Revlon's (REV) CEO Lorenzo Delpani on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Revlon, Inc. (REV)

Revlon, Inc. (NYSE:REV)

Q2 2014 Earnings Conference Call

July 30, 2014, 09:30 AM ET

Executives

Jessica Graziano - Senior Vice President, Corporate Controller and Chief Accounting Officer

Lorenzo Delpani - President and Chief Executive Officer

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

Analysts

Pat Trucchio - BMO Capital Markets

Grant Jordan - Wells Fargo

Operator

Good morning, ladies and gentlemen, and welcome to Revlon's second quarter 2014 earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Jessica Graziano, Revlon's Chief Accounting Officer and Treasurer. Please go ahead.

Jessica Graziano

Thank you, Shallon. Good morning, everyone, and thanks for joining today's call. Earlier today, we released our financial results for the second quarter ended June 30, 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 would 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 second 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 law.

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 the release.

Just to note that 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.

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 thank you all for joining our call today. Looking at the second quarter as a whole, I would characterize these as a good quarter. We have continued strong momentum in net sales growth in the Professional division.

American Crew, Revlon Professional hair color and Crème of Nature brands each contributed strongly to higher sales in the quarter versus last year. And the Consumer division also add higher net sales this quarter than last year, although at much lower rate than the Professional division.

Net sales in the Consumer division were positively impacted by Revlon color cosmetic and Revlon ColorSilk, but were unfavorably impacted by the Almay performance. So all-in-all, we consider this a good quarter. As you know a significant part of our business is in the U.S., mass color cosmetic category, which is declining year-to-date into '14 versus 2013.

While, the color cosmetic category in the U.S. continues to be softer, we remain focused on supporting our brands with the intent to grow market share and develop our business. To that end, we have increased our advertising spend by $11.7 million in the second quarter versus last year, which was primarily in support of our consumer brands. Year-to-date, we have spend $20 million more than last year, which is a 16% increase.

Finally, let me update you on our integration program. The actions that have been taken to date are generating saving across the business, and we are on track to deliver the annualized cost reduction of $30 million to $35 million by the end of 2015. The information in details are quite granular, especially when it comes down to the pro forma details by segment.

So I'll turn the call over to Larry who will walk you through the results in detail.

Lawrence Alletto

Thank you, Lorenzo, and good morning, everyone. On a GAAP as reported basis, our second quarter consolidated net sales were $497.9 million versus $344.7 million in the prior period. Remember that our as reported second quarter 2014 results reflect the inclusion of the net sales of the brands acquired from Colomer with no comparable results in the prior period.

Income from continuing operations, net of taxes, was $14.4 million or $0.27 per share, which does not include the impact of certain non-recurring items in both periods. This compares to $27.1 million or $0.52 per share in 2013.

Also, on a GAAP as reported basis, our year-to-date consolidated net sales were $967.7 million versus $670.6 million in the prior period. Again, 2014 results reflect the inclusion of the net sales of the brands acquired from Colomer with no comparable results in the prior period.

Income from continuing operations, net of taxes, was $23.1 million or $0.44 per share, which includes the impact of certain non-recurring items in both periods. This compares to $22.6 million or $0.43 per share in 2013.

As Jessica mentioned for comparison purposes, my commentary on the results for the second 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 Colomer, as if they were a combined company for all of 2013.

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

Total company net sales during the quarter were $497.9 million and segment profit was $113.8 million. On an XFX basis net sales increased 3.6% and segment profit increased 7.1%.

Consumer segment net sales increased 2.5% on an XFX basis to $367.3 million. The increase was primarily due to higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color, partially offset by lower net sales of Almay color cosmetics.

Consumer segment profit decreased $82.4 million, which was a 2% decrease on an XFX basis. The decrease was largely due to $11.7 million of higher advertising expense in the period, partially offset by an increase in gross profit primarily due to the higher net sales in the segment, which I had just discussed.

Moving to the Professional segment. The Professional segment net sales were $130.6 million, which increased 6.7% on an XFX basis. Primary drivers for the increase were higher net sales of American Crew, Revlon Professional hair products and Crème of Nature products.

We reported $31.4 million of Professional segment profit, which was a 41.9% increase on an XFX basis. This increase was mainly due to the higher gross margin, which resulted mainly from the higher net sales as I had just discussed.

Moving to net sales by geography. In the second quarter, U.S. net sales were $255.2 million and international net sales were $242.7 million. Both the Consumer and Professional segments contributed to the 3.3% increase in the U.S. as compared to the second quarter of 2013.

Within the Consumer segment, higher net sales of Revlon color cosmetics, Revlon ColorSilk hair color and SinfulColors color cosmetics were partially offset by lower net sales of Almay color cosmetics. And within the professional segment, higher net sales of Crème of Nature and CND nail products as well as higher net sales from contract manufacturing services were partially offset by lower net sales of CND Shellac.

Moving to the international net sales. Total international company sales outside of the U.S. increased 3.8% on an XFX basis as compared to the second quarter of 2013. Within the consumer segment, net sales increased primarily due to the higher net sales of Venezuela of Revlon ColorSilk hair color, Revlon color cosmetics and other beauty care products.

Results in Venezuela benefited in the second quarter of 2014 from increased availability of U.S. dollars to import finished goods for sale in Venezuela as compared to the second quarter of 2013.

As I will discuss later, as of June 30, we have changed the foreign exchange rate we used to measure our financial results for Venezuela. We expect the change in rate will have a negative impact on Venezuela's results going forward.

The Professional segment's results outside of the U.S. included higher net sales of Revlon Professional, CND Shellac and American Crew. These were partially offset by lower net sales of Orofluido throughout most of the international region.

With respect to adjusted operating income, total company adjusted operating income in the second quarter of 2014 increased 1.2% versus last year to $67.4 million this year, and adjusted EBITDA increased 3.2% in the year-over-year period to $93.7 million in this period. Both measures were largely impacted by higher gross profit as a result of the increased net sales I have discussed, offset by an increase in advertising expenses within SG&A expenses.

Now, moving on to liquidity and cash flow. Net cash used in operating activities for the six months of 2014 was $6.4 million compared to net cash provided by operating activities for the first six months of 2013 of $11.3 million. The $17.7 million of increased cash used in the comparative period is primarily due to changes in working capital. Most notably, working capital was unfavorably impacted by approximately $24 million in restructuring and other payments related to the company's exit of its operation in China.

As of June 30, our unutilized borrowing capacity in cash on hand was $311.5 million. Available cash was $145.6 million and available borrowings were $165.9 million under our revolver.

Of note, on May 1, 2014, we used available cash on hand to optionally prepay without penalty in full our $58.4 million non-contributed loan, which carried an interest rate of 8.5% and would have otherwise matured on October 8, 2014.

As an update to our integration program, we continue to execute our program to integrate the Colomer business post-acquisition and are on track with our previously disclosed charges, cash payments and cost reductions.

Finally, let me comment on Venezuela. Our adjusted results for the second quarter exclude the impact of a $6 million foreign currency loss arising from the required remeasurement of our Venezuelan balance sheet.

At June 30, 2014, we made the determination to translate our Venezuelan balance sheet using the average SICAD II transaction rate, which is currently 53 Venezuelan Bolivars to the U.S. dollar. This was mainly due to the fact that we began transacting in the SICAD II exchange market in the second quarter of 2014 and intend to continue to utilize the SICAD II market to the extent available for additional allocations.

From a P&L perspective, during the second quarters of 2014 and 2013, Venezuelan net sales, which were less than 2% and 1% of total company net sales respectively during those periods were translated at the official exchange rate of 6.3 Bolivars to the dollar.

Beginning on July 1, 2014, and going forward, we will translate our results at the SICAD II Rate. Using SICAD II Rate in lieu of the official rate to translate Venezuelan's financial statements will have a negative impact on Revlon Venezuela's results of operations going forward.

Now, I'll turn the call back over to Jessica.

Jessica Graziano

Thank you, Larry. This concludes our prepared remarks. And we would now like to open up the call for your questions. Shallon, please prompt the participants for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll have our first question from Connie Maneaty, BMO Capital Markets.

Pat Trucchio - BMO Capital Markets

This is actually Pat Trucchio filling in for Connie. Just a couple of question. The first one is in the context of fewer, bigger and better launches going forward, I am wondering what your thinking is for Almay? How does it fit in the portfolio? And what do you think it would take to get the brand performance to improve?

Lorenzo Delpani

So I want to make it clear that for us Almay is a core asset, it needs turnaround, and that's no question about it. But it is a core asset, is materially significant, and we believe in the brand possibility to contribute to the future growth of the company. That's why we are investing resources, energy and cash into its turnaround. The current results are temporary, and the results of the implementation of our strategy that it takes time to be played out.

Pat Trucchio - BMO Capital Markets

And then could you remind us how much of your sales and profits Venezuela represent on an annual basis? And that you have been using the 6.3 rate and that now going forward it is going to be at the SICAD II Rate of around 50?

Lawrence Alletto

Yes, correct. That's consistent with our disclosure, Patrick. We don't breakout for our country's profitability, so I can't answer that directly. But let me try to help you for the quarter, and it's relatively consistent if you look back, the net sales for Venezuela was approximately 2% in the quarter and last year it was 1%. And that is total company net sales. So we included that to try to give you a sense of the magnitude. And those numbers, as we discussed were in fact translated at this 6.3 versus the 53. So therefore you can just look at devaluation and see what the potential impact would be.

Pat Trucchio - BMO Capital Markets

And at this point, the issue with the fire and insurance payments, et cetera, all of that is done. Is that right?

Lawrence Alletto

We still have work to do in terms of closing out those issues. But in terms of how they're being treated, and that from a P&L standpoint, most of that impact you've already seen that.

Pat Trucchio - BMO Capital Markets

And then just on the Dollar Store consolidation, will that have any impact on your business. And if it would, do you expect an impact on inventories from drawdown as a result of it?

Lorenzo Delpani

No. We don't expect anything material from this event and we have done yet an analytical assessment, because there are not sufficient information to make it, but in any case it shouldn't be material.

Operator

We'll go next to Grant Jordan, Wells Fargo.

Grant Jordan - Wells Fargo

Just kind of looking at the SG&A rate, I know you talked about you continue to invest in advertising. If you stripped out the advertising, would the SG&A rate still be going up?

Lawrence Alletto

If you stripped out, within actually in factors, most of our integration savings have been flowing through the departmental line. So there are a lot of puts and takes, but if you corrected that, I think you'll start to see an improvement in the SG&A rate.

Grant Jordan - Wells Fargo

And then my next question would be, can you give us a little more detail on the trends for Shellac and maybe how you see that playing out?

Lorenzo Delpani

Well, talking about the year-to-date performance of Shellac overall on a global basis, Shellac is doing well and continue to do well. Remember that Shellac sell primarily through distributors, so quarterly fluctuations are not unusual. In this specific quarter, we are doing particularly well internationally and a bit softer nationally and that has to do with the anniversary versus some trends of last year.

Last year Shellac in the same period had strong quarter because some domestic distributor ramp up their inventory positions. So the underlining trend, the matters is the sell out, and the sell out of Shellac remains positive, encouraging, and we are pleased with the performance of the brand.

Grant Jordan - Wells Fargo

So just to paraphrase, in terms of the data you're seeing is still -- the market share for the product continues to be strong.

Lorenzo Delpani

As we don't have market share per se, we receive some sort of extrapolation of sell out data from our distributors and consistently an indication from this sell out data is positive. And market share in the conventional sense, we don't have it.

Operator

At this time, I'll turn the conference back over to Mr. Lorenzo Delpani to offer any additional or closing remarks.

Lorenzo Delpani

So thank you very much for joining our call. We look forward to speaking to you on our third quarter 2014 call. And that concludes our call. Thank you.

Operator

That concludes today's conference. Thank you for your participation.

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