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Elizabeth Arden, Inc. (NASDAQ:RDEN)

Q4 2014 Results Earnings Conference Call

August 19, 2014 8:30 AM ET

Executives

Allison Malkin - ICR, IR

Scott Beattie - Chairman and CEO

Rod Little - Executive Vice President and CFO

Joel Ronkin - Executive Vice President, North American Business

Marcey Becker - Senior Vice President, Finance

Analysts

Arnie Ursaner - CJS Securities

Bill Chappell - SunTrust

Joe Lachky - Wells Fargo

Joe Altobello - Oppenheimer

Jason Gere - KeyBanc

Connie Maneaty - BMO Capital Markets

Linda Bolton Weiser - B. Riley & Associates

Operator

Greetings. And welcome to the Elizabeth Arden’s Fourth Quarter and Fiscal 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Allison Malkin of ICR. Thank you. You may begin.

Allison Malkin

Good morning. Thank you for joining us. Before we begin, I’d like to remind you that some of the comments made on this call as either prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

Such information is subject to risks and uncertainties that could cause actual results to differ materially from the statements as described in the press release and in Elizabeth Arden’s most recent annual report on Form 10-K filed with the SEC.

If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure is available in our press release.

I would now like to turn the call over to Scott Beattie, Chairman and CEO of Elizabeth Arden. Scott, please go ahead.

Scott Beattie

Thank you very much, Allison. And welcome everyone to our quarter four and fiscal 2014 conference call. Joining me today in New York are Rod Little, our Executive Vice President and Chief Financial Officer; Joel Ronkin, our Executive Vice President of our North American Business; and Marcey Becker, our Senior Vice President of Finance.

In terms of the agenda today, I’ll provide an overview of the Q4 and fiscal 2014 performance, as well as the restructuring activities we have implemented to improve the performance of our business as we enter fiscal 2015.

In addition, I will discuss the strategic investment of Rhône Group L.L.C. into Elizabeth Arden, and their involvement in assisting our company to return the business to the performance we experienced prior to fiscal 2014.

I will then introduce Rod Little, our CFO, who will review our key operating priorities for fiscal 2015 and our key financial metrics for fiscal 2014. Following Rod’s discussion, Joel Ronkin will provide a detailed review of our fiscal 2014 performance for the North American business and the changes that have been put in place to improve the performance of this business moving forward.

As I stated in our Q2 and Q3 conference calls and which continued through Q4, the decline in revenues and gross margins were driven primarily through a decline in retail performance of our celebrity fragrance portfolio, primarily in our North American business.

Although, we do not anticipate the decline in this business, excuse me, although, we did anticipate the decline in this business during fiscal 2014, given the extraordinary pipeline of celebrity fragrances that occurred during fiscal 2013, the weakness in consumer demand and retail traffic for most of last year was far greater than we anticipated. This resulted in fewer replenishment orders as retailers normalized fragrance inventories.

Of the approximate 13% decline in revenues during 2014, about half of that volume was a decline in demand of our celebrity brand portfolio, primarily in the North American business.

The other half was either destocking of retail inventories or a concerted effort by ourselves to take distribution globally in order to improve pricing and reduce discounting of our brands.

Again, as I stated in our Q2 and Q3 conference calls, following the Christmas selling season, we proactively began a comprehensive review of our entire business modeling cost structure and a concerted effort to improve distribution of our brands globally under the leadership of our new CFO, Rod Little.

Much of these changes have been significant and are reflected in the financial performance of fiscal 2014, including the restructuring charge related to our performance improvement plans.

The question, I am sure, many of you would like to answer is, what changes have been made and when will they be reflected in the improve performance of the business? Firstly, as Rod will discuss in more detail, we have reduced our cost structure and simplified our organization, particularly our marketing organization and our international commercial structure.

In retrospect, we invested too heavily in organizational capability in these two areas ahead of sustained improvement in revenue and gross margin growth. Under our new leader of international, Eric Lauzat, he has simplified the international organization, taken significant cost and improved the commercial execution of the business.

As we grow internationally, we will leverage regional distributors that have significant expertise and marketing and sales particularly our prestige beauty products in their specific regions.

This will increase the breath and scope of our sales reach with our brand portfolio without increasing our SG&A expense and allow us in partnership with these distributors to invest more advertising behind our brands to drive healthier organic growth.

The marketing organization has also been significantly restructured. It has been flatten and simplified, resulting in the global brand management and regional marketing organizations working much more collaboratively. These changes are already improving the communication, the coordination and particularly, the agility of our marketing initiatives globally.

Significant costs have also been taken out of the rest of the organization and costs rest of the organization and our based cost structure to allow us to improve profitability even at a lower revenue volume.

The most impactful issue effecting profitability, however, is gross margin and the dilution of gross margin driven by price discounting and too broader distribution particularly of our fragrance portfolio.

Over the past six months we have taken dramatic action to reduce sales to distributors and retailers, they are ultimately selling our products at too lower price in the market. This price and distribution discipline is especially important in the age of e-commerce where these e-commerce platforms around the world are selling billions and billions of products at discount prices.

The consumer in this day and age has full price discovery in all brands globally and therefore discipline distribution strategies are critical to protect brand equity and the performance of new business. Many, many companies are dealing with this issue as distribution becomes much more e-commerce base, particularly in many emerging markets.

Again, a significant amount of the pain of this tightening of product distribution has been taken this past fiscal year and we are now beginning to experience an improvement in gross margin as a result.

In summary, I believe as I promised in our Q2 conference call, I in partnership with our Board have made significant organizational, cost reductions and business model changes to address the unacceptable performance of 2014. As Rod will discuss, we have a very focus plan with very focus priorities for fiscal 2015 and beyond to ensure consistent execution and improvement in performance.

I would now like to address the strategic review process undertaken by our Board and Goldman Sachs. As we’ve previously stated, our Board of Directors engaged Goldman Sachs to review a wide variety of strategic alternatives available to the company, that process has been completed with the strategic investment by the Rhône Group L.L.C. announced today.

Rhône have extensive experience with other consumer product companies, including being a strategic investor with Cody. I'm personally very excited to have Rhône as an equity partner. They will help us and assist us in the development of many product and marketing initiatives before us and to work with me to attract the talent to company to realize on these opportunities.

They have a deep understanding of the global beauty industry and are confident that the brands and the capabilities of the Elizabeth Arden organization that has built the business very successfully over the past, supplemented with additional management and Board expertise can build from restructured base to become a much stronger, more sustainable beauty business.

This has obviously been a very disappointing year, but out of this has come an intensive internal and external review of the business, and many very positive impactful decisions have been made that will make our business stronger in the future.

I’d now like to hand the call over to Rod Little, our CFO.

Rod Little

Thank you, Scott, and good morning. Our focus for fiscal ’15 is on making the necessary changes to turn the business around and get back to consistent and reliable sales and earnings growth. We have made many significant innovations to stabilize the business, began to impact our results in a positive way.

Fiscal ’15 will be a transition year. We have full clarity and alignment on the most important key metrics for fiscal ’15, gross margin, EBITDA and operating cash flow, and with specific score cards and monthly tracking to drive better accountability and focus on these measures.

Last quarter, I talked about four priorities on which we are focused to drive improve performance. One, improve distribution quality, two, improve gross margin, three, simplify and streamline the organization, and four, improve the pace and effectiveness of our innovation program. We are making good progress against all four priorities. Here is the brief update on each.

First, improving distribution quality, we are now seven months into a product distribution tightening strategy, where we are focused on limiting distribution of key pillar brands. This change has a negative impact on sales and profitability in the short run, but it is a critical component in building back better pricing and margin as we move forward. We expect to see positive benefits from this effort beginning in the second half of fiscal ’15.

Second, improving gross margin, this is a top focus area for us and we have many interventions in place to begin the rebuild margins after steep decline in fiscal ’14. In addition to the tighter distribution choice, we are also focused on reducing sales allowances and discounts, taking pricing where we have opportunity, driving a better mix of basic versus promotion stock and reducing cost of goods across many of our brands. We expect to see the benefit of these efforts primarily in the second half of fiscal ’15, but we should begin to see some progress as of the second quarter.

Third, simplify and streamline the organization, the 2014 performance improvement plan announced at the end of June reduced headcount by 175 position, closed unprofitable doors and fragrance license agreements, discontinued certain products and chain -- supple chain relationships in addition to closing our affiliate in Puerto Rico. The bulk of the headcount reductions were from headquarters organization with the intent to simplify and focus on only the most important value adding activities.

As part of this, we have also streamlined and restructured our international marketing teams in a way that simplifies the interaction between our global and local teams and improves coordination of our sales teams. We have more work to do to simplify and improve our processes, but we are making good progress.

Finally and fourth, improve the pace and effectiveness of our innovation program. We have improved our product development process to move new innovation through milestone gates, with our executive team now more directly involve, which we think will improve overall quality, as well as speed.

As Scott mentioned, we have also established a partnership with Air Paris to help us with all aspects of the look and feel of the Elizabeth Arden brand in a post-Arden positioning -- repositioning environment. Air Paris will also be involved in helping us create the future of the Juicy brand. We will begin to see the financial benefits from these interventions by the end of fiscal ’15 and into fiscal ’16.

So a lot of progress has been made against these four priorities, while we realistic about the timeframe, these interventions will start to show up in our results, we are also confident, we will start to see the benefits in fiscal ’15 as I have outlined here. While we are not going to give formal guidance as part of this earnings call, here is how we expect fiscal ’15 to shape up behind these interventions and recognizing our current business momentum.

Gross margins will expand as we stabilize and reduce our dilution rates, improve pricing and realize supply chain benefits. We will see lower overall SG&A spending with some reinvestment to drive future growth. We will see improved EBITDA margins behind gross margin expansion and the cost restructuring, we will also see better operational free cash flow behind higher earning, lower capital expanding and inventory reductions.

Finally, the P&L will improve sequentially throughout the year, with quarter one looking a lot more like the recent quarters and then improvement from there as our distribution pricing, gross margin and cost restructuring interventions more fully kick in.

Now for a discussion of the specifics of our year-to-date results for fiscal year ’14, the main drives that impacted our net sales result this year were, one, fewer launches in fiscal ’14 versus the significant amount of fragrance lunch activity in the prior fiscal, two, inventory destocking at a number a number of mass retail accounts, which continued through the fourth fiscal quarter, and three, an increase level of highly promotional and discount activity on fragrances and our decision to prune distribution of key brands as we mentioned earlier.

The gross margin decline this year even after adjusting for non-recurring items was due to higher volume of new fragrance lunches in the prior year period in the highly promotional environment which led to higher sales discount. Gross margins this year were also impacted by higher percentage of lower gross margin distributed brands 13% this year as compare to 9% in the prior year versus own brands.

Recurring SG&A expenses were lower as compared to last year as the prior year included higher marketing and advertising expenses to support to significant launch activity. Recurring total indirect SG&A expenses were relatively flat to prior year, including incentive compensation costs for non-executives in fiscal ‘14.

Before I turn to the balance sheet, I want to discuss the fourth quarter charges associated with the 2014 performance improvement plan that we announced in June, as well as the non-cash valuation allowance taken against our U.S. deferred tax assets.

We incurred $56 million of charges of which $37 million were non-cash, of the $19 million a cash charges $13 million relates to returns and markdowns for store and affiliate closures, which will not require cash outlay by the company, as well as future royalty guarantees and fragrance licenses being discontinued that will be paid out as normal course during the remaining term of the license.

The remaining amount mostly for transition of severance will be paid out over the next several months. The $37 million of non-cash charges are primarily for inventory and intangible write-downs. We expect additional chargers in fiscal ’15 related to the 2014 improvement plan of approximately $15 million.

The non-cash tax valuation allowance of $89.5 million or roughly $3 a share recorded in the fourth fiscal quarter reduced the deferred tax assets and impacted net income and shareholders equity but does not impact the company's cash flow or restrict our ability to utilize the NOLs in future periods.

Now, turning to our balance sheet, working capital and cash flow metrics, we have a $300 million asset based revolving credit facility of which we had $78 million outstanding as of June 30th and availability of $92 million.

We have only one financial maintenance covenant which is in effect only if availability falls below certain thresholds. We are expected to be above those -- these thresholds throughout fiscal ’15 even before giving effect to the application of proceeds from the preferred stock investment from Rhône.

We ended the year with inventory of $339 million. This is $28 million above the prior year. Inventory is expected to be lower throughout fiscal ’15 as compared to fiscal ’14 and to be a source of working capital throughout the coming year. For fiscal ‘15 based on improved earnings and lower inventory levels, we expect to return to positive cash flow from operations.

Capital expenditures for ’14 total $46.6 million, which included investments in the Arden brand, including the new Red Door Spa prototype here in Union Square in New York and for IT including the implementation of the final phase of the Oracle JD Edwards Enterprise System, which resulted in a total capital outlay for the year of approximately $10 million. We currently expect capital expenditures for fiscal ‘15 to total approximately $32 million to $35 million.

With that, I’ll turn the call over to Joel Ronkin, our Executive Vice President and GM of North America.

Joel Ronkin

Thank you, Rod. I’m going to discuss the performance of our North America business during fiscal 2014, as well as comment on key initiatives and objectives as we head into fiscal 2015.

The North America business comprises about 60% of our total company net sales and includes all sales of our products in the prestige and mass channels in North America, as well as our outlet stores, professional channels and global e-commerce business.

Needless to say, our results for fiscal ‘2014 in North America were not typical and not acceptable. The primary drives of our 15% decline in net sales for the fiscal year were, one, the significant drop in sales of our celebrity portfolios and particularly the Bieber and Swift brands that accounted overall for about half of the decline, two, the destocking of inventory by our retailers, and three, our tighten of distribution on certain key pillar brands which has been discussed by Scott and Rod.

While we anticipated some decline in sales in our celebrity brands, we didn’t anticipate the extent of the decline we experienced. This led throughout the year to both shortfalls in our shipments of these brands, as well as to need to assist our retailers and lowering their inventory of these brands.

Compounding this issue as we have stated many times this past fiscal year was that number of our key retailers destocked their inventory, leaving shipments well below our retail sales.

We experienced the destocking of both the prestige and mass channels. For example, our net sales to department of fragrance counters declined 25% for the year, while retail sales were down 16% for the same period. Also in the mass channel, our net sales were down 15% for the year but our retail sales were down 7%.

Finally, sales for the fiscal year were impacted by deliver chooses by us to decrease the availability of certain brands in the market which is already leading to increase prices in the market on some of these brands globally.

While we struggled throughout the fiscal year with our fragrance business, we did show progress with our e-commerce and direct-to-consumer business, which is up 19% for the fiscal years. As foot traffic continues to decline in a number of our traditional retailers, we look to grow our business online via our own website and on the sites of our retailers.

Now as we move forward we need to return to the type of performance we’re used to seeing in our North America business. This is performance that led to five years in a row of positive net sales and EBITDA growth before this past year.

To drive better and more sustainable performance as we move ahead we’re focused on, one, driving growth in our fragrance portfolio by targeting activities and spend against our key designer brands, for example, Juicy Couture and John Varvatos, and a number of other key pillar brands, Curve, White Diamonds and Fantasy, as well as better managing our celebrity portfolio for profitability.

Two, accelerating growth in the Arden brand through the applications of our learnings from the Arden repositions activities. Three, improving gross margins to a better mix of sales, lower dilution and increased pricing.

Four, a renewed emphasis on innovation pacing and new licensing opportunities, and five continuing to embrace opportunities with our e-commerce site, our e-commerce retailers, and the websites of our brick and mortar retailers.

In addition to these growth initiatives, we have also taken certain steps to restructure our North America organizations and to better align cost to sales. These steps include the closing of our Puerto Rico affiliate, exiting a major customer in Canada, discontinuing certain fragrance plans and eliminating a significant number of employee positions. We believe that our growth initiatives coupled with our cost control efforts will result in a business that can generate significant profitability even with modest sales growth.

Now we are encouraged by the fact that the retail sales trend in the mass channel improved in the fourth quarter. In fact, its improvement was broad based, with most accounts showing improving trends. Category retail sales declined 2% for the year but increased 3% for the quarter.

Our retail sales declined 7% for the year and 3% for the quarter largely due to reduced sales of celebrity brands. Sales continued to improve in July as our retail sales were flat to last year.

So we’ve now seen sequential improvement of retail sales trends for a number of months. This gap between retail sales and replenishment orders represents an opportunity for us as we head into fiscal 2015 as retailer inventory deleveraging should moderate as retail sales improve.

As we move into fiscal 2015, we’re very focused on driving improved profitability even in the slow or no-growth environments in North America. We intend to do so by focusing on the initiatives I outlined earlier which are largely centered on driving retail sales improvement and gross margin growth as well as controlling overhead expense.

And with that, I’d like to turn the call back over to Scott Beattie.

Scott Beattie

Thank you, Joel. Thank you, Rod. Operator, we’re now available to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Arnie Ursaner with CJS Securities. Please proceed with your question.

Arnie Ursaner - CJS Securities

Hi. Good morning. My first two questions are just clarifications. In your press release, you indicated that the Arden flagship counters have increased 9% since conversion and that is for the year. Could you be more specific about the trend in Q4 and your future plans for the Arden rollout?

Marcey Becker

Arnie, the trends in the fourth quarter were lower than that in North America. And I think they were slightly lower than that for the international piece.

Arnie Ursaner - CJS Securities

Were they positive year-over-year?

Scott Beattie

Yeah.

Arnie Ursaner - CJS Securities

But obviously much lower single digit because you’ve been running much higher than that?

Marcey Becker

Yeah. Right because I think it was like 0% to 2% because remember we’re lapping significant increase in the prior year period.

Arnie Ursaner - CJS Securities

Does that affect your future plans for the rollout?

Scott Beattie

No, I mean, the Elizabeth Arden brand is critical to us in terms of not only North America but international growth. And I would say that the focus for us in terms of our priority will be Asia, the U.S., the U.K. and our ecommerce direct-to-consumer platform.

Those are the three markets we’re prioritizing in terms of growth. And we’ll continue to invest to drive market share and improvement in the performance of Arden. As Rod mentioned, we’ve also made changes in the structure of our marketing organization around the Elizabeth Arden, repositioning including hiring Air Paris as our new both ad agency and product development consultant.

Arnie Ursaner - CJS Securities

And then my other clarification, you indicated you expect sales headwinds through the first half of the year. Overall for the year, do you expect the sales decline?

Scott Beattie

Yes, Arnie, we do.

Arnie Ursaner - CJS Securities

Okay. And then my final question is, I think, I know I’m, I’m sure some others are surprised. You’ve emphasized your strong balance sheet a number of times over the last several years. Why would you dilute your existing shareholders by putting out preferred paper with 5% coupon and a fair number of warrants. You obviously didn’t need the financing. You highlighted that. What was the rationale behind it?

Scott Beattie

Well, this is one component of the investment by Rhône Capital as we stated in our 8-K and our press release this morning. We feel and as I said in the press release, this morning we’re very excited about them being a strategic partner with us to help us scale the business and not only in the short run too help with the turnaround process but also to take advantage of many of the growth initiatives that we have before us and to capitalize on those effectively.

Arnie Ursaner - CJS Securities

And just from a clarification, you in your prepared remarks indicated you have a compelling business plan? Were they involved in creating the compelling business plan?

Scott Beattie

No.

Arnie Ursaner - CJS Securities

Okay. Thank you.

Operator

Thank you. The next question is coming from the line of Bill Chappell with SunTrust. Please proceed with your question.

Bill Chappell - SunTrust

Good morning. I'm going to follow-up on Arnie's question. I guess I still don't understand what Rhône is bringing to the table and that you weren't already doing kind of behind the scenes. And kind of to Arnie's, I don't understand why dilute shareholders here. So maybe you can give us a little more color on what they've done in the past or what sold you on this kind of strategic alternative, because it's kind of difficult to understand just looking at what you've said so far?

Scott Beattie

Well, I think we’ve laid it out pretty clearly in the press release. They have an extensive experience in the consumer product and particularly in the beauty sector. They understand the challenges and the opportunities of both the fragrance businesses as well as the Elizabeth Arden brand. They have a global reach and global platform. And clearly one of our key objectives here as I stated is that we are in the process of initiating a number of strategic partnerships with regional distributors and potentially other organization to help us commercialize and capitalize on our brand portfolio around the world. They also have the ability to assist in that.

And frankly to have a partner that can support us both at the board level as well as in the operating management, assist in attracting additional talent to the organization that we need to sort of reach the potential of our brand portfolio and our organizational capability. I think all those considerations are important.

You know, as Rod said that next year is a transitional year. And it’s important to us as an organization to have a strong partnership to help us move through this and beyond. And also be in a position to take advantage of opportunities that arise in terms of acquisitions and so on.

Bill Chappell - SunTrust

Moving on, but I guess, I still don’t -- it sounds like you just kind of went out and didn’t have the resources internally and so are paying a kind of consultant to come in?

Scott Beattie

No, I mean clearly, they are not operating management. But as the press release says Bill, the initial investment is relatively modest in terms of dilution. It’s about 7% dilution in terms of the capital. As they’ve -- we've laid out in the -- both the 8-K and the press release, subject to regulatory and review, they intend to increase their ownership in the company.

We have a standstill agreement up to 30% of the fully diluted common share equity. And that gives us a strong sponsoring shareholder as well as the management and directors of the company in order to reposition, restructure the company and move forward.

Bill Chappell - SunTrust

Okay. Moving on, Rod, can you explain a little bit more on just you’re not giving formal guidance but kind of say EBITDA will be better than last year as hopefully an understatement. So maybe you can -- are there goals set out? I mean, do you think over the next two, three years the company can get back to where it once was and kind of the double-digit EBITDA margin business. I mean, how should we look at that other than just better than last year which was obviously a disappointment?

Rod Little

Yeah. So Bill, just to clarify on the dilution point, it’s $0.07 a share is the dilution calculation from this investment. Bill, looking forward to your question, I mean, it’s a good one, it’s the right one to ask. We do have goals internally that are out to all divisions, all business units, all geographies, everyone’s got their number that has an EBITDA delivery that’s well ahead of where we’re finishing this year.

So yes, we see EBITDA improving year-over-year. And we spent time, looking at three-year plans with the strategies we have both on topline and bottomline and how that might develop. And can we get back to the level of performance in fiscal ‘13 in the absolute from a margin standpoint? Yes, we think we can but we also see it as potentially being at a lower overall revenue number but with higher margins in terms of how we assemble the business and drive it over time.

Bill Chappell - SunTrust

Okay. And last one, just reason why some of the issues, I think on the distribution on some of the changes, why they won’t impact first half of the year. I mean, that’s kind of 60% of your business, so I’m trying to understand. I would have thought some of the things you’ve done over the past six months would help margins in the interim?

Scott Beattie

Yeah, there are two things going on there, Bill. One is if you look year-over-year fiscal ‘15 versus ’14, the pipeline of innovation skews very differently. It was just proportionately in the first half of ‘14. We don’t have that same pipeline skewing this year. But the other thing that’s going on is we are seeing some bounce back in pricing in certain areas as demand remains but supply has dried up.

The biggest drag we have in the first half is beyond the phasing of the pipeline is in fiscal ‘14, we had shipments out in the front half to distributor partners that were just not replicating in the first half of ‘14. And so we don’t lap to even base period until beginning January ‘15. So it is pipeline and it’s lapping a like-for-like distribution base.

Bill Chappell - SunTrust

Okay. Thanks.

Operator

Thank you. Our next question is coming from the line of Joe Lachky with Wells Fargo. Please proceed with your question.

Joe Lachky - Wells Fargo

Hi. Thanks. So just to clarify one last time on Rhône investment and I guess more focused on the future investments that they plan on making. Do you guys plan on making additional follow-up offering? I mean, I guess, should we expect further dilution as they grow their ownership in the company?

Scott Beattie

No. As we stated in the 8-K, the issuance of the preferred and warrant is an initial investment. Their remaining investment will be purchased subject to the caveats in the 8-K and in the press release in the open market. So there won’t be any additional dilution as a result of that.

Joe Lachky - Wells Fargo

Okay. Thank you. And then I guess, on the guidance, I know you’re being very vague here and you talked to Bill about the improvement in the EBITDA. But from an EPS standpoint, I mean, are you still expecting EPS to be negative in fiscal year ‘15 and especially in the second quarter which is your biggest quarter. I mean, what -- can you kind of frame it a little bit better, just…

Scott Beattie

I don’t -- we don’t want to start providing guidance in partial increments. I think Rod’s been really clear in terms of the outline of our plan for fiscal ‘15. We have some anniversarying of distribution and innovation that will affect us in the first half. And we’ll see a stronger performance in both revenue and gross margin and EBITDA growth in the second half.

But fundamentally, we’ll still earn the majority of our money in the second quarter. And from an EBITDA point of view and the seasonality of our business isn’t changing. What we’ve essentially done as an organization is that we’ve rationalized the cost structure, the distribution and the brand portfolio to a level that we think is stronger, more profitable and can grow from a strong organic base moving forward.

And we’ve taken some drastic action in Q3 and Q4 to position ourselves. So as we go into fiscal ‘15, we have much more systematic improvement in gross margin, EBITDA margin and free cash flow.

Joe Lachky - Wells Fargo

Okay. And then just going back to the restructuring program, I guess. I’m just kind of curious, you know, if you could frame a little bit as far as when you might begin to see some of those savings flow to the bottom line, how much you plan on reinvesting back in, but I guess the more important question is do you think -- Rod, now that you are into the business, do you think that $40 million to $50 million in restructuring is big enough? I mean given the deterioration and the topline, shouldn’t that be two to three times bigger in order to kind of get back to historical margin levels?

Rod Little

I guess Joe, there’s always a debate you can have on how big should it be. We think we’re in the right spot today, given what we know, the $40 million to $50 million remains what we’re working to do. If we need to ultimately go further down the road, if we don’t see our plans play out like we think that something we’d obviously consider. But lot of these savings start to hit in fiscal ‘15, and we’ll see -- we talk annualized savings in the $27 million and $35 million range from this initial part of the plan.

That remains intact. And I think we’ll see a good 70% of that realize in fiscal ‘15. It would disproportionately hit the back half just from timing of when some of these things happen. And I guess, we said it goes across all elements, indirect, direct SG&A, cost of goods. As you know, we’ll gauge that as we go forward in terms of is it enough. But as of now, we’re into execution mode, making this happen and focused on the interventions to get the top line sales number turned around heading in the right direction, which we think, starts to happen in the back half of the year.

Joe Lachky - Wells Fargo

And then just final question just split difference between the $27 million and $35 million and $40 million to $50 million difference between the initial program. And then I guess the total outline savings, what is that and when is it coming?

Scott Beattie

A lot of is carryover, just again on timing, it would come in fiscal ‘16. The action would be taken. It just timing that drives the lag and realizing that. And then the range estimates really drive around some of the choices around restructuring of accounts in different parts of the line up that were just -- we haven’t made the final call in terms of how big that will be or not be in those areas.

Joe Lachky - Wells Fargo

Okay, thanks.

Scott Beattie

Yeah.

Operator

Thank you. Our next question is coming from the line of Joe Altobello with Oppenheimer. Please proceeds with our question.

Joe Altobello - Oppenheimer

Thanks, good morning. First, a quick question for Rod on housekeeping side. And I apologize if I miss this, what was the ending debt and cash balance as of June 30th?

Rod Little

One second Joe.

Marcey Becker

The cash, Joe, was $56 million and $80 million outstanding on the credit line.

Joe Altobello - Oppenheimer

Okay, but the total amount is debt outstanding?

Marcey Becker

And we had $350 million outstanding on the bond.

Joe Altobello - Oppenheimer

Okay. So $350 million and $82 million. Okay, great. Secondly in terms of the outlook for this year or actually for fiscal ‘14, you mentioned in the press release that you did expect sales to be down because of the number of product launches last year in absolute lapping that? But if you go back to original guidance, you guys were assuming sales growth this year in fiscal ‘14. So what changed throughout the year? Did you curtail innovation or did -- if not, what’s causing that case of innovation to slow, is it internal or is there another issue?

Scott Beattie

We -- what we laid out in my remarks is as well as Rod is that of the total 13% decline in revenues, about half of that came from decline in the prestige fragrance or the celebrity fragrance portfolio. The other half of that decline came from destocking of inventory primarily in our North American retailers. And then finally the final half was -- I consider that we buyout to reduce distribution of our brands globally. So wasn’t that we curtail innovation, it was the component that I just described.

Joe Altobello - Oppenheimer

Okay. Why the lack of innovation, I guess is, is my real question and why aren’t we seeing more new products to help offset some of that?

Scott Beattie

Well, first of all we had an extraordinary large pipeline of innovation and the intent this time last year was that we want to build and commercialize some of the brands that either we had acquired or that we had recently launched in fiscal ‘13 and 2014. We obviously expected that some decline based on after the original launch year but we expected it as we cascaded the distribution of those brands both into masses as well as international that we’ll provide growth. And we had a broad array of new brands that we wanted to support and that -- those for the most part those celebrity brands didn’t perform as we expected.

In addition to that, as I said the retail trends were weak. So the innovation that we did implement wasn’t as strong as what we had expected, particularly again in the U.S. mass business. So moving forward, I think we called out the importance of adding new licenses and adding new innovation and we’ve accelerated that program as we move into ‘15 and certainly as we go to ‘16.

Joe Altobello - Oppenheimer

Okay, just last one if I could. In terms of the sales that you guys have exited because of discounting, what percentage of your overall revenue base, do you think you’ve exited essentially?

Rod Little

We think approximately 2%.

Joe Altobello - Oppenheimer

And that’s now all behind you?

Rod Little

It will be as of January. We lap it and be like-for-like distribution points at that point.

Joe Altobello - Oppenheimer

Okay, thanks Rod, thanks.

Operator

Thank you. The next question is coming from the line of Jason Gere with KeyBanc. Please proceeds with your question.

Jason Gere - KeyBanc

Thanks. Good morning. Just, I guess, two questions one, Scott, just kind of adding on to the comment you said about adding new licenses and talking about the innovation? So can you talk a little bit about just with some of the -- I guess the disappointment we’ve seen with some of the celebrity licenses? How you look at the portfolio which is skewed a little bit more towards celebrity? Can you think about the designer side, is that something that you would need more for some of the newer markets that you’re really trying to penetrate such as Europe, so that’s the first question? I have a follow-up.

Scott Beattie

Well the couple of things on the celebrity side, first of all, that business is still a good business it. I think the adjustment that we’re making to that as we move forward is that we learned a lot from the one direction launch. We’ve learned a lot from other celebrity launches that these brands have primarily match these distribution globally. And so the cost of goods and the marketing and support provided to those brands need to more reflect to match these price point and distribution.

And part of what we’re doing now in terms of driving cost of goods improvements is to review some of those brands and ensure that we’ve got the right cost of goods and we’ve got the right price point and positioning, not just in the U.S. but globally. So that we can grow those brands appropriately and profitably.

In terms of adding new designer licensees, we’ve just announced that in the spring the addition of the Wildfox license, which we’re excited about, it’s a beautiful product, that it’s a very fast growing California edgy brand and it’s a global brand. It’s growing as quickly in Europe as it is in the U.S. and which is exciting for us. And so that brand will launch in the spring of 2015. The product is being developed now.

We’ve reviewed a number of other designer opportunities, both domestically and internationally. And so there is no lack of potential of new licenses but clearly, we want licenses that we think, one it can be global and two, our businesses that are big enough with enough brand equity and awareness to be meaningful to our overall portfolio.

Jason Gere - KeyBanc

Okay. Great. Thanks for the color. And then I guess, the other question is on kind of the marketing spending and in light of the comments you’re talking about some of the efforts on kind of revamping the marketing and flattening that out. Can you talk about the overall spend? How we should see that over the next few years?

And then in particular with the EA brand, I think your approach with that was a little bit more holistic than maybe some of the traditional ways. Has that proven to be sufficient to what you wanted to accomplish or do you think there needs to be any changes on that approach with the brand repositioning? Thanks.

Scott Beattie

I think, in our overall marketing and fuel spend, it will be much more focused. I think as Rod laid out in his remarks, clearly we’re focusing on and accelerating the growth of the Elizabeth Arden brand portfolio through stronger distribution and better pricing of that business. And particularly focused on Asia, North America, the U.K. and our e-commerce platforms, both of our own e-commerce platform but also our partners e-commerce platforms.

We’ve obviously given performance of the business will be much disciplined on how we fuel our brands in -- with what by brand, by region, by retailer. There clearly we have to make choices in terms of what are the best and most sustainable opportunities in our brand portfolio and we’ve done that moving forward.

In terms of beyond this year and as we move into ‘16 and beyond. Clearly, we’ve had a long track record of being able to grow our business, both through new licenses, as well as global expansion of our business. And we fully expect to start growing our revenue base again as a business but on a much healthier sort of restructured base level of distribution and brand portfolio.

And so as Rod said, as we grow our revenues, it will be with higher gross margins and higher EBITDA and higher return on invested capital, as our objective. We still have immense amount of operating leverage. It works both for and against us as you saw this year. It worked against us, particularly, when we saw decline in our U.S. mass business, which is our core profit driver in our business. But that can also work in our favor as we see gross margin recovery this year as well as acceleration in the revenues as we move into fiscal ‘16 and beyond.

Rod Little

And Jason, if I could just compliment that with, we believe, we have the right amount of spend in total, up against the brands. We don’t have it in the right place everywhere. And so we’re over and under invested, depending on where you are. And so as we look at that getting that more proportionate, up against where we can get return, that’s something that we’re actively doing.

And I think the Air Paris investment, that’s one of the areas where we are net investing to bring them in to work with our internal marketing teams to improve the innovation, look and feel of the brands as we go forward to make it net more desirable to the target audience, along with a better targeted spend with the right elements, heavier digital, heavier PR things like that.

When that all come together, that’s when you’ll start to see the results. But it’s a combination of all those things with the total spend being right and absolute, just not in the right places.

Jason Gere - KeyBanc

Okay. Great. Thank you.

Operator

Thank you. The next question is coming from the line of Connie Maneaty with BMO Capital Markets. Please proceed with your question.

Connie Maneaty - BMO Capital Markets

Good morning. I was wondering if you could talk about the focus of the Elizabeth Arden brand, particularly, some of the newer initiatives of this. I think, earlier that you are using the words omnichannel, that as focused now, maybe more focused now than before. So what’s happening with the investment in the spa channel and also with the Elizabeth Arden brands move into dermatologist purpose?

Scott Beattie

Thank you for asking that question, Connie. Obviously, during fiscal ‘14, we made significant capital as well as operating investment through our P&L in a standalone spa prototype here in union square as well as in the professional business that we acquired this time last year. We spent essentially this year repositioning the professional business in terms of product innovation around the Elizabeth Arden Rx and Pro line, which will be sold exclusively in dermatology offices, as well as Medi Spas around the world.

Now that will be sold through distributors, professional channel distributors, which is a unique distribution channel for us. That business we acquired had an additional line of product -- has an existing line of products sold there, has a long track record of success in this channel, particularly in the U.S., the U.K., Scandinavia, Australia, and Canada.

We're now starting to build on those distributor relationships and we’re starting to ship that product this fiscal year. So, although, it will be a slow build, we’re excited about having a presence in that channel.

Connie Maneaty - BMO Capital Markets

Also what was the level of return in the fourth quarter? How much did that depress the growth margin, sort of what is industry average in your normal run rate or return?

Scott Beattie

Most of the depression in our gross margin has just come from deleveraging of our operating structure and also anniversarying -- the lack of anniversarying, some of the innovation that we had in fourth quarter last year. But as the volumes decline, the many of the costs within gross margin are fixed like supply chain and logistics and distribution type costs and as a result, we saw decline in margin there.

Also the tightening of sales to some of the distributors that both Rod and I talked about, those tend to be high gross margin contributors that also had a detrimental impact on our margins.

Connie Maneaty - BMO Capital Markets

Okay. Just one final question on the gross margin, in the last restructuring, I think, about six years ago, how does the gross margin expansion, as I recall, came from moving to a turnkey sort of turnkey productions?

Scott Beattie

Yes.

Connie Maneaty - BMO Capital Markets

And now we’re hearing that some of the costs and cost of goods are too high? So could you reconcile those two?

Scott Beattie

Yes. They are not -- those aren’t related those two issues. The reengineering we did of our supply chain as you say both five, six years ago and the margin improvement both in that, as well as logistics are strong and continue to be competitive advantage for us, I believe.

The issue we have with cost of goods is what I described. There are certain products in our portfolio, where -- particularly in our celebrity portfolio where we need to reengineer the cost of goods, so that we can hit targeted price points for these brands.

The fact of the matter is that some of the celebrity brands are -- have more prestige type cost of goods and price points where as the real growth and opportunity globally in the celebrity category tends to be more in the [mass] piece price point ban and as a result, we need to reengineer some of our cost of goods both on basic but also on our promotional gift sets and things, so that we generate more profit margin out of those businesses.

Connie Maneaty - BMO Capital Markets

Okay. Great. That’s it for me. Thanks.

Operator

Thank you. Our next question is coming from the line of Linda Bolton Weiser with B. Riley & Associates. Please proceed with your question.

Linda Bolton Weiser - B. Riley & Associates

Hi. My first question was on the POS, the performance at retail and I think you said -- you’ve pointed out it was improving, but I think, you said, it was down 3% for your POS in the quarter? So it still down? And the way I’m thinking about it is that I would suspect the retailers still wanting to reduce inventory, as long as POS is negative? Am I right in thinking that? And when do you -- I mean, I know it’s hard and you don’t want to say, but POS being positive, is that something you’re expecting for the second half of this fiscal year, it seems like you’re getting close because it’s improving?

And my second question is just on housekeeping. If you could give some tax rate and share account, diluted share account and interest expense for the year that would be helpful? Thanks.

Scott Beattie

Joel, why don’t you answer the retail question?

Joel Ronkin

So in terms of the category, the category is actually up for the quarter. It was up 3%. We were down 3% for the quarter. Largely due to effect that we have a lot of celebrity brands a prior year in cascading the Bieber and Swift brands, that were so big and prestige the year before that happen last year in June.

So that’s one. In terms of inventory levels, yeah, generally, if sales are going down, we would want less inventory but we’ve actually not seen necessary to correlation between retail sales trends and the amount of inventory they’re carrying.

We do think that we’re well-positioned as we move into the fiscal year. We have some initiatives that we are hopefully and to drive our growth in the mass channel or being cautious on our approach to that. So, like I said, July, we were flat to last year and that’s also an improving from the down three to prior quarter.

So we’re seeing sequential improvement over the last number of months and we watch this daily and its clearly the profit driver and we’re confident as we move forward that we can reestablish the profit drivers of the business that we’re in that mass channel on which have for so many years driven positive sales and EBITDA growth before last year.

Rod Little

And Linda, on the second part of the question around tax rate, share count and interest expense. In order on the tax rate, we expect it to be inline, let’s call up with ‘14 back towards ’13, some averaging in that range, just given why we think will land in the absolute. Share count of outstanding common essentially flat. We don’t see a change there. Interest expense will move up by approximately $5 million in fiscal ’15 versus ’14, just recognizing the increased debt load.

Linda Bolton Weiser - B. Riley & Associates

Great. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, that is all the time we have today for the question-and-answer session. I would now like to turn the floor back over to Mr. Beattie for any concluding comments.

Scott Beattie

Thank you everyone for joining us today.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.

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Source: Elizabeth Arden's (RDEN) CEO Scott Beattie on Q4 2014 Results - Earnings Call Transcript
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