Revlon's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Jul.31.12 | About: Revlon, Inc. (REV)

Revlon, Inc. (NYSE:REV)

Q2 2012 Earnings Call

July 31, 2012 09:30 a.m. ET

Executives

Elise Garofalo – SVP, Treasurer, IR

Alan Ennis – President and CEO

Chris Elshaw – COO

Steven Berns – CFO

Analysts

Grant Jordan – Wells Fargo

Carla Casella – J.P. Morgan

Brian Schinderle – BAM

Operator

Good morning, ladies and gentlemen, and welcome to Revlon’s Second Quarter 2012 Earnings Conference Call. At the request of Revlon, today’s conference call is being recorded, if you have any objections you may disconnect at this time. At the conclusion of today’s presentation, we will open the call for questions. [Operator Instructions] I would now like to turn the call over to Ms. Elise Garofalo, Revlon’s Senior Vice President, Treasurer and Investor Relations. You may now begin, Ms. Garofalo.

Elise Garofalo

Thank you, Karenna. Good morning, everyone, and thanks for joining today’s call. Earlier today, we released our results for the second quarter ended June 30, 2012. If you’ve 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 Alan Ennis, Revlon’s President and Chief Executive Officer; Chris Elshaw, Chief Operating Officer; and Steven Berns, Chief Financial Officer. Before I turn the call over to Alan, I’d like to remind everyone of a few things. First, our discussion this morning might include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Information on factors that could affect the company’s results from time-to-time and cause them to differ materially from such forward-looking statements is set forth in the company’s filings with the SEC, including our 2011 Form 10-K and our 2012 second quarter Form 10-Q, which we filed earlier this morning.

Next, our remarks today will include a discussion of adjusted EBITDA and free cash flow, both of which are non-GAAP measures. These non-GAAP measures are defined in the footnotes to our release and are also reconciled to the most directly comparable GAAP measure in the financial tables at the end of our release. Finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I’ll turn the call over to Alan.

Alan Ennis

Thank you, Elise, and good morning everyone. As we’ve discussed for some time, our strategic goal is to profitably grow our business. Overall, we had a positive quarter and I am pleased with our performance so far this year.

From a net sales perspective we grew 4.2% in the quarter and 2.4% year-to-date. Our Revlon brands performed very well in the market place again this quarter. We are pleased with both new and core product performance during the period and are excited about our recent new product introductions.

From a regional perspective we grew in the US, Canada and Latin America, however we experienced some softness in Europe, Greater China and Australia.

As we move forward, we will continue to manage our resources carefully given the uncertain global economic environments. While we continue to drive growth organically, we are also growing through acquisitions and are excited about the recent addition of Pure Ice to our brand portfolio. Pure Ice is a wide range of value priced nail color products which have been in distribution for over 20 years in the U.S mass retail channel. This acquisition complements our brand portfolio and builds on the successful acquisition of the Sinful Colors brand in 2011.

From a financial perspective we had a positive quarter as we continue to deliver competitive operating income margins and our financial profile remains strong.

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

Chris Elshaw

Thank you Alan and good morning everyone. Today I will review our net sales performance excluding the impact of changes in foreign currencies. Total company net sales in the second quarter of 2012 were $357.1 million, an increase of 4.2 % as compared to the second quarter of last year. The increase was primarily driven by higher net sales of Revlon and Almay color cosmetics and Revlon ColorSilk hair color.

In the United States, net sales increased $9 million, or 4.6% primarily driven by higher net sales of Revlon color cosmetics.

In Asia Pacific, net sales decreased $1.7 million, or 2.9%, primarily driven by lower net sales of Revlon color cosmetics in China and Australia and lower net sales of other beauty care products in Hong Kong. These lower net sales were partially offset by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color in certain distributor territories.

Moving on to Europe, Middle East and Africa, net sales decreased $1.8 million, or 3.5%. The decrease was primarily due to lower net sales of fragrances in the U.K. and certain distributor territories as well as lower net sales of Revlon color cosmetics in France, Italy and certain distributor territories. This was partially offset by higher net sales of Revlon color cosmetics in the U.K, where we continue to be very pleased with a strong marketplace performance of the Revlon brand.

In Latin America, net sales increased of $7.3 million, or 27.8%, primarily due to higher net sales of Revlon and Almay color cosmetics and Revlon ColorSilk hair color throughout the region. Venezuela’s increase in net sales was primarily due to the absence of sales in June 2011 as a result of the fire that destroyed the Company’s facility there last year. Net sales in the region also benefitted from higher selling prices in Venezuela and Argentina which accounted for approximately one-third of the $7.3 million net sales increase in the region. Finally, with respect to our Canada region net sales increased $2.1 million or 10.8% primarily due to high net sales of Revlon and Almay color cosmetics.

Now, moving onto the performance by brand, starting with Revlon color cosmetics, total company net sales increased as compared to the prior year. In phase, earlier this year we expanded our PhotoReady franchise with the introduction of Airbrush Mousse Makeup which contains innovative photochromatic pigments that bend and reflect light to give a flawless air brushed appearance. PhotoReady Airbrush Mousse is performing well in U.S. and Canada. Also in phase, we recently introduced Revlon ColorStay Whipped Crème Makeup, a foundation with a Mousse like texture with time release technology that provides up to 24 hours of wear without feeling heavy.

In lip, our ColorBurst Lip Butter continues to perform exceptionally well in the market place and has now been launched in all of our major markets. This buttery balm that instantly hydrates lips while providing color with a high shine finish is an extension of our established ColorBurst franchise. Also in lip, building up on our successful Revlon Just Bitten franchise we recently introduced Kissable Balm Stain. A balm infused with a light weight lip stain packaged in a retractable chubby crayon that gives women softer smoother lips with a perfect flush of color. Today this product has been extremely well received in the market place and in these early days shows every sign of being as successful as our ColorBurst Lip Butter.

In Eye, we restaged and upgraded our Revlon ColorStay Eyeshadow Quads with 16 hour wear and new premium design and packaging. This restaging is consistent with our approach of not just expanding our product range with new products, but also strengthening our existing products with new technology. These new quads have performed well in the market place. Also in eye, we recently introduced ColorStay overtime lengthening mascara formulated to create long intensely dark lashes for 24 hours of wear.

And lastly nail, we introduced ColorStay Longwear Nail Color containing our exclusive color stay light curing technology which cures in natural light versus a sullen UV light providing a gel like shine and 11 days of high impacts color. Today ColorStay nail color is performing well in the marketplace.

Finally, with respect to the Revlon Brand earlier this month we launched a Revlon Expression Experiment, a unique digital engagement platform designed to spark a social movement of makeup experimentation.

Accessible through Revlon’s Facebook page, this new platform provides women with monthly challenges beginning with a Red Lipstick Challenge. The launch of the new platform will be supported by digital advertising, as well as promotions on Twitter, Facebook and YouTube.

Moving on to the Almay brand. Net sales increased during the quarter as compared to the prior year. However, we remain dissatisfied with the market place performance of the brand. The higher net sales in the quarter were driven by lower returns in allowances and the cycling of the five in Venezuela.

As I mentioned last quarter, we are very focused on improving all elements of Almay's marketing mix. We have made changes to future advertising promotional plans which we believe we’ll improve the combined effectiveness overtime. We continue to place emphasis on refine in the brand positioning as well as improving the overall merchandising of the brand.

Additionally, we remain focused on innovative new product developments which is an essential driver of net sales performance. With respect to both our Revlon and Almay color cosmetics performance, we have recently received a number of awards in recognition of our competitive levels of innovation from magazine such as Total Beauty, SELF Magazine and REDBOOK.

We believe these will demonstrate the strength of our new product portfolio and we are very pleased to receive recognition that we are meeting the needs of consumers with so many of our products in 2012.

In women’s hair color, net sales of Revlon Colorsilk increased versus the second quarter of 2011. Building on the success of Colorsilk and Colorsilk Luminista we introduced Root Erase by Colorsilk, which erases roots and grace with ease for beautiful seamless color in 10 minutes. Year-to-date we are pleased with the performance and expansion of both Root Erase and our Colorsilk franchise including our recent introduction in Canada.

Antiperspirant deodorants, net sales of Mitchum in the second quarter were essentially unchanged year-over-year, and finally with regard to Revlon beauty tools net sales were essentially unchanged year-over-year. While the category remained soft we continue to maintain our strong leadership position and in 2012 we have new products that are performing exceptionally well in the market price.

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

Steven Berns

Thank you Chris and good morning everyone. As we have already discussed our net sales performance, I will begin with our gross margin performance in the quarter.

In the second quarter of 2012, our gross profit margin was 65.2 % versus 65.3% in the second quarter of 2011, essentially unchanged year-over-year as the unfavorable impact of product mix was offset by the favorable impact of lower allowances and lower manufacturing and freight costs. SG&A in the second quarter of 2012 increased approximately $8.4 million to $189.9 million versus the second quarter of 2011, primarily attributable to two items.

First, a net charge of $6.7 million with respect to estimated costs of resolving previously disclosed pending litigation related to our 2009 exchange offer. And second, higher incentive compensation primarily due to the timing of expense within 2012 as compared to the same period last year. These increases were partially offset by the favorable impact of foreign currency fluctuations within SG&A as compared to the same period last year.

Operating income in the second quarter of 2012 was $42.8 million compared to $47.8 million in the same period last year and adjusted EBITDA was $58.7 million compared to $63.3 million in the same period a year ago. Interest expense decreased $2.1 million to $21.2 million primarily due to refinancing the company’s bank term loan credit facility in May 2011 at lower interest rates.

The provision for income taxes was $9.1 million compared to $2.6 million in the same period last year primarily due to increased pre-tax income, which was partially offset by the favorable resolution of tax matters in a foreign jurisdiction. Cash paid for income taxes in the second quarter of 2012 was $7.5 million compared to the $10.1 million in the same period last year.

Net income in the second quarter of 2012 was $11.1 million or $0.21 per diluted share, which included a net charge of $6.7 million after tax related to the pending litigation mentioned earlier in my remarks. Net income in the second quarter of 2011 was $6.5 million or $0.12 per diluted share, which included $6.9 million of charges after tax related to the refinancing of the company’s credit facilities.

Moving on to cash flows, net cash used in operating activities in the second quarter of 2012 was $1.3 million compared to a use of $20.8 million in the same period last year. Free cash flow in the second quarter of 2012 was a negative $6.6 million compared to negative $24.2 million in the same period a year ago. Cash flow in the second quarter of 2012 benefited from favorable changes in working capital and lowered cash interest paid, which were partially offset by higher pension contributions.

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

On the liquidity front, our unutilized borrowing capacity and cash on hand as of June 30, 2012 was $194.1 million, which was comprised of $68.6 million of available cash and $125.5 million available under our revolving credit facility. Our revolver was undrawn at the end of the quarter and we had $10.3 million of standby letters of credit issued under this facility.

Subsequent to the end of the second quarter, we funded the July second acquisition of Pure Ice with $45 million of cash on hand and $21.2 million of borrowings from our revolving credit facility.

Moving on to the balance of 2012, regarding the cash flow guidance we previously provided for 2012, the following items remain unchanged. Capital expenditures of approximately $25 million, pension plan contributions of approximately $35 million and cash paid for income taxes of approximately $20 million. Lastly, we are updating our guidance for permanent display expenditures to be approximately $45 million for 2012, an increase from our prior guidance of $40 million.

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

Question-and-Answer Session

Operator

Thank you [Operator Instructions] First we will go to Grant Jordan with Wells Fargo.

Grant Jordan – Wells Fargo

Good morning. Thanks for taking the question. My first question, you talked a little bit about inventory but on a year-over-year basis your inventory was down 6%. How do you see that moving over the course of the rest of the year?

Alan Ennis

A couple of things Grant, it’s Alan here. One of the objectives that we have as a company is to improve profitability and cash flow, and clearly inventory management is a key element of working capital and obviously the lower the inventory levels the better our cash flow. Over the last number of years we’ve done a wonderful job of reducing inventory and improving turns. You know three or four years ago our turns were about 2.5 times and now they are north of four. And so what we are doing is through a combination of more effective portfolio planning which means having greater visibility to what we are going to launch in the future and when, and a more strict approach to how we manage stock shipments, better approach to forecasting new products. We are able to effectively maintain effective in-store levels and service levels and at the same time reducing our inventory. So it’s all very much within a managing process of improving cash flow.

Grant Jordan – Wells Fargo

Okay. On the acquisition, I think in the Q it says you use the combination of cash and revolver borrowings to fund that July. Do you expect to be out of your revolver by the end of Q3?

Steven Berns

Yeah. It’s Steven, Grant. We don’t forecast as you know any of these numbers, but certainly as you know in the past years we have generated a significant portion of our free cash flow on the back half of the year and we don’t see any change in the balance of this year relative to prior periods.

Grant Jordan – Wells Fargo

Okay. My last question, you guys have done a couple of smaller acquisitions over the past year, year and a half, and now the new one. When should that start to really roll into the earnings line or have we seen that and that’s offsetting something else, just trying to get our understanding for the timing?

Alan Ennis

Yeah. No. So the Pure Ice acquisition we closed that on July 2nd. In the financial results for the second quarter there was nothing in there obviously because we hadn’t done the business, but you will see essentially a full quarter performance in the third quarter and from then on.

Grant Jordan – Wells Fargo

Then the other acquisitions that you have completed are you seeing a full benefit from those in terms of which you had expected when you did the acquisition?

Alan Ennis

Yeah. So Sinful Colors is the one that we did in March of last year, so that’s clearly now on an annualized basis between the numbers that’s all periods and is performing very well consistent with our expectations.

Grant Jordan – Wells Fargo

Okay. Thank you.

Elise Garofalo

Hi Karenna. Can you take the next question please?

Operator

Yes. We’ll go to Carla Casella with J.P. Morgan.

Carla Casella – J.P. Morgan

Hi. I have one question on the finance section and a business question. If you were to refinance your bonds, 9¾ quarters bonds, would you – is there some restriction would you have to address the Masco [ph] term loan first?

Steven Berns

Carla, it’s Steven as you know or as you may know earlier this year the loan that was payable to McAnderson Forbes was a sign pursuing to the terms of that loan by McAnderson Forbes to unaffiliated third parties. So that loan is now payable to third parties and there is no requirement in the 9¾% bonds of 2015. There is no requirement in those that we deal with the subordinated loans in advance or any restrictions associated with that.

Carla Casella – J.P. Morgan

Okay. And is that term loan to third parties is that callable or are there any prepayment policy?

Steven Berns

Yeah, there is a prepayment penalty, but the final maturity date is still in the fall of 2014 and that loan has been filed as an exhibit to our previous filings. So we are happy to answer any questions with that specifically. If you have that file and you could take a look at it and we can review that at an appropriate time.

Carla Casella – J.P. Morgan

Okay. That’s great. And then on the display stand the increase is that related to timing of new products or is it retailer demands or is it just a reaction to the competitive environment?

Chris Elshaw

Carla, it’s Chris here. We are constantly looking at how we improve our in-store experience. So as you know particularly in the U.S. every year there is a twice yearly reset at which we change what is on the display, and we often take the opportunity then to upgrade our in-store graphics or our kind of merchandising. Around the world it happens on a more ongoing basis. But what we really doing is focusing on improving the in-store experience of the consumer. But there is nothing really unique. That’s not like a big change we are making, but it’s just a constant continuous upgrade.

Carla Casella – J.P. Morgan

Okay, great. And then on in the U.K. is the Olympics good or bad for business there?

Alan Ennis

Well, we haven’t seen any impact from that. Obviously Olympics only just started this week. I have read the same as you read which is a number of newspaper reports that Central London is pretty empty and visitors have been avoiding it because of all the traffic congestion. But we haven’t seen anything.

Carla Casella – J.P. Morgan

Okay, great. Then on the nail care with these acquisitions are the - is nails tending to be a stronger margin or in line margin with the color cosmetics?

Alan Ennis

I think if you look across the portfolio new product launches they vary by segment in terms of margin. The nail tends to be a higher margin business for us than relative to the likes of face which tends to be a lower margin, it’s less expensive too to produce. So you do see some benefits there. But again we are investing in innovation technologies which are costly obviously to us, and investing in new package design across our portfolio which accounts to it. So overall, the margins tend to neutralize each other and again a very highly competitive margin as you know.

Carla Casella – J.P. Morgan

Okay, great. Thanks a lot.

Operator

We’ll now go to Connie Maneaty with BMO Capital. Connie Maneaty, please go ahead. There is no response, we’ll move on to Brian Schinderle with BAM.

Brian Schinderle – BAM

Yeah, hi. Just to expand on Carla’s question on the 9.75% notes. I believe those become callable in the falls I read.

Chris Elshaw

That’s correct.

Brian Schinderle – BAM

Do you have any present intention on dealing with those? I believe that – I believe those trade north of par, right?

Chris Elshaw

Yes, I believe they are trading at a premium and have historically done so over the past several months. We evaluate our capital structure on a regular basis and that includes of course a 9.75% notes and we are cognizant in on the market place and we’ll continue to look at opportunities to refinance when and as appropriate.

Brian Schinderle – BAM

Right. But is that a way of saying that if you find an attractive option you’ll look at it then or – I mean obviously all your options are open. But any reason if there was an attractive opening the market why you wouldn’t want to do that and extend out your maturity wall?

Alan Ennis

We evaluate both the maturity as well as the notional amount of the securities and make sure that the capital structure is in line to support the strategic objectives of the business. So certainly your expectations are continuing to look at that are appropriate.

Brian Schinderle – BAM

Okay. Thank you very much guys. Keep up the good work.

Operator

We’ll now go to [inaudible] with SGIX.

Unidentified Analyst

Hi, this is Anya Wasch from [inaudible]. It seems like sales in Europe and Asia deteriorated sequentially a bit. Is that due more to the consumer weakness in those regions or was there any timing of shipments?

Chris Elshaw

No, if you put values to those regions in terms, first of all in China those of you who have seen this slowdown in China, our sales have been running still positive but the growth has definitely moderated versus both our expectations and much higher levels last year. As that’s moderated with the local economy slowing, our net sales have declined as a result. In Europe, across Europe it’s mainly driven by our fragrance business, which impacted all across Europe, and again as you are well aware those many countries where GDP is down and the economic environment is tough for the consumer.

Unidentified Analyst

Thank you.

Operator

We have no further questions. I will now turn the call back over to Mr. Ennis for any additional or closing remarks.

Alan Ennis

Thank you all very much for joining our conference call and for your continued support of our company. We look forward to speaking with you when we release our third quarter results later this year. Have a good day.

Operator

This does conclude today’s conference. We do thank you all for joining us.

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