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Revlon, Inc. (NYSE:REV)

Q1 2014 Earnings Conference Call

April 30, 2014 9:30 am ET

Executives

Jessica Graziano - SVP, CAO & Corporate Controller

Lorenzo Delpani - President & CEO

Larry Alletto - EVP, CFO & CAO

Analysts

Ryan Gilligan - BMO Capital Markets

Carlos Castello - J.P. Morgan

Grant Jordan - Wells Fargo

Operator

Good morning, ladies and gentlemen, and welcome to Revlon's First Quarter 2014 Earnings Conference Call. At the request of Revlon, today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to turn the conference over to Ms. Jessica Graziano Revlon's Senior Vice President, Chief Accounting Officer, and Corporate Controller. Please go ahead ma'am.

Jessica Graziano

Thank you, Jake. Good morning, everyone, and thanks for joining today's call. Earlier today, we released our financial results for the first quarter ended March 31, 2014. 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 might 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 and our 2014 first quarter 10-Q which we filed earlier this morning. We undertake no obligation to publicly update any forward-looking statements except for the company's ongoing obligations under the U.S. federal securities laws.

Next, our remarks today will include a discussion of certain GAAP, non-GAAP, and pro forma measures to enhance the comparability of our results in light of The Colomer Group acquisition that occurred in October 2013. These measures are defined in our release and are also reconciled in the financial tables at the end of our release.

Just to note that the 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. Also the unaudited pro forma results do not purport to project the future consolidated operating results of the combined company.

In addition the results of operations have been adjusted to reflect the company's exit of its business operations in China as a discontinued operation for all periods presented.

As a reminder, the company's results of operation of its brand sold in retail channels, including retail brand acquired in the Colomer acquisition are included in the consumer segment, and the results of operations of the brand sold in professional channels acquired as part of the Colomer acquisition are included in the professional segment.

Finally, our discussion this morning should not be copied or recorded. And with that I will turn the call over to Lorenzo Delpani.

Lorenzo Delpani

Thank you, Jessica, and good morning to everyone on the call. Overall Revlon first quarter has been very strong, as comparable pro forma net sales were up by 6.4% and segment profit was up by 11.6%. Adjusted EBITDA was up 15.2.

So indeed arguably a very strong quarter. However, we observed mixed dynamics for the consumer and professional segment.

Consumer business was flat, primarily as a result of market softness year-to-date, while the Professional segment had one of its best quarter ever. This is mainly due to past business inertia for the Consumer business and strong momentum for the Professional business. Larry Alletto, will shortly go into details about the segment performance.

In addition, it's worth nothing that the Consumer segment albeit flat, benefited from a favorable return adjustment as we are reducing the quantity of new product launches. This is the results of the implementation of our fewer, bigger, better innovation strategy. Our strategy focus on more quality and less quantity of innovation and therefore, we should see a lower level of returns going forward. This will impact favorably the P&L. However, at the same time this may be partially offset and will partially offset the level of the pipeline flow.

The integration of the Professional business is overall on track. And a very significant project we are undertaking is the migration of our complex and multiple IT system to SAP. This is a significant investment; this is required to create a strong and integrated global platform and also is the base for working potential future synergies.

Finally, other transformational changes that we have undertaken are on track. For example, we are completing the elimination of our regional management infrastructure. We are going to manage our business only globally and locally as opposed to globally, regionally, and locally. This is because our scale does not justify the efficient maintenance of regional organization. We are focused organization around segment of Consumer and Pro and we no longer look at regions because we no longer maintain regions. This has resulted in some of the changes that you have seen in the earning release.

Now, I will turn it over to Larry that will work you through our results in details. Thank you.

Larry Alletto

Thank you, Lorenzo. Good morning everybody. On a GAAP as reported basis our first quarter net sales were $469.8 million versus $325.9 million in the prior period. Results reflect the inclusion of net sales of the brands acquired from TCG in the first quarter of 2014 with no comparable results in the first quarter of 2013 as reported.

Income from continuing operations, net of taxes, up $8.7 million or $0.17 per share compared to a loss from continuing operations also net of taxes of $4.5 million or $0.08 per share.

As Jessica mentioned for comparison purposes, my commentary on the results for the first quarter will be on a pro forma basis adjusted for certain non-recurring and non-operating items. These pro forma results reflect the financial results of both the company and TCG as if they were a combined company for all of 2013.

The details of these non-recurring and non-operating items as well as reconciliation of GAAP results to adjusted results and to pro forma adjusted results can be found in our earnings release we issued this morning.

Total company net sales in the first quarter were $469.8 million on an Ex-FX basis total net sales increased 6.4% primarily as a result of higher net sales from our Professional segment. Before I speak to each segment, just a note that the results for the Consumer segment in 2014 and 2013 pro forma include the results of Consumer brands acquired from TCG that were previously included in the Professional segment.

Specifically net sales in the first quarter of 2014 for these Consumer brands were $15.5 million, an increase of approximately 10%.

Consumer segment net sales decreased slightly to $339.5 million. On an Ex-FX basis they increased 2.8%. The primary drivers of this increase were a $6.3 million favorable returns adjustment in the U.S. as a result of lower expected discontinued products related to the company's strategy to focus on fewer, bigger, and better innovations and higher net sales of Revlon ColorSilk hair color partially offset by lower net sales of SinfulColors.

Consumer segment profit decreased to $71.5 million, which was a 4% decrease on an Ex-FX basis. The primary driver of this decrease was higher advertising expense to support the consumer brands of $8.4 million, partially offset by an increase in gross profit primarily due to the returns adjustment net of related inventory write-off charges.

Moving to net sales in the Professional segment, Professional segment net sales were $130.3 million, which increased 17.4% on an Ex-FX basis. Primary drivers of the increase were higher net sales of CND Shellac and American Crew products as well as net sales in the first quarter of 2014 of CND Vinylux which launched in the second quarter of 2013 and new products under the Crème of Nature brand, which we launched in the second half of 2013.

We reported a $31.9 million Professional segment profit, which was a 77.9% increase on an Ex-FX basis. The increase was primary due to higher net sales as I have just discussed as well as lower advertising expense within the professional segment primarily due to the timing of advertising and other brand support in 2013 compared to 2014.

Lorenzo Delpani

So I think I wonder I will give some color on the fact that it is important to look at Professional result of the first quarter in light of the fact that last year at the same time we didn't have Vinylux and we didn't have these multi-cultural innovation with the finest Crème of Nature. In that sense that quarter has very strong momentum because such innovation were successful, but we will soon hit the anniversary of the launch of these innovation namely April/May for Vinylux and last quarter, Q4, for Crème of Nature and therefore these initial performance cannot be automatically rolled on a yearly basis. Nonetheless, we appreciate that the momentum is stronger.

Larry Alletto

Let's move on to the geography discussion for net sales. In the first quarter, combined U.S. net sales were $250.2 million and international net sales were $219.6 million. The 7.8% increase in the U.S. compared to the first quarter of 2013 is primarily due to higher net sales of CND Shellac and American Crew products as well as net sales for CND Vinylux and the Crème of Nature brands that Lorenzo just spoke of. Also included is the $6.3 million favorable returns adjustment in the U.S. I just spoke about.

For international sales total company net sales outside of the U.S. increased 4.8% on Ex-FX basis as compared to the first quarter of 2013. This increase was primarily driven by higher net sales of CND nail products throughout most of the international region, and higher net sales of Revlon color cosmetics in Japan.

With respect to adjusted operating income, total operating adjusted income in the first quarter of 2014 increased 20.8% versus last year to $62.8 million this year. And adjusted EBITDA increased 15.2% in the year-over-year period to $87.8 million. Both measures were impacted by higher gross profit as a result of increased net sales, partially offset by increased advertising expense within the SG&A expense line and approximately $2 million of negative CapEx.

Moving on to liquidity. As of March 31, 2014, our unutilized borrowing capacity, as well as cash on hand was $349.9 million. Available cash was a $184.4 million and available borrowings under revolver was $165.5 million.

Of note, on May 1, 2014, we will use available cash on hand to optionally prepay without penalty in full our $58.4 million senior subordinated term loan, whose current interest rate is 8.5% and would have otherwise matured on October 8, 2014.

One comment on integration and restructuring, we continue to execute our right to integration program and are on track with our previously disclosed charges, cash payments, and cost reductions.

Jessica Graziano

This concludes our prepared remarks. And we would now like to open up the call for your question. Jake please prompt the participants for questions.

Question-and-Answer Session

Operator

(Operator Instructions).

And we will hear first from Connie Maneaty with BMO Capital Markets.

Ryan Gilligan - BMO Capital Markets

Good morning. This is Ryan Gilligan on for Connie. My first question is on the Revlon and Almay brands, can you talk about the sales trend in the U.S. and worldwide for each of the brands in the quarter?

Lorenzo Delpani

Overall in the Q1 Revlon color cosmetic and Almay were flat overall.

Ryan Gilligan - BMO Capital Markets

Okay.

Lorenzo Delpani

And as most of the business is in the U.S. and the market has been soft in Q1, I would say that being flat is -- does not make us happy but is directionally encouraging because it seems that the market has done worse than that.

Ryan Gilligan - BMO Capital Markets

Okay. That's helpful. Thank you. And can you talk about the expected impact eliminating the regional management structure will have on the P&L?

Larry Alletto

Yes. Let me take that. The regional infrastructure restructuring that Lorenzo had talked about is actually included in our January '13 program, where we holistically talked about $45 million to $50 million of cost, $30 million to $35 million of savings of which we expect $10 million to $15 million for 2014. So that specific project is inclusive of our previously disclosed cost savings and integration.

Ryan Gilligan - BMO Capital Markets

Got it. That makes sense. Thanks. And the rest of my questions are sort of housekeeping items. What was your EPS ex items for the quarter? And may be if you can provide your adjusted tax rate?

Larry Alletto

Don't have that detail right in front of us. So let us come back to you on that.

Operator

And next we will hear from Carlos Castello with J.P. Morgan.

Carlos Castello - J.P. Morgan

My question relates to the changing strategy doing fewer but more impactful new launches, has that affected your shelf space within each season or are you pleased with what kind of space you're holding throughout the period?

Lorenzo Delpani

Okay. Basically, you appreciate that we -- there is a beginning of a change to a strategy. It will take up to one-and-a-half to two years to see the full deployment of it because we're not going to be hyper radical about it. And so this is -- I just give an example that doesn't reflect our specific number because I don't want to give guidance.

Let's say we introduce 50 new innovation a year. We're going to go may be to 45 then to 40 and may be end up at 30. And hopefully each of those 30 will have a pickup what we progressively lose. But it is important to understand that the key idea is indeed not to lose shelf space because the current innovation in quantity we do, we put innovation on shelf but they become returns and we basically withdraw them.

So it's not about doing less and therefore losing space, it's about doing less quantity and hopefully improving the quality so that what we do stay on shelf because it is a characteristic of our business but as well as apparently of the industry to have an incredible churn and some initiative stay on shelf less than a year and other about the year. And clearly, this is not efficient. And that don't even give us the time to do a proper innovation diffusion, which is basically the process for which you build distribution on a global level and then you make people aware of your innovation, then you persuade them above your product, they experience it, they hopefully enjoy it and they come back with very big cycle.

Without giving you marketing class, I just want to tell you that the repeat rate of the innovation is the key driver of the profitability of the business. And if our production speed is very, very, very high, we really enjoy very few repeat if any, so it's a philosophical changer that will drive exactly what I said more quality less quantity and at this stage we are not concerned about specific shelf space losses related to this strategy.

Shelf space losses I just wanted to say are always profitable and are sometime driven by customer strategy, in other cases may be obviously related to the performance of the innovation that we will put in play, but based on the concept of our innovation block that I don't see a correlation with this -- between this strategy and shelf space loss.

Jessica Graziano

So we have time this morning for one more call. Jake?

Operator

Now a question will come from Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo

Hey thanks for providing the pro forma analysis it was very helpful. My first question when we look at the Consumer segment like I mentioned given the state of the U.S. being flat there is clearly a big win, but when I relook at the stats received for Nielsen particularly for your products it seems like you way outperform those. Can you comment on the difference there?

Lorenzo Delpani

I'm not characterizing it as you characterize it as a big win that simply saying that overall the result we're overall flat and accordingly to our data which may be different from yours would receive that the market has declined more than we've declined in sales. So our stocking sales versus market and that's an overall column. More detail for me is difficult to provide it as I don't look at the data and probably in the same way you look at them. So it's difficult to reconcile this comment.

Larry Alletto

But as Lorenzo said, when we look at the market in the first quarter, we look at the sales; we're generally trending slightly better than the market.

Grant Jordan - Wells Fargo

Okay.

Lorenzo Delpani

And there is no denial about the fact that I would say the market share of Almay and the Revlon color cosmetic has been declining in the past years and I don't think this was -- we are working really hard and investing really hard to make sure that we turn this around and that's exactly what we are at. And in this first quarter, while in the past we were having let's say a market that apparently was growing single-digit cumulative normal growth rate was effectively high-single-digit. As of mid next year, the market seem to have softened and the Q1 of this year is soft. And we don't want to comment on this because it opens endless discussion.

Nevertheless, in this marketing there is softening it becomes absolutely critical for us to grow market share in order to continue the growth of the company and that's what keep us here focused and that's what we're aiming to do.

Grant Jordan - Wells Fargo

So based on your data you would say that you did gross share in the first quarter?

Lorenzo Delpani

No, I'm not going to give the share data, because we decided that we're not going to provide that.

Grant Jordan - Wells Fargo

Right.

Lorenzo Delpani

Let's say that either way characterize it as suggesting that is appropriate.

Grant Jordan - Wells Fargo

Okay. All right. And then just to kind of help understand the strategy of doing fewer launches. Can you go to some specifics in terms of what products you pulled back on and then it seems like maybe advertising was up in the quarter even though you did fewer launches so just kind of how that might play forward?

Lorenzo Delpani

Well, advertising is been up and probably is going to be up for the year versus last year if everything goes in line with expectation, "I want to remind that any decision that we take from now on can be different and so can project the future based on what we're discussing today." But that yes we're advertising more because it's part of the innovation plot like doing fewer quantity, more quality, and supporting the innovation more.

So it is absolutely a consistent in by the idea, let's say instead of I go back to this number, which is our position. Okay. Let's say if I do 50 innovation and I have $50 million and I put $1 million each, if $1 million each is absolutely insufficient to break the threshold of the class that we have out there and is not enough to create the proper diffusion then let's say that the number you need is $2 million each, if I do 25 innovation I spend $2 million each I'm spending the same amount, but I'm now all of a sudden crating a level of support that is capable of breaking the class there and overcoming the threshold of relevance.

So the idea of fewer, bigger, better innovation is not just about the quantity and quality innovation, but is also of reallocating or refocusing the investment on the fewer things that we have so that they do become bigger and better. Because being bigger and better is not just a function of design of the innovation, which obviously we aim to improve but that is also function of support levels and of the diffusion plans. And the diffusion plan cost money. So the thing is coherent and consistent.

Grant Jordan - Wells Fargo

Okay.

Lorenzo Delpani

At least in terms of objectives. And as I said then I think it's worth reminding that well as I said before, we're going to be evolutionary about this. We are not going to be radical.

Grant Jordan - Wells Fargo

Okay. And my last kind of follow-up to that is was there an area in the first quarter where you put more emphasis and was there an area where you put less emphasis as you go through that strategy?

Lorenzo Delpani

Overall you appreciate that in doing fewer bigger better. I don't just decide to do better with the decision. Coming up with better is about designing a better innovation. And designing a better innovation requires understanding your consumer and identifying what's really relevant for them, what's unique, what's impactful from emotional standpoint; what differentiate us on shelf, and what could be also ownable. So these -- the focus of my -- very much the first quarter and will probably continue to be the case in the next months is indeed to design better innovation for the future. And that is what we're doing right now.

And as far as concern the first quarter execution or diffusion, we did indeed do what I suggest to differ, which is to concentrate resources on fewer initiative and we will see how we progress in the next months. We don't provide share data, but some specific initiatives are working well and are benefiting from this focus. But it's a bit soon to tell, it's a bit soon to come to conclusion maybe we can give more color in second quarter because it's early. So the execution in the first quarter, as we've implemented a bit these concentration of recourses with the mindset of supporting a differ diffusion.

Grant Jordan - Wells Fargo

Okay. It would be helpful. I hear some of the examples of what is working not necessarily the actual share data, but which products you're seeing return?

Lorenzo Delpani

Yes, so I appreciate the (inaudible) we don't want to have to may be just from competitive standpoint, but I don't want to give a product-by-product -- blow by blow of what's working, where we're focusing the resources. I think you can appreciate that.

Grant Jordan - Wells Fargo

Sure. Okay, thank you.

Lorenzo Delpani

Thank you. Okay, so thank you very much for joining our call. We look forward to speak to you in our second quarter and thanks for my colleague for the preparation of this.

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