Revlon Inc (REV) 2020 Q1 法說會逐字稿

Hello. And welcome to the Revlon Q1 2020 Earnings Release Call. My name is Lydia, and I will be your coordinator for today's event. Please note, this conference is being recorded. (Operator Instructions)

I will now hand you over to your host, Eric Warren, Treasurer and Vice President, to begin today's conference. Thank you.

Thank you, Lydia. Good morning, everyone. And thank you for joining the call. Earlier today, the company released its financial results for the quarter ended March 31, 2020. 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; Sergio Pedreiro, our Chief Operating 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 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, Eric. Good morning, everyone. And thank you for joining us.

Let me start by saying I hope everyone participating on this call is safe and healthy. These truly are unprecedented times, and Revlon is adapting quickly to ensure that we emerge from this global crisis strong. As a result of COVID-19, we quickly implemented additional protocols in our manufacturing sites to ensure we could continue operations to fulfill our customers' needs while also protecting the health and safety of our employees. At this time, all of our manufacturing sites and distribution centers around the world are operating. We adjusted our supply chain to begin producing hand sanitizers in almost all of our manufacturing sites, and I'm very proud that we have collaborated with one of our key suppliers, as well as one of our key customers to donate these products to support our frontline health care workers. In addition to our hand sanitizers, we also have been donating personal care products to health care workers around world.

As you likely know from this morning's earnings release, our refinancing is complete, and we secured over an additional $500 million of liquidity. We are also very closely monitoring both our commercial investments and our expenses. We have prioritized our investments to focus primarily on our continued growth in e-commerce. In addition, we have reduced our indirect spend through temporary employee measures, including furloughs, reduced work schedule as well as both hiring and travel freezes. We should also note that we are achieving the anticipated cost reduction from our Revlon 2020 restructuring program that we announced in the first quarter.

Many of these decisions and actions are difficult for us but are necessary until the industry returns to normal levels of activity. All of these actions are designed to ensure that Revlon will continue to operate during this crisis and ensure we emerge stronger when markets begin to reopen.

It goes without saying that due in part to COVID-19, we experienced a negative impact on our business in the first quarter of 2020. Our total company reported net sales were $453 million, a decline of 18% or $100 million versus the first quarter of 2019. The decline was primarily driven by the impact of COVID-19, which began in Asia early in the quarter and then progressed around the world. COVID-19 impacted net sales in all reporting segments and in all regions, although the effects were not uniform across our various lines of business. With the implementation of lockdowns and closures of department stores, perfumeries and hair salons beginning in January in Asia, for the first quarter of 2020, we experienced the majority of this decline in this region, particularly in travel retail. Towards the end of the quarter, we saw COVID-19 impact our EMEA region, and we began to see the initial effects in our North America region as well, with the company's prestige channel being impacted as department stores across the region closed.

Our first quarter 2020 adjusted EBITDA was $28 million as compared to $39 million in the first quarter of 2019, reflecting the company's ability to manage its cost base despite the COVID-19 top line decline. Victoria will take you through more details later on this call.

While these results are not what we like to see, there are several factors about which I am cautiously optimistic. Our e-commerce business continues to accelerate. In the first quarter of 2020, net sales from our e-commerce channel grew 47% or approximately 12% of total company net sales, almost doubling versus the first quarter of 2019. We are experiencing e-commerce growth in all regions and our own channels, including elizabetharden.com where net sales grew just under 40% in the first quarter of 2020.

Despite COVID-19 we also continue to see positive momentum with our Revlon color cosmetics online business in China, which launched less than 1 year ago and have just announced Jessica Jung as the newest brand ambassador for Revlon in this region. Our Elizabeth Arden skin care business in China has remained resilient. We experienced strong performance in 2 key events in China in the first quarter, our Queen's Day campaign and Tmall Super Brand Day, both of which grew strong double digits over prior year period.

As consumers shift their purchasing habits given the impact of COVID-19, we are experiencing resilience in some of our personal care brands globally, including Mitchum and Cutex. With closure of salons in the U.S., we are also seeing shift towards at-home hair color, which has increased both net sales and consumption of our Revlon ColorSilk hair product.

And finally, we are starting to see parts of the world begin to reopen. Many stores in China have reopened, and the current indicators show that the consumer is still very much engaged in beauty, and this highlights its resilience as a category. We are closely monitoring all of our key markets to understand the resiliency of our consumers as we know this is an ever-evolving industry.

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

Thank you, Debbie. And good morning to everyone on the call. Let me first touch on our recently announced refinancing transaction. We are pleased to have completed this new $880 million 5-year financing, which accomplishes 3 primary objectives for the company. First, the new issuance allowed us to fully pay down at closing our $200 million 2019 term loan facility and provides us with a source of liquidity to address upcoming maturities, including the 5.75% senior notes. Second, we were able to extend the maturity of a substantial portion of our 2016 term loan to 2025, which improves the maturity profile of our capital structure. And third, the transaction delivers new funding to the business that will support investments in our brands, innovation as well as value-creating projects such as the Revlon 2020 Restructuring Program.

I will now turn to our first quarter 2020 results. First quarter as reported net sales were $453 million compared to $553 million during the prior year period, a decline of 18%. As reported net sales includes approximately $54 million of estimated negative impacts associated with COVID-19. Excluding the COVID-19 impact, net sales on a constant currency basis declined 6.5%.

First quarter operating loss increased to $186 million compared to a $23 million operating loss during the prior year period. The higher operating loss was driven primarily by $124 million noncash intangible impairment charges reflecting COVID-19's financial impact, $19 million of higher restructuring charges primarily related to the Revlon 2020 Restructuring Program and the lower net sales in the quarter. These impacts were partially offset by $43 million in lower selling, general and administrative expenses driven in part by reduced brand support in response to COVID-19 as well as cost reductions associated with the company's restructuring programs and cost mitigation actions. Excluding our onetime items in the quarter, adjusted operating loss in the first quarter of 2020 increased by $2 million to $11 million from $9 million in the prior year period.

First quarter net loss increased to $214 million versus a $75 million net loss in the prior year period. The higher net loss was driven primarily by the $124 million of noncash intangible impairment charges discussed previously, $16 million negative foreign currency impact in the quarter, partially offset by a $37 million improvement in the benefit from income taxes driven in part by the company's adoption of the tax provisions under the new CARES Act.

Finally, adjusted EBITDA was $28 million in the first quarter of 2020 compared to $39 million during the prior year period driven primarily by the lower net sales, partially offset by the lower SG&A expenses and improved gross profit margin.

Next, I would like to turn to our segment results. Revlon segment net sales in the first quarter of 2020 were $182 million, representing a 25% decrease on a constant currency basis. The segment's lower net sales were driven primarily by the global impact associated with COVID-19, increased trade spread and increased pipeline shipments to support in-store activity that occurred in the prior year period. Revlon segment profit decreased to $16 million from $26 million in the prior year period driven by the segment's lower net sales and lower gross profit margins.

Elizabeth Arden net sales were $95 million in the first quarter, representing a 12% decrease on a constant currency basis. The decline was mainly driven by lower net sales of certain Elizabeth Arden-branded skin care products and color cosmetics and certain Elizabeth Arden-branded fragrances due in part to the closure of department stores and travel retail outlets as a result of COVID-19, partially offset by higher net sales of Ceramide skin care products internationally. Elizabeth Arden segment profit was $4 million, an increase of $2 million versus the prior year period primarily due to the segment's higher gross profit margin and lower brand support, partially offset by lower net sales.

Net sales for our Portfolio segment were $110 million in the first quarter of 2020, a decrease of 4% on a constant currency basis. This decrease was primarily driven by lower net sales of Almay and SinfulColors, American Crew and CND driven in part by the closure of salons globally due to COVID-19, partially offset by higher net sales of Mitchum and Cutex primarily in North America. Portfolio segment profit was $7 million, an increase of $3 million versus the prior year period driven by lower brand support and higher gross profit margin, partially offset by the lower segment net sales.

Finally, net sales of our fragrances segment were $66 million in the first quarter of 2020, representing a 13% decrease on a constant currency basis. This decline was driven primarily by COVID-19-related impacts on the category as well as a key U.S. mass retailer's strategic decisions to reduce space allocated to the fragrance category. Fragrances segment profit in the first quarter of 2020 was $1 million, a $6 million decrease compared to the prior year period primarily as a result of lower segment net sales and higher brand support, partially offset by higher gross profit margin and lower distribution costs.

Turning to liquidity. Cash used in operating activities during the first quarter of 2020 was $78 million compared to $28 million used in the prior year period. The increase in cash usage was driven primarily by the lower net sales and unfavorable working capital changes.

Free cash flow used in the first quarter of 2020 was $79 million compared to $34 million used in the prior year period. The increase in free cash flow usage was driven by higher operating cash flow usage partially offset by lower capital expenditure. During the first quarter, we spent $2 million in capital expenditures and $7 million on permanent displays.

And finally, as of March 31, the company had approximately $121 million of available liquidity, consisting of $63 million of unrestricted cash and cash equivalents, $34 million in available borrowing capacity under the revolving credit facility, $30 million in available borrowing capacity under the 2019 senior line of credit, less float of $6 million. On May 7, 2020, after closing on the company's new 5-year senior secured term loan facility, the company had approximately $600 million of available liquidity.

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

Thank you, Victoria. In closing, we continue to manage through the impact of COVID-19, including the safety and health of our employees. We remain focused on continuing our ongoing efforts to transform our company, including executing on the 2020 Restructuring Program and the growth in e-commerce.

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

(Operator Instructions) Our first question comes from Carla Casella of JP Morgan.

This is Sarah Clark on for Carla Casella. We just have a few questions. Can you talk about if you've gained or lost shelf space at retail during COVID?

Yes. So -- can you hear me?

Yes.

Okay. Great. Thank you. Thank you. Yes, so what I can say is what we mentioned previously with regards to Victoria's comments in that we did see that one U.S. mass retailer reduced space in the first quarter for the Fragrances segment, which impacted our business.

And then a little bit more on the financing transaction. Are you expecting to pay $500 million in cash for the 2020 bond with either liquidity today, or are you planning on raising additional debt? Or given where the bonds are trading now, are you thinking a little bit more opportunistically?

Well, thank you for the question. I think that's a good question. Obviously, we are balancing all considerations, given that we are in the midst of managing this unprecedented COVID-19 issue. We are managing our cash flow. We are allocating our cash. We are ensuring we have sufficient cash, not only to support our operations but to support the restructuring program. And we'll take mitigating actions to the extent that's needed.

Now relevant to the 2021 maturities, we are cognizant certainly of all of those impending maturities. We're focused on managing that near-term liquidity, and we will deal with those 2021 maturities in due course.

That was helpful. And then one more question, if I can. What brands do not secure the new term loan?

Revlon is not part of that. I mean it is part of the overall -- Revlon brand is not part of that security.

Our next call is Stephanie Wissink of Jefferies.

This is Ashley Helgans on for Steph Wissink. How are you thinking about Q2 in terms of order flows? And any view on the back half in terms of how retailers are planning into the reopening and fully reopened phase?

So thank you for the question. Why don't we first -- let's take a step back so we can just -- I can just touch on what has happened. And then with regards to the second quarter, since we don't provide any forward-looking guidance, I can talk about what we're seeing as an industry, right?

So when we look at what has happened in -- particularly the U.S. mass channel, right, as well as prestige, we started seeing the impact of COVID-19 really in the back half of the first quarter and primarily hitting us the back half of March. What we saw was that retailers in the mass channel remained open, right, so with restrictions in terms of social distancing and restrictions in terms of hours. We also saw that department stores and specialty and salons did close their doors. During that period of time and until now, what we have seen is a shift to e-commerce for the consumers as well as for retailers in terms of their focus has been also on e-commerce, including order online and pick up at curbside. And we have seen the consumer start to make that shift of where they are buying.

And as we continue to go through the second quarter as an industry, what we are seeing is that, one, specialty stores are starting to slowly reopen with regards to ordering online and curbside pickup. We're starting to see department stores reopen. We're starting to see, in some states as well as globally, salons reopening. And we continue to see that our mass customers as well as drug customers continue to remain open as well as have an e-commerce presence. We expect for that to continue throughout the second quarter as an industry, following the patterns that the retailers have announced in terms of the phasing of their openings as well as depending on the states, the softening of the restrictions. And we closely monitor those and the impacts that it would potentially have on our business.

What I can say, which we highlighted, is that there are certain categories that continue to remain strong throughout this period, including hair color, nail color, nail care, as well as personal care products like APDO. And we continue to monitor the color cosmetic market, where you can see in the Nielsen over the past couple of weeks, it has, I would say, it has progressed in a positive way.

So with regards to your question with -- for second quarter, that provides the context. We continue to monitor the reopenings across all the channels that we operate in. And we continue to work with our customers both to service them in-store as well as online.

With regards to the view for the back half, exactly what I said, we just continue to monitor it and make sure that we have the ability to service the consumers and the customers and have flexibility in our operating models to do that.

Okay. Great. And if I could just squeeze in one more. We were just curious on Arden's operating profit improvement, with sales down 12% but profits up almost 150%.

Okay. Yes. I mean obviously we are working on optimizing each one of our segments as we go. A lot of that was, let's see, we had Elizabeth Arden segment declined about 14 million or 12% on a constant currency basis. And it was really all COVID-19 driven but we were able to offset that decline with very strong continued growth in China, which was up 46% primarily driven by e-commerce. And then we did see benefit from gross profit margin, which actually went up 600 basis points. We saw fewer returns and lower promotionality as well as we saw the favorable cost reductions from our 2018 optimization program continue to flow through.

Our next caller is Mary Gilbert of Imperial Capital.

I wondered if you could also talk about what you're seeing in terms of reopening in other markets, including Europe. And also, I didn't know if you could quantify generally what you're seeing in Asia in terms of the recovery. Is it sort of still down x percent pre-COVID? Or is it sort of recovered? If you could just give us color on that. And then also with the impairment charge of $129 million, what that was related to specifically?

Yes. So with regard to -- let's take the first part of the question, the reopenings that we're seeing in Europe. Honestly, it depends on the country in terms of how we're seeing the phasing of the reopenings. If you look at Italy and Germany, where we're seeing some of these reopenings happening particularly on pro, it is phased. So it's slow and very controlled. If you look at the U.K., what we're seeing is similar to what we experienced here where department stores are remaining closed as well as Professional. But on their terms and their equivalent to mass and drug, they are open with restrictions. So what I would say is that it's really country dependent but we are starting to see the reopenings happening on a phased approach across all the channels, pro, mass, and I would say a little bit, frankly a little bit less in prestige and -- in the prestige channel.

Turning to your question in Asia with regards to our business. So what we're seeing is and what we experienced in the first quarter, and Victoria mentioned this, is that the largest impact on our business there was really due to COVID. And a big piece of that was attributed to travel retail. We did experience growth in China with our Elizabeth Arden brand as well as Revlon as we had launched in the back half of 2019. And we continue to see those markets in Asia reopening, though again very similar with this phased approach, really I would say except for travel retail, which continues to remain, I'm going to call, depressed at this point.

Victoria, do you have anything that you'd like to add with regards to Asia? And then I'll turn it over to you for the impairment piece as well.

I guess not anything that's quantifiable per se but just to build on your comments that as we have worked very closely with all of our customers as they reopen, we are seeing green shoots of growth, right, with orders and that e-commerce continues to be strong.

So on the impairment, it was $124 million impairment charge, Mary. And as we saw the impact of COVID-19 on our business, we needed to do a reassessment of our internal forecasts to determine if we had an impairment, and obviously we did. The majority of those charges were recorded against our Portfolio segment, our Professional, Portfolio and EA fragrances. We had indicated in our 2019 10-K that each of those 3 reporting units had less than a 15% cushion relative to fair value. So these revised projections, the fair value obviously was less than the book value, which resulted in our Q1 impairment. But it was triggered by what we have seen and continue to see with COVID.

Okay. That's very helpful. Then also, I wondered if -- 2 things. One, if you can give us the updated guidance for -- or I guess you don't do guidance but rather how we should think about CapEx and permanent displays, given COVID for -- as part of your cost reduction or mitigation?

So in the Q, you'll see that we took down our capital range to 15 million to 25 million for the year, but previously was 25 million to 30 million. And from displays, we took down from 30 to 40, to 40 to 50. And I guess this is again out of an abundance of caution and also being realistic relative to what's happening in the market as well as with our customers.

(Operator Instructions) We have no incoming questions. I will turn the call over to you, Debra.

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 stay safe. Thank you.

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