Revlon's (REV) CEO Fabian Garcia on Q1 2016 Results - Earnings Call Transcript

May 06, 2016 1:22 PM ETRevlon, Inc. (REV)
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Revlon Inc (NYSE:REV) Q1 2016 Earnings Conference Call May 6, 2016 9:30 AM ET

Executives

Siobhan Anderson – Chief Accounting Officer and Treasurer

Fabian Garcia – Chief Executive Officer

Juan Figuereo – Chief Financial Officer

Analysts

Grant Jordan – Wells Fargo

Kevin Ziets – Citigroup

David Diamond – Provita Advisor

Ashley Conti – DDJ Capital

Operator

Good morning, ladies and gentlemen, and welcome to the Revlon First Quarter 2016 Earnings Conference Call. At the request of Revlon, today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin, Ms. Anderson.

Siobhan Anderson

Thank you. Good morning, everyone, and thanks for joining today’s call. Earlier today, we released our financial results for the quarter ended March 31, 2016. 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 Fabian Garcia, our recently appointed Chief Executive Officer, and Juan Figuereo, our recently appointed Chief Financial Officer. Before I turn the call over to Fabian, 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 Q1 2016 Form 10-Q, which we filed earlier this morning.

We undertake no obligation to publicly update any forward-looking statements except for the company’s ongoing obligations under the U.S. federal securities laws.

Next, our remarks today will include a discussion of certain GAAP and non-GAAP measures. The company has identified certain unusual items impacting the comparability of the company’s period over period results. As a result of these unusual items, the definition of adjusted EBITDA has changed from that used in prior periods. The adjusted measures are defined in our earnings release and are also reconciled in the financial tables at the end of the release. Our discussion this morning should not be copied or recorded.

And with that, I will turn the call over to Fabian.

Fabian Garcia

Thanks, Siobhan, and good morning to all of you, and thank you for joining our call today. As I mentioned in the press release, I am excited to have joined Revlon during a period of renewed growth and innovation. I have been here for three weeks now, and I have a positive impression of the improvement and results that the Company has achieved in the last couple of years.

Let me share some of my early observations. We have a clear strategic framework of value creation, which the Company has fully embraced and is implementing with great focus and discipline. The Revlon brand is healthy, and there are strong plans for continued solid growth across the segments where we compete. Indeed, all of our brands have defined roadmaps to deliver growth.

We have a strong innovation pipeline, and our teams are focused on delivering differentiated and unique products, both in our consumer and professional divisions. The organization is passionate, dedicated, and committed to reestablishing Revlon as the quintessential and most innovative beauty company in the world. Against this background, we are happy to report that the Company began 2016 with a solid start.

As you have seen in the release, net sales on an XFX basis were up 3.6%, driven by increases in all segments, with particular strength in the international consumer business and the U.S. pro business. Specifically, we continue to post strong growth internationally, where our consumer business net sales were up 7.5% in the first quarter on an XFX basis. This strong increase was driven by Revlon color cosmetics and Cutex nail polish remover, as well as the expansion of Revlon’s ColorSilk hair coloring to new countries including France and Australia. In addition, we had new product innovations in Mitchum antiperspirant deodorant.

In the U.S., Revlon color cosmetics consumption has grown for the past seven months, with Nielsen shares increasing in the past six months. Most recently, our innovation has been well received by consumers. To mention one example, our new Revlon Ultimate All-In-One Mascara has driven significant growth in the category, and it was ranked among the top three selling new products in the U.S. this quarter according to Nielsen.

In our professional business in the U.S., we had strong results, with net sales growth of 10.3% in the first quarter, driven by new point-of-sale merchandising initiatives for Creme of Nature and the very successful launch of our new Elvis-branded line of American Crew products. Net, a positive start of the year for the Company.

I will now turn over the call to Juan, who will walk you through a summary of our financial performance.

Juan Figuereo

Thank you, Fabian and good morning, everyone. We will now review our segment results. Starting with our consumer segment, net sales were $321 million in Q1 2016, representing an increase of 2.5% on an XFX basis. This was driven by an increase in consumer international sales of 7.5% XFX, as discussed by Fabian.

Our consumer U.S. net sales were essentially flat versus the prior year quarter as we experienced inventory reductions with certain customers. Encouragingly, as mentioned before, consumption rates have remains strong during the quarter. Consumer segment profit was $58.4 million in Q1, representing a decrease of 4.7% on an XFX basis, mainly due to unfavorable impact of product mix and FX transaction within cost of sale.

Switching now to the professional segment, net sales in Q1 were $115.1 million, an increase of 2.7% on an XFX basis. This increase was driven by the U.S. as a result of higher net sales for Creme of Nature and American Crew products. Internationally, American Crew net sales were also higher, driven by continued presence expansion and the initial rollout of the Elvis-branded product.

Our CND global net sales were healthy, with the exception of Russia. In Russia, net sales were down due to the tough macroeconomic situation in that country. Professional segment profit was $25.6 million in Q1, which was essentially flat versus the prior year quarter, after excluding a $3 million gain related to the sale of certain non-core professional brands last year. As for our other segment, which includes the results of the CBB business, we generated net sales of $4.5 million in Q1, with no comparable net sales in Q1 2015.

Moving now to total Company results, on an XFX basis, consolidated adjusted EBITDA in Q1 2016 declined by 4.3%, primarily due to the decrease in the consumer segment profit, as discussed earlier. Consolidated adjusted net income in Q1 increased by $12.5 million. This increase was primarily due to foreign currency gains on intercompany debt in Q1 compared to foreign currency losses in Q1 2015.

Taking a look at our cash, we continue to feel good about our liquidity position. As of March 31, 2016, we had approximately $339.8 million of gross liquidity, consisting of $173.6 million of cash on hand plus available borrowing capacity of $162.2 million on our revolver. In closing, I really like what I’ve seen since joining the Company, and I am excited about the growth potential of this business.

Now I would like to turn the call back over to Siobhan.

Siobhan Anderson

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

Question-and-Answer Session

Operator

[Operator Instructions] And we will go first to Grant Jordan with Wells Fargo.

Grant Jordan

Great. Good morning. Thanks for taking the questions. Good to hear from you. So I guess my first question, you talked a little bit about the consumer segment being down in terms of profitability due to mix. Can you give us some more information there in terms of what specifically was the mix headwind?

Fabian Garcia

Well, why don’t we start by reiterating that we feel very good about that business from a growth point of view. I think you are referring to EBITDA results. And the mix has to do with geographic mix, new product innovation, and of course ForEx, which impacts the gross profit.

Grant Jordan

Okay.

Juan Figuereo

I would like to add to that. Just in our view, this impacts our brand share, because the new products, when you are introducing, you are making space in the channel. So that usually allows us to recover other products, and there’s additional support going in. Obviously, that only happens when you are introducing. Once you get to steady-state, your margins go back up.

Grant Jordan

Okay. Are there more – how would you characterize the amount of product introductions we should see over the next couple of quarters compared to the previous year?

Fabian Garcia

We characterize it as strong, first. As you know, as part of our value creation, we talk about fewer, bigger, bolder innovations, and that’s what you should expect from the Group.

Grant Jordan

I guess where I’m driving is should we seem more mix, margin pressure, as there’s new products coming online, or is this more weighted towards the first half of the year?

Fabian Garcia

I don’t think you should expect any more one-time impact related to mix of this nature. I think all of this is in our expectations. So we don’t see anything abnormal going forward.

Grant Jordan

Okay. Another question I had, we had heard from some of your competitors that there was some weakness in the domestic nail category. Did you guys experience any of that?

Juan Figuereo

I think that we had a – this is an ongoing trend. From a nail point of view, there is a lot of value brands that are coming into the market. So the way we look at this is we need to continue to differentiate our brands so that we can gain market share. As you know, we are up in the U.S. recently. So we feel good about what we’re doing there this quarter, and we feel good about the innovation that we are bringing to the market. But there isn’t this pressure in the marketplace from the value play.

Grant Jordan

Okay. And then my last question, you paid down some debt in the quarter. It looks like you had the free cash flow sweep and then you paid some excess. Can you give us any updated thoughts about your view on the balance sheet and how you view your debt?

Fabian Garcia

We continue to keep our options open as to what to do with the cash. So I would not comment further than that.

Grant Jordan

Okay. Thank you.

Fabian Garcia

Thank you.

Operator

We will go next to Kevin Ziets with Citigroup.

Kevin Ziets

Hi, good morning. Thanks for taking my questions. First of all, welcome. I just wanted to mention our equity analyst has spoken highly of you. So I look forward to getting to know you.

Fabian Garcia

Thank you, Kevin.

Kevin Ziets

Of course, my first question was on just in terms of the opportunity and what attracted you to Revlon and where you see some of the big opportunities, and maybe where you think your strategy may or may not differ from your predecessor?

Fabian Garcia

First of all, thank you for the warm welcome. I’d like to know who you talked to. First of all, what attracted me to the Company was first the industry and then the brand. I believe this brand is much bigger than its current state. When you think about what the brand has achieved over time and when you think about how the brand is doing right now, you can see that the brand is turning around. And I have – I will take this opportunity to give kudos to my predecessor for having put in place a strategy that is now being implemented and that is yielding the kind of results that we are experiencing.

That said, there is a lot more to be done, and some of the things that we want to build here are of course focused on market share, focused on the heritage of this brand and making sure that we continue to drive some of those jewels in the crown.

I will highlight one which is important is in the hair business. The hair coloring business, we have a very strong business, as you know, here in the U.S. and is one that remains, in a way, underleveraged. So I will not go beyond that because I don’t want to tip my hand to the competition, but what I can tell you is that this brand has a lot more value than we have been able to leverage so far.

Kevin Ziets

Okay. That’s great. And is there – I know it’s early, but are there parts of the portfolio that you think you might be evaluating for divestiture to drive more towards the brands where you see the most potential?

Fabian Garcia

I think it’s too early to answer that question. And even in six months when you ask me again, I would probably say no.

Kevin Ziets

Okay. That’s fair. On to the quarter, if I could just ask about the transaction FX issue, obviously FX has been a headwind for a few quarters in terms of top line and translation. But not sure we’ve seen it flow through to the transaction side as directly as it did in this quarter. I was just wondering, is there some sort of timing lag that we should be aware of? And maybe when do you think that starts to funnel out as rates have moved more in your favor?

Fabian Garcia

Let me ask Juan to answer the question for you.

Juan Figuereo

Hey, Kevin, this is Juan. So I think the point about the lag is correct. Most companies hedge a little bit their transactional exposure, and so do we. Basically, roughly about 80% of our exposure is in four currencies: the British pound, the Mexican peso, Canadian and Australian dollar. And so we go outs and we hedge. We put on running hedges about 12 months for a portion, not a total, we may go up to about 40%, 50% of the exposure. As those roll out, if the currencies are strengthening against the U.S. dollar, then we will begin to see more of the benefit.

Fabian Garcia

And I will add one thing to that, Kevin, which is we continue to be very interested in expanding our business internationally. And the conditions in the marketplace for the past two years have been unfavorable, given the strength of the dollar. As you know very well, these are cycles. So we want to, first of all, be prepared to weather the storms that will be along the way, but our interest in the market remains very, very strong.

Kevin Ziets

Okay. That’s great. Thank you for that clarification. And then on the U.S. business, I think you mentioned that there were inventory reductions with certain customers. Is that specific to your product or the category, or is it Company-wide? And I guess maybe related to that, one of the sort of benefits of the fewer, bigger, bolder strategy was supposed to be to have lower returns over time and lower reserves taken on a regular basis. And I’m just curious in your early days if you think that will still continue to be the case.

Fabian Garcia

Well, let me start with the inventory question. The inventory trade reductions are industrywide. They have not pointed at particular brands. We don’t believe this is just us, number one. Number two, we have looked at more recent trends, and we already shift into consumption, so we’ve seen that abate.

On your second question, yes, the strategy of fewer, bigger, bolder is about making bigger impact in the market, of course, but also to have the reduction in markdowns and the reduction in [indiscernible] So that strategy will continue – we will continue to implement it and we need to be sure that what we are implementing is indeed bigger and is indeed bolder. So we plan and we intend to improve on that on the execution of that strategy.

Kevin Ziets

Okay, great. Thank you for taking my questions and welcome, again.

Fabian Garcia

Thank you very much, Kevin. Very kind of you.

Operator

We will go next to David Diamond with Provita Advisor.

David Diamond

Hi, good morning. Thanks for taking my question. Fabian and Juan, welcome to the Company. We are your second- or third-largest investor based on public filings. And Fabian, we’ve heard great things about you from your colleagues at Colgate and are thrilled to have you aboard. So welcome, first of all.

Fabian Garcia

Thank you very much, David. You’re very kind.

David Diamond

No problem. I have just a very brief philosophical question, since I know you just joined the Company, so I won’t ask anything too difficult. But my question revolves around what your approach will be towards investor engagement. Just as background, your predecessor never met with an investor or any investors during his entire tenure. The Company has never spoken, at least to my knowledge, in the last couple of years at an investor conference. There’s no equity sell-side coverage. The Company, in the minds of most investors, is de facto a private company with a public listing. And to some extent, this explains why the stock market values Revlon at such a cheap level, at a discount, because of this approach.

I’m wondering, given your background and your experience at Colgate and the anticipation that a lot of us have for you joining, should we expect progress in this area in terms of investor engagement and engaging Wall Street in a positive way? Or should we expect more of the same? Thanks very much.

Fabian Garcia

Well, thank you very much for the question. And you did say that you were going to ask easy questions for the first time. So I’m looking forward also to the second time. From a philosophical point of view, as you know very well, I come from a public company. And it is a company that is very transparent and engages frequently with shareholders. You also know very well, this is a controlled company. And as such, we have to respect the desires of the shareholders.

That said, my intention is to be as transparent as I can be and to engage with the stakeholders that of course include our investors. So the degree of that engagement and the frequency of that engagement will be different than what perhaps you have experienced more recently because, obviously, we want to all be sure that the Company is appropriately valued.

David Diamond

Okay. Great. Well, we look forward to seeing that and meeting you and hearing you be out in front. This conference call already is a dramatic improvement from the past, so thanks very much.

Fabian Garcia

Thank you very much, David. Looking forward to meeting you in person.

Operator

[Operator Instructions] We will go next to Ashley Conti with DDJ Capital.

Ashley Conti

Hi, guys. Thanks for taking the question. Just curious, on the working capital side, why did you see a shift in the timing of your customer collections? And do you expect to see this sort of going forward or as a lasting trend?

Juan Figuereo

Good morning, Ashley. This is Juan. As you probably know, the first half of the year we tend to use more working capital that the second half, and usually the second quarter – the first quarter will be higher. This quarter was unusually high because of the timing of certain brand support payments. So there was a big impact on the BPOs. And on the receivables side, last year we had some customers pay early, and then there’s the timing this year of the introduction of innovation, which shifted – failed later towards the quarter, and so we ended up with more receivables. I expect that to wash out in the balance of the year.

Ashley Conti

And any reason why customers were paying early?

Juan Figuereo

Different customers have different reasons, but we’ll receive their money if they want to pay us early every time.

Fabian Garcia

We’d always welcome those wishes, by the way, Ashley.

Ashley Conti

Of course. On the brand support, nothing abnormal, then, for the rest of the year in terms of what you plan to spend?

Fabian Garcia

Absolutely not. We plan to remain competitive with our brand spend.

Ashley Conti

Okay. Great. Thanks for taking the question.

Fabian Garcia

Thank you very much, Ashley.

Operator

And at this time, there are no further questions.

Fabian Garcia

Thank you very much to everyone who participated. We are delighted and humbled by the very good welcome that we have received. I want to thank you again, and also thank all of the Revlon teams around the world for their hard work to make possible the results that we have achieved, also a happy Mother’s Day to all those who are celebrating. We will talk to you next quarter. Thank you.

Operator

This does conclude today’s conference. We thank you for your participation.

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