Revlon, Inc. (REV) Q1 2022 Earnings Conference Call May 4, 2022 5:00 PM ET
Jeff Kennel - VP, Treasury & IR
Debra G. Perelman - President and Chief Executive Officer
Victoria L. Dolan - Chief Financial Officer
Conference Call Participants
Unidentified Analyst -
Good morning. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revlon First Quarter 2022 Earnings Conference Call. All participant lines have been in listen-only mode to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions]. I will now turn the call over to Jeff Kennel, Vice President, Treasury. Please go ahead.
Thank you, operator. Good afternoon, everyone and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended March 31, 2022. 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 afternoon are Debbie Perelman, our 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 Q1 2022 Form 10-Q. 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 non-operating 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'll turn the call over to Debbie.
Debra G. Perelman
Thank you, Jeff. Good afternoon, everyone. Thank you for joining today's call. I am pleased to be sharing our first quarter 2022 results, which reflects strong top line and bottom line performance across our segments and regions. It's important to note that the company achieved these results despite operating in an uncertain global environment, marked by new COVID-19 lockdowns in various parts of the world, the conflict between Russia and Ukraine, and continued macro supply chain challenges. Despite these headwinds, consumers continue to engage in the beauty category. For example, in the U.S., retail sales in the mass color cosmetics channel grew for the fourth consecutive quarter. In Europe, salon owners reported steady recovery as traffic increased and clients were eager to return to in-person services. And as consumers resume traveling, the travel retail channels continue to rebound.
Revlon's first quarter 2022 as-reported net sales of $480 million represents growth of 8% relative to the prior year quarter with all reporting segments growing. As a result of this top line growth as well as internal efforts to manage costs, our adjusted EBITDA of $58 million represents an increase of $20 million or 53% and an adjusted EBITDA margin improvement of 400 basis points. This is the strongest first quarter adjusted EBITDA that Revlon has posted in the last six years. While consumer demand for Revlon's products remained strong throughout the quarter, supply chain challenges are putting pressures on our ability to meet this demand. Lack of availability or long lead times for raw materials and components, along with shortages and delays across all modes of transportation, are resulting in reduced supply to support the demand. Additionally, we are faced with rising costs due to global inflation putting pressures both on consumers' wallets as well as on our margins.
Let me share how Revlon is navigating a complicated global environment. First, we continue to lean into our strategic pillars, focusing on our key brands in key markets as well as our digital acceleration. All of our key brands grew in the first quarter with particularly robust growth in the Revlon segment of over 15% at constant currency and continued growth in Elizabeth Arden. Contributing to this brand momentum are our recent launches, including Revlon's ColorStay Matte Lite Crayon, the number 1 lip launch in the U.S. mass channel; Revlon Professional's RE/START CURL; and Elizabeth Arden's PREVAGE Anti-Aging Eye Serum 2.0, a complement to last year's PREVAGE Anti-Aging Daily Serum 2.0. Growth in our e-commerce channel is pacing with our total company growth of approximately 10%.
Second, we are highly focused on protecting our profitability and managing our liquidity given the uncertainty in the market. We are tightly managing our costs and globally implementing select price increases across our portfolio. From an external supply chain perspective, we are rerouting freight and sourcing additional vendors for key materials and components. Our strong adjusted EBITDA performance in the first quarter is also a testament to the strength of our brands. In addition, as we continue to manage our liquidity, we recently announced an at-the-market equity program, under which we may offer and sell shares of our common stock from time to time with an aggregate offering price of up to $25 million.
And finally, our leadership team and I continue to be focused on how Revlon can have a broader impact on the world. For example, we have joined One Mind at Work, a global employer-led coalition dedicated to implementing a gold standard for workplace mental wellness. The company continues to remain agile as we manage the business through ongoing expected macroeconomic uncertainties and are prepared to dynamically adjust as needed. We remain focused on executing against our strategy to drive long term, sustainable and profitable growth. And now I will turn the call to Victoria to share the details of our first quarter 2022 results.
Victoria L. Dolan
Thank you, Debbie and good afternoon to everyone on the call. Before I share the details of our Q1 2022 results, I'd like to reiterate our financial strategy which supports Revlon's long-term ambition and helps us to manage through a volatile external environment. First, given the market context Debbie described earlier, we are focused on managing with agility to adapt to the ever-changing circumstances across all lines of the P&L and balance sheet. And second, 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 investments to the business priorities and ultimately strengthen our core iconic brands in the market. Our RGGA program, which remains on track to deliver its estimated in-year savings, is one example of how we are executing against our investment posture. These strategies have allowed Revlon to navigate through COVID-19, supply chain disruptions, and other emerging macroeconomic challenges that continue to impact businesses across most industries.
Before I get into the segment details, I'd like to summarize Revlon's first quarter results on a consolidated basis. As-reported net sales were $480 million in the first quarter of 2022 compared to $445 million during the prior year period, an increase of $35 million or 8%. As-reported operating income was $24 million in the first quarter of 2022 compared to an operating loss of $13 million during the prior year period, an improvement of $36 million. The higher operating income was driven primarily by higher as-reported net sales; a gross margin improvement of 190 basis points; $4 million in lower selling, general and administrative expenses, SG&A; and $4 million in lower restructuring charges.
Adjusted operating income in the first quarter of 2022 increased by $27 million to $29 million compared to the prior year period. Adjusted EBITDA in the first quarter of 2022 was $58 million versus $38 million in the prior year period. The higher adjusted EBITDA was driven primarily by higher as-reported net sales and higher as-reported operating income. As-reported net loss was $67 million in the first quarter of 2022 versus a $96 million net loss in the prior year period. The lower net loss was primarily driven by higher operating income partially offset by higher foreign currency losses of $5 million over the prior year period and higher interest expense of $3 million over the prior year period.
Next, I would like to turn to our segment results. Revlon segment net sales in the first quarter of 2022 were $182 million, a $20 million increase or 15% on a constant currency basis compared to the prior year period. The segment's growth was driven by higher net sales of Revlon color cosmetics in North America and to a lesser extent, higher net sales of Revlon-branded professional hair care products in international regions and higher net sales of Revlon ColorSilk in North America. This increase was due primarily to the mass retail channel continuing to show signs of improvement from the effects of the ongoing COVID-19 pandemic as well as salons' increased activity in connection with lifting of restrictions related to the ongoing COVID-19 pandemic.
Revlon segment profit during the first quarter of 2022 was $24 million, a $16 million increase or approximately 208% on a constant currency basis compared to the prior year period. This increase was driven primarily by the Revlon segment's higher net sales, higher gross profit margin, and lower brand support expenses partially offset by higher other SG&A expenses.
Elizabeth Arden segment net sales in the first quarter of 2022 were $115 million, a $3 million increase or 4% on a constant currency basis compared to the prior year period. The segment's net sales increase was driven primarily by higher net sales of Green Tea and White Tea fragrances in international regions and to a lesser extent, higher net sales of other Elizabeth Arden-branded fragrances partially offset by lower net sales of Ceramide largely in North America. Additionally, the segment's net sales increase was due to an increase in the travel retail business as well as signs of improvement from the effects of the ongoing COVID-19 pandemic on foot traffic at department stores and other retail outlets.
Elizabeth Arden segment profit during the first quarter of 2022 was $6 million, a decrease of $3 million or 33% on a constant currency basis compared to the prior year period. This decrease was driven primarily by the Elizabeth Arden segment's higher brand support partially offset by the higher net sales that I mentioned and higher gross profit margin.
Fragrances net sales in the first quarter of 2022 were $83 million, a $9 million increase, or 13% on a constant currency basis compared to the prior year period. The Fragrances segment increase in net sales was driven primarily by higher net sales of Britney Spears and to a lesser extent, John Varvatos and Juicy Couture, mainly in international regions as well as certain other licensed fragrance brands, both in North America and international regions. This was largely due to continued recovery from the ongoing COVID-19 pandemic as well as growth in e-commerce net sales and the travel retail business. Fragrances segment profit during the first quarter of 2022 was $12 million, a $4 million increase or 49% on a constant currency basis compared to the prior year period. This increase was driven primarily by the Fragrances segment's higher net sales and higher gross profit margin partially offset by the segment's higher other SG&A and brand support expenses.
Portfolio segment net sales in the first quarter of 2022 were $99 million, a $3 million increase or 5% on a constant currency basis over the prior year period. The Portfolio segment increase in net sales was driven primarily by higher net sales of Mitchum antiperspirant deodorant in international regions; higher net sales of Cutex, both in international regions and North America; higher net sales of CND nail products in international region; and higher net sales of Almay color cosmetics in North America. This was partially offset by lower net sales of certain local and regional brands, both in international regions and in North America. The increase was primarily in connection with retail channels continuing to show signs of improvement from the effects of the ongoing COVID-19 pandemic.
Portfolio segment profit during the first quarter of 2022 was $17 million, a $4 million increase or 35% on a constant currency basis compared to the prior year period. This increase was driven primarily by the Portfolio segment's higher net sales and higher gross profit margin partially offset by the segment's higher other SG&A and brand support expenses.
Turning now to liquidity. As of March 31, 2022, the company had approximately $132 million of available liquidity, consisting of $70 million of unrestricted cash and cash equivalents as well as $65 million in available borrowing capacity under the product corporation's amended 2016 revolving credit facility, less float of approximately $3 million. These liquidity numbers include updates as previously disclosed.
First, on March 31, 2022, Revlon Consumer Products Corporation amended its asset-based revolving credit agreement dated as of September 7, 2016. The amendment, among other things, made certain changes to the calculation of the borrowing base. The amendment has the effect of temporarily increasing the borrowing base under the facility by up to $25 million until September 29, 2022. The amendment also establishes a reserve against availability in the amount of $10 million until June 29, 2022, and $15 million thereafter. Second, in addition, on March 30, 2022, Revlon Finance LLC amended its asset-based term loan credit agreement dated as of March 2, 2021. The amendment, among other things, made certain changes to the calculation of the borrowing base that had the effect of temporarily increasing the borrowing base for one year after the effective date of the amendment.
Finally, as previously disclosed, on April 25, 2022, the company announced an ATM offering through which we may offer and sell shares of our Class A common stock from time to time with an aggregate offering price of up to $25 million. Free cash flow of $4 million was a source of cash in the first quarter of 2022 compared to a use of $29 million in the prior year period. The increase in free cash flow was primarily driven by a lower as-reported net loss and favorable working capital changes. During the first quarter of 2022, our capital expenditures were $2 million, and the company spent $4 million on permanent displays.
In summary, our first quarter 2022 results reflect the strength of our business and commercial strategy, particularly given the headwinds created by a volatile external operating environment, including supply chain challenges. Importantly, we remain singularly focused on operating with agility to deliver commercial and financial results in 2022 and beyond. I'll now hand the call over to Debbie for closing comments.
Debra G. Perelman
Thank you, Victoria. In closing, we are pleased with our first quarter 2022 results, particularly given the external context under which we are operating that I highlighted at the beginning of the call. Despite the current uncertainty in the market, we do believe that the current headwinds are not long term and that our brands have tremendous strength and opportunity for sustained growth in the market. And now we will open the call for questions.
[Operator Instructions]. We'll now take our first question from Stephanie Wissink of Jefferies.
Hello, [Technical Difficulty] on for Steph. I was wondering if we could get more color on the lower SG&A, was it a reflection of restructuring or was it a pullback on marketing spend or something else? I was also hoping we could maybe size up the China exposure and how to best think about the near-term impacts on the model that, that may have? Also any color you have on kind of where, in terms of brands, we might be seeing the most impact? And then lastly, if you could just talk about any upcoming innovation in the pipeline. Thank you so much.
Victoria L. Dolan
So that's a very good question. And obviously, one of the things if we take a step back and we talk about the volatile environment that we are working in as well as the supply chain constraints that we are addressing, we are focused on achieving our financial results, focusing on driving liquidity. And as we think about one of the levers that we have is to control our SG&A. And so yes, we are managing very aggressively our overhead spend, and we are strategically allocating our brand support, right, to the markets where we get the highest return to the markets in line to our strategic pillars.
Debra G. Perelman
So I'm going to jump in here as well, Victoria. Thank you so much. So when you mentioned SG&A, obviously a component of that is our brand support. And so as we are going through the first quarter recognizing the volatility and the uncertainty with regards to the world around us as well as supply chain, we made very specific decisions with regards to where and how we are going to spend. And we did take the time to reevaluate the brand spend in key markets on key brands. And given the impact of the supply chain challenges, we are very focused on supporting the brands where we had availability of stock in market and where we felt we can meet the consumer needs at shelf.
So with regards to some other parts of your question, there are multiple parts of the question. So I think you had another part with regards to the impact of China. And in the first quarter, we actually fared pretty well with regards to our results in China. Like many other companies in the industry, we started to see impact at the end of March going into April with the shutdown of Shanghai. And so we continue, obviously, to navigate through that, not only with regards to our brands, and our primary brand in China is Elizabeth Arden, but also in terms of how it's impacting our supply chain in terms of receiving components, receiving freight and containers out of China as well as looking to mitigate those risks by rerouting as we can that freight. Okay. So the next part of your question, I think it was innovation, if you could just confirm that?
Yes. That was it. It was -- yes, any upcoming innovation you guys have. Thank you so much.
Debra G. Perelman
Yes. No problem. So I'm not going to comment on innovation that's not in the market. I think that we put some very strong innovation that's currently in the market. I highlighted our Revlon lip launch as well as our Elizabeth Arden eye launch, and there are many others that are in the market today, including our Revlon Professional Curls as well, which are all performing extremely, extremely well.
At this time, I'd be happy to return the call to Debbie Perelman for any concluding remarks.
Debra G. Perelman
Thank you so much. Seeing no additional questions, let me say thank you to all who joined the call today and a special note to our team members around the Revlon world who are all listening. Thank you for all the efforts that you make every single day. Have a good afternoon.
This does conclude today's Revlon first quarter 2022 earnings call. Please disconnect your lines at this time, and have a wonderful day.