Q2 2020 Revlon Inc Earnings Call
So starting approximately 10 minutes. Thank you.
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Hello, and welcome to back loans Q2, Twentytwenty earnings call.
My name is crazy it'll be a couple of and they tested today said that.
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Well now how did you buy a good to Eric Lauren Vice President and tried to read to begin todays conference. Thank you.
Thank you rosy good morning, everyone and thank you for joining the call.
Earlier today the company released its financial results for the quarter ended June Thirtyth 2020.
Not already received a copy of the earnings release copy can be obtained on the company's website or web Bonnie Dot com.
On the call. This morning are department, our President and Chief Executive Officer, Surjit, Pedro our Chief operating officer inventory adult in our Chief Financial Officer.
Discussion today might include forward looking statements that are based on current expectations that 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 as set forth in a company that's easy filings, including its Q2 2020 <unk> form 10-Q.
The company undertakes no obligation to publicly update any forward looking statements.
For the company's obligations under the U.S. Federal Securities laws.
Remarks today will include the discussion of certain GAAP and non-GAAP results.
There's been a pass 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 to find any earnings release and are also reconciled in the financial tables at the ended it really.
Please also note that certain amounts provided throughout this call have been roundup.
The call today should not be copied or recorded but that will turn the call over today.
Thank you Eric Good morning, everyone and thank you for joining us.
Let me start by saying I hope everyone participating on the call is safe.
Unhealthy as we continue to navigate through this global pandemic.
I think syrians throughout the beauty industry coated 19 had a significant impact on our business.
Our as reported net sales in the second quarter 2020.
$348 million.
Decline of $223 million for 39% compared to the second quarter 2019.
Substantially all of this decline is attributed to cope at 19, and all segments and regions were negatively impacted.
It is worth noting that excluding the impact of both cope at 19 and FX.
Our second quarter 2020, net sales would have remained essentially flat relative to the prior year period.
Later in the call Victoria will provide additional kobin detailed actually reviews, our second quarter financial performance.
Despite covert nineteens negative impact on the company's net sales, we moved very quickly to take significant action to protect our profitability.
We began the implementation of the Revlon 2020 restructuring program earlier this year, just as a pandemic was beginning to spread globally.
And because of this we have begun to realize meaningful cost reduction from this program.
Specifically in the second quarter 2020, we captured approximately $38 million of cost reduction related to this program, primarily due to reductions in headcount.
In mid April 2020, we also took additional temporary employee action.
Quoting furloughs.
A reduced work week and hiring freezes all of which resulted in additional significant cost reductions in the second quarter.
Well these were very difficult decisions to me.
They were necessary to protect the business and our profitability during that unpredictable time.
With the realization of these substantial cost reductions from the Revlon 2020 restructuring program and the Coven 19 measures, we delivered $45 million of adjusted EBITDA on the second quarter 2020, compared to $47 million in the second quarter of 2019.
Our adjusted EBITDA margin as a percent of net sales increased approximately 480 basis points to 13.1% and the second quarter 2020.
The strategies, we've put in place and the decisions. We had actions have all been done with the objective of securing the company's future preserving cash and ensuring that our liquidity remains sufficient.
The company also moved very quickly to adapt the accelerated shifts in consumer behavior, notably to E Commerce.
As we have shared previously with you. This channel has been a key strategic pillar for the company over the last 24 month and the current coping 19 environment has only serve to further accelerate the importance of the channel not only to revlon, but to the industry as a whole.
In the quarter, we rapidly adopted to meet the surge of online demand and we have proven that we are able to serve these consumers and their needs quickly and efficiently.
As a key catalyst for the company's growth going forward, we will continue to invest aggressively to further build out our ecommerce capabilities and continued to strongly support the brands that perform well in the channel.
In the second quarter, our E Commerce net sales grew approximately 58% now representing approximately 18% of total company net sales more than doubling the 7% penetration from the second quarter 2019.
Elizabeth Arden Dotcom, our largest on direct to consumer site grew over 100% in the quarter.
Well all regions experienced very strong double digit ecommerce growth in a second quarter, we experienced notably strong growth in the proceeds channel EMEA as wells with parts of our math and professional business in North America.
In China, where our business is predominantly online we continue to see growth.
Driven by Elizabeth Arden provide answer my skin care businesses as well as our green and White T. fragrance collection.
We continue to drive excitement online in this market as evidenced by the recent launch of hyaluronic acid, Sam I capsules drink China's important hey box event on T Mall.
In total our China business grew 56% versus the prior year quarter on a constant currency basis.
Additionally, we have seen consumer shift their product behavior, and given our brand portfolio Revlon is well positioned to capture this changing consumer preferences.
As many consumers remained at home with salons and Barbershops close for much of the second quarter, we saw double digit growth in our personal care brand, notably our Revlon beauty tools.
We ended nature hair care to techs nail care products and Sinfulcolors nail color.
In the U.S., we also experienced growth in our hair color and hair care categories in part driven by our newest product launch total color, our first ever clean and deacon permanent hair color.
Revlon was also quick to enter the hand sanitizer business and we are now producing hand, cleansing and sanitizer products across our to attack.
Andy Revlon professional and Hydrogenics brands.
Well, we continue to live in challenging and I'm certain times, Judy remains a resilient industry.
Our ability to mitigate the significant top line impact due to cobot with aggressive cost reduction measures protecting our profitability and liquidity enabled the company to continue to focus on accelerating ecommerce to drive the business forward.
Because of our leaner operational structure strong E commerce growth as well as our range of product offering we're confident that revlon is well positioned to meet the needs of our customers and consumers.
And now I will turn it over to Victoria to walk you through the details of the second quarter 2020 result.
Thank you Debbie and good morning to everyone on the call.
Let me first detail our second quarter 2020 result.
Second quarter as reported net sales were $348 million compared to 570 million during the prior year period, a decline of 39%.
As reported net sales includes approximately $214 million estimated negative impacts associated with cobot 19.
Excluding the cobot Nike impact net sales on a constant currency basis were essentially flat to the prior year period.
Second quarter operating loss increased to $59 million compared to a $9 million operating loss during the prior year period.
The higher operating loss was driven primarily by the lower net sales due to cobot 19.
$20 million of noncash intangible impairment charges, reflecting the financial impact of Copel 19.
$17 million of higher restructuring charges, primarily related to the Revlon 2020 restructuring program as lower gross profit margin driven primarily by unfavorable sales mix negative foreign exchange as well as higher manufacturing overhead absorption costs associated with cobot 19.
These negative impacts were partially offset by $136 million in lower selling general and administrative expenses driven in part by the cost reductions associated with the company's restructuring programs as additional actions specifically implemented to mitigate the adverse impact of cobot 90.
Moving on the Companys operating results.
Excluding or nonrecurring items in the quarter second quarter, adjusted operating income increased to $8 million from $5 million in the prior year quarter.
Second quarter as reported net loss increased to $127 million versus $64 million net loss in the prior year period.
The higher net loss was driven primarily by the higher operating loss described previously and $13 million in higher interest expense, partially offset by a 9 million dollar improvement in the benefit from income taxes.
Finally, adjusted EBITDA was 45 million in the second quarter of 2020 compared to $47 million during the prior year period, driven primarily by the cobot related lower net sales, which were substantially offset by lower S. DNA expenses and improved adjusted gross profit margin.
Next I would like you turn to work segment results.
Revlon segment net sales in the second quarter 2020, $135 million, representing a 45% decrease on a constant currency basis.
The segment lower net sales were driven primarily by Revlon color cosmetics.
As well as lower international sales of Revlon branded professional products and Revlon Colorsilk hair care products due primarily to the continuing affects of Copel 19 on the math retail channels and on Salon activity.
Revlon segment profit decreased to $12 million from $26 million in the prior year period, driven by this segment's coated related lower net sales and lower gross profit margin, partially offset by lower brand support.
Elizabeth Arden net sales were $81 million in the second quarter, representing a 30% decrease on a constant currency basis.
The decline was mainly driven by certain Elizabeth Arden branded skin care products and color cosmetics and certain Elizabeth Arden branded fragrances due impart to the continuing effect of cobot 19 on foot traffic at department stores and in travel retail outlets, partially offset by higher net sales of.
There are my skin care products predominantly in the Asia region as well as strong growth in our E Commerce channel.
Elizabeth Arden segment profit was $11 million compared to a $3 million in the prior year period.
Primarily due to the segments higher gross profit margin and lower brand support partially offset by the cobot reloaded lower net sales.
Net sales for our portfolio segments were $89 million in the second quarter of 2020, a decrease of 24% on a constant currency basis.
Driven primarily by Al May color cosmetics American crew men's grooming product and CND nail products.
These declines were due in part to the continuing effect of Cobot 19 on the math retail channel and salons, partially offset by higher net sales of Cutex nail care product creme of nature hair care products and sinful color cosmetics, primarily in North America.
Portfolio segment profit was $15 million, an increase of $8 million versus the prior year period, driven by this segment lower SDMA expenses as a result of cost reductions designed to mitigate the adverse effect of cobot 19 on the Companys operating results as well as the Red 120 20.
Restructuring program, partially offset by just segments lower net sales and lower gross profit margin.
Finally, our fragrances segment net sales were $43 million in the second quarter of 2020.
Representing a 47% decrease on a constant currency basis.
The segment lower net sales were driven primarily by the continuing impact some cobot 19, especially in the Christie's channel due to the temporary door closures.
Regimen, So segment profit in the second quarter of 20 $28 million, a 5 million dollar decrease compared to the prior year period, driven by the segments lower net sales, partially offset by higher gross profit margin and lower S. DNA expenses.
Now turning to liquidity.
Cash used in operating activities. During the first half of 2020 was $164 million compared to $41 million use in the prior year period.
The increase in cash usage was driven primarily by the cobot 19 related lower net sales.
Free cash flow used in the first half of 2020 was $167 million compared to $53 million views in the prior year period.
The increase in free cash flow usage was driven by the higher operating cash flow usage due to the cobot related impacts on the business.
Partially offset by lower capital expenditures.
During the first half the 2020, we spent $3 million and capital expenditures and $13 million on permanent displays.
During the second quarter of 2020 and since the completion of our brand co financing in May the company's liquidity position has been negatively impacted by a number of non operating items.
First we repurchased five in three quarter percent senior note in the open market at an aggregate cost of $51 million.
Second we settled tranche b under our 2016 revolving credit facility upon its maturity at a cost of $31 million.
Third we paid 21 $20 million related to our for an asset base from facility due to a cobot related decline in the borrowing base, but secures the facility.
Lastly.
The available borrowings under our 2016 revolving credit facility declined by $14 million due to a drop in the facilities borrowing base driven predominantly by lower accounts receivable balances, resulting from coded related lower net sales.
Driven in part by these non operating items as of June Thirtyth. The company had approximately $416 million of available liquidity, consisting of $339 million of unrestricted cash and cash equivalents.
$51 million in available borrowing capacity under the revolving credit facility $30 million and available borrowing capacity under the 2019 senior line of credit less flow of approximately $4 million.
Please also note there's approximately $387 million, a five and three quarter percent senior notes due February 2021 currently outstanding for which we recently, we recently launched an exchange offer as disclosed in an 8-K, we filed on July 27th with the FCC.
The exchange was launched in order to extends our debt maturities and more importantly preserve liquidity over the short and long run which will allow us to continue investing in our business and strategic growth priorities.
And finally as of July 31st 2020, the company had approximately $392 million of available liquidity, consisting of $318 million of unrestricted cash and cash equivalents.
$51 million and available borrowing capacity under the revolving credit facility $30 million in available borrowing capacity of the 2019 senior line of credit let slope of approximately $7 million.
I'll now hand, the call over could that be for closing comments.
Thank you Victoria in closing, we continue to manage through the impact of covert 19, including ensuring the safety and health of our employees.
We remain focused on continuing our ongoing efforts to transform our company, including executing on the 2020 restructuring program and propelling our growth in E Commerce.
With that we will now open up the call for questions.
Thank you so I will remind us if he would like coffee question. Please press star one on your telephone keypad.
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I now with that question comes from the line also Stephanie Wissink from Jefferies. Please go ahead.
Hi, Good morning. This is actually Hogan ball for southwest thing Thanks for taking our question.
No I'm wondering if you've seen any change lives and put age out retail based on brand performance.
And then just if you could give us a little color on how you quantified the impact from cobot things.
[noise] Ah. Thank you for the question, let me start a with addressing the first part of your question and then Victoria can address though the Covance part of the question with regards to any changes and say Oh, we see fluctuations frankly, all the time I would say that this quarter.
Order was really no different.
Except to note that retailer within a math as but really a shrunk their space within the fragrance segments.
So that had impacted the business, but other than that it's really the normal course.
[noise] [noise] Victoria's you want to take the second part with regards to sure.
So when we quantified the impact of cobot. It is a bottoms up approach with each of bar markets and it's within each market is by channel as well as by customer.
We're looking at our the impact relative to prior year, but also relative to current variables. So the external variables include store closures. It includes the change in foot traffic that that we have that we have seen for example, it would also include changes in category growth.
Let's take a very detailed process again by market by channel by customer.
Okay, great. Thank you books of the color and I'll pass Lumpsum, though.
The next question comes from the line of Rosemary Sisson from Cowen. Please go ahead.
Yes. Good morning. Thank you for taking the call I just wanted to clarify deployed you said that <unk> Suncor 51 million to buy back the five in coming quarters in the open market. There was 2 million or so that you bought back in service.
Yes.
Right, Okay that was.
Okay. Thank you and the other question was supposed to working capital going forward, how should I should think about that how you know alternative sources and uses over the course of the next.
Couple of quarters.
The working capital is obviously as we are conserving cash and I'm working on optimizing our liquidity. We are hyper focused on our working capital as well to optimize each element each element of that no I don't provide forward guidance on that but that factors into our liquidity equation to ensure the.
We have sufficient liquidity for us to continue to operate to invest in our business strategies. Both for today, the second half of the year as well as into 2021 factoring in the three variables that are really important right now one the economic uncertainty we have to the uncertain trajectory of coal.
Good and three the seasonality of our of our business.
Okay. So in the isn't is working capital generally a source or use of funds in the next two quarters.
It does it really depends it really depends on on what's happening in the overall in the overall economics again, if we look at the seasonality of our business and I think you can look back on that we can see how the different variables play out given the timing of our inventory builds the timing of our payables.
Timing of our receivables as you know the seasonality of our business would suggest that most of our cash generation is towards the end of two through Q3 and into Q4.
Right right, Okay, all right well. Thank you very much for your time appreciate it.
So we continue please be reminded that if you do have a question you can press star one Aneel key patch now.
And our next question comes from the line off [laughter] Bill Kabbalah from Lightspeed management. Please go ahead.
Your broader question is you've got this exchange offer up there you're clearly you don't have enough cash to meet your covenants.
So you can you discuss the water.
The border plan for addressing the capital structure I mean, just it seems like you're just kind of bouncing from.
From one.
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So as I said, I think we need to put that in the context of the uncertain economic environment, we find ourselves in right now the on certain trajectory of posted as well as the seasonality of our business. We are hyper focused right now on on our liquidity on ensuring that we have.
The operating cash that is sufficient for the balance of the year and and into next year. We're also hyper focus on consummating. The exchange transaction. That's our primary focus right now we're always in conversations with our with our other lenders relative to how we optimize that capital structure and deal with deal with.
Upcoming maturities as they come due but right now our focus is on shoring operating cash flow given the uncertainty we have today as well as consummating the exchange transaction.
Thank you.
Seeing no additional questions. Let me say, thank you to all who joined the call today and especial no toward team members around the Revlon World.
Those who are listening thank.
Thank you for all the efforts you make every single day and Stacey. Thank you.
Thank you for joining today's conference you May now disconnect. Your lines hosts please stay connected and wait for their instruction and key.
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