Q2 2019 Earnings Call
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No.
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Hi, you're connected to not break that may take your possibly.
Revlon.
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David Brown.
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If I can find and I think he's with Elizabeth Arden Dotcom net sales growing 42% versus the prior year quarter and the launch of flush beauty dotcom in June .
In this recent quarter. We also went live with the relaunch of our American crew direct to consumer sites.
While we saw strong growth in our international and ecommerce operations.
We continue to see headwinds in our North America business, which declined 13% on a constant currency basis due in large part to the overall declines at our industry is experiencing in the us mass color cosmetic market.
We experienced declines across the cosmetics portfolio, including Revlon and now may as well as we continue to cycle through space loss for pure rights and sinful.
In order to mitigate the broader market forces weighing down our industry, we remain committed to our core strategies and investing in our brands, which continue to excite and engage our consumer.
I'll now hand, the call over to Victoria, who will share details on our second quarter results before we begin QNX.
Thank you Debbie and good morning to everyone on the call.
Let me start by highlighting our second quarter results.
On an as reported basis net sales for the second quarter of 2019 were $570 million a decline of 6% versus the prior year quarter.
On a constant currency basis, net sales decreased 3.3% driven by declines in our portfolio and fragrances segments, partially offset by strong growth within our Elizabeth Arden segment, while the Revlon segment net sales were essentially flat versus prior year period.
As reported operating loss for the quarter was $9 million.
A 49 million dollar improvement compared to the prior year quarter.
The improvement in operating loss was driven by lower selling general and administrative expenses as well as lower acquisition and integration costs.
The lower SDMA is mainly attributable to lower overhead costs and lower brand support versus prior year to a line marketing initiatives with new product launches.
Non working media spend decline versus prior year, driven primarily by cost reductions from that transition to our internal agency.
We also benefited from nonrecurring charges in the prior year period associated with the re acquisition of Elizabeth Arden intellectual property and the ERP implementation remediation efforts.
As reported net loss for the quarter was $64 million, an improvement of 48% versus the prior year period.
The lower net loss was driven by the lower operating loss described previously partially offset by higher interest expense.
Finally, adjusted EBITDA improved $10 million or 28% to $47 million in the second quarter of 2019.
Compared to $37 million during the prior year period.
Next I would like to turn to our segment results.
Revlon segment net sales in the second quarter of 2019 were $252 million, representing a 3% decrease on an as reported basis.
Or essentially flat to the prior year period on a constant currency basis.
The decrease in as reported net sales was driven by lower net sales of Revlon color cosmetics in North America.
Due in part to weakness in the U.S. mass retail markets.
Partially offset by higher net sales of color cosmetics and Colorsilk in our international markets.
Revlon segment profit decreased by $11 million over the prior year quarter to $26 million.
Driven by the segments lower net sales and lower gross profit margin, partially offset by lower general and administrative costs.
Elizabeth Arden net sales were $117 million, representing an 11% increase on an as reported basis or a 15% increase on a constant currency basis.
This improvement was mainly driven by higher net sales of Elizabeth Arden skin care products, including semis and provides principally in our international territories.
Elizabeth Arden segment profit was $3 million, an increase of $9 million versus prior year period, primarily due to the segments higher net sales and higher gross profit margin.
Net sales for our portfolio segment were $119 million in the second quarter of 2019.
A decrease of 20% on an as reported basis or a 17% decrease on a constant currency basis.
This decrease was primarily driven by lower net sales of CND nail products as well as almay and sinful color cosmetics.
Portfolio segment profit was $6 million, an increase of $11 million versus the prior year period.
As a result of lower brand support and general and administrative expenses offset by the segments lower net sales.
Finally, net sales of our fragrances segment were $83 million in the second quarter of 2019.
Representing a 13% decrease on an as reported basis.
On an 11% decrease on a constant currency basis.
This decline was driven by North America in large part by the weakness in the overall mass fragrance category as well as proactive actions taken to limit excess inventory in market.
Fragrances segment profit in the second quarter of 2019 was $13 million, a $2 million increase compared to the prior year period, primarily as a result of lower general and administrative expenses and distribution costs.
Partially offset by this segment's lower net sales.
Turning to liquidity cash used in operating activities. During the first six months of 2019 was $41 million or an improvement of $149 million versus the prior year period.
Primarily attributed to the lower net loss in the quarter and an improvement in working capital as well as onetime costs incurred in 2018 related to the remediation of the ERP implementation.
Free cash flow used in the first six months of 2019 was $53 million compared to $220 million used in the prior year period.
The improvement in free cash flow usage was primarily driven by decreased use of cash in operating activities and lower capital expenditures.
During the first half of 2019, we spent $12 million in capital expenditures and $20 million on permanent displays.
As of June Thirtyth, the company had approximately $108 million of available liquidity, consisting of $63 million of unrestricted cash and cash equivalents.
$23 million and available borrowing capacity under the revolving credit facility.
$30 million and available borrowing capacity under the 2019 senior line of credit.
Lets flow of $8 million.
On August six the company finalized a new four year $200 million senior secured term loan facility.
The loans net proceeds of approximately $187 million will give us fresh resources to continue to invest in our core strategies.
Drive profitable growth.
And also be used for other general corporate purposes.
Inclusive of the new financing as of August six 2019, the company had approximately $260 million of available liquidity.
And finally to provide an update on our optimization program, we remain on track to deliver the anticipated cost reductions across our company.
Ill now hand, the call over to Debbie for closing comments. Thank you Victoria.
In closing despite the headwinds in North America and their color cosmetics.
We remain focused on investing in our brands and core strategy.
We are making good progress in our ongoing efforts to transform our company.
With that we will now open up the call for questions.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad and you will be prompted one to ask a question.
Our first question comes from the line of Hale Holden of Barclays Capital. Please proceed.
Hi, good morning.
I have two questions for you on the new secured term loan.
I was wondering.
You know if you could give us any thought into doing that as a four year facility versus shorter term facility to what you did last year and weather.
Well on the counters and for US It was on the other side of it or if there is a third party loan.
Thank you for the question. So this new capital infusion is a four is a four year loan as you as you point out it's important for our business as it provides us the capital that we need as we said to invest in our core strategies to invest in innovation and to be used for general corporate purposes. In addition to being able to accelerate our our transformation efforts.
The partner that we that did this loan with US is Aeris capital management. They are already part of our of our capital structure and so I think this this deal with them shows their continued support for our business.
Thank you very much.
Our next question comes from the line of Carla Casella.
Carla Please proceed.
Hi, I'm in the past you've commented do you expect to de lever by the end of the year to a level, where you believe you can refinance the 2021.
Maturity is that still the plan and in conjunction with that can you give us how much you expect the optimization savings to be for 19, and how much you've achieved through the first half of the year.
Okay. So two good two good questions. So I think this infusion of capital as I said before allows us to continue to invest in our business to be able to deliver against our core strategy is to be able to deliver against innovation and to be able to accelerate our transformation efforts it will better position us to be able to refinance those those bonds and so as the time is appropriate we will be refinancing the bonds.
On your second question in terms of the transformation program, we do not disclose the specific amount of savings, but I will remind everybody that we announced the transformation in November of 2018 that we said we expected to.
Deliver savings of between 125, and 150 million on an annualized basis and that we expected.
Most of the program to be complete by the end of 2019.
And we are on track to do that.
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All right excellent. Thank you. Our next question comes from the line of William Reuter of Bank of America. William Please proceed.
Hi, This is mariano for buildings for taking the question. So my first is just on e-commerce what.
Percent of your business do you ultimately think this will grow to and what sort of margin impact or do you expect as this continues to grow.
Gary Thank you for the question.
You know with regard to e-commerce as I mentioned, we continue to see strong growth with the increase as a percent of sales going from 5% in 2018 second quarter to 7% in second quarter 2019, we remained very focused in terms of expanding our capabilities with regards to e-commerce .
When I look at.
The competitive sets and I won't comment specifically in terms of giving forward guidance for ourselves, but when I look at the competitive set that really hover around 10% to 15%.
We look to be competitive there.
And with regards to impact on margin I'm not going to comment on that thank you for the question.
Sure and just one more for me if you could just update us on your expectations with tariffs I know last quarter. You had said you don't expect it to be material, but is there any change to that and if you could just touch on your exposure to China.
So we do are impacted by Terra it's something that we are constantly monitoring and working out ways to to mitigate that.
When we look at our at our margin, which I'm sure you will somebody will ask you about the margin bridge terrorists are having an impact on our margin, but we're not going to disclose the specific amount.
Okay got it thank you so much.
Our next question comes from the line of.
Jana of Goldman Sachs. Jennifer Please proceed.
[noise] if given the the bifurcation in some of that brand and regional performance have you given any updated thoughts on potential asset sales or monetization of some of the better performing assets.
So.
We are always looking at M&A opportunities with regards to our business, but where we stand today with our brands, we feel comfortable with where we are.
Okay, and then just on the cost savings appreciate that you're not going to break out how much we've realized year to date, but can you just remind us that the mix of those 125 to 150 between Cogs enough DNA that you foresee.
Sure.
It's up it's roughly half and half.
Okay, and then just finally as we it seems like we've had the last two quarters. Some you know lower brand I support and marketing expenses are helping out the s. DNA line, how should we think about that for the rest of the year or is this sort of a temporary tailwind or something that we can think of as a as a good normalized run rate.
So thank you for the question I'm not going to provide forward guidance, but I just want to point to a what victory at highlighted which is we are seeing a cost efficiency within our brand support.
Oh, when we brought in the internal agency as well as when we signed up our new Mayor Media Agency. That's driving savings are we still remain committed to investing in our brands and we do that and we invest in the brand on a quarterly basis.
Thank you.
Thank you.
Our next question comes from the line of Mary Gilbert of Imperial capital.
Mary Please go ahead.
Thank you I wanted to follow up on the new term loan.
It sounds like the vast majority of it is going to fund the company's initiatives, whether its innovation I wondered if we could learn more about.
How those funds will be.
No use specifically and also will the company consider repurchasing, let's say some of the.
20 fours the bonds that are trading in the.
Sixty's.
So so as I said the this is a new capital infusion for us it is important.
Infusion of capital for us to be able to invest in as I said.
Our core strategies, our innovation, our transformation as well as for general corporate purposes, we're not going to break out the mix of that of that spend and we're not going to give forward statements in terms of what we're going to do from a capital structure standpoint.
Okay, and then with regard to innovation, how should we think about innovation in the back half of the year across the brands.
And then I wondered if you could give us an update on flush beauty. What the response has been to the company's new DTC launch and just how you see the the growth potential there.
Ah Tony Mary. Thank you for the question with regard to innovation in the back half a I'm not going to comment specifically, but what I will say is its competitive to two where we had been in the past into the industry itself.
You know with regards to flush a we continue to remain very optimistic about.
That brand, we did launch the direct to consumer site. It is early days, but we are seeing a very positive response, particularly with the millennial consumer.
Okay, Great and then my last question with regard to excess inventories and fragrance has then has that been rectified and is attributed to specific brands.
And also are you implementing initiatives to address the weakness in the mass channel associated with that.
You know with fragrances.
No just in terms of the.
The structure of of how consumers are able to interact or not interact with fragrances in the mass channel. Thank you.
So yeah with regard to the excess inventory on fragrances, we're always monitoring the inventory levels that are in the market across a the fragrance brands and on specific ones.
That remains very active Ah within our teams and within the company.
With regards to the fragrance industry in it of itself a in the U.S. mass market.
Oh, we are continuously working with our retail partners in order to address the weakness in the category.
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Alright. Thank you. Our next question comes from the line of Grant Jordan of Wells Fargo.
Grant. Please proceed.
Good morning, Thanks for taking my questions.
You talked about the weakness in the North American match market.
Oh for the Revlon brand can you talk about how your efforts are going to grow sales more in the specialty channel you know not just online but specially.
Yep. Thank you Ah I think well would be helpful to just understand what's driving the decline in the U.S. mass color cosmetics category in how we look at it.
Oh, So if you look at what drives growth within the category. It is driven by innovation and in the first half of 2019, we seen a 15% reduction in with regards to innovation.
We've also seen a reduction in foot traffic or within the stores for the cosmetics industry as well as increased promotionality across the category, which is impacting this industry.
And we're working to execute our strategies in order to mitigate that decline from an industry overall with regards to specialty.
Our brands are in specialty channel and we're always working with the retailers that in order to grow and address their consumer.
Sure I appreciate the color how do you how do you define innovation is not just new product introductions or the pace of new product introductions.
It is new product introductions, and the pace would be inherent to that as well.
Okay, and so are you, saying that it's an industry wide problem attorney traffic of the mass channels is that what you're implying.
When you look at what has been launched in first half of 2019, there is a reduction in and innovation.
As well as a reduction in foot traffic in store.
You know, we believe very strongly that the retail store experience is very important to the category and very important to our brands.
And we continuously work with our retailers in order to enhance our own experience and enhance the experience of the consumers within the store.
Okay. Thank you my question so on the new term loan on how that secured by personally and on the American brand.
Are there other brands like that that are.
On pledged to the existing debt agreements.
No.
No I mean.
No we're fine.
Okay American cruising only on blogs brand that you could have secured against that line.
Well, we can't we could do others, but we have no plans to do that at this time.
Okay. Yeah, that's what I was asking are there other added no sorry, I didn't understand the first question.
Which due to dawn and what should the other large ones would be in that pocket of Unblind now, we're not going to I'm not we're not going to talk about that today.
Okay.
Thank you.
Our next question comes from the line of Steph Wissink of Jefferies Staff. Please proceed.
Thank you good morning, I just wanted to follow up on the question on Cara.
Have or will you take pricing to help cover some of the cost of the tariff and if you're willing to quantify that would be helpful. And then a second question just related to your comment on marketing and the effectiveness of some of your activation programs can you give us an update on what your digital versus your traditional mixes or paid versus earned media. How you think about that balance today in an evolving over time. Thank you.
Well I'll take the first one on pricing on Debbie do the marketing one one on pricing we are always looking for opportunities across our portfolio of brands as well as our geographies and obviously be the mix in them and how we go to market is different a market by market, but it's something that we constantly evaluate to look for those opportunities and where are our our products sit within the competitive frame of pricing. So it's something that is part of what we do on a regular on a regular basis and and as as we said with Paris, well have to see how how many prices we can take to mitigate it as I said, we had a number of mitigation strategies, which includes pricing and could be also include change of outsourcing.
Now with regard to the marketing mix question.
I'm not going to break out the specific mix, but what I will say is that we have shifted to be more digital.
And it really depends on the brand in terms of what that mix is.
Looking at digital versus traditional meaning that it might change by category by brand or by channel.
Thank you.
Our next question comes from the line of Aram Rubinson of Jefferies.
Our Oh. Please go ahead.
Hi, This is chocolate Crawford on for crew I'm, just sort of get your revised down your capex and permanent wall display guidance for 20, 910, and just in the wake of the fresh financing infamous your term loan I was wondering what that was the reason for this was.
So when we look at our investment levels, regardless of source of capital. We're looking at how we invest our cash across many elements of our portfolio, we could be how we invest in brand support permanent displays capital for our business accelerating our our transformation program and we're looking at the ROI across all of those different all of those different elements. So I would not anticipate.
A change in what in what we're seeing in that range for the year.
Okay. Thanks, and then can you just talk a little bit more about the weakness that you saw and Revlon North America kind of what drove the difference here between first quarter and second quarter performance and then just in regard to all my are we still expecting some some new products from them in the second half.
So with regards to just so I understand with regards to Revlon, you're interested in the factors towards the decline.
In the U.S. and in U.S., Yeah, exactly and North American and the Revlon segment, just with Q2, a universal from from Q1.
So yeah with regards to the Revlon business overall, the business declined approximately 2%.
With regards to U.S. math, we were impacted by the decline in the category as well and I called brought to market forces, but what I will point to is that the market itself has been it was declining as of June 30 is about 4.3% and Revlon was declining less than a market at about 3.5%.
So we've been able to grow share in the quarter. A we continue to remain confident in the brand and confident that we continue to resonate with the consumer and the U.S. mass market as well as we've been able to show real strength on the Revlon brand in the international market.
Now with regards to the question on El May Oh, we are always looking to put innovation in the market. We have an exciting refresh coming into the market now on the almay brand, which were leaning heavily into our clean heritage, having really been the first hypoallergenic brand in the market and you will see that rolling out now and we are coming out with the first two mass bio degradable face make up remover, which is also rolling out now so a lot of excitement happening on the almay brand.
Okay. Thanks.
Seeing no additional questions. Let me say, thank you to all who 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 you make every single day, especially your contributions in driving our strong results this quarter.
I am proud of all that we have accomplished together and I'm excited about our future as we strive to build an even stronger global business that will be our foundation for achieving long term profitable growth. Thank you.
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