Revlon, Inc. (REV) CEO Debbie Perelman on Q4 2021 Results - Earnings Call Transcript

Revlon, Inc. (REV) Q4 2021 Earnings Conference Call March 3, 2022 8:30 AM ET

Company Participants

Jeff Kennel - Vice President, Treasury

Debbie Perelman - President and Chief Executive Officer

Victoria Dolan - Chief Financial Officer

Conference Call Participants

William Reuter - Bank of America

Grace Menk - Jefferies

Operator

Good morning. My name is Brittany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revlon Fourth Quarter and Full Year 2021 Earnings Conference Call [Operator Instructions].

I will now turn the call over to Jeff Kennel, Vice President, Treasury. Please go ahead.

Jeff Kennel

Thank you, Brittany. Good morning everyone and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended December 31, 2021. If you have not already received a copy of the earnings release, a copy can be obtained on the company's website at revloninc.com. On the call this morning are Debbie Perelman, our President and Chief Executive Officer; and Victoria Dolan, our Chief Financial Officer. The discussion today might include forward-looking statements that are based on current expectations and are provided pursuant to the Private Securities Litigation Reform Act of 1995. Information on factors that could affect actual results and cause them to differ materially from such forward-looking statements is set forth in the company's SEC filings, including its Q4 2021 Form 10-K.

The company undertakes no obligation to publicly update any forward-looking statements, except for the company's obligations under the U.S. federal securities laws. Remarks today will include a discussion of certain GAAP and non-GAAP results. Consistent with past reporting practices, non-GAAP results exclude certain nonoperating items that are not directly attributable to the company's underlying operating performance. These adjusted measures are defined in the earnings release and are also reconciled in the financial tables at the end of the release. Please also note that certain amounts provided throughout this call have been rounded. The call today should not be copied or recorded.

And with that, we will turn the call over to Debbie.

Debbie Perelman

Thank you, Jeff. Good morning everyone, and thank you for joining today's call. Before I share our results from the fourth quarter of 2021, I want to take a step back and reflect on the full year. 2021 began with tremendous uncertainty as much of the world was facing winter surges and COVID 19, vaccinations were not yet readily available and many cities, states and countries were under some form of restrictions. For the beauty industry, while many retail stores were open, traffic remained light and many salons were closed. As the year progressed, however, we saw tremendous recovery. Markets reopened and our consumers eagerly returned to the beauty category across all channels. From a Revlon perspective, in 2021, all of our regions and reporting segments returned to growth.

Our Elizabeth Arden Fragrances segments grew double-digits as did our Revlon professional business and many of our key portfolio brands. Our consumption rebounded with Revlon color cosmetic retail sales in the US mass channel, growing double-digits and outpacing the market in last three quarters, and our mass fragrance business maintaining its category leadership position. Also based on retail sales in the US mass channel, our award-winning Revlon's ColorStay sating lip color was the number one lip launch of 2021 and our Revlon ColorStay eyeliner pencil is the number one eyeliner. We continue to drive innovation in our Elizabeth Arden franchises of Prevage Ceramide with the launch of Prevage 2.0 antiaging daily serum and Retinol Ceramide Line Erasing Eye Cream.

We double down on our sustainability goals with over two thirds of our 2021 new product launches incorporating as the sustainable element, including the formula and or packaging. And the Revlon global growth accelerator program continues to drive our long-term profitable growth through a combination of commercial and cost reduction initiatives. I am so proud of the Revlon teams around the world for all that we have accomplished in 2021. However, despite this momentum in the markets and in our brands, we have not been immune to the macro supply chain challenges that are also impacting many other companies. As I first highlighted in our third quarter call, we are seeing pricing pressure and shortages with key ingredients and components, logistic challenges across all modes of transportation and persistent labor shortages, all of which negatively impacted our business in the fourth quarter.

Turning more specifically to our fourth quarter results. As reported, net sales were $615 million, a slight decline of $11 million or approximately 2% versus prior year quarter. This decline was largely driven by the supply chain challenges I highlighted, which impacted our ability to manufacture and deliver our products. As Omicron spread far more rapidly than expected in the fourth quarter, these challenges were exacerbated, particularly with regards to labor shortages, specifically at our Oxford and Jacksonville facilities. Despite these headwinds, our adjusted EBITDA was $108 million, just $4 million lower than the previous year quarter. And we were able to drive an improved growth margin and very strong operating income.

Before I hand the call of Victoria to walk these through the detailed financial results, including our segment results, let me touch on some of the steps the Company is taking to mitigate these prevailing supply chain challenges. To protect the business as well as manage against inflation, we are tightly managing our costs and implementing select price increases across our portfolio globally. From an external supply chain perspective, we have rerouted freight and sourced additional vendors for key materials and components. To address internal labor shortages, we have significantly increased the personnel in our manufacturing facilities. These actions resulted in increased manufacturing production levels as we entered 2022, specifically for our Revlon color cosmetic product. We also announced today that we are extending our RGGA program, which will continue to drive additional cost across the business. Victoria will share more details on this extension later in the call. Despite the microeconomic supply chain headwinds we are facing, which at this time we believe to be temporary, I remain optimistic about the strength of our brands in the market. We continue to dynamically manage our business and remain focused on executing against our strategy to drive long term sustainable and profitable growth.

And now I will turn the call to Victoria.

Victoria Dolan

Thank you, Debbie, and good morning to everyone on the call. Before I share the details of our fourth quarter 2021 results, I would like to reiterate our financial strategy, which supports Revlon's long term ambition and helps us to manage through a volatile external environment. First, our goal is to ensure sufficient liquidity to support both our growth and our capital structure. Our investment posture is focused on making smart and disciplined choices in order to align our investment to the business priorities and ultimately strengthen our core iconic brands in the market. And second, we're focused on managing with agility to adapt to the ever-changing circumstances across all lines of the P&L and balance sheet. These strategies have served Revlon well through COVID 19 and as supply chain challenges continue to impact businesses across most industries.

Before I get into the segment details, I'd like to summarize Revlon's fourth quarter results on a consolidated basis. As reported net sales were $615 million in the fourth quarter of 2021 compared to $627 million during the prior year period, a decrease of $11 million or approximately 2% on constant currency and as reported basis. As Debbie mentioned earlier, much of this year over year decrease can be attributed to global supply chain challenges. As reported operating income was $67 million in the fourth quarter of 2021 compared to $28 million during the prior year period, an improvement of $39 million. The higher operating income was driven primarily by a gross margin improvement of 240 basis points and $30 million in lower selling, general and administrative expenses, SG&A. Adjusted operating income in the fourth quarter of 2021 increased by $1 million to $76 million from $75 million of adjusted operating income in the prior year period. Adjusted EBITDA in the fourth quarter of 2021 was $108 million versus $112 million in the prior year period. The lower adjusted EBITDA was driven primarily by the lower as reported net sales. As reported net income was $10 million in the fourth quarter of 2021 versus $234 million net loss in the prior year period. The higher net income was primarily due to the prior year period, reflecting a $202 million non-cash charge to the company's federal tax valuation allowance and higher as reported operating income over the prior year period.

Next, I would like to turn to our segment results. Revlon segment net sales in the fourth quarter 2021 were $206 million, a $1 million increase or essentially flat on a constant currency basis compared to the prior year period. The segment's modest growth was driven by higher net sales of Revlon branded professional hair care products in all regions, as well as Revlon color cosmetic in North America and in Latin America. This increase was partially offset by decreased net sales in North America of Revlon branded beauty tools. Additionally, supply chain constraints largely impacted this segment primarily in North America, which is evident when looking at our strong consumption growth of Revlon color cosmetics in the US mass channel of approximately 30% versus net sale growth of low single digits. Revlon segment profit during the fourth quarter of 2021 was $42 million, a $4 million decrease or approximately 8% on a constant currency basis compared to the prior year period. This decrease was driven primarily by the Revlon segment’s higher transportation costs and higher SG&A expenses as we continued to support the brand in market.

Elizabeth Arden segment net sales in the fourth quarter of 2021 were $173 million or $9 million decrease, or 6% on a constant currency basis compared to the prior year period. The segment’s net sales decreased was driven primarily by lower direct-to-consumer e-commerce net sales at elizabethaden.com in North America and increased competition and slowing growth rates in China. This decrease was partially offset by increased net sales of green tea and white tea fragrances in Asia and EMEA, eight hour skincare products, primarily in international regions, as well as strong travel retail channel performance in EMEA. Elizabeth Arden's segment profit during the fourth quarter of 2021 was $21 million essentially flat compared to the prior year period on an as report of basis, or down 5% on a constant currency basis. This decrease on a constant currency basis was driven primarily by the Elizabeth Arden segment's higher SG&A expenses, as well as higher transportation costs during the period.

Fragrances segment net sales in the fourth quarter of 2021 were $125 million, a $12 million decrease or 9% on a constant currency basis compared to the prior year period. The fragrance of segment decrease in net sales was driven primarily by lower net sales in the North America region due to fewer sales of gift sets and some space loss, which occurred earlier in the year as well as supply chain constraints. Fragrance segment profit during the quarter of 2021 was $22 million, an $11 million decrease or 33% on a constant currency basis compared to the prior period. This decrease was driven primarily by the fragrances segment’s lower net sales and higher SG&A expenses.

Portfolio segment net sales in the fourth quarter of 2021 were $112 million, a $9 million increase or 9% on a constant currency basis over the prior year period. The portfolio segment increased in net sales was driven primarily by higher net sales of CND nail products in North America and EMEA, Almay color cosmetics in North America, American crew men’s grooming product in North America and international regions, and higher net sales of Creme of Nature in North America and EMEA. This increase was partially offset by lower net sales of previously sold brands. Portfolio segment profit during the fourth quarter of 2021 was $25 million, an $11 million increase or 84% on a constant and currency basis compared to the prior year period. This increase was driven primarily by the portfolio segment’s higher net sales, higher gross profit margin and lower SG&A expenses.

Turning now to liquidity. As of December 31, 2021, the company had approximately $172 million of available liquidity, consisting of $102 million of unrestricted cash and cash equivalents as well as $72 million in available borrowing capacity under the product corporation's amended 2016 revolving credit facility, less float of approximately $3 million. Free cash flow used in 2021 was $25 million compared to $108 million used in the prior year period. The decrease in free cash flows used was primarily driven by a lower as reported net loss. During 2021, our capital expenditures were $14 million and the company spent $25 million on permanent displays. Finally, as Debbie mentioned, today we announced an expansion and extension of our RGGA program through 2024.

This extension and expansion will allow the company to continue to first, focus on implementing new opportunities and second, provide an additional year to implement larger projects. Under this extension and expansion, the company expects to deliver an additional range of annualized cost productions of approximately $50 million to $65 million through end of 2024, and expects to recognize an additional cost range of approximately $8 million to $10 million of total pre-tax restructuring and related charges. The company also expects to incur approximately $5 million of additional capital expenditures. In summary, our fourth quarter results reflect the strength of our business and commercial strategies, which were critical mitigants to the headwinds created by today's macro supply chain challenges. Importantly, we remain singularly focused on mitigating those supply chain risks in 2022 and continuing to transform our company with the extension and expansion of the RGGA program.

I'll now hand the call over to Debbie for closing comments.

Debbie Perelman

Thank you, Victoria. In closing, given what we see today, we believe that the current supply chain headwinds while challenging are temporary, and that our brands have tremendous strength and opportunity for growth in the market. We remain focused on managing through these disruptions while continuing to execute on our plans for the future.

And now we will open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from William Reuter with Bank of America. Your line is now open.

William Reuter

You went through a handful of different things that you're going to be doing to mitigate the supply chain challenges. One of which is cost savings. In your filings you've laid out some ranges of potential savings that are still to come. Do you have a sense for what the amount of cost savings we might see in 2022 will be?

Victoria Dolan

One of the things that we were pleased with this quarter is that we had worked through in extension and expansion of our RGGA program. So that we would realize through 2024 additional cost savings, and we validated that we were on track to deliver the program savings that we had disclosed. As you know, we don't give specific financial forward guidance. So I'm not going to be able to talk about how much we're doing in ‘20 - expect to do in 2022. But the disclosure does confirm that we are on track to deliver the program parameters that we've outlined.

William Reuter

And I can, I'll wait until your 10-K is filed. But is there anything you can disclose about whether the range of the potential sum will be the same as what was in your 3-Q, 10-Q?

Victoria Dolan

The range of what? The total…

William Reuter

The ranges of the savings. Because it was pretty wide, I can't remember the exact range, but it was relatively wide. Is the range going to stay the same for the whole program?

Victoria Dolan

So we took the range up. You mean the breadth of the range, we took the range up to [325 to 390] through 2024. It was [275 to 325]. And we took it up based on our expectation of $50 million to $65 million in additional cost saving.

William Reuter

And then the second question is you guys highlighted that the supply chain negatively impacted revenues during the fourth quarter. Is there any way that you have attempted to try and quantify how much revenue was lost or maybe shifted into the first quarter?

Victoria Dolan

So obviously, as I said in the comments, we are singularly focused on managing those supply chain risks. Obviously, as we've seen even over the last two weeks, the uncertainty and volatility in the world have definitely increased, impacting what was already a very volatile supply chain situation. We are monitoring the risk. We're mitigating the risk, as I said even around our financial strategy, managing with agility in terms of our overall spend level and production. One way of looking at it and Revlon Color Cosmetics in North America was the channel that was impacted the most, but it gives you some ideas as it parallels what I said in the third quarter also. But we saw for Nielsen Revlon Color Cosmetics consumption growth, which is our customers sell out to our consumers was up 30% year-over-year, whereas our sales were low-single-digit. Now, again, that's not representative of all our channels, but that is representative of the largest impact to our business.

Operator

We will take our next question from Stephanie Wissink with Jefferies.

Grace Menk

This is Grace Menk on for Steph. Our first question is on innovation upcoming this year. Any major innovation initiatives that you have planned for 2022?

Debbie Perelman

So we have a number of innovations plan for 2022 across the brand. And so from Revlon to Elizabeth Arden to fragrances, some are rolling into the market now. We had a lot of success in 2021 with our new products that we put into market. I'll just highlight again that with the number one lip launch for Revlon Color Cosmetics in the US as well as we continue to maintain leadership in eyeliner. And we're looking to build out the categories where we have strength and face as well as hair color, as well as in lip. So you'll see those rolling out. And then for Elizabeth Arden, you'll shortly see our skincare launches coming into market. So those are the areas that I would highlight. I think right now, we have our relaunch of our ColorSilk care color hitting market right now.

Grace Menk

And then just wondering if you could speak about the marketing expense component of SG&A and how that might be changing, like are you improved efficiency in any areas that you're investing in?

Debbie Perelman

So from a company as a whole?

Grace Menk

Yes, exactly

Debbie Perelman

So we normally don't break out the marketing spend, but what I would say to that is that we continue to support the brands. We have seen an increase quarter-over-quarter year-over-year with regards to the marketing spend that we put against our brands. And we're always looking at ways in which we can drive efficiency and also effectiveness across the marketing spend that we have in terms of the different channels that we play as well as the different platforms that we use. So whether it's on digital or whether it's on TV or print, as well as other types of social channels and social commerce, we're always looking at how to balance that not only in terms of the ROI but how effective we are in terms of reaching our consumer.

Operator

We have no further questions on the line at this time. I will turn the program back over to Debbie Pearlman for any additional or closing remarks.

Debbie Perelman

Thank you. Seeing no additional questions. Let me say thank you to all that have joined the call today, and a special note to our team members around the Revlon world who are listening. Thank you for all the efforts that you make every single day. Thank you again and have a good day.

Operator

This does conclude today's Revlon fourth quarter and full 2021 earnings call. Please disconnect your line at this time and have a wonderful day.