Revlon, Inc. (NYSE:REV)
Q4 2012 Earnings Conference Call
February 5, 2013 08:30 AM ET
Elise A. Garofalo – Senior Vice President, Treasurer and Investor Relations
Alan T. Ennis – President and Chief Executive Officer
Chris Elshaw – Executive Vice President and Chief Operating Officer
Steven Berns – Executive Vice President and Chief Financial Officer
Carla Casella – JPMorgan
Connie Maneaty – BMO Capital
Arthur Roulac - Three Court
Good morning ladies and gentlemen and welcome to Revlon’s fourth quarter and yearend 2012 earnings conference call. At the request of Revlon, today’s call is being recorded, if you have any objections you may disconnect at this time. (Operator Instructions) Now, for opening remarks and introductions I will turn the call over to Ms. Elise Garofalo, Revlon’s Senior Vice President, Treasurer and Investor Relations. Elise, please go ahead.
Thanks very much Debbie. Good morning, everyone, and thanks for joining today’s call. Earlier today, we released our results for the year and fourth quarter ended December 31, 2012. If you’ve not already received the copy of the earnings release, you can obtain one on our website at revloninc.com.
On the call with me this morning are Alan Ennis, Revlon’s President and Chief Executive Officer; Chris Elshaw, Chief Operating Officer; and Steven Berns, Chief Financial Officer. Before I turn the call over to Alan, I’d like to remind everyone of a few things.
First, our discussion this morning might include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Information on factors that could affect the Company’s results from time-to-time and cause them to differ materially from such forward-looking statements, is set forth in the Company’s filings with the SEC, including our 2011 Form 10-K and our 2012 form 10-Q, filed in 2012. We expect to file our 2012 form 10-K later this month.
Next, our remarks today will include a discussion of adjusted EBITDA and free cash flow, both of which are non-GAAP measures. These non-GAAP measures are defined in the footnotes to our release and are also reconciled to the most directly comparable GAAP measures in the financial tables at the end of our release. As a reminder, effective for the period beginning October 1, 2012 we have consolidated maritime Canada into a single region as a result prior period amounts have been reclassified to conform to this presentation. For your convenience we’ve included the reclassified numbers for each of the quarters in both ’11 and ’12 at the end of our press release. And finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I’ll turn the call over to Alan.
Thank you, Elise, and good morning everyone. 2012 is another year of strong performance for Revlon, guided by our strategic goal of profitably growing our business. We are focused on executing our business strategy which is to build our strong brands, develop our organizational capability, drive our company to act globally, pursue growth opportunities and improve our financial performance.
Let me discuss some of our notable achievements in 2012 under each of these elements of our business strategy. First, building our strong brands. From a topline perspective, we delivered growth of almost 5%, clearly reflecting the effectiveness of our strategy. From a market place perspective, we introduced new innovative products which together with effective brand communication and strong in-store execution drove positive performance of our Revlon brands in many of our key markets. We had a number of notable product successes across color cosmetics and beauty tools that we will discuss later in this call.
Next element of our business strategy is to develop our organizational capability. We continue to do this through retaining and promoting highly capable people internally and through attracting new talents. The success of our strategy depends on our people. We have a dedicated team of employees around the world who are focused on achieving our strategic objectives of profitably growing our business.
The third element of our business strategy is to drive our company to act globally. This guides how we think, plan and act across all our brands and markets. We continue to leverage our brand positioning, our portfolio of planning process and our brand communication plans to meet the needs of our consumers globally. Additionally, our operational results demonstrate the actions that we have taken to improve operating efficiency through a variety of initiatives including global supply chain management.
The fourth element of our business strategy is to pursue growth opportunities. As I stated earlier we delivered net sales growth of almost 5% in 2012 and are very pleased with our Revlon brand performance around the world. We also complimented our portfolio of brands by adding SinfulColors in 2011 and Pure Ice in 2012, both of which performed very well this year. We will continue to focus on opportunities to grow our existing brands as well as to acquire brands that complement our core business.
The last element of our strategy is to improve our financial performance which we’ve accomplished through delivering topline growth, expanding operating margins and generating free cash flow. Over the last few years, we have elevated our company’s performance. We have grown to topline consistently since 2009. We have delivered highly competitive margins and in 2012 we achieved our fifth consecutive year of positive free cash flow which we used in parts to fund acquisitions.
Our Revlon brand performed very well globally and we’ve a fantastic team of people around the world focused on executing our strategy. It is a privilege to be leading this company as we go from strength to strength. So, with that let me hand over to Chris who will take you through our market place performance.
Thank you, Alan and good morning everyone. Today, I will review our net sales performance by region and by brands excluding the impact of changes in foreign currencies. Total company net sales in 2012 were $1.4 billion, an increase of 4.8% versus 2011. This increase was primarily driven by high net sales of Revlon color cosmetics, Revlon ColorSilk hair color and SinfulColors as well as the inclusion of Pure Ice. These increases were partially offset by low net sales of fragrances under the beauty care products.
In the United States, net sales increased $42.4 million or 5.6%, primarily due to high net sales of Revlon color cosmetics and simple colors as well as the inclusion of Pure Ice since its acquisition in July 2012. These increases were partially offset by lower net sales of Almay Color Cosmetics. Net sales in the U.S. region grew in 2012 excluding the results of Pure Ice. I’ll speak more about the drivers of brand performance following my regional remarks.
In Asia-Pacific, net sales increased $4.4 million or 1.9%, primarily due to higher net sales of Revlon Color Cosmetics in Japan and certain distributor territories. Partially offset by low net sales of Revlon Color Cosmetics in China. With respect to China, as you are aware the rate of growth in the economy slowed in 2012 and we also slowed down in the rate of consumption. We are closely monitoring the situation and we continue to ensure that we have the appropriate product portfolio for the consumer while working closely with our retail partners and focusing on the execution of our marketing plans.
Moving on to Europe, Middle East and Africa, net sales decreased to $8.9 million or 4.3%. Lower net sales were adversely impacted by a number of factors. Firstly, an increased returned accrual of $1.6 million associated with the restructuring and related activities in France and Italy. Secondly, lower net sales of fragrances in the U.K. and certain distributor territories. Lastly, lower net sales of certain beauty care products throughout the region. These decreases were partially offset by higher net sales of Mitchum Anti-Perspirant Deodorants in the U.K. and Revlon ColorSilk hair color in South Africa, Italy and certain distributor territories.
In Latin America and Canada, net sales increased $28 million or 15.4%, this increase was primarily due to high net sales of Revlon and Almay color cosmetics and Revlon ColorSilk hair color throughout the region. Net sales in Venezuela and Argentina benefited from high selling prices reflecting market conditions and inflation which accounted for approximately one third of the $28 million net sales increase in the region. Venezuela’s increase was also impacted by the absence of sales for a portion of the prior year as a result of a June 2011 fire that destroyed the company’s facility there.
Now, moving on to our performance by brand. Starting with Revlon color cosmetics, certain company net sales increased as compared to the prior year, 2012 benefitted from the positive performance of several successful Revlon franchises including PhotoReady, ColorBurst and ColorStay as well as a number of new products introductions.
With respect to noticeable product performance in the market place in face, we recently introduced a new franchise Nearly Naked, a revolutionary light weight make-up line with buildable coverage and seamless blending to create a fresh even look. Nearly Naked which includes foundation and pressed powder is early in its global roll out and so far has been launched in the U.S. and Canada. Also, in face are PhotoReady Airbrush Mousse Makeup continues to perform well. Building up on the successful PhotoReady franchise, we are also pleased with recent introductions of both face and eye products.
In face, we introduced PhotoReady BB Cream, Skin Perfector, a light weight multi benefit beauty balm that combines skin care, makeup and sunscreen into one simple step. In eye, we introduced PhotoReady Primer, Shadow and Sparkle, a palette featuring a primer three highly pigmented shadows that can be used wet or dry and the sparkle top coat (inaudible) limitless eye looks in one convenient package.
In lips, we recently expanded our ColorStay franchise with Ultimate Suede Lipstick which contains a velvety soft formula that gives the lips instant moisture and all day color and also notably in lip, both ColorBurst Lip Butter and Just Bitten Kissable Balm Stain continue to be extremely well received by consumers in all our major markets.
In nail, as stated during 2012 trend setting and innovation are driving our positive performance in all key markets. We recently introduced Revlon Nail Art, a collection of nail shades and art trends offered in a unique dual-ended package containing everything needed to achieve the latest in nail design at home. Continuing in nail, ColorStay longwear nail color which provides a one step gel like shine which is one of the leading new nail products in the U.S. and Canada in 2012.
I’d like to note that in-line with Revlon’s leadership as the color authority we will off course be very active in forth coming spring fashion weeks in New York and London and also of note during 2012 we launched a Revlon Expression Experiment, a social media campaign that debuted on our Facebook page. I am delighted that for this pioneering activity Women’s Wear Daily recognized Revlon as the digital innovator of the year.
Moving on to the Almay brand, net sales decreased year-over-year and this decrease was driven by performance in the U.S. As you know Almay is a priority focus area for improvements as we are dissatisfied with the market place performance of this brand and are focused on the following. Firstly, we continue to refine our advertizing promotional plans seeking to improve their combined effectiveness overtime. Changes include increased media support across a wider range of products as well as incremental promotional support. Secondly, we completed an assessment of our brand positioning and are in the process of making refinements in the form of graphics, packaging and merchandising which will start to appear in store during 2013. Thirdly, we aim to continue to strengthen Almay’s brand affinity through innovative new products which both continue to build upon the strength of existing co-franchises as well as take advantage of new opportunities and finally as we progress throughout the year we will continue to monitor our performance and refine these actions in order to build the brand to the consumer over the long term. Given the highly competitive category in which we compete it takes time for the impact of these changes to be reflected in the market place. However, not unlike other challenges we have faced in the past we are staying very focused on the drivers of category performance.
Now with regard to new product innovation, we are building up on the intense eye color franchise with the addition of intense eye color bold nudes kit which helps consumers create the perfect neutral eye with a puff of expertly coordinated color. We’re also building up on our Smart Shade Franchise by introducing to new products. SmartShade Mousse Makeup which instantly adjusts the consumer skin term and SmartShade Power Blush, the first powder blush for the franchise. In addition we continue to feature Kate Hudson our Almay brand ambassador. Recently, Kate attended the Golden Globe Awards and received rave reviews on her beauty look which was created with Almay Color Cosmetics. Kate will also be featured in our new advertising campaigns for SmartShade and Intense Eye Color franchises.
Moving on to women’s hair color. Net sales of Revlon ColorSilk increase year over year. We continue to be pleased with the market price performance of ColorSilk and continue to build upon the success with the recent introduction of Revlon Luxurious ColorSilk Butter Cream. This new product is enriched with a revolutionary ammonia free triple butter complex for nourished hydrated and ultra conditioned hair.
In anti-perspirant deodorants, net sales of Mitchum decreased slightly year over year, and finally in Revlon beauty tools, net sales increased year over year. In 2012, our new products performed exceptionally well in the market places. This year, we continue to bring to exciting and innovative new products to the market, including the Revlon Diamond collection, featuring tweezers, lash colors and files in bright colors with eye catching sparkle.
And our File N Peel 6-in-1 File which contains 6 layers that peel cleanly away each revealing a fresh filing surface. Referring to our insightful beauty tools in invasions, O magazine recently described our File N Peel as another simply brilliant concept. So, overall we are pleased with our portfolio of brands, in particular our strong Revlon brands, which are having tremendous success across a number of categories.
Now, I’ll turn it over to Steven to walk you through the rest of our financial results.
Thank you Chris and good morning everyone. Starting with gross margin performance, gross margin in 2012 was 64.5% versus 64.3% in 2011. Gross profit in 2012 benefited from lower manufacturing costs as a result of supply chain cost reduction initiative and lower sales returns and allowances. These items were partially offset by the unfavorable impact of product mix.
SG&A was $710.2 million in 2012, as compared to $685.5 million in 2011, an increase of $24.7 million. The increase was primarily attributable to the following items. $8.9 million of costs to settle the previously disclosed share holder litigation, $6.9 million of lower benefit from insurance proceeds in 2012 related to the Venezuela fire, as compared to 2011. And finally an increase in various other G&A expenses.
Operating income for 2012 was $188.7 million compared to $203.3 million. An adjusted EBITDA for 2012 was $254 million compared to $266 million in 2011. Operating income and adjusted EBITDA in 2012 included $24.1 million of restructuring and related charges and the net charge of $8.9 million with respect to the estimated cost of settling previously disclosed share holder litigation. Restructuring and related charges related to the actions announced on September 5, 2012 are expected to total approximately $25 million, of which $24.1 million was recorded in our P&L for 2012. The charge was recorded as follows, $20.7 million was recorded as restructuring charges, $1.6 million was recorded as a reduction to net sales, $1.2 million was recorded as an increase in cost of goods sold, and lastly $600,000 was recorded in selling, general and administrative expenses.
Of the total expected charges of $25 million, $24 million are cash charges of which $3.8 million was paid in 2012 and the remainder is expected to be paid in 2013. These restructuring actions are expected to generate annualized cost reductions of approximately $10 million with 2013 expected to benefit by approximately $7.5 million as a result of the timing of the implementation of these restructuring actions.
Moving on to interest expense, interest expense decreased $5.7 million to $85.6 million this year, primarily due to the impact in 2012 of the May 2011 refinancing of the company’s term loan credit facility at lower interest rates.
The provision for income taxes was $43.7 million in 2012, compared to $36.8 million in 2011. The provision for income taxes included non-cash benefits of $15.8 million in 2012 and $16.9 million in 2011, in each case primarily associated with reductions in the company’s deferred tax asset by evasion allowances. These items had no impact on the company’s cash flow or liquidity. Cash paid for income taxes, net of refunds in 2012 was $18 million, as compared to $20.5 million in 2011.
Net income for 2012 was $51.1 million or $0.98 per diluted share compared to net income by $53.4 million or $1.02 for diluted share for 2011.
Moving in to cash flows, net cash provided by operating activities for 2012 was $104.1 million compared to $88 million and free cash flow was $84 million compared to $74.4 million. Free cash flow in 2012 as compared to 2011 benefited from favorable changes in working capital and lower cash interest paid, partially offset by the renewal and partial prepayment of certain multi-year insurance programs and higher capital expenditures. Net cash used in investing activities in 2012 was $86.3 million, which included the cash paid to acquire Pure Ice, compared to $52.6 million in 2011, which included the cash paid to acquire SinfulColors.
Moving on to our fourth quarter of 2012 results, there are a couple of high level items to note regarding net sales in the period. Excluding the impact of foreign currency fluctuations, total net sales in the fourth quarter of 2012 increased $33.3 million or 9.3%, primarily driven by higher net sales of Revlon Color Cosmetics, Revlon ColorSilk hair color and SinfulColors, as well as the inclusion of Pure Ice. These increases were partially offset by lower net sales of Almay Color Cosmetics. In the U.S. net sales increased $27.6 million or 14.4%, primarily driven by higher net sales of Revlon Color Cosmetics, Revlon Color Cosmetics in addition to Revlon ColorSilk hair color and SinfulColors, and the inclusion of Pure Ice partially offset by lower net sales of Almay.
We are pleased with the 14.4% increase in our U.S. net sales in the fourth quarter of 2012. There are a couple of factors contributing to this increase. First, fourth quarter 2012 net sales benefited from the strong performance of our Revlon brands as well as the inclusion of Pure Ice. And second, in the fourth quarter of 2011, net sales were negatively impacted by higher returns and promotional allowances in the period. As a reminder, both returns and promotional allowances are accounted for as reductions in arriving at net sales. Other details of our financial performance in the fourth quarter can be found in our press release issued this morning.
Moving on to liquidity, our unutilized borrowing capacity and cash on hand as of December 31, 2012 was 237.6 million, comprised of $108 million of available cash and $129.6 million available under our revolving credit facility. Our revolver was undrawn at year end and we had $10.4 million of standby letters of credit issued under this facility.
By April of 2013, we expect to make an amortization payment under our term loan based on our 2012 results, the payment will be approximately $19.5 million and you will see it on our balance sheet as part of the current portion of long term debt.
Also on January 29, 2013 we commenced an offer to purchase for cash any and all of our CPC’s 9.75% senior secured notes due 2015, which is conditioned on our obtaining financing proceeds in an amount sufficient to effect the purchase of these notes. Earlier this morning, we also issued a press release announcing an offering of $400,000 of senior unsecured notes to repay Revlon Consumer Products Corporation’s currently outstanding issue of $330 million of 9.75% notes due to 2015.
Finally, consistent with our historical practice, I’m going to provide our expectations regarding certain 2013 cash flow information. Capital expenditures are expected to be approximately $25 million, permanent display expenditures are expected to be approximately $50 million. Pension plan contributions are expected to be approximately $20 million and lastly, cash paid for income taxes is expected to be approximately $20 million.
This concludes our prepared remarks and we would now like to open up the call for your questions. Operator, please prompt to participants for questions.
Thank you. (Operator Instructions) We’ll take our first question today from Carla Casella with JPMorgan.
Carla Casella – JPMorgan
Hi, I’m wondering if you could talk about how the sell through versus selling was in the quarter particularly given all the new products, and then how you’re seeing sell through versus selling in first part of the year?
Hi Carla, this is Chris. So as you know, we don’t actually provide sell through data and as you also know, sell through and selling may vary quarter to quarter. But suffice to say as we went through the remarks, you would have heard to say we’re very pleased with a number of our new product innovations. We’re also very pleased with the strength to the Revlon brand, so we think that in a very healthy position.
Carla Casella – JPMorgan
Okay, great thanks.
We’ll take our next question from Connie Maneaty with BMO Capital.
Connie Maneaty – BMO Capital
Good morning. What was the impact there’s a 50% evaluation being in Venezuela?
As you know Connie, it’s Steven. As you know, our business of Venezuela is a very small percentage of our raw global net sales of approximately 2%, and second is, certainly the valuation of a currency really has more to do with and nay particular, that is the immediate impact on our business, so to the extent that consumption continued a lot of that to valuation. If it was accompanied by looser currency controls, might be a better thing if they were tied across for currency controls that could be that tremendous. But certainly, it’s a small impact on our business, so we evaluated as you would expect us to as we compete in the market place.
Connie Maneaty – BMO Capital
Okay, and what’s the priority used to free cash, now that you’re generating more and more of it?
Connie, its Alan, our strategy has been for the last few years to profitably grow the business and clearly a key element of that is to improve our financial performance. And so as we’ve generated our fifth consecutive year of cash flow, we have done a number of things, we’ve acquired 2 brands, we acquired SinfulColors and Pure Ice collectively for about $100 million. We’ve also reduced debt over that time. And so we will continue on that path.
Connie Maneaty – BMO Capital
Okay, what sort of time frame do you expect it will take for Almay to strengthen again, it just seems like there is so much competition in the areas where it’s positioned.
Well as I know, so Connie, it’s a very competitive market place as you know. As I say, we’re focused on all those drivers we know that are important in the category so, the amortizing levels, the media support, the incremental promotions support, and then the instill experience for this through packaging, graphics or merchandising. So, we’re focused on all those plus new product innovation, we’re not going to focus when the situation is going to improve, but we are focused on profitable growth for this brand and building it with the consumer of the time. So, we know those are the drivers that produce that and we’ll continue to focus on them overtime.
Connie Maneaty – BMO Capital
Okay, that’s it from me. Thank you.
We’ll take our next question from Arthur Roulac with Three Court.
Arthur Roulac - Three Court
Hey, good morning guys, two questions. First, did you say you’re going to be retiring some of the senior sub term loan this year, later this year as well, or is that callable in October 14 normally?
So, just to be clear, we made no announcement in regard to the senior subordinated loan, there’s a $48.6 million subordinated loan payable in October of 2013, and a $58.4 million loan payable in October of 2014, so under the senior subordinated term loans that we made no announcement this morning with regard to any prepayment.
Arthur Roulac - Three Court
Okay, got it. Is the senior subordinated term loan pre-payable in fact?
Under certain conditions, the portion of the loan that matures in 2014 can be repaid subsequent to October 2013.
Arthur Roulac - Three Court
Okay, got it.
All of those terms Arthur are included in our public filing which is in our 2011 form 10-K.
Arthur Roulac - Three Court
I will look there, thank you.
Thank you. I will now turn the call back over to Mr. Alan Ennis for any additional or closing remarks.
Thank you, Debbie, and thank you all for joining our call this morning. As we embark upon our new year, I’d like to take this opportunity to acknowledge how far we have come as a company, since our founding 80 years ago in 1932. Our vision of glamour, excitement and innovations has guided us through the years and I’m excited about the future for our company. Our focus in 2013 will be to build upon the solid foundation we’ve established and continue to profitably grow our business. I’d like to express my sincere appreciation to all of our employees around the world for our many accomplishments in 2012. We look forward to speaking with you when we report our fourth quarter 2013 results. Thank you and have a good day.
Ladies and gentlemen, thank you for your participation. This does conclude today’s conference. Have a great rest of your day.
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