Revlon Inc (REV) 2021 Q2 法說會逐字稿

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

Thank you, Ryland. Good morning, everyone, and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended June 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 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 Q2 2021 Form 10-Q. The company undertakes no obligation to publicly update any forward-looking statements, except for the company's obligations under 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 recorded or copied.

And with that, we'll 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 be sharing our strong second quarter results, which reflect the strength of our brands as well as the changing dynamics in the world as markets reopen and our consumers reengage their beauty category across all channels.

Before I share our second quarter 2021 results, I would like to highlight the progress we are making on our 4 strategic pillars. First, we are focused on leveraging the strength of our iconic brands of Revlon and Elizabeth Arden as well as on those brands where we have scale or a unique positioning in the market. This includes, for example, American Crew, where we are the #1 men's styling brand and CND where our innovation is truly groundbreaking. Our continued focus on our global brand strategies, including executing in key markets such as China and the U.S., helped to drive double-digit net sales growth in the second quarter.

Second, our digital transformation remains fundamental to our strategy. Building on the robust e-commerce growth we delivered throughout 2020, we are committed to driving growth in this business as well as creating a true omnichannel experience as our consumers have now become much more comfortable shopping across all channels. For instance, our Elizabeth Arden consumers are able to engage one-on-one with a beauty consultant, both at our counters worldwide as well as now live on elizabetharden.com.

Third, I am very proud of the work our team is doing to create a positive impact on the world around us, including increasing the sustainability of our products and focusing on our diversity, equity, and inclusion initiative. Today, over 2/3 of our 2021 new products feature sustainable elements, including the formula and/or packaging. And lastly, we have rapidly moved into implementation of our holistic Revlon Global Growth Accelerator, or RGGA program, where we now have teams around the world engaged to drive this program forward.

As we shared on our last earnings call, this company-wide initiative further supports our growth ambitions by focusing on reinvesting in our iconic brands, improving margins, strengthening our internal capabilities, and building long-term value for the company.

Our team's consistent focus on these 4 pillars, coupled with continued global recovery from COVID-19, drove a strong second quarter results, which I will now turn to.

As-reported second quarter net sales were $497 million, representing growth of 43%, or $150 million versus prior year quarter. Foreign exchange positively impacted our business in the quarter. When removing this impact, our net sales were $475 million, representing growth of 37%, or $127 million versus the second quarter of 2020. It is notable that all regions and all reporting segments returned to growth.

Our adjusted EBITDA of $64 million versus $45 million in prior year quarter, growing $19 million or 41%. Aligning with our strategy, we have been focused on driving efficiencies within our company to enable investment into our brands.

Victoria will take you through the detailed financial results later on the call, and I will now share some of the key drivers behind our top line growth.

First, as mentioned, our focus is on maximizing the global strength of our iconic brands. In the second quarter, all of our segments grew over prior year as many markets continue to reopen and our consumers return to stores, counters, and salons. As an example, in EMEA, where salons in many key markets have reopened with 50% to 75% capacity, we were able to successfully launch our newest Revlon Professional innovation, Color Sublime, in thousands of salons in the region.

Our Revlon segment net sales grew over 30% in the second quarter, driven primarily by our Revlon color cosmetics business where net sales grew over 70% versus prior year. The overall color cosmetics category saw a strong rebound with the U.S. mass channel growing 17% and Revlon outpacing the categories of retail sales soaring over 40%.

It is particularly exciting to see the return to growth in the lip category, specifically as Revlon has long been a leader here. Our ColorStay Satin Ink lip color is currently the #1 lip launch in the U.S. mass channel, and we also have many other new products in the top 10, including our ColorStay Brow Fiber Filler, So Fierce! Big Bad Lash Mascara and prismatic pallets, ColorStay Light Cover Foundation, and Ultra HD Snap! nail color.

Net sales in our Revlon Professional business, which is primarily based in EMEA, grew over 65%, driven in part by the Color Sublime hair color launch I mentioned earlier. This product, which is vegan, also uses 60% less plastic and 25% less paper in its packaging. We have received great feedback from both hairdressers and consumers since launch.

Turning to Elizabeth Arden. Globally, this segment's net sales grew 44% over the prior year quarter. Our skin care, fragrances, and makeup categories all experienced strong double-digit growth with exceptional growth of over 100% in the fragrances category as consumers return to some of our classic brands such as Red Door and 5th Avenue.

Our newest franchise of White Tea continues to perform well by attracting new consumers to the brand.

China remains the lead market for Elizabeth Arden with a number of important e-commerce events in the second quarter driving growth, including Super Brand Day and 618. One of our most successful events of the quarter was the launch of Prevage 2.0, which we introduced in the market in China through a Super Brand Day activation in April.

Turning to our Fragrances segment. This is our second consecutive quarter with impressive results. Net sales in the second quarter grew 96% as consumers return to some of our retail channels. While all of our key brands experienced explosive growth, our Juicy Couture and John Varvatos brands were truly exceptional, with both over growing 200% driven in part by recent launches of OUI Splash and John Varvatos XX.

There are many other examples of our brand momentum in the market, including our new American Crew hair care line featuring bottles that are made with 80% post-consumer recycled materials and formulas that are vegan and free from silicon, as well as share gains in Mitchum and key markets of the U.K., South Africa, and Australia.

But I want to now provide an update on our digital transformation. We saw modest growth in our e-commerce channel with second quarter net sales growing 7% as traditional retail channels reopened relative to prior year. This channel now represents 15% of our net sales, more than double our penetration in 2019.

In addition to continuing to drive our e-commerce net sales growth, we are also focused on providing a truly omnichannel experience as consumers increasingly demand a seamless shopping journey regardless of where they shop. This is most evident in our Elizabeth Arden brand. In store, we have a suite of interactive digital tools that engage the consumer to find their perfect skin care regimen, shade of foundation or fragrance. Similarly, online on elizabetharden.com, we have virtual one-on-one beauty consultations, so the consumer can get the same personalized expert advice, both in-store and online.

Turning to our ESG strategy. I want to reiterate how proud I am of the work our teams are doing to make a positive impact on our broader world. While this has always been a part of our company, I continue to evolve our ambitions based on where I believe we can have the largest impact. Our internal inclusion and diversity council is participating in the W.K. Kellogg Foundation, expanding equity program to further drive our internal vision of an inclusive culture where a diverse workforce thrives.

Externally, our Creme of Nature brand, partnered with the United Negro College Fund to launch our Legacy to Leadership Scholarship fund to support students currently enrolled at HBCU. Over 600 students submitted video applications, and we announced our 20 winners last month.

Finally, all of 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 within the formulation and/or packaging. One recent example is our Almay All-Day Intense Gel Eyeliner, which has received the Environmental Working Group verification seal.

And finally, turning to our recently announced RGGA program, for which we began our implementation phase in the second quarter, this program was put in place to support our growth ambitions and to build the foundation for Revlon's future.

The program consists of 3 key initiatives implemented and executed over a 3-year time horizon. One, strategic growth, which will drive organic sales focused on our key brand in key markets, particularly the United States and China; two, operating efficiencies, which will be used to invest in 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 have already launched a number of internal training focused on increasing efficiency and effectiveness, and are continuing to expand these throughout the organization.

We have engaged hundreds of employees to drive our RGGA program forward, and we remain on track to deliver against our expectations. The timeliness of this program is especially relevant to capture the growth we are seeing as markets continue to reopen and consumers increase their engagement within our relevant beauty categories.

Our second quarter results are a great reflection of the strength of our brands in the market and the ongoing recovery of our business and the beauty industry as a whole.

Going into the second half, we are following the recent uptick of COVID-19 cases as well as the pressure on the global supply chain stemming from industry-wide labor and material constraints. Consistent with past practices, we are actively monitoring these risks and will adjust our business as necessary to mitigate the impact to our results.

Taking a step back, I want to emphasize that while we are certainly not ignoring the macro challenges that lie ahead, I am extremely pleased with the positive indicators we are seeing in our business and how we performed in the second quarter.

As we look towards the rest of the year, I'm confident that our momentum, combined with the benefits driven by our RGGA program, position us well to continue to unlock the potential of our brands, improve margins, strengthen our internal capabilities, and build long-term value for the company.

And now, I will hand the call to Victoria to share more details on our second quarter 2021 financial results.

Thank you, Debbie, and good morning to everyone on the call. Before I share the details of our Q2 2021 results, I'd like to share the financial strategy we put in place approximately 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 investments to the business priority 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 circumstances across all lines of the P&L and balance sheet, including our gross margin and working capital.

Before I go into the segment details, I'd like to summarize Revlon's strong second quarter results on a consolidated basis. As-reported net sales were $497 million in the second quarter of 2021 compared to $348 million during the prior year period, an increase of $150 million or approximately 43%, which is also approximately 37% on a constant currency basis. All segments experienced double-digit as-reported net sales growth during the second quarter of 2021 over the prior year period.

As consumers return to stores, this tempered our e-commerce net sales growth to approximately 7%. As Debbie mentioned, at 15% of net sales, our e-commerce penetration has doubled since 2019.

As-reported operating income was $15 million in the second quarter of 2021 compared to a loss of $59 million during the prior year period. This is the best second quarter operating income reported in the last 5 years. The higher operating income was driven primarily by $150 million in higher net sales, offset by $83 million in higher selling, general, and administrative expenses, SG&A. This includes the reinstatement of the roughly $30 million in temporary cost reduction measures we took in Q2 of 2020 in response to the impact of COVID.

The company was able to improve its gross margin by 900 basis points. Adjusted operating income in the second quarter of 2021 increased by $20 million to $28 million from an $8 million adjusted operating loss in the prior year period. Driving our improved gross margin was favorable obsolescence, lower nonrecurring COVID-19 costs, favorable foreign exchange results, and cost reductions achieved through our ongoing RGGA program.

Adjusted EBITDA in the second quarter of 2021 was $64 million versus $45 million in the prior year period, driven by improving gross margin and top line growth.

As-reported net loss was $68 million in the second quarter of 2021 versus $127 million net loss in the prior year period. The lower net loss was driven primarily by improvements in the as-reported operating income, as I've previously outlined.

Adjusted net loss was $55 million in the second quarter of 2021 compared to an adjusted net loss of $84 million during the prior year period.

Next, I'd like to turn to our segment results. Revlon as-reported segment net sales in the second quarter of 2021 were $187 million, representing an approximately 32% increase on a constant currency basis. The segment's higher net sales were driven primarily by Revlon color cosmetics, both in North America and in international regions and to a lower extent, higher net sales of Revlon-branded professional hair care products in international regions. This increase was driven by the momentum in the mass retail color cosmetics channel. The increase in net sales was partially offset by decreased net sales in North America of Revlon hair color and care product and Revlon-branded beauty tools.

Revlon as-reported segment profit in the second quarter of 2021 was $21 million compared to $12 million in the prior year period, an increase driven primarily by the segment's higher net sales as well as higher gross profit margins, partially offset by higher SG&A expenses, including brand support.

Elizabeth Arden as-reported segment net sales in the second quarter of 2021 were $125 million and approximately 44% increase on a constant currency basis compared to the prior year period. The higher net sales were driven by an increase of Ceramide skin product, Green Tea and White Tea fragrances, and other Elizabeth Arden-branded fragrances, largely in international regions. Growth in e-commerce, the travel retail business, and increased foot traffic at department stores all contributed to the increase in net sales.

Elizabeth Arden as-reported segment profit in the second quarter of 2021 was $12 million compared to $11 million in the prior year period, an increase primarily due to the segment's higher net sales, partially offset by higher SG&A expenses, including brand support as well as moderately lower gross profit margin.

Fragrances as-reported segment net sales in the second quarter of 2021 were $87 million, an increase of approximately 96% on a constant currency basis compared to the prior year period. The segment's higher net sales were driven primarily by Juicy Couture, John Varvatos, Britney Spears, and Curve fragrances in North America, and to a lower extent, in international regions.

Fragrances as-reported segment profit in the second quarter of 2021 was $20 million compared to $8 million in the prior year period. This increase was driven by the segment's higher net sales as described above, partially offset by higher SG&A, including brand support expenses.

Portfolio as-reported segment net sales in the second quarter of 2021 were $99 million, an increase of approximately 8% on a constant currency basis compared to the prior year period. The increase in segment net sales was driven by Mitchum antiperspirant deodorant and American Crew men's grooming products, and also by Almay color cosmetics and CND nail products. This increase was partially offset by the sales of the Natural Honey brand in December 2019, which continue to produce transition services revenue during 2020.

Portfolio as-reported segment profit in the second quarter of 2021 was $11 million compared to $15 million in the prior year period, a decrease driven primarily by the Portfolio segment's higher SG&A, including brand support, partially offset by higher net sales as described above as well as higher gross profit margin.

Turning now to liquidity. As of June 30, 2021, the company had approximately $153 million of available liquidity, consisting of $110 million of unrestricted cash and cash equivalents, as well as $54 million in available borrowing capacity under the Product Corporation's Amended 2016 Revolving Credit Facility, less float of approximately $10 million.

Free cash flow used in the first half of 2021 was $42 million compared to $167 million used in the prior year period. The decrease in cash usage was driven primarily by improved operating performance and lower inventory levels.

During the second quarter, our capital expenditures were $2 million, and the company spent $3 million on permanent displays.

And finally, as reported previously on May 7, 2021, the company closed an amendment to its 2016 asset-based revolving credit agreement with MidCap Funding IV Trust as the collateral agent and administrative agent as successor in such capacity to Citibank. The amendment, among other things, extends the scheduled maturity of the revolving credit facility and the second-in, second-out term loan thereunder from June 8, 2023, to May 7, 2024, subject to certain springing maturities.

In summary, our positive second quarter results reflect the strength of our business and commercial strategy, coupled with momentum in the broader industry.

As Debbie said earlier, going into the second half of the year, we are focused on taking the right steps to mitigate risks associated with industry-wide supply chain headwinds.

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 experienced strong results in the second quarter, driven by our progress against our key strategic pillars, the implementation of our RGGA program as well as the market recovery from the COVID-19 pandemic.

As we move into the second half of the year, we remain focused on capturing the growth in our iconic brands through our digital and omnichannel acceleration, our RGGA program as well as driving our ESG initiatives to make a broader positive impact on the world around us.

And now, we will open the call for questions.

(Operator Instructions) And we will go ahead and take our first question from Stephanie Wissink from Jefferies.

This is Grace Menk on for Steph. Wondering if you could talk a little bit about the performance that you saw in the period, just the differences between mass and prestige. Any color there?

Grace, thank you for the question. It's Debbie. With regards to mass and prestige, we really saw a recovery across the board globally. I mean, as we mentioned, we saw the recovery and the growth happening in all channels, all segments, and across all regions.

As the consumers start to move back into the store, that was a big driver of the growth, along with e-commerce. So we continue to see that throughout the quarter and building momentum across both mass and prestige.

Was there anything specific that you were looking for in those channels in terms of -- more specific?

Yes, just seeing the momentum kind of across both channels, that makes sense. I think some retailers are seeing more strength in mass versus prestige, or the other way around. So we're just interested in that dynamic.

Yes. Yes. So we saw it in both.

Well, I think that -- as-reported double-digit growth right across all of our segments, which is reflected in both of those channels, and in addition to the...

Right.

Yes.

Okay. That makes sense. What about category-wise across mass or prestige. Any categories that you saw performing well in one versus the other?

Yes. Again, I would say all the categories performed extremely well. When you look at Fragrances, we were about 100% interim growth. So very strong driven by in-store as well as on e-commerce.

When we look at mass color cosmetics, we saw -- as you could see, we saw a rebound happening there. I mean, our Revlon color cosmetics grew 70% in the quarter. So very strong on the color cosmetics side.

Skin care prestige with Elizabeth Arden again saw some very strong double-digit growth. So it just really mirrors what you're seeing on the -- with regards to the higher level performance that we were seeing it across category and across channel.

That makes sense. And then kind of double-clicking on Elizabeth Arden. I'm wondering if you could give a little -- it's really interesting to hear about the events in China and Hainan in the quarter.

Do you have anything going forward? Any events coming up? Or kind of how are you thinking about Elizabeth Arden internationally as we look forward?

So we don't give any forward guidance. So I would say is that we're always focused on the key events that happen in the international markets, including in China. We're very carefully watching any rebound that's happening in travel retail, as Arden intends to play very well there.

And that again is across category for Arden and fragrances and makeup as well as in skin care. So I would say that the growth that we've seen in the past with being event-driven as well as the regular business, we expect to see reflected as you go into the second quarter and the events -- the bigger events throughout that, the second half of the year.

Okay. And then any innovation plans that you could speak to in terms of newness coming up?

It's a great question. We're not going to speak to -- I'm not going to speak to today, the innovation that we have planned for the second half, but it should be coming out shortly. And it's all very exciting. So we're -- to the market.

Great. That's great to hear.

Our new products have performed, right, in the market for the first half. Revlon has the #1 lip launch with our ColorStay Satin Ink. You can see how we've had performance -- great performance in the ancillary categories such as brow and shadow under Revlon, as well as the launches that we put forth under Elizabeth Arden with Prevage2.0 performing extremely well in the market.

Okay. And then just lastly, and thanks for answering all these questions. On consumer demand kind of in the second half, obviously, you kind of touched on you're monitoring the situation.

Anything that you're seeing so far, you can touch on just with some mass mandates coming back and the uncertainty with the Delta variant. Anything else to add there?

We're -- like everybody, we're watching it very, very closely, both from an internal perspective to ensure that our employees remain safe and healthy, and then also from an external perspective to see the impact on the business.

I still think it's very early to call any change in behavior than what we've been seeing for the first half. But we're obviously going to continue to monitor it.

And at this time, I will go ahead and turn the call back over to Debbie Perelman. Please go ahead.

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

And this does conclude today's Revlon Second Quarter 2021 Earnings Call. Please disconnect your line at this time, and have a wonderful day.