Revlon's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Revlon, Inc. (REV)

Revlon, Inc. (NYSE:REV)

Q2 2013 Earnings Conference Call

July 31, 2013 9:30 AM ET

Executives

Elise A. Garofalo – Senior Vice President, Treasurer and Investor Relations

Alan Timothy Ennis – President and Chief Executive Officer

Chris Elshaw – Chief Operating Officer and Executive Vice President

Analysts

Karru Martinson – Deutsche Bank

Patrick Trucchio – BMO Capital Markets

Operator

Good day, everyone, and welcome to Revlon’s Second Quarter 2013 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) And now your host for today’s call is Elise Garofalo, Revlon’s Senior Vice President, Treasurer and Investor Relations. Ms. Garofalo, please go ahead now.

Elise A. Garofalo

Thank you, Rufus. Good morning, everyone, and thanks for joining today’s call. Earlier today, we released our results for the second quarter ended June 30, 2013. If you have 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, and Chris Elshaw, Chief Operating Officer.

Before I turn the call over to Alan, I’d like to remind everyone of a few things. First, our discussion this morning may include forward-looking statements that are based on our current expectations. Information on factors that could affect our actual results from time-to-time and cause them to differ materially from such forward-looking statements is set forth in our SEC filings, including our 2012 Form 10-K and our 2013 second quarter Form 10-Q, which we filed earlier this morning. We undertake no obligation to publicly update forward-looking statements.

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 their most directly comparable GAAP measure in the financial tables at the end of our 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.

Alan Timothy Ennis

Thank you, Elise, and good morning, everyone. As we have discussed for sometime, our strategic goal is to profitably grow our business. We accomplished this by building our strong brands, developing our organizational capability, driving our company to act globally, pursuing growth opportunities, and improving our financial performance.

Our net sales in the second quarter of 2013 were essentially unchanged year-over-year. We benefitted from the inclusion of our 2012 Pure Ice acquisition, which was offset by continued softness in our Almay brand and a negative impact of business conditions in Venezuela. With respect to our recent acquisitions, SinfulColors performed very well during the quarter and we are on track with the integration of our Pure Ice brand.

From a market size perspective, we continued to support our brands at appropriate levels and placed emphasis on innovation, effective brand communication, and strong in-store execution. So far this year, we’ve introduced a number of successful, innovative, high quality new products.

From a financial perspective, we delivered competitive operating income margins, generated positive free cash flow, and our financial profile remains strong. As always, we remain focused on our strategic goal of driving profitable growth.

Before I hand the call over to Chris, I’d like to briefly cover two significant changes with respect to our leadership team, which we announced this morning. Firstly, Bob Kretzman, who serves as our Chief Administrative Officer has decided to retire at the end of September, following a successful 25-year career at Revlon. Bob has been elected to join Revlon’s Board of Directors effective October 1, 2013, and I look forward to working with him as a member of our Board.

Secondly, I’m delighted that Larry Alletto will join Revlon as the Executive Vice President, Chief Financial Officer and will also assume the role of Chief Administrative Officer upon Bob Kretzman’s retirements.

Larry will join us. He completes his obligations with his current employer, and comes to us following a 26-year career in the financial services industry. Most recently, Larry was Managing Director and Global Head of Financial Sponsors Group at JP Morgan Chase & Company where he spent the last 20 years. Larry is the seasoned business executive who brings a strong intellect, a high degree of financial acumen, and strategic ability, as well as strong leadership. I look forward to Larry joining our team.

So with that, I will hand it over to Chris who will talk about our marketplace performance.

Chris Elshaw

Thank you, Alan, and good morning, everyone. Today, I will review our net sales performance by region and by brand, excluding the impact of changes in foreign currencies. Total company net sales in the second quarter of 2013 were approximately $350 million essentially unchanged year-over-year. Lower net sales in Venezuela and lower net sales of Almay color cosmetics were offset by higher net sales of SinfulColors plus the inclusion of Pure Ice.

The decrease in net sales of Almay color cosmetics was primarily driven by the reallocation of brand support in the U.S. from advertising to promotional allowances, which are a deduction in arriving at net sales. In the United States, net sales were essentially unchanged year-over-year, higher net sales of SinfulColors, plus the inclusion of Pure Ice were offset by lower net sales of Revlon and Almay color cosmetics. As I just mentioned, the decrease in Almay net sales was primarily driven by the reallocation of brand support.

In Asia Pacific, net sales were essentially flat year-over-year with higher net sales of Revlon color cosmetics in Japan, SinfulColors in Australia, Revlon ColorSilk hair color in certain distributor territories, which were all offset by Revlon color cosmetics in China and certain distributor territories, as well as low net sales of other beauty care products in Hong Kong.

Moving on to Europe, Middle East and Africa, net sales increased $1.6 million or 3.6%. This increase was primarily due to higher net sales of fragrances and SinfulColors in both the U.K. and Italy, also offset by lower net sales of other beauty care products in France.

As we have previously discussed, in France, we are in the process of completing our restructure, and in July, we sold our manufacturing facility there. In the U.K., we’re continuing to be very pleased with the strong performance of the Revlon brand from a marketplace perspective, as well as the successful introduction of SinfulColors.

In Latin America and Canada, net sales decreased $2.7 million or 5.1%. This decline in net sales was driven by $6.3 million of lower net sales in Venezuela due to business conditions included in Venezuela’s currency restrictions. Excluding Venezuela, net sales in the region increased primarily due to higher net sales of Revlon color cosmetics in Argentina, Mexico, and certain distributor territories, plus high net sales of Revlon ColorSilk hair color across the region and the introduction of Pure Ice in Canada. These increases were partially offset by lower net sales of Almay color cosmetics in Canada.

With respect to Venezuela as you know, it has historically represented approximately 2% of our total company net sales. And in the second quarter of 2013, it represented approximately 1% of our total company net sales.

As we mentioned last quarter, the country is going through a period of uncertainty, as well as strict currency controls, where our access to U.S. dollars to purchase inventory has been virtually eliminated since February of this year. We did obtain approval from the local government for limited access to U.S. dollars for the import of only certain approved products.

However, this has not impacted our results or access to U.S. dollars year-to-date through June. Our continued focus is to manage the business such as Revlon Venezuela is only taking delivery of the imported products for which you can pay in U.S. dollars. We are continuing to monitor the local currency market developments closely.

Now, moving on to our performance by brand, starting with Revlon color cosmetics, net sales decreased modestly as compared to the prior year. With respect to new product performance, in face, our PhotoReady BB Cream continued to perform well in the marketplace.

However, our recently lowest Nearly Naked franchise, I think canceled some challenges due to the spreads and growth of the BB Cream segments overall. In eye, we extended and built upon our successful Grow Luscious franchise. We are pleased with the recent introduction of Lash Potion mascara in the U.S., which contains strengthened proteins to drain slashes for volume.

Moving on to lip, earlier in the year, we extended our longstanding ColorStay franchise with Ultimate Suede Lipstick, which continues to be exceptionally well received in the marketplace and is capitalizing on the growing lip trend. Continuum in lip under our Super Lustrous color franchise, which has been a mainstay of Revlon, we are pleased with the recent introduction of Super Lustrous Shine lipstick, which contains LiquiSilk, an exclusive lightweight formula with mega moisturizers that seal in color and softness and the reintroduction of Super Lustrous lip gloss, a silky gloss that boosts hydration and moisture with plumped colorful glamorous shine.

This reintroduction featuring new packaging and an updated shade range is consistent with our approach of not just expanding our product range with new franchises, but also strengthening our existing franchises. In nail, Revlon Nail Art continues to perform well in the marketplace and we’re also pleased with the recent introduction of Revlon Brilliant Strength nail enamel in the U.S. This collection, which was previously launched around the world, consists of 24 on-trend shades that contain a strengthening formula with a built-in protective base and a top coat.

Additionally, in support of the strength of our Revlon brand in South Africa, we recently signed this Ms. Bonang Matheba as Revlon brand ambassador. Bonang is a vivacious TV and radio personality, fashion icon, business model, and philanthropist, as well as being Glamour magazine’s 24 Woman of the Year in South Africa. We believe she will help us continue building meaningful connections with our core South African consumer.

Turning now to Almay, net sales decreased year-over-year primarily due to its performance in the U.S. As I’ve mentioned already, net sales of Almay color cosmetics were unfavorably impacted primarily by the reallocation of brand supports from advertising to promotional allowances, which are a deduction in arriving at net sales.

During the quarter we launched our next generation of new products, including Almay’s reentry into the lip category with Almay Color & Care Liquid Lip Balm, which is a new type of lip balm in a liquid form that provides hydration, as well as color in a range of ten on-trend shades. This product was recently launched in the U.S. and we are pleased with this marketplace performance so far.

Also, new is our CC cream, which provides skin care benefits, as well as color correction Almay i-Color Almay Smart Shade franchise. Almay was one of the first CC creams introduced into the mass market, and we are pleased with the early indications of marketplace performance in the U.S.

And lastly, we extended our highly successful Eye Makeup Remover business, by bringing new benefits, which we believe further differentiates our products offering. The entire range also featured new packaging with a fresher look and feel. While the early results from these new launches are positive, we remained satisfied overall with our major marketplace performance, and we continue to focus on ensuring the longer-term success of this brand.

Moving on to women’s hair color, net sales of Revlon ColorSilk were essentially unchanged year-over-year. However, ColorSilk continues to perform well despite softer demand in the U.S. category overall. In Revlon beauty tools, net sales increased year-over-year consistent with our comments in the past, the beauty tools category remains soft. However, we continue to maintain our strong leadership position in the U.S. and Canada. In 2013, we have new products that are performing very well in the marketplace, including our designer Diamond collection.

And finally, since acquiring SinfulColors two years ago, we have gained new distribution in the U.S. while we’re very pleased with our marketplace performance. We have also successfully launched this brand in a number of our key international markets.

Now, I’ll turn it over to Alan, to walk you through the rest of our financial results for the quarter.

Alan Timothy Ennis

Thank you, Chris. Starting with gross margin performance, gross margin was 64.4% compared to 65.2% last year, a decrease of 0.8% or $7.4 million. The second quarter of 2013 was impacted by a few items. First, higher sales returns and markdowns which had an unfavorable impact of 0.6% or $6.2 million, second, higher promotional allowances, which reduced gross profit by 0.3% or $3.7 million, and third, the impact of foreign currency fluctuations, which reduced gross profit by 0.3% or $5.1 million.

These unfavorable impacts in gross margin were partially offset by higher volume, which increased gross profit by $6.4 million and have no impact on margin, and favorable product mix, which increased gross profit by 0.4% or $1.5 million.

SG&A was $163.1 million in the second quarter of 2013 as compared to $189.9 million last year. Excluding the favorable impact of foreign currency fluctuations of $2.7 million, SG&A expenses decreased by $24.1 million. This decrease was primarily attributable to the following items.

First, in the second quarter of 2013, we benefited from an $18.1 million gain on insurance proceeds from the final settlements of the business interruption and property claim related to the 2011 fire, which destroyed our facility in Venezuela. This gain was partially offset by a $4.5 million charge for estimated clean-up costs related to that facility. Second, we had a $7.3 million of lower advertising expenses primarily due to the reallocation of brand supports from advertising, which is included in SG&A to promotional allowances, which are a deduction in arriving at net sales. And third, general and administrative expenses were lower primarily due to the impact of the $6.7 million litigation loss contingency recognized in the second quarter of 2012 that did not recur this quarter.

SG&A for the second quarter of 2013 also included $1.2 million of higher incentive compensation expense related to a modification of our structure of our long-term incentive plan to better align that plan with our long-term performance. While the new structure does not change the amount of the annual potential incentive award, the transition is expected to result in higher expenses of $5 million in 2013 and $3 million in 2014 as compared to 2012.

Moving on to restructuring, during the second quarter of 2013, we recorded a $3.3 million of additional restructuring and related charges primarily for severance and other termination benefits associated with our September 2012 program. With regard to this program, we expect restructuring and related charges to total approximately $26 million.

Through June 2013, we recorded approximately $28 million of expense and we expect to record a net benefit of $2 million in the remainder of the year primarily as a result of the sale of our France manufacturing facility in July. We expect to pay cash of approximately $24 million, $17 million of which has been paid to-date.

Overall, the 2012 restructuring plan is still expected to achieve approximately $10 million of annualized cost savings, $7 million of which is expected to benefit 2013, and the majority of the 2013 savings will benefit the second half of 2013.

Operating income in the second quarter of 2013 was $59.1 million, compared to $48.2 million in the same period last year and adjusted EBITDA was $76.1 million, compared to $58.7 million in the same period a year ago. There is a meaningful currency move in the second quarter of 2013, compared to the second quarter of 2012.

So let me summarize the impact of these for you. The total unfavorable FX impact of operating income was $2.5 million, which included net sales, which were negatively impacted by $6.4 million, gross profit, which was negatively impacted $5.1 million, and finally, SG&A, which was positively impacted by $2.7 million.

Interest expense, which includes dividends on preferred stock decreased by $3.8 million to $17.4 million, primarily due to lower interest rates as a result of a refinancings in February of 2013.

Moving on to taxes, the provision for income taxes was $17 million, compared to $9.1 million in the same period last year. This increase was primarily attributable to the following items. First, the second quarter of 2012 benefited from the favorable resolution of certain tax matters in a foreign jurisdiction, which did not recur in the second quarter of 2013. And second, we had higher pre-tax income this quarter compared to last year. These unfavorable items were partially offset by certain favorable discrete items that benefited the second quarter of 2013.

Cash paid for income taxes in the second quarter of 2013 was $5.3 million, compared to $7.5 million in the same period last year. Net income in the second quarter of 2013 was $24.7 million or $0.47 per diluted share, compared to net income of $11.1 million or $0.21 per diluted share in the same period last year.

Moving onto cash flows, Net cash provided by operating activities in the second quarter was $28.2 million, compared to the use of $1.3 million in the same period last year. Free cash flow in the second quarter was positive $21.6 million, compared to negative $6.6 million in the same period a year ago. The following items impacted cash flow this quarter, all of which can be derived from our reported cash flow statements and 10-Qs.

Lower interest payments of $23 million, is primarily due to the companies senior notes refinancing in the first quarter of 2013, lower pension contributions of $8.3 million, and lower permanent display purchases of $3.9 million. These improvements were partially offset by restructuring payments of $8.7 million related to the actions announced in September 2012.

As a general reminder with respect to operating cash flow, the timing of cash flow from working capital can vary significantly from quarter-to-quarter based on a number of factors. We continue to closely manage our key working capital accounts, including receivables, payables, and inventory.

On the liquidity front, our unutilized borrowing capacity and cash on hand as of June 30, 2013, was $261.1 million, comprised of $130.9 million of available cash and $130.2 million available under our revolving credit facility. Our revolver was undrawn at the end of the quarter and we had $9.8 million of standby letters of credit issued under that facility.

Moving on to the balance of 2013, we guided the cash flow guidance we previously provided for 2013, the following items remain unchanged, capital expenditures of approximately $25 million, permanent display expenditures of approximately $50 million, and pension plan contributions of approximately $20 million.

Lastly, we are updating our guidance for cash paid for income taxes to be approximately $15 million, a decrease from our prior guidance of approximately $20 million.

This concludes our prepared remarks, and we would now like to open the line for your questions. Operator, please prompt the participants for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) For our first question, we go to Karru Martinson with Deutsche Bank.

Karru Martinson – Deutsche Bank

Good morning. Given all the new product launches that we had in Revlon that we outlined kind of last quarter, I was a little bit surprised to see the sales there down modestly, I mean could you provide a little more color and the kind of challenges that you are seeing on the Nearly Naked line?

Chris Elshaw

Yeah, hi, it’s Chris here. So, yeah, as I said, we had some very encouraging results in our new product launches recently. Nearly Naked is a face franchise that we launched at the start of this year. And at the same time the BB cream phenomenon really took off in the marketplace, and they play in quite a similar place from the consumers’ perception.

So I think we’re being be impacted by that. We’ve also benefited from ourselves, of course, with the growth of our own PhotoReady BB cream. Conversely, our lip business continues to do well, nail continues to be vibrant, and we continue to range to build our eye category through launches like Lash Potion.

Karru Martinson – Deutsche Bank

If we were to look at the Almay brand and strip out the promotional allowances, I mean, do you feel that the brand volume and market share is recovering here?

Alan Timothy Ennis

Well, during the quarter, I would characterize it as stable, but I will go back to what I said earlier, we are pleased with our new product launches for the second half, but we remain very focused on improving the other drivers and they’re not all done overnight. We work on a three-year rolling portfolio plan. So over the three-year horizon, we’ve got a lot of interesting products to fund.

We’ve been working on the repositioning of the brand, which also includes changes to our communication created, changes to our in-store merchandizing, and changes to packaging. Now, yeah, packaging takes time to flow-through. You’ll see some of it install now. You will see a lot more of it installed over the start of next year. So we’re working on all those drivers. We don’t guide this to how each quarter goes. All I can tell you is, we’re very focused on building the long-term success of the brand.

Karru Martinson – Deutsche Bank

Okay. And when we look at Asia Pacific and I think we talked last quarter about reducing inventories in China in particular kind of a match up with lower consumption trends. Where do we stand on those inventory levels in that market?

Alan Timothy Ennis

Yeah. As we said, they’ve been coming down. Yeah, our consumption grew soft in China. Now, that a lot of changes in the marketplace is a very mixed picture in that marketplace. So we’re really focusing on our core customers that how can we partner with them to drive productivity in-store, because in China it’s really a question of productivity. If you want to expand distribution maybe straightforward, but really the challenge is to raise productivity in the core distribution.

Karru Martinson – Deutsche Bank

Do we feel that we still have little ways to go and bring those inventories down or we kind of reaching a stable point here?

Alan Timothy Ennis

Well, we are monitoring it constantly, of course, the inventories, the equation between the sales values to the consumer they’re selling. So, yeah, it’s something that takes time, because over time, you’re selling against your plan, and then if your plan exceeds or misses, the inventory adjusts accordingly. They don’t manage on the total inventory number, they manage on a number of days inventory. So we’re working on it constantly.

Karru Martinson – Deutsche Bank

All right. Thank you very much, guys. I appreciate it.

Alan Timothy Ennis

Thank you.

Operator

And for our next question, we go to Connie Maneaty with BMO Capital Markets.

Patrick Trucchio – BMO Capital Markets

Hi, good morning. It’s actually Pat Trucchio filling in for Connie.

Alan Timothy Ennis

Good morning, Pat.

Patrick Trucchio – BMO Capital Markets

Good morning. So a couple of questions, first one is, what’s the impact of the end of the insurance payments in Venezuela on Latin America operations going forward?

Alan Timothy Ennis

So as it relates to Venezuela insurance, this really covers a couple of things, first of all. So as of today, we have settled the business interruption and property claim, as well as the inventory claim. So all insurance claims have been resolved and settled.

Total proceeds from those claims like to-date have been $43.8 million. We received the final installment of $14.1 million in July of this year. And all of those proceeds have been reflected in our P&L as of the end of the second quarter. One thing that does remain on the balance sheet is a $4.5 million estimated accrual for the cleanup costs relating to that facility, and that’s within SG&A.

So what you’d expect to see going forward as it relates to the insurance is, with the exception of the $4.5 million balance sheet item, there should no impact in the P&L as it relates to insurance from this point forward. That’s the first point.

Second point, which Chris talked about earlier is, clearly the business conditions in Venezuela continued to have a negative impact on our performance. And we operated that business to the extent that we can sell product in and get U.S. dollar there to pay for it. We will do that. To the extent that we’re unable to get U.S. dollars out of that country, which has been an issue we’ve experienced since February of this year. We’re simply not shipping products in. And so if you see the impact of that being – that $6.3 million negative impact on net sales in the second quarter.

So as it relates to insurance, from this point forward, you should see no impact in the P&L for Venezuela. But Venezuela will continue to be uncertain as it relates to the business conditions in that country.

Patrick Trucchio – BMO Capital Markets

Got it. And then so – through what period did the insurance payments cover profits, is that they cover them through first half of 2013 or they cover all of 2013?

Chris Elshaw

I believe it was through September of 12, so it was an 18-month period – 15 to 18-month period, so from June of 2011 through around September of 12.

Patrick Trucchio – BMO Capital Markets

And so is Argentina a bigger market than Venezuela?

Alan Timothy Ennis

Not currently although, of course, Argentina is growing well. It really depends on how many U.S. dollars we can get out of Venezuela to take our product, if Venezuela had full supply then Venezuela would be the bigger market.

Patrick Trucchio – BMO Capital Markets

So, I guess in Venezuela is your facility up and running again, and I guess does it relate to the currency restriction, any idea on when that country might turn back to normal, or I guess when business would return to normal there?

Chris Elshaw

So as it relates to the facility, so the facility is not up and running. The facility was destroyed by the fire, and as I said we’ve got a $4.5 million accrual for the estimated cleanup of that facility. If the facility is destroyed, we do not, at this point have a manufacturing footprint in Venezuela nor do we plan to, we use our U.S. business for sourcing products that can be easily sourced here or third-party manufacturers.

And so at this point, I wouldn’t expect a footprint – a manufacturing footprint that we would own to be established in Venezuela. As it relates to the currency restrictions, I mean your guess is as good as mine. I mean, we constantly work with the local authorities and our local team down there to get the latest information on currency flows, but as of now, it remains uncertain.

Patrick Trucchio – BMO Capital Markets

So last question is just why has category growth in nail slowed from 18% in 2011 and 2012 to 2% in the latest quarter?

Alan Timothy Ennis

Well, I think it’s purely the impact of the size of the category. So as you’ve seen over the last two three years, nail has grown exponentially. So there comes a point at which growth levels start to slowdown. The important thing is the category is still growing, but growth is driven by penetration usage. There are so many people that use nail color. And then there’s a frequency with what should I use it.

So there has been an increase in people’s repertoire of brands that they use an increase in a number of occasions that they’re using nail color. But it obviously can’t go forever. So the growth rate is slowing down as a result of that. However, who knows what’s going to happen in the future. At this stage, we don’t see any decline in the category. But clearly, growth can’t continue at high double-digit rates.

Patrick Trucchio – BMO Capital Markets

That’s it for me. Thank you very much.

Alan Timothy Ennis

Thank you, Pat.

Operator

Thank you. I’ll now turn the call over to Mr. Ennis for any additional or closing remarks.

Alan Timothy Ennis

Thank you all, and thank you, Rufus. Thanks for joining our call this morning. We look forward to speaking with you when we report our third quarter 2013 results. Thank you, all.

Operator

You’re welcome. Thank you, sir. And ladies and gentlemen, this will conclude today’s conference. Thank you for your participation.

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