fragrances grew strong double digits, led by White Tea, our newest franchise as well as Green Tea. Both performed exceptionally well online in China as well as in Asia travel retail as that panel continues to recover from COVID-19. Within skincare, our 8-hour franchise performed remarkably well, especially in EMEA, a key market for the 8-hour brand. Our fragrance pillars of Juicy Couture and John Varvatos both grew double digits due in part to our newest launches of Oui Juicy Couture/Viva la Juicy Neon as well as distribution expansion of Juicy Couture in the U.S. market. It is notable that this quarter marked the third consecutive quarter of net sales growth in the Fragrances segment relative to prior year.

Additionally, our American Crew and Almay brands both grew well over 50% as consumers return to these brands following depressed markets in 2020.

Turning now to our second strategic pillar of digital transformation. We remain committed to building on the robust e-commerce growth we delivered throughout 2020 as well as creating a true omnichannel experience for our consumers. We saw double-digit growth in our e-commerce channel with third quarter net sales up 12%. This channel now represents approximately 13% of our net sales. We are leveraging e-commerce to bring new consumers into the brand, as evidenced by Revlon's collaboration with StockX to launch a limited edition makeup collection with Megan Thee Stallion. Critical to our e-commerce strategy is expanding our direct-to-consumer channel. Our owned Elizabeth Arden sites remain our largest direct-to-consumer platform, and we are thrilled to have launched additional local sites in the third quarter, including Germany, Spain and Australia.

On elizabetharden.com in the U.S., we continue to bring the offline experience online, offering one-on-one beauty consultation and a suite of interactive tools. Similarly, for our in-store consumers at our counters, they will find interactive digital tools, including foundation and fragrance finders.

Our third strategic pillar is to create a positive impact on the world around us through the sustainability of our products and our diversity, equity and inclusion initiatives. Our brands are focused on driving towards our mission to be sustainable forward with over 2/3 of our 2021 new products incorporating sustainable elements, either in the formulation, ingredients or packaging. In addition to our work with the environmental working group on verification fields for select Revlon and Almay products as well as the partnership between our Creme of Nature brand and the United Negro College Fund to support students currently enrolled at HBCUs, we are also partnering with BeautyUnited.

BeautyUnited was founded with a mission to make the beauty and wellness industry more diverse and inclusive, and Revlon is proud to be one of the BeautyUnited first supporters. And finally, we continue to implement our holistic Revlon Global Growth Accelerator or RGGA program. This company-wide initiative was put in place to support our growth ambitions and to build the foundation for Revlon's future.

The program consists of 3 key elements: implemented and executed over a 3-year time horizon. One, strategic growth, which will drive organic sales focused on our key brands in key markets; two, operating efficiencies, which will be used to invest in our revenue growth as well as increased margins; and three, capability building a critical element to enhance our internal capabilities and upscale employees throughout the organization.

We remain on track to deliver against our expectations of approximately mid-single-digit compounded annual growth rate through the end of 2023 as well as cost reductions of approximately $75 million to $95 million on an annualized basis. In closing, the positive momentum we are experiencing in our business is a reflection of the strength of our brands in the market as well as our company's ability to continue to adapt to ever-changing market pressures.

We expect the macro supply chain challenges to continue into 2022, and we remain steadily focused on executing against our strategy while dynamically managing external pressures. And now I will hand the call to Victoria to share more details on our third quarter 2021 financial results.

Thank you, Debbie, and good morning to everyone on the call. Before I share the details of our Q3 2021 results, I'd like to reiterate the financial strategy we put in place over 3 years ago to support the strategic pillars Debbie walked through earlier on the call. First, our goal is to ensure sufficient liquidity to support both our strategic priorities and our capital structure.

Our investment posture is focused on making smart and disciplined choices in order to align our investment to the business priorities and ultimately strengthen our core iconic brands in the market. And second, we are focused on managing with agility and optimizing our business dynamically to adapt to the ever-changing market circumstances across all lines of the P&L and balance sheet, including our gross margin and working capital.

These strategic objectives have served Revlon well as supply, logistical and labor shortages continue to impact businesses across industry. Although Revlon was impacted in the third quarter by supply disruptions and higher costs, we were able to largely mitigate these impacts to EBITDA in the quarter. Before I go into the segment details, I'd like to summarize Revlon's strong third quarter results on a consolidated basis.

As reported net sales were $521 million in the third quarter of 2021 compared to $477 million during the prior year period, an increase of $44 million or approximately 9%, which is roughly 8% on a constant currency basis. While all of our segments grew, as reported net sales during the third quarter of 2021 over the prior year period, our Elizabeth Arden and Portfolio segments experienced double-digit revenue growth.

As Debbie mentioned earlier, our e-commerce channel also experienced double-digit growth over the prior year period at 12% and now represents approximately 13% of Revlon's net sales. As reported operating income was $34 million in the third quarter of 2021 compared to a loss of $10 million during the prior year period. The higher operating income was driven primarily by $44 million in higher net sales and a gross margin improvement of 670 basis points over the prior year period, offset by $9.7 million in higher restructuring charges and $2.7 million in higher selling, general and administrative expenses, SG&A.

Adjusted operating income in the third quarter of 2021 increased by $33 million to $47 million from $14 million of adjusted operating income in the prior year period. Adjusted EBITDA in the third quarter of 2021 was $82 million versus $55 million in the prior year period, driven by improved gross margin and top line growth.

In addition to this absolute improvement, adjusted EBITDA as a percent of net sales improved by 440 basis points versus the prior year period. As reported net loss was $53 million in the third quarter of 2021 versus a $45 million net loss in the prior year period.

Excluding nonoperating items, as reported net loss would have improved by approximately $42 million, driven by a $31 million gain from the early extinguishment of debt in 2020 and $20 million of unfavorable variance in foreign currency year-over-year.

Next, I'd like to turn to our segment results. Revlon segment net sales in the third quarter of 2021 were $173 million, a $7 million increase or approximately 3% on a constant currency basis compared to the prior year period.

The segment's growth was driven by higher net sales of Revlon ColorSilk and Revlon color cosmetics, both in North America and in international regions. Higher net sales of Revlon-branded professional hair care products in international region and to a lower extent, higher net sales of Revlon-branded beauty tools in North America and in the international regions.

This increase was due primarily to retail channels continuing to show signs of improvement from the effects of the ongoing COVID-19 pandemic as well as salons' increased activity in connection with progressive and/or temporary lifting of restrictions related to the ongoing COVID-19 pandemic, partially offset by decreased net sales in North America of Revlon-branded hair care product.

Revlon segment profit during the third quarter of 2021 was $16 million, a $3 million increase or approximately 15% on a constant currency basis compared to the prior year period. This increase was due to the segment's higher net sales as described above, partially offset by moderately lower gross profit margins.

Elizabeth Arden segment net sales in the third quarter of 2021 were $123 million, a $17 million increase or 12% on a constant currency basis compared to the prior year period. The segment's growth was driven largely by higher net sales of Green Tea and White Tea fragrances as well as certain other Elizabeth Arden-branded fragrances and skin care products, particularly in international regions. This increase was due in part to growth in e-commerce net sales as well as an increase in the Travel Retail business.

There are also signs of improvement from the effects of the ongoing COVID-19 pandemic on foot traffic at department stores and other retail outlets, primarily internationally. Elizabeth Arden segment profit during the third quarter of 2021 was $21 million, an $18 million increase compared to $3 million in the prior year period. This increase was due to the segment's higher net sales and higher gross profit margin, partially offset by higher brand support and other SG&A expenses to support the increase in sales activity.

Fragrances net sales in the third quarter of 2021 were $113 million, a $7 million increase or 6% on a constant currency basis compared to the prior year period. The Fragrances segment increase in net sales was driven by strong double-digit growth of our prestige brands, including Juicy Couture and John Varvatos. This was partially offset by lower net sales in North America of distributed fragrances. Fragrances segment profit during the third quarter of 2021 was $23 million, a $3 million decrease or 11% on a constant currency basis compared to the prior year period. This decrease was driven by the Fragrances segment higher brand support and SG&A expenses, partially offset by higher net sales and moderately higher gross profit margin.

Portfolio segment net sales in the third quarter of 2021 were $113 million, a $13 million increase or 12% on a constant currency basis over the prior year period. The portfolio segment increase in net sales was driven by higher net sales of American Cruise men's rooming products, Almay Color Cosmetics and CND nail products in North America and higher net sales of Mitchum antiperspirants in international regions, primarily in connection with the mass retail channel continuing to show signs of improvement from the effects of the ongoing COVID-19 pandemic.

This increase was partially offset by lower net sales of previously sold brands and of certain local and regional skin care brands. Portfolio segment profit during the third quarter of 2021 was $22 million, a $10 million increase or 79% on a constant currency basis compared to the prior year period.

This increase was driven largely by the portfolio segments' higher net sales and higher gross profit margin, partially offset by higher brand support expenses to support the increase in sales activity.

Turning now to liquidity. As of September 30, 2021, the company had approximately $122 million of available liquidity, consisting of $73 million of unrestricted cash and cash equivalents as well as $53 million in available borrowing capacity under the product Corporation's amended 2016 revolving credit facility less float of approximately $5 million.

Free cash flow used in the first 9 months of 2021, a was $93 million compared to $264 million used in the prior year period. The decrease in free cash flows used was primarily driven by a lower as-reported net loss and a decrease in the amount of cash used by working capital. Based on the seasonality of the business, we anticipate both free cash flow and liquidity will sequentially improve as we finish the year.

During the first 9 months of 2021, our capital expenditures were $6 million, and the company spent $15 million on permanent displays. In summary, our positive third quarter results reflect the strength of our business and commercial strategy, coupled with the momentum in the broader industry in the face of macro supply chain challenges. Going into the fourth quarter of the year, we continue to be focused on taking the right steps to mitigate risks associated with industry-wide supply chain pressures. These include working with our suppliers and customers, taking selective price increases and aggressively managing costs. Importantly, we also continue to execute against our strategic pillars and are confident in our ability to deliver on the growth potential of our iconic brands. I'll now hand the call over to Debbie for closing comments.

Thank you, Victoria. In closing, we are proud of our strong results in the third quarter. As we move towards the end of the year, we are actively mitigating the macro supply chain challenges and remain focused on executing our strategy, including building on the momentum of our iconic brands through our digital and omnichannel acceleration, our RGGA program as well as driving our ESG initiatives. And now we will open up the call for questions.

(Operator Instructions) We'll take our first question from Hale Holden with Barclays.

I was wondering if you could give us a sense of the magnitude of the cost overruns or increases that you saw in the third quarter and whether that would impact your ability to have product on the shelf in the fourth quarter?

Thanks for the question. I think that's obviously top of mind. We're very pleased with our results in Q3. As we said, given the macro challenges that we're facing and that it did dampen some of our results.

I guess the best way that I would think about it was we talked about our Revlon segment results of about 3% growth. And then we also talked about the -- which is sell-in. So our sales in. And then we also talked about sell-out and consumption, which was approaching 20%.

So that difference is kind of the order of magnitude because it really impacted U.S. mass and Revlon color cosmetics, more than other parts of the business. And we saw that in a reduced case fill rate. We did though manage -- there are some cost increases, although you saw our margin improve. So we were able to offset some of that. And we manage costs aggressively across the P&L to be able to deliver the EBITDA results that we did deliver.

And I'll also jump in here with regards to your question on the holiday. So we've worked closely with our suppliers and our vendors to ensure that we're able to protect the portions of our business that are driven by holiday and get those products on shelf. And as Victoria mentioned with regards to holiday, we continue to work with them on the color cosmetics side, which has been impacted really the most from the supply chain issues that we've been seeing.

And then the second question I had was your international growth was really quite impressive. And I was wondering if it could have been stronger or if you were negatively affected by lockdowns or slower growth in some regions.

I think the growth that you see, we're really pleased by. And the international regions exhibited strong growth really across all the segments. With regards to the shutdowns, we really managed through that. So in the Pacific region, there were shutdowns, Asia there were shutdowns, some in the EMEA region as well. But as you could see, our team really delivered and it really showcases the power that our brands have in the market and meeting the consumers where they're shopping both in-store as they opened as well as online.

And we'll take our next question from Carla Casella with JPMorgan.

The returns and allowances were a little bit higher this quarter, and I'm wondering why they picked up sequentially. And is that a barometer for fourth quarter? Or are we returning to kind of more of a normal level of returns and allowances.

So that's a good question. I think that's just some timing issues. We're not anticipating anything that is different from the norm. We track our returns and returns and allowances very closely. We've worked very closely with our customers on that. From a return standpoint, with COVID, we have seen some volatility with our customers in terms of just the timing of when those returns happen. So nothing unusual, nothing to read into that.

Okay. Great. And then if we look at each of your businesses prepandemic versus today or maybe where you're thinking of it going forward, is there opportunity to get back to pre-pandemic levels? Or are there structural issues or changes in any of the specific sectors, meaning fewer doors or smaller shelf space that would preclude you from being able to get back to the 2019 type levels of revenue?

So it's a great question, Carla. We don't give any forward guidance. But what I will say is that we continue to track each of the segments that we operate in very carefully. And as you know, from an industry perspective, you can see some are recovering much faster and growing fairly stronger than others, right?

So if you look at the skin care segment, that's recovered very, very well. If you look at color cosmetics in the mass segment globally, that's really had a slower recovery. So we continue to watch those dynamics in the market. The beauty industry, as you know, is extremely resilient. So we're very focused on the macro environment, the impact that it has on duty, but remain very positive about the trends that we're seeing currently in the market.

Okay. So in the Revlon brand specific, is your shelf space comparable today to where it was in '19 in terms of like food, drug, mass, just feet of space or other, I don't know how other ways you may track it?

I would say we continue to see like the normal ebbs and flows of space with regards to Revlon color cosmetics. There's nothing really of note to call out today versus where we were in '19.

Okay. And just one more, and then I'll pass it on, and I'll get back in queue. But on the Fragrances side, we're going into a big holiday quarter. Do you have a sense for are retailers planning a big holiday promotion around the fragrances? Are you setting up for more -- are you shipping in the box sets or other promotional items? Any thoughts on fragrance?

I mean, look at the fragrance industry as a whole, right, that's really recovered globally as well as we highlighted our third consecutive quarter of fragrance growth. And the Prestige Fragrance segment is performing very, very strong, including our prestige fragrances. So when we look into holiday, right, as an industry, we continue to believe that it's going to be equally as strong. And as I mentioned earlier in another question is that we were able to get all of our holiday sets on shelf and are really looking forward to those performances.

We'll take your next question from Steph Wissink with Jefferies.

You wanted to focus on the e-commerce business. If you could talk a little bit more about how much of that is your brand.com versus how much is the dot-com businesses of your retail partners?

So thank you for the question. As you know, e-commerce has been a strategic pillar of ours since, I mean, 2 and 3 years in 2018, and we continue to focus on the e-commerce acceleration. And when you look at the progress we have made, we ended the quarter at about 14% of net sales coming from e-commerce versus in '19, it was around 8%. So we continue to make a tremendous amount of progress there.

The way that we track e-commerce is primarily our own brands, so elizabetharden.com as well as other owned brands and the e-commerce pure plays. So in that number, we do not capture the retailer.com businesses. So it's a little bit difficult to answer with regards to the specifics there. But in terms of a trend, we are definitely seeing that acceleration happening.

And one follow-up question on channel mix. I think you mentioned in your remarks that department store traffic had been improving. I'm curious if that changes the way you think about the balance of mix going forward? Do you reengage in that channel in a more direct way? Or do you continue to derisk from some of the legacy channels and focus forward on some of the emerging channels.

Thank you. It's really a combination of both because today, it truly is striving to be omnichannel. So it goes back to meeting the consumer where the consumer is shopping. And today, they're shopping both -- We did see that once stores start to reopen, right, that the consumer was going back into store and wanted to have those experiences in store. But she or he has not given up on online. They're still engaged online. And so for us, it's really about how to connect the 2.

We mentioned about our digital consultations that the consumer is able to sign up for on elizabetharden.com as well as on the counter, they're able to find digital tools to enable their purchases. So we're really trying to link both channels together more seamlessly...

Last one for us on channels on Travel Retail. I think you also mentioned that, that was positive in the quarter. If you could just give us a sense of where you are relative to '19? And what your expectations are for recovery in that channel...

Yes. No, thank you so much. So as an industry, travel retail has been recovering since 2020. And we've seen a steady recovery throughout the quarters.

With regards to 2019, as you are aware, travel really has not come back as a whole. And so the travel industry has a big impact on Travel Retail. So as -- from an industry perspective, we have not seen that come back to 2019 levels. And I would say that our business is reflective of what you see with regards to industry trends.

We'll take a follow-up from Carla Casella with JPMorgan.

Just a couple of follow-ups. One, the -- you mentioned travel retail just now what percentage of sales do you see Travel Retail before the pandemic and coming out?

Yes. We don't normally break that out. It's a very highly profitable channel for us, but it's not significant relative to our overall sales mix.

Okay. Great. And then the cash sitting internationally, do you have restrictions from repatriating that? And would you consider repatriating that to reduce the revolver balance and increase the revolver availability.

So that's a good question, and that's the dynamic we work through on a daily and weekly basis. We work with all of our foreign entities so that they hold the minimum working capital required for the business.

Obviously, as you know, in some countries, it's harder to bring cash out than others. We've talked about China in the past where there are some specific restrictions and specific governmental approvals that are required.

But it's a dynamic that we are constantly focused on in terms of exactly that dynamic you talked about, about paying down the revolver, so we have greater availability.

Okay. And have you said how much of that international cash is China, the $67 million?

We don't disclose that. But it's not -- but again, it's balanced across that international cash is balanced across all of our international entities, right? Because as I said, they need to have the minimum working capital required to operate. So it's going to be balanced globally.

Okay. Great. And then just on the cost increases that you're seeing, can you just talk about which ones are the most impactful? And then where do you see the peak time frame of cost increases? Have we passed the peak? Or is that coming in fourth quarter? And how does that relate to your pricing actions to offset it?

So that's a good question. As you know, we're not going to specifically provide forward guidance but when I think about what I've read externally, I think from an industry standpoint and cross industry, people are expecting these inflationary pressures and even shortages to last into 2022. But I don't know that anybody has an exact crystal ball on what -- on the timing of that.

We're seeing those -- the cost increases in commodities, in components in labor as well as in freight. And so we are managing against all of those different variables and have different strategies against each one, like right, we can have a holistic labor plan relative to making sure that we have the right people in the factories to keep our manufacturing going.

And we are taking selective price increases to offset the inflationary pressures. We announced one to the trade at the end of Q3, which will go into effect in Q4. So the combination of the top line price increases, managing the cost, working with our customers, working with our suppliers and then also relentlessly looking at our own cost structure to manage that entire dynamic, which you saw, I think, in our Q3 results.

There are no further questions at this time. I will turn the call back over to Debbie Perelman for any closing remarks.

Thank you. Seeing 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 that you make every single day, and congratulations on a terrific quarter.

And this does conclude today's Revlon Third Quarter 2021 Earnings Call.