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Revlon, Inc. (NYSE:REV)

Q4 2013 Earnings Conference Call

March 5, 2014 9:30 am ET

Executives

Lorenzo Delpani - President and Chief Executive Officer, Revlon, Inc.

Lawrence Alletto - Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Elise Garofalo - Senior Vice President, Treasurer and Investor Relations

Analysts

Kevin - Citi

Connie Maneaty - BMO Capital

Grant Jordan - Wells Fargo

Aaron Rosen - Archview

Operator

Good morning, ladies and gentlemen, and welcome to Revlon's Fourth Quarter and Year-End Earnings Release Conference Call. At the request of Revlon, today's conference is being recorded. If you have any objections, you may disconnect at this time. (Operator instructions) And now, I would like to turn the conference over to Ms. Elise Garofalo, Revlon's Senior Vice President, Treasurer and Investor Relations. You may begin, Ms. Garofalo.

Elise Garofalo

Thank you, Nicole. Good morning, everyone, and thanks for joining today's call. Earlier today, we released our results for the fourth quarter and year ended December 31, 2013. If you have not already received a copy of the earnings release, you can obtain one on our website at revloninc.com. On the call with me this morning are Lorenzo Delpani, Revlon's President and Chief Executive Officer; and Larry Alletto, Executive Vice President, Chief Financial Officer and Chief Administrative Officer.

Before I turn the call over to Lorenzo, 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 and cause them to differ materially from such forward-looking statements is set forth in our SEC filings, including our 2013 Form 10-K which we filed earlier this morning. We undertake no obligation to publicly update any forward-looking statements.

Next, our remarks today may include a discussion of adjusted operating income, adjusted EBITDA, adjusted income from continuing operations, free cash flow, and certain pro forma results, all 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 measures in the financial tables at the end of our release.

Please note, effective with this 2013 year-end earnings release, we modified the definition of adjusted EBITDA to exclude, in addition to those items defined in prior releases, certain unusual items that are not directly attributable to the Company's underlying operating performance, such as restructuring, acquisition cost and other unusual items. Please refer to footnote (a) in our release for a detailed list of those adjustments. We have provided comparable reconciliations for the 2013 and 2012 periods at the end our release.

Next, as a reminder, we completed the acquisition of The Colomer Group in the fourth quarter of 2013. Our consolidated financial statements include the results of operations on this acquisition, beginning on the October 9, 2013 acquisition date. As a result of this acquisition, Revlon now operates in and will record in two segments; the Consumer segment, which includes the Revlon business pre-acquisition; and the Professional segment, which includes the business acquired from The Colomer Group.

Also, with respect to the acquisition, we have provided certain unaudited pro forma results for the full year 2013. Pro forma results are not necessarily indicative of the operating results that would have occurred if the Colomer acquisition had been completed for the period presented. In addition, unaudited pro forma results do not purport to project future consolidated operating results of the combined company.

Also, please note that effective December 31, 2013, the Company is reporting the results of its China operations as discontinued operations, net of taxes. As a result, prior period amounts have been reclassified on the income statement to conform to this presentation.

Finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I’ll turn the call over to Lorenzo.

Lorenzo Delpani

Thank you, Elise, and to all of you, welcome to our first call together. My name is Lorenzo Delpani, and as you know I'm the new CEO of Revlon as of November 1. Prior to that, I've been CEO of The Colomer Group since May 2007. I just want to give you a few highlights on myself. I'm Italian. I started to work my career in P&G Italy, then moved to J&J in Switzerland, then in Benckiser as a General Manager in Scandinavia, then I led the innovation and new initiative in Reckitt Benckiser in London, and moved to manage a South Western Europe for Reckitt Benckiser in Barcelona, and finally joined Colomer in May 2007. And later in my Colomer period, I moved to the United States. So in that sense I have full experience in four multinationals between marketing, commercial, general management, different roles, leading to my previous assignment in Colomer as well as now as of November 1, I'm extremely excited to be leading this new opportunity.

I want to give some color to the rationale for the acquisition of The Colomer Group and give some details about it because maybe some of you are not fully aware of that business that as we heard from Elise, we're going to consider it a separate segment. The Colomer Group was before the year 2000 the Professional division of Revlon, and at that time they may have called it in a different way, but that's how we define it. It was spinned off by Revlon in 2000 and was bought by CVC and other minority shareholder, and CVC has developed the business, and then I took over in 2007 and we managed last year to sell it back to Revlon. So essentially, it was a Revlon asset that had an independent life and story and then came back to the Company.

The channels that Colomer Group operates in is primarily professional, and when we talk professional, we refer that to salons and hair salons or nail salons, and we address these channels directly, we have an army of salespeople and for example that's primarily the model in Europe where we have approximately 600 salespeople and 37,000 approximately customers, and that's basically a direct business, or indirectly through major wholesaler and broker like for example in the U.S. where we sell through these macro distributors. The key primary category in which we operate are professional hair and professional nail, even if we also have some mass brands in Spain and multi-cultural brands in the United States. And the key brands are, for nail, CMB and the primary franchises that have been very successful in the past years, and Shellac and Vinylux. And then Revlon Professional for the hair care business, American Crew, that is a leading, grooming brand in the Professional channel for men, Orofluido, UniqOne. And then in the mass, Natural Honey and Llongueras are the key one. And in the multi-cultural segment the key asset is Creme of Nature.

And in the past years, The Colomer Group has developed its business substantially and we have been arguably one of the most innovative professional beauty company. And in this sense, our recent stream of innovation has performed extremely well.

So I'll move to the acquisition rationale and essentially the rationale for the acquisition is simple, like any other acquisition, acquisitions are done to enhance the value of the combined entity. And so this for us is driven essentially by these macro reasons. First, we wanted to reunite the Revlon brand globally so that Revlon brand and asset is now fully owned by Revlon. We bought new brands, new products with growth potential. It has given more global presence and therefore provides us more geographical opportunities and scale in some of our international geographies. It was a very important opportunity to challenge the status quo and boost the innovation capability and Revlon bought critical mass and in fact today we are approximately reaching the 2 billion mark, and obviously this integration will deliver clear synergies and in the fundamental, in cost of goods, in our purchasing, and we have different other scale factors that will lead and generate more value.

To give you an idea, and that is pro forma information as it is clarified in our introduction, the combined entity has $1.9 billion in net sales, would have had in 2013 $1.9 billion in net sales, and the total Company adjusted EBITDA would have been $348 million as a combined entity. So as I said before, I'm very glad to be given the opportunity to lead this combined entity forward and we have been working in the past months a lot on the integration and integration has been the key effort of our initial period as well as the definition of incremental opportunities along the key pillars that were described before.

The new Company vision or let's say the refreshed Company vision is to establish Revlon as the quintessential and most innovative beauty company in the world by offering products that make consumers feel attractive and beautiful. This sounds or may sound like a bold statement or quite ambitious, yet we mean it, we are here to win and we are here to make it happen. It's an inspirational course for us and we believe in it, and through this mission we will generate value for our shareholders.

And I'm going to give a little color on the integration, and the acquisition, the target that was set forth was to achieve $25 million of cost reductions through our initial work. We have identified opportunities up to $35 million approximately and Larry will give more detail on that. The primary source of cost reduction are in cost of goods and fundamentals, and that's the 80-20 of the benefits, even if there are – and in the fundamental, one of the primary benefits is basically the opportunity to integrate all the Company expansions, and so we are keeping the model whereas the two segments have independent marketing and sales because we serve different channels with different assets. So for the time being and the foreseeable future, we will keep those functions independent, but all other functions in the background we are in progress and advanced stage of full integration, and that's the key source of these synergies.

But we have also obviously picking – this is not just an integration, this is also an opportunity for us to look at the business in a fresh way and in different angles. We have looked beyond the synergy of integration, identified various incremental opportunities to optimize the allocation of our resources and therefore generate value. Stemming from this analysis, we have announced the exit from China which target approximately $11 million of annualized cost reduction ongoing, and this goes on top of the $35 million from integration. So we're approximately right now around $46 million of improvement and I think that's not bad for three months of dedication. Our key focus for 2014 would be to successfully integrate the two companies and preparing a foundation for future profitable growth, and in this effort, we are obviously taking 360 degrees full diagnostic of brands, processes, country, people et cetera.

Now, I'll turn it over to Larry who will work you through our earnings. I thank you for participating to this call, and we'll connect later.

Lawrence Alletto

Thank you, Lorenzo. This is Larry Alletto. Before I go over the earnings and those comments regarding the integration, I'd refer all of our listeners to the 8-Ks that we filed in regards to China in December and then earlier this quarter for the integration savings, but in regards to that, let me just point out Lorenzo had mentioned that our current estimate is $30 million to $35 million of annualized savings with associated costs of $40 million to $45 million. We have disclosed that we expect to realize $10 million to $15 million of those savings in 2014. And in regards to the $40 million to $45 million of costs, we have disclosed that we expect cash expenditures associated with that to be approximately $30 million to $35 million in 2014.

Let me just build upon one thing that Elise mentioned, of all the results that I'll be talking about, we'll exclude the impact of certain unusual items. So again, refer the listeners to our press release and earnings release this morning for the reconciliation of all those unusual items in the footnote. Also as I go through the earnings, I will be referring to the Consumer division and the Professional division. Again, the Consumer division is the legacy Revlon and the Professional division is the acquired Colomer Group business.

Let me start with net sales. For the full year 2013, net sales were $1.49 billion versus $1.39 billion in 2012 for a sales increase of 7%. I'd like to point out that the 2013 results do include the Professional division since October 9 and that increase was $116.8 million. On an organic growth basis, as reported, net sales would have been down 1.3%. Ex-FX or without the impact of foreign currency changes, net sales organic would have been up 1.3%.

Let me now give you some color regarding the U.S. region. Again because of the brief period of time that we've had in regards to The Colomer Group since October 9, these regional comments will be focusing on the Consumer division. In U.S. sales increased 0.1% to $800.4 million which included the full-year price in 2013. U.S. had higher net sales of SinfulColors, Revlon Beauty Tools, Revlon ColorSilk hair care. These net sales increases were offset by declines at Almay. Net sales decreased on an absolute basis for Almay and on a relative basis versus the color cosmetics category in the United States.

In regards to Europe, EMEA sales decreased 2.3% to $180.2 million. On an ex-FX basis, net sales increased 5.2%. Higher net sales of Revlon color cosmetics in the U.K. and certain distributor territories, and fragrances and other beauty care products in South Africa were partially offset by declines in other beauty care products in France.

In regards to Asia-Pacific, net sales decreased 2.2% to $204.5 million, and on an ex-FX basis, net sales increased 4.3%. Higher net sales of Revlon color cosmetics in Japan and Revlon and SinfulColors cosmetics in Australia were partially offset by declines in other beauty care products in Hong Kong.

In Latin America and Canada, sales decreased 5% to $192.8 million. On an ex-FX basis, net sales decreased 0.8%. This decrease included the negative impact of $12.7 million of lower net sales in Venezuela. Excluding Venezuela, net sales in the region were higher due to Revlon color cosmetics in Argentina, Mexico, certain distributor territories, other beauty care products in Argentina and certain distributor territories, and Revlon ColorSilk hair color in the region, and they were offset by decreases in sales of Revlon and Almay color cosmetics in Canada.

Switching over to earnings, total Company adjusted operating income in 2013 decreased $25.7 million or 11.1% to $206.8 million. Primary drivers of this decline were negative impact of foreign currency of $14 million, an increase in depreciation and amortization which was due in part to the acquisition accounting of The Colomer Group, and higher incentive compensation from the previously disclosed 2013 long-term incentive plan transition grant.

Adjusted EBITDA decreased 4.7% to $283.7 million. The primary driver for this decline was the negative impact of foreign currency of $15.1 million. Similar to adjusted operating income, it was further impacted by the higher incentive compensation as previously disclosed.

I'd like to pause for a moment and build upon Lorenzo's comment regarding the pro forma full Company profile. In particular, if TCG were included for the full year, pro forma segment sales would have been $1.9 billion. These were comprised of $1.377 billion for Revlon Consumer and Revlon Professional of $531 million. Pro forma segment profit would have been $420.2 million, comprised of Revlon Consumer of $347.1 million and Revlon Pro of $73.1 million. Total combined pro forma EBITDA would have been $348.4 million.

Flipping now to taxes, provision for income taxes was $46 million in 2013 compared to $43.7 million in 2012. Cash taxes paid, net of refunds, for 2013 was $12.7 million as compared to $18 million in 2012. Adjusted income from continuing operations decreased 34.7% to $50.4 million. Adjusted EPS of $0.96 was compared to $1.47 in 2012. Lastly, due to our decision to exit the China business, we are now recording the results of operations as discontinued operations. Please note, 2013 includes the impact of $20 million of previously mentioned and disclosed restructuring charges.

In regards to our balance sheet and cash and liquidity, I'd like to point out that as of December 31, 2013, available cash was $234.5 million. At December 31, available borrowings under our revolver was $150.2 million. Late last year we upsized our revolver to $175 million, and since our increase in available borrowings has gone from $150.2 million up to $165.2 million.

Most recently, as announced on February 26, we re-priced the $675 million tranche of our term loan. The spread decreased 50 basis points, the LIBOR floor decreased 25 basis points, so 75 basis points of total savings. Annualized savings to the Company expressed in dollars is $5 million.

Now moving over to the fourth quarter, net sales in the Consumer segment was down 2.4% as reported or up 0.7% on an ex-FX basis. The U.S. was down slightly offset by positive net sales performance in international markets and the fourth quarter continued to be negatively impacted by Venezuela in Almay. Net sales for the fourth quarter for the Professional division was $116.8 million, representing the period from which we had acquired it.

In the fourth quarter, total Company adjusted EBITDA declined $9.3 million year-over-year. This was partially as a result of negative foreign currency of $5.4 million, higher brand support and SG&A, and the phasing of incentive compensation accrual in the fourth quarter. Net cash from operating activities of $117.5 million compared to $86.2 million last year.

With this, we have concluded our prepared remarks and we would now like to open up the call for your questions. Operator, please prompt the participants for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from Kevin [indiscernible] from Citi.

Kevin - Citi

I guess I had a question about the fourth quarter, it looked like the core Consumer segment was down pretty significantly from a segment profit basis and I was wondering if all that is the incentive comp or it looked also like maybe the currency was a driver as well, but I was wondering if you could talk about some of the other drivers besides those?

Lawrence Alletto

Again, just going back, we have called out the primary drivers, as you point out, FX consistent with the year was a negative driver. Also on a year-over-year basis, higher brand support and phasing that brand support in the fourth quarter was another one of them, and then the phasing of the incentive compensation accrual for the incentive compensations being accrued for through the third quarter at a lower rate. So there had to be an adjustment for the fourth quarter. Those are the primary drivers.

Kevin - Citi

Can you quantify them or did you just rank order them at least for us in terms of how you just listed those out?

Lawrence Alletto

We have just quantified FX.

Kevin - Citi

Okay. Would you say that was – of the three, FX was the main one and then brand support and then incentive adjustment?

Lawrence Alletto

Again, we just quantified the brand support and haven't disclosed specifically the other line items.

Kevin - Citi

Okay. And just trying to understand the reconciliation between adjusted EBITDA and the segment profit numbers that you put out, [indiscernible] I could reconcile the two from the numbers that are in the release but if you…?

Lawrence Alletto

The primary difference – there is a footnote that goes through the reconciliation, but between adjusted EBITDA and the segment profit, the primary difference is the unallocated corporate expense for the total. So you come down to segment profit for the two divisions and then we have corporate and that's how we got to the adjusted operating income pro forma for the full Company.

Kevin - Citi

I see, okay, I think I'm getting that. And then I guess my last question is the $348 million of pro forma EBITDA, does that include synergy expectations and any cost saving expectations either from the divestiture or outside the exit of China or the synergy expectations?

Lawrence Alletto

So let me clarify that for you. First, that's a historical number for 2013. So it is not inclusive of the integration savings that we have pointed out that would range $30 million to $35 million. As the numbers have been reported, the China is being treated as a discontinued op. So therefore, these sales, earnings, et cetera are excluded from the $348 million. Hopefully that helps you.

Kevin - Citi

It does. Alright, thanks very much.

Operator

We will take our next question from Aaron Rosen from Archview.

Aaron Rosen - Archview

I just have a couple of questions please. The working capital performance in the fourth quarter was very strong, just you alluded to that being due in part to the TCG acquisition. I'm wondering how much of that, is this sticky, is this cash that was generated from working capital at risk to be reversed as the 2014 year goes by?

Lawrence Alletto

No, this was primarily driven by working capital as you stated.

Lorenzo Delpani

To give you a little bit more color, the Professional business is strongly seasonal. We tend to launch innovation in the first part of the year and there is a disproportionate investment and it's been historical, and as we go, it tends to be in the second part of the year typically we start to be generating more cash, and we are very careful in managing our cash delivery without any peak in value simply due to the seasonality of cost and revenue, and that's it basically.

Aaron Rosen - Archview

Okay, so whatever we're seeing here it's not one-time in nature, just the normal seasonality of the business as it relates to the inclusion of TCG?

Lawrence Alletto

I think that's a good characterization.

Aaron Rosen - Archview

Okay, thank you. So the next question just on the restructuring, you have clearly laid out the benefits and the timing at which those are going away or in, have you said, and maybe I missed this, what the cash charges are going to be or the cash restructuring payments are going to be in 2014?

Lawrence Alletto

Yes, it is in the 8-K. The cash amounts is $30 million to $35 million in 2014.

Aaron Rosen - Archview

Okay, and that's inclusive of both integration on TCG and China?

Lawrence Alletto

No, let me give you the detail on the detail in that, that was specifically – the $30 million to $35 million was apples-to-apples with the $45 million to $50 million of costs, in regards to China, the costs were in 2013, for 2014 the cash portion expended is expected to be $18 million.

Aaron Rosen - Archview

Okay. And then just finally on China, I guess I'm going back and looking at previous quarters for 2013 as they were previously reported and it seems like the numbers have moved as that's been now classified as a discontinued op, was that – it looks like China was a loss for the first three quarters and now that it's been excluded has served to benefit the year-to-date numbers. Is that a correct characterization?

Lawrence Alletto

So I can't give you – if you look at the footnote, and I do call out, as I called out there's $20 million in 2013 which is the restructuring charge, and in our big table when we filed it back in December, we had suggested and approximated that the annual cost savings would be $11 million. So I think if you look at the footnote and you look at the restructuring charge, you can see how we got to that type of estimation. We had also said in the 8-K that we expected a realization of approximately $8 million in 2014. But again, because it's been backed out of the operations, you need to look at it with that lens.

Aaron Rosen - Archview

Okay, but the benefits from China are going to be additive to the $340 million of pro forma that you've disclosed as a historical number for 2013?

Lawrence Alletto

No, no, because they are not in the results, they are not in the $348 million. So if it were a loss, then it's not in the $348 million, that loss isn't. So you should look at the $348 million as the Revlon Consumer and Professional division without China.

Aaron Rosen - Archview

Okay, understood.

Lawrence Alletto

That makes sense?

Aaron Rosen - Archview

Yes, I guess. So there is no incremental benefit we should really be expecting going forward from China, it's kind of in the pro forma number?

Lawrence Alletto

Yes, that's the right way to look at it.

Aaron Rosen - Archview

Okay, alright. Thank you very much.

Operator

We'll take a question from Connie Maneaty from BMO Capital.

Connie Maneaty - BMO Capital

Given how important Revlon color cosmetics sales still are to the total Company, what was the growth rate of sales in 2013?

Lawrence Alletto

Connie, we don't disclose performance by brand.

Connie Maneaty - BMO Capital

Okay.

Lorenzo Delpani

But qualitatively, as you can imagine, it is one of our core assets and franchise and is a priority for us and there is no reason for us for it not to continue to be a priority.

Connie Maneaty - BMO Capital

Okay. Let's see, I think on the Professional business, what is the sales split between sales to nail salons and sales to hair salons?

Lorenzo Delpani

We will say approximately, I would say it's a bit more complex because you talk about the Professional segment, as I said we have also a piece of it that is retail in Spain and we also have a multi-cultural division that is also operating in an hybrid channel, mainly the top five Americans plus [indiscernible]. and therefore we don't have right now the percentage of the nail segment. I would say that if I exclude the Consumer, approximately more than half is nail and less than half is hair, but that's mainly driven by the Shellac and Vinylux development. But as I said, this percentage has to be considered in light of the totality of the business.

Connie Maneaty - BMO Capital

Okay. When the acquisition was announced, and I assume you've probably seen the report we wrote on it based on Euromonitor data, I don't know if the conclusions from that were right or wrong, so I'd love your perspective on it, but it suggests that, the data suggested that over say the prior eight years in the hair salon business, TCG market share went up a little bit but it looked as though it was out-marketed by John Paul Mitchell, L'Oreal, Estee Lauder and P&G, so that while TCG gained a little bit of share in professional hair care, the others gained 20 times as much. So can you give us a little perspective on historically what was going on?

Lorenzo Delpani

Basically I cannot comment to the source you mentioned. We don't use that source and I don't know many that do in our industry. And in any case, we have a different perception. First of all, we do not have formal market share data in the professional industry. Historically, the information that we have comes from consolidation at the industry level by country in some sort of association that puts information together. The data of this association have been quite inconsistent because not every company reports such information, and let's say, we have seen significant data with the source you mentioned. Said that, I can't really comment on the comment – let's say that our point of view and our reality is quite different to the point that some of the competitors that you mentioned for us are not even competitors. But the fact is, in our understanding and based on our as I said limited information, we have been maintaining to developing our market share in the past years.

Connie Maneaty - BMO Capital

Okay. If I could ask a few more, the Professional sales from the date of acquisition were about $117 million. Do you have what the change was from the same period a year ago and also on a pro forma basis what the year-over-year change was?

Lawrence Alletto

So we don't – we are only accounting for the acquisition since the date of acquisition. In one of the footnotes for business combination within the 10-K, number two, I'll just pull it out, Connie, if you haven't had time to go through it yet, so Footnote 2, 'Business Combinations', so for the total – on an apples-to-apples to the $1,908.9 million that we have mentioned in 2012, the comparable number was $1.911 billion.

Connie Maneaty - BMO Capital

Okay. And just one final one, where in the P&L is the inventory step up charge booked, is it in restructuring or is it in cost of goods, and was everything sold through in the December quarter or is there more to go in March?

Lawrence Alletto

So Connie, you'll find it in the cost of goods and there is a little bit more for the first quarter.

Connie Maneaty - BMO Capital

Okay, that's it for me. Thanks very much.

Operator

We'll take our next question from Grant Jordan from Wells Fargo.

Grant Jordan - Wells Fargo

My first question, it's helpful to get the $348 million pro forma EBITDA, can you give us a sense as to what the pro forma EBITDA would have been year-over-year for the fourth quarter?

Lawrence Alletto

No, we just have it, and again in the Footnote 2, 'Business Combinations', we have tried to be able to provide some visibility into the year-over-year, but we don't have that, we just for the fourth quarter accounting in since October 9 for the 2013 reporting period.

Grant Jordan - Wells Fargo

How would you say the profitability for Colomer on a year-over-year basis trended throughout 2013?

Lorenzo Delpani

In 2013 on a pro forma basis and that's just to give an indication, we have developed our profit and we can't give more color to that because we have agreed not to provide those details.

Grant Jordan - Wells Fargo

Okay, I guess I'm asking, it seems like the Revlon business kind of was down for most of the year pretty consistent, just trying to get a sense for the Professional side of the business, is it growing, what are the trends been like?

Lawrence Alletto

And I think it's important to have Lorenzo talk a little bit about the business to give you some color. Again, just in terms of, refresh it to the 10-K when you get a chance to see to it, we do provide income from continuing operations before income taxes for the 2012 period and the 2013 period, and that income from continuing operations would be after depreciation and after unallocated corporate overhead.

Grant Jordan - Wells Fargo

Okay. Do you have any plans to file pro forma of quarterly results?

Lawrence Alletto

No. What you see for the fourth quarter will continue on for the first, second and third. So you'll start to see year-over-year pro forma for – not pro forma, year-over-year numbers for the Professional when we anniversary the acquisition in the fourth quarter.

Lorenzo Delpani

But to give you a bit of color on the business, the Colomer business since May 2007 when I joined, then basically after approximately 12 to 18 months started a growth pattern that has been consistent quarter by quarter since the acquisition. So regardless of external data sources that may give you different color, my sources are internal and internal reference is that we've been developing the business both in top line and in bottom line, and most importantly [indiscernible] we do this to stretch our business and clean up a lot of dead ends and pieces of business that were less strategic. So in what Revlon acquired last year is a fairly healthy clean business and this treatment does not mean that we will continue to be in the future, and that giving the disclaimer, but at least as far as concerned 2013, the business is in a healthy shape and the main driver of this is our innovation model.

And we have been launching fewer bigger better innovation, as I like to say, and these innovations in some cases blockbuster status, like for example Shellac, and followed recently by Vinylux as well as overall of American Crew brand, some successful introduction of new brands altogether like UniqOne and Orofluido that went from zero to significant size in few years, those brands often are not accounted by these external sources. And so, net-net, the business is healthy. And as we know, past performance doesn't predict future performance, anything can happen, some of our geography like everybody else are exposed and we are exposed in Europe and we are significantly developed in some European countries where the crisis is very deeper. And so the situation is always challenging, we face market challenges, but as of 2013 the business was healthy.

Grant Jordan - Wells Fargo

That's very helpful. Would you say in terms of the growth for Colomer, it sounds like a lot of that was driven by new products, how much of it was driven by expansion into new geographies for the Company?

Lorenzo Delpani

It was mainly driven by new products. I actually in my tenure I kind of retrenched from geographies because I like to focus on fewer bigger better everything, fewer bigger better brands, fewer bigger better countries, fewer bigger better people, fewer bigger better across the board. It's a bit my motto and focus and we were owned by private equity, we were seeking an exit, so I guess at the time, it was not our priority to expand geographically. Now being part of a company that is built to last, it is our responsibility to look at the opportunity to develop geographically. Frankly I don't expect to focus much on this part of the strategy for the foreseeable future, for the short-term future, because we have other opportunities in the short-term.

Grant Jordan - Wells Fargo

Okay. My last question, can you comment on your view on the Company's level of debt and how comfortable you are with the balance sheet and the leverage statistics?

Lawrence Alletto

I think the most important thing, Grant, is I'd point out to the liquidity that we have in terms of cash balances as well as the $165 million unused on our revolver. So I think that is a very good indication to look for the health of the business in the balance sheet.

Operator

We have a follow-up question from Kevin [White] (ph) from Citi.

Kevin - Citi

So the $5 million of segment profit that came out of the Professional segment this quarter, I imagine that's not the kind of margin run rate we should expect for the business. So I was wondering if you could talk about the seasonality of the business from a cost perspective because I know the fourth quarter is typically the most profitable quarter for the legacy Revlon business.

Lorenzo Delpani

First of all, the numbers you talk about, remember that they are not a full quarter, they reflect the incorporation as of October 9, but approximately a quarter, and it is a bit of an anomaly in the sense that a few things that came together, like in one thing that in Colomer we didn't used to do and that's part of a philosophical attitude, is to really focus on quarters and therefore we prepared in that quarter some purchases and investments for new things that we are launching. You know that's part of the new accounting standard when we buy marketing material, we have to expense it regardless when we use it. So there is an unusual, let's say, overweight of [balance] (ph) report items that are affecting the period as well as some innovation sheets, innovation timing sheets.

But as Larry indicated in his segment profit, the total pro forma non-GAAP reconciliated information on our profit on yearly basis is $73 million and that is up versus last year and up versus previous year and up versus previous year. So basically, this last quarter is not an indication of that. Unlike Revlon, we are I would say last quarter is not necessarily most profitable. It is we generate cash more than profit, and so there is a seasonality of cash to profit, and that also has a lot to do with our networking capital dynamics. So I would say that that provides enough color, and I want to restate again that our past performance doesn't reflect at all the future performance because in our business we play it every day in every salon and every day in every store.

Lawrence Alletto

So Kevin, just following up on Lorenzo, the Professional business is different than the Consumer business, I want to highlight that if you're trying to draw parallels, and then also just state that in the fourth quarter the Colomer business performed as we expected to.

Kevin - Citi

Okay, that's really helpful. And I was wondering on the Consumer business, can you talk about sort of the state of retail inventories and how retailers are approaching or approach the quarter from an inventory stocking level?

Lawrence Alletto

We don't typically comment on the customers and inventory dynamics.

Kevin - Citi

Okay. More of a bigger picture question, you sort of said your focus has been on fewer bigger better I should say, as you're looking at the legacy Revlon business with obviously a number of smaller brands in the personal care and fragrance area, can we expect that you might look to divest some of those, I won't hold you to anything primarily, but I'm just curious are your strategies more leaning towards divestitures versus acquisitions as you're looking at the legacy business?

Lorenzo Delpani

So we don't give comment on our future, and I would agree that we don't give forward statement. Said that, broadly speaking we don't – we will probably do both divestment and acquisitions and it's part of the portfolio cleaning exercise. And when you characterize it primarily divesting, that may not be necessarily what we do. As I said, we are right now through the diagnostic phase and we have no conclusive plan yet, and if we would have done, we wouldn't disclose them for obvious reason, and that's basically [indiscernible] the point.

Kevin - Citi

Okay. And I guess I'd take another run at Grant's question on the balance sheet, clearly there are no liquidity concerns but could you talk maybe just from a long-term standpoint of what kind of leverage ratio that you would be comfortable running the business with or would you say that the leverage ratio you have now that that's the level that you are comfortable with from a long-term perspective?

Lawrence Alletto

So on that first, we don't have a target leverage and we are certainly comfortable with the current amount of leverage that we have, and if you look historically, Revlon, they have from time to time had higher leverage than subsequently used excess cash flow to pay down. So again, we don't have a target leverage but we are comfortable with both our liquidity and the existing leverage we have right now.

Kevin - Citi

Okay, I appreciate that. Thanks guys.

Operator

We have a follow-up question from Connie Maneaty from BMO Capital.

Connie Maneaty - BMO Capital

Just a couple of follow-ups. In Latin America, can you tell us what exchange rate you are using in Venezuela, is it the 6.3 or 11.7?

Lawrence Alletto

For the 2013, the official 6.3 for 2013.

Connie Maneaty - BMO Capital

And for 2014?

Lawrence Alletto

We have not made any disclosure, we haven't made a disclosure to determination on the exchange rate to use.

Connie Maneaty - BMO Capital

Okay. Also in Latin America, what was the sales growth rate if you exclude inflationary pricing in Argentina?

Lawrence Alletto

So we don't disclose that but I can say that, just to give you a size and scope and maybe this will help you out Connie, Argentina is less than 2% of our net sales.

Connie Maneaty - BMO Capital

Is that of the Consumer business or of the total Company?

Lawrence Alletto

Of total Company 2013.

Connie Maneaty - BMO Capital

Okay, great. And just the last question, with all the departures at the upper levels of management over the last few months, how close to complete is your going forward team at this point, and if you're looking to add talent, in what positions or capabilities would that be?

Lorenzo Delpani

So some of the changes that seems to be quite dynamic in your supports according to your perception predated my rival and some individual are left on their own and some changes are made are driven by the new requirements of the new vision and the combined business going forward. I'm looking at profiles that are obviously talented consumer goods background type of individuals and who have international experience with global breadth.

And most importantly that they have three characteristics that are displayed that they are achievers and they have achieved in their life meaningful results, that they have proven innovation skills because innovation will be one of our competitive advantage. As I said, we want to become one of the most innovative beauty company in the world and so we need innovators to do that. And most importantly, people that drive really the business. So we call this, achievement, innovation and drive or AID, and this is how I want to aid the business.

And in looking at the team across the skill set that I just described, I have made some adjustments and we have incorporated recently a couple of individuals integrated into a team, and one is Gianni Pieraccioni. Gianni Pieraccioni has 30 years of experience in consumer goods industry working in companies like Procter, J&J, Pepsi, luxury business, and most recently was the Chief Commercial Officer of Alitalia where he managed a multibillion-dollar business, and he's going to join us now to be with the Consumer business and he's going to lead it from a let's say mainly commercial standpoint.

On the Professional side, as I said I'm going to keep them separate, I have appointed Sennen Pamich, and Sennen Pamich was already in the Pro business leading the U.S. business and is now on a broad basis taking care of Pro. So, the departure of Chris, when that happened, we have substituted and we have two people that are essentially now slightly lower level but focusing on the segment independently, because we have a segment focus. These people bring on the table in my view exceptional managerial talent and I'm extremely confident that they are an asset for our future.

I'm not going to comment in detail on all the changes except to say that the team I have in place, I may not be done with it because I still need to address some areas in marketing, but frankly speaking in principle, the team I have in place is a very strong team and pretty much I'm almost done, okay, basically.

Connie Maneaty - BMO Capital

And just one more, what's your assessment of Revlon Consumer's R&D pipeline or capabilities?

Lorenzo Delpani

I think that from a [indiscernible] standpoint, Revlon just overall it's a very good characterization, it's an assessment, therefore it's an opinion, as such it's not a fact. This opinion may be incorrect and you cannot rely on it. Said that, I think that the technical capabilities of the Revlon team are ranging from category to category from very good to excellent, and from R&D standpoint, we are strong, we have strength and extremely responsible manufacturers and the capability of Revlon Consumer coupled with ours, that of the Pro, which were probably a bit more entrepreneurial and a bit less structured than the one of Revlon, we'll make a good combination to feed the future innovation pipeline. So from an R&D standpoint, we are in good shape. And this is an opinion, okay.

Connie Maneaty - BMO Capital

Okay, thanks so much.

Operator

At this time, we have no further questions. I will turn the conference back over to our speakers for any closing remarks.

Lawrence Alletto

Great. Thank you everyone for participating today and we look forward to speaking again to you after our first quarter. Thank you.

Operator

Once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.

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