Revlon Inc (REV) 2020 Q4 法說會逐字稿

Good morning. My name is Nikki, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revlon Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the call over to Jeff Kennel, Vice President, Treasury. Please go ahead.

Thank you, Nikki. Good morning and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended December 31, 2020. 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 Q4 2020 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, Jeff. Good morning, everyone, and thank you for joining us. I hope that everyone and their families are staying safe and healthy. Our focus continues to be on the health and safety of our employees, their families and our consumers.

It goes without saying that 2020 was a challenging year for our industry and for Revlon. That said, I'm encouraged by how the company navigated through this period. Our employees demonstrated incredible agility and resiliency, which enabled the company to make new products such as hand sanitizers, capture the accelerated growth in the e-commerce channel as well as support important societal causes throughout the year.

We faced increased complexity due to the pandemic and remained focused on the key strategic pillars, including our e-commerce channel, our iconic brands of Revlon and Elizabeth Arden and our important U.S. mass and China regions as well as strict cost discipline across the company. I am proud of all that the company accomplished last year.

Now turning to our results for the fourth quarter of 2020. As reported, fourth quarter net sales of $627 million declined by approximately 10% year-over-year. This decline was primarily driven by the impact of COVID-19 with net sales impact of approximately $118 million. From a segment perspective, while all of our segments were impacted by COVID-19, the impact relative to size was especially great in our Revlon and portfolio segments, we believe, due to the particular impact on the color cosmetics category. While we are all eager to return to growth, it is notable that the net sales decline has been steadily improving quarter-over-quarter.

In the second quarter of 2020, our net sales declined 39% versus prior year followed by a 20% decline relative to prior year in the third quarter and now to an approximate 10% decline last quarter. While still managing through macro headwinds, we are clearly headed in the right direction.

As with the 2 previous quarters, we maintained strong controls over expenses to mitigate against the negative top line impact from COVID-19. First, we prioritize brand support to focus primarily on e-commerce and growth areas such as China. Second, we work to control indirect expenses. And third, we were able to capture savings from our Revlon 2020 restructuring program that was announced at the start of 2020.

These key actions helped drive our fourth quarter 2020 adjusted EBITDA, which, at $112 million, was flat relative to the same period in 2019. Adjusted EBITDA margin, however, improved from approximately 16% to approximately 18% year-over-year, representing an increase of approximately 200 basis points.

Though COVID-19 was a year-defining challenge and impacted all of our regions and brands, we have seen some green shoots of recovery in the fourth quarter. E-commerce remains very strong and we continue to see growth and momentum in this channel. Across the company, we saw e-commerce growth of approximately 39%, and this channel now represents approximately 20% of our net sales as compared to approximately 13% in fourth quarter 2019.

We experienced strong double-digit e-commerce growth in most regions across our mass, prestige and professional channels, particularly North America where e-commerce grew over 70% in the quarter. elizabetharden.com continues to perform well with growth in the fourth quarter exceeding 70%, and the brand also performed strongly during the important 11/11 event on Tmall in China. As a key catalyst for the company's growth going forward, we will continue to invest aggressively in further building our e-commerce capabilities and supporting our brands in this important channel.

Elizabeth Arden, where net sales grew approximately 4% relative to the prior year quarter on a constant currency basis, remains an important key pillar and showed resiliency last quarter with global net sales growth driven by the skincare and fragrances category. In China, our Elizabeth Arden skincare business grew 49% year-over-year. And in North America, this business also grew over 14%.

Our Prevage and Ceramide franchises were key growth drivers in both regions in part due to the launch of our hyaluronic acid capsules earlier this year. The fourth quarter is a critical selling period for the fragrances business, and I'm very pleased that some of our key brands saw a strong holiday season in 2020.

Our Elizabeth Arden branded fragrances grew year-over-year driven by our Green and White Tea franchises, which both grew strong double digits over the prior year quarter. The launch of White Tea Mandarin Blossom added animation to this business when it launched earlier in 2020.

Additionally, our key prestige brands of Juicy Couture and John Varvatos experienced growth in part due to the successful launches of Viva La Juicy Le Bubbly and our Varvatos [Teal] line. Further, we saw strong growth from our Curve brand, which remains the #1 men's prestige fragrance in the mass channel.

Before handing the call to Victoria to share additional details regarding our fourth quarter results, I want to circle back to how I opened my remarks by reflecting on 2020 as a whole and how we have internally pivoted to emerge from this year stronger and poised to capture the opportunities we anticipate in 2021 and beyond.

First, we have successfully delivered on our 2018 optimization and our 2020 Revlon restructuring programs, which in addition to our in-year cost control measures, played an important role in our improved EBITDA margin. Second, with our debt swap completed last quarter, the refinancing of our foreign asset-based term loan and the amendment of our U.S. asset-based revolver completed, there are no imminent maturities on the horizon.

And lastly, our organization has learned to be agile, adjusting our plans, strategies and ways of working so that we are poised to capture the changing consumer dynamics that accelerated in 2020 and will undoubtedly continue to evolve. This is truly a signal of change in our company, and we will continue to adapt and adjust to ensure that Revlon is at the forefront of evolving trends that we are seeing and reaching our consumers where they are.

And now I will turn it to Victoria to walk you through the details of the fourth quarter 2020 results.

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

Let me first detail our fourth quarter 2020 results. Fourth quarter as reported net sales were $627 million compared to $699 million during the prior year period, a decline of approximately 10% on an as-reported basis and 12% on a constant currency basis. As-reported net sales includes approximately $118 million of estimated negative impacts associated with the COVID-19 pandemic. Excluding the COVID-19 impacts, net sales would have increased versus the prior year period.

Fourth quarter operating income was $28 million compared to $77 million during the prior year period. The lower operating income was driven primarily by the adverse impacts of the COVID-19 pandemic impact on net sales, sales mix and higher manufacturing overhead absorption costs, along with the costs associated with the company's various debt refinancing activities.

These negative impacts were partially offset by $11 million in lower selling, general and administrative expenses, SG&A, driven in part by cost reductions associated with the company's restructuring program and additional actions specifically implemented to mitigate the adverse impact of the COVID-19 pandemic on the company's operating results.

Despite the higher costs associated with the impacts of the COVID-19 pandemic, the company was able to improve its gross margin by 160 basis points driven by cost reductions associated with the company's restructuring program, along with favorable foreign currency impacts.

As-reported net loss was $234 million in the fourth quarter of 2020 versus $26 million net income in the prior year period. The net loss was driven primarily by a $190 million noncash charge related to an increase in the valuation allowance for the company's net federal deferred tax assets as well as higher interest expense of $14 million.

Finally, adjusted EBITDA was $112 million in the fourth quarter of 2020, essentially flat against the prior year period driven primarily by strong control over our expenses.

Next, I would like to turn to our segment results. Revlon segment net sales in the fourth quarter of 2020 were $206 million, representing an approximately 16% decrease on a constant currency basis. The segment's lower net sales were driven primarily by Revlon color cosmetics. This decrease was partially offset by higher net sales of Revlon-branded beauty tools in North America, which grew approximately 25%.

Revlon segment profit increased to $45 million from $43 million in the prior year period, an increase driven primarily by the segment's lower brand support, lower customer allowances and lower SG&A expenses driven by cost reductions achieved through the company's initiatives designed to mitigate the adverse impact of COVID-19 on the company's operating results as well as the Revlon 2020 restructuring program.

Elizabeth Arden as-reported net sales were $181 million in the fourth quarter, representing an approximately 4% increase on a constant currency basis. The growth was mainly driven by skincare and fragrances in the Asia region. Additionally, North America showed growth, indicating the beginnings of a recovery with an approximate 3% net sales increase in that geography. Elizabeth Arden segment as-reported profit was $21 million, essentially flat against the prior year period due to the higher revenues being partially offset by higher brand support expenses.

As-reported net sales for our portfolio segment were $103 million in the fourth quarter of 2020, a decrease of 23% on a constant currency basis. We saw slight growth in Creme of Nature and Mitchum, but this was unable to offset declines in Almay, aligned with the declines we've seen in the color cosmetics category as well as American Crew and CND, which were both impacted by salon closures.

Portfolio segment as-reported profit was $14 million, a decrease of $7 million versus the prior year period driven by the segment's lower net sales and lower gross profit margin, partially offset by lower SG&A expenses and brand support expenses.

Finally, our Fragrances segment as-reported net sales were $137 million in the fourth quarter of 2020, representing a 12% decrease on a constant currency basis. The segment's lower net sales were driven primarily by the continued adverse impact of COVID-19. This was partially offset by bright spots, including Juicy Couture, John Varvatos and Curve in North America.

Fragrances segment as-reported profit in the fourth quarter of 2020 was $32 million, a $3 million increase compared to the prior year period driven by cost reductions achieved through the company's initiatives designed to mitigate the adverse impact of COVID-19 on the company's operating results as well as the Revlon 2020 restructuring program.

Turning to liquidity. Net cash used in operating activities during 2020 was $97 million compared to $68 million used in 2019. Free cash flow used in 2020 was $108 million compared to $97 million used in 2019. The increase in free cash flow usage was driven primarily by higher operating cash flow usage due in part to COVID-19's ongoing adverse impacts on the business. During 2020, we spent $10 million in capital expenditures and $31 million on permanent displays.

Just a brief note on our 5.75% senior notes exchange offer. As we stated last quarter, all conditions precedent to the consummation of the exchange offer were satisfied, including the minimum liquidity requirement of $175 million and settlement occurred on November 13.

During March 2021, the company extended or refinanced 2 of its maturing debt facilities. We closed an amendment to our 2016 $450 million asset-based revolving credit agreement with Citibank, continuing as the collateral agent and administrative agent. The amendment, among other things, extends the scheduled maturity of the revolving credit facility from September 2021 to June 8, 2023.

We also closed on a $75 million asset-based term loan facility with Blue Torch Finance LLC as the collateral agent and administrative agent. The new facility, which is scheduled to mature on March 2, 2024, replaces the 2018 foreign asset-based term loan that was scheduled to mature in July of 2021. The proceeds of the term loan were used to repay the company's 2018 foreign asset-based term loan and fund the company's ongoing liquidity needs.

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

Thank you, Victoria. In closing, in the fourth quarter, we continued to see improvement towards top line recovery from COVID-19 while protecting our bottom line. We anticipate emerging from the challenges of 2020 and once again driving growth by focusing on our key business strategies, including driving our e-commerce acceleration, iconic core brands of Revlon and Elizabeth Arden and growth markets such as China.

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

(Operator Instructions) We will now take our first question from Stephanie Wissink with Jefferies.

Debbie, a first question for you is just on the shelf space for Revlon and Almay, how you're thinking about that over the course of this year and even into next year just given the performance in color cosmetics.

And then Victoria, one for you is on some of the improvements you've seen in SG&A and gross margin. How much of those improvements should we continue to carry forward? How much are the permanent savings from the 2020 cost program versus the cost controls that you've leaned into for COVID? Just trying to assess how much of that spend could come back to support the brands.

Steph, thank you for the question. This is Debbie. Look, so with regards to shelf space, we don't provide forward-looking guidance. But what I can say with regards to 2020, we didn't have space loss. We had some of the normal ebbs and flows that happened throughout the year of normal course but nothing in terms of any major changes.

With regards to '21 and '22, per your question, look, from an industry standpoint, what we are really looking for and working towards is the recovery of the industry in the -- particularly in color cosmetics. We're very focused on, obviously, tracking consumer behavior, understanding when this trend, this decline will mitigate and start an upturn. We started to see a little bit of that over the summer as the stimulus checks came in.

We're looking to see -- track that to see as states reopen and as stimulus checks are sent to the consumers. Do we start to see that uptick again? We believe so. We believe that there is incredible opportunity within the color cosmetics as a whole, the category as a whole, and believe that there's a lot of pent-up demand. And I know you've heard that with regards to other industries, and I think it's very applicable to the color cosmetics industry.

So with regards to our own space, again, I don't -- we don't provide forward-looking guidance. But with regards to the industry, we look forward to rebound. It's, as you know, an extremely resilient industry and believe that the disruption that we have seen is short term. Thank you.

Okay. And thank you for your question on the improvements in SG&A and gross margin. There were 2 portions to our cost reductions, as you rightly point out: one is what I would call more structural, sustainable savings, which were started with the 2018 optimization program; and then we -- with the 2020 restructuring program.

Now there were other measures taken in 2020 relative to our investments in brand support as well as some temporary employee changes we made around reduced work weeks and furloughs, which will not be repeating. So we are unilaterally focused on ensuring the efficiency of our business, ensuring we have the right amount of operating cash flow so that we can invest in our brands so that we can grow the top line.

We continue to support the fact that our 2020 restructuring program will deliver what we announced it would deliver, which is in the range of $200 million to $230 million through 2022.

Debbie, could I just put one more question out, just as a follow-up to your first comments? Were there any major innovation initiatives in 2020 that you held back that you have plans to launch in 2021?

I think we're just trying to assess, when the consumer does come back, hopefully, with some excess capital from stimulus, that there's going to be enough excitement in the category to thrill her to purchase. So maybe talk a little bit about your innovation as well just in the context of what you expect to be as kind of this pent-up demand effect.

Thank you, Steph. Look, I think it's a great question. And really it highlights the agility that our teams had throughout the year in terms of managing what we are focused on and how we are executing in the market.

So we did actually hold back on launches in 2020 across actually multiple brands given the state of the market, right, given the closures in mass, the closures in prestige and the closures in the professional channel. And we do look to bring a lot of excitement into 2021 both with our product innovation across all of our brands as well as executing in the market with a real focus on executing in store as well as executing on digital.

So I think that from my perspective, we're prepared. We're prepared to capture that pent-up demand, frankly, globally as well as I believe that the industry itself is prepared to bring excitement to that consumer within beauty, right, beyond just color cosmetics.

We will take our next question from Steven Ruggiero with R.W. Pressprich.

Your purchase of permanent displays, can you give us a sense of if you're going to continue to cut back on that in '21 or will it remain about that $30 million? And also CapEx, is that a good number for '21, the $10 million that you did in '20?

That's a very good question. And we -- in the -- in our 10-K, you'll see that we have updated the guidance for both of those and are taking both of those ranges up. Let me quickly find them for you because, you're right, those numbers were somewhat artificially low in 2020 given the reaction to COVID.

So if you just bear with me one second, I will find that for you. Just one second. It is in our 10-K, but they are both up because, again, we have to continue to reinvest in the business. And obviously, we were impacted, as you saw by COVID '20 -- by COVID.

Okay. And you also signed that attractive Helen of Troy trademark license deal late last year. Are any other potential transactions like that, that you're contemplating in '21?

So we really don't comment on potential transactions. But obviously, we are always looking at ways to optimize our portfolio and optimize our business and our capital structure.

Okay. And just a final question, can you give us a liquidity number with the couple of transactions you entered into in March that provided some further out debt maturities? What is your liquidity as a result of those transactions as of today? Can you give us a sense or if you still have the [$250 million]?

So we refinanced the transactions, as you rightly point out. The U.S. ABL provided us the same borrowing base, so really immaterial to our liquidity. The foreign ABTL that we talked about actually had incremental collaterals, so the amount went from $59 million to $75 million. Obviously, it fluctuates some with the value of that collateral. So we are comfortable with our liquidity position as we have now, and we are also comfortable that we have sufficient liquidity for the year.

There appear to be no further questions at this time. I would now 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 have joined the call today and a special note to our team members around the Revlon world who are listening. I am truly appreciative of all of your significant efforts and continued dedication and passion throughout all of 2020. Thank you for all the efforts you make every single day, and continue to stay safe and healthy. Have a good day.

This does conclude today's Revlon Fourth Quarter and Full Year 2020 Earnings Call. Please disconnect your lines at this time, and have a wonderful day.