Revlon shakes up exec suite, dumps "mature" line; working on 8 5/8% refinance

By Paul Deckelman

New York, Sept. 25 - Revlon Inc.'s new boss hit the ground running, announcing a sweeping program of changes Monday - just one week after taking command at the underperforming New York-based cosmetics company.

Among the measures announced by newly installed president and chief executive officer David L. Kennedy was an organizational streamlining aimed at saving Revlon $34 million annually, and the decision to discontinue its new Vital Radiance line of cosmetics for women 50 and up, just eight months after the line's much-publicized mid-January launch. The executive who was a key architect in that launch was among several top names ousted in the shakeup.

Bond refinance 'very high' priority

Kennedy also told analysts on a morning conference call that Revlon was continuing to work on refinancing its $217.4 million of outstanding 8 5/8% senior subordinated notes due 2008 issued by its wholly-owned Revlon Consumer Products Corp. operating subsidiary, but could offer no details yet as to when and how that might be accomplished.

"We are actively looking at options and developing those plans," he said, without going into further detail. The refinancing would be "very high" on the company's agenda, he added.

He would not say whether the proceeds from a planned $75 million equity issuance scheduled to take place later this year or early next year would specifically be used to help redeem the 8 5/8% notes, only repeating the company's previous, more general statement that it would be used to reduce Revlon Consumer Products' debt. According to the company's most recent quarterly 10-Q report filed this past August with the Securities and Exchange Commission, as of the end of the second quarter on June 30, the unit's debt also included $386.6 million of outstanding 9½% senior notes due 2011, $104.6 million of debt drawn under a multi-currency revolving credit facility due 2009, and $700 million of term loan debt due 2010.

In July, after the second quarter had already ended, the Consumer Products subsidiary negotiated a $100 million add-on to the term loan with its bank lending group, upping the company's outstanding debt to about $1.5 billion.

No asset sales seen

In answer to queries from several analysts, Kennedy flatly ruled out divesting any of Revlon's established brands to raise funds for paying down its debt load.

"As we've said in the past, we don't see that," Kennedy told one analyst. "We like our brands, we like our brand portfolio. We believe that we'll be able to invest at appropriate levels behind each of the categories that we are in. So we don't see any divestitures of brands at all."

In response to another analyst who asked specifically why Revlon didn't just sell what she called its "miscellaneous" brands, then concentrate on its core color cosmetics business and use the sale proceeds to pay down debt, Kennedy replied that while the company has "obviously, a sizable amount of debt," it is management's feeling that "over time, as we produce more cash-flow-positive results, we'll be able to reduce that debt."

The CEO continued that "as far as the debt levels" go, it was not so much a question of raising capital as using it wisely.

"We've had access to a tremendous amount of capital in the company - we've never really been capital-constrained - but we've probably made some bad judgments about how we've utilized that capital in the past - and we need to improve that as we go forward."

Not so Vital, nor so Radiant

In retrospect, one such questionable use was probably the launch of the Vital Radiance line. When it debuted in mid-January, Revlon touted the product, described as the first major color cosmetics brand sold at mass retailers created for women over fifty, in glowing terms.

The company projected that the target market was both affluent and growing, as more female members of the Baby Boom Generation approached, and eventually hit, the Big Five-Oh and sought ways to maintain a more youthful appearance. Vital Radiance - which the company promised would "help the 50+ woman achieve a flawless beauty look in a matter of minutes" - seemed like a sure winner.

However, things didn't work out that way.

In announcing Monday that it was pulling the plug on Vital Radiance, Revlon cited the "disappointing performance of the brand and the likelihood that Vital Radiance would not maintain an economically feasible retail footprint in the future."

As a result, it expects to incur charges of approximately $63 million in this year's third quarter related to discontinuing the brand, including $40 million as a provision for estimated returns and allowances, as well as about $13 million for the write-off of inventories and selling and promotional materials, and another $10 million for the acceleration of display amortization.

Revlon further indicated that, including the cost to discontinue the brand, Vital Radiance is expected to negatively impact its operating results by $70 million in the third quarter and $110 million for the full year, including the cost to discontinue the brand in the third quarter and the charges taken earlier in the year associated with a reduction of retail space at several large-format retailers.

When asked point-blank by an analyst whether Vital Radiance's failure was because its marketing plan wasn't executed properly, or whether it was just a bad idea from the get-go, Kennedy waffled, saying that although he has his own ideas, "it would be difficult to comment.

"I think the bottom line was - it really didn't work. It didn't perform, it didn't build awareness, it didn't build trial fast enough, and it just didn't meet the consumption hurdles that it needed to in order to retain [store shelf] space.

"As we looked forward, we were looking at a much-reduced retailer footprint from what we had anticipated and a continuing investment that was more than the scale that the brand would really justify."

Kennedy said that the cosmetics themselves were not at fault; they were "high quality."

But he said that "one can question a number of the elements of the marketing which didn't appear to work."

He said "obviously, if you start out with the overall presentation of the brand, certainly, some of the imagery might be questionable."

Looking ahead, he said "what we'll do, as soon we have the opportunity, we'll analyze [what worked and what didn't work] - but more from a learning standpoint."

Vital Radiance exec, others axed

Besides the demise of Vital Radiance, the other major news coming out of Revlon Monday was the organizational streamlining - the second such large-scale corporate shakeup this year, following an organizational realignment announced Feb. 1 that involved the consolidation of functions within its sales, marketing and creative groups, as well as some headquarters functions.

In the latest round of changes, Revlon will eliminate 250 positions, or 8% of its workforce, including those of three senior executives.

One job being eliminated is the post of executive vice president and chief marketing officer, held by Stephanie Klein Peponis, who was closely associated with the failed Vital Radiance initiative; Peponis, in fact, was the senior executive who was quoted at length in the company's Jan. 23 announcement of Vital Radiance's debut.

Also being cut is the post of executive vice president and chief creative officer, held by Rochelle Udell, with the brand marketing leadership in the United States that formerly reported to Peponis and Udell to now report directly to Kennedy. A third top post being axed is that of its executive vice president and president of international operations, currently held by Tom McGuire. His underlings in charge of the three geographic regions in to which Revlon divides the rest of the world will now also report directly to the CEO.

Revlon said in its announcement of the changes that reducing the layers of management and thus eliminating redundancy would "enable more effective innovation and creativity, while fostering more efficient decision-making and appropriately aligning this decision-making with accountability."

Charges to impact earnings

Revlon will take $29 million in restructuring and related charges as a result of the restructuring, most of it in employee-related costs, including severance and other termination benefits for the executives involved and other employees affected. It will incur $15 million of the charges in the current 2006 third quarter, for which results will be released in early November, and the remainder in the fourth quarter.

Of the $34 million in ongoing annualized savings that are expected to come out of the latest round of changes, Revlon sees about $5 million benefiting 2006 results. The restructuring actions implemented earlier in the year resulted in $10 million of charges in the first half of 2006, with expected related ongoing annualized savings of approximately $15 million.

Revlon projected that net sales in the current third quarter - which ends this week - are expected to be in the range of $280 million to $290 million, including the effects of around $40 million in estimated Vital Radiance returns and allowances to retailers.

It said that adjusted EBITDA for the quarter (which the company defines as net earnings before interest, taxes, depreciation and amortization, as well as before gains or losses on foreign currency transactions, gains or losses on asset sales, and gains or losses on the early extinguishment of debt, and miscellaneous expenses) will show a loss of approximately $50 million, while the company will also post an operating loss of about $90 million, both of those numbers calculated after giving effect to the costs related to the organizational streamlining, the total impact in the quarter of Vital Radiance, including the cost to discontinue the brand, and other charges in connection with executive severance.

It said that total impact of these items on adjusted EBITDA in the quarter is expected to be approximately $79 million, and the total impact on operating profitability is expected to be some $92 million.

Sees Q3 loss of $135 million

Figuring in all of the above, Revlon projects a net loss for the third quarter of $135 million.

For the full year, Revlon is looking for net sales to come in around $1.34 billion, including the impact of retailer returns of Vital Radiance products and other related allowances.

Adjusted EBITDA for the year is expected to be around $75 million to $85 million, and the operating loss is expected to be approximately $45 million to $55 million, including all of the above-mentioned factors. The total impact of these items on adjusted EBITDA for the year is expected to be roughly $129 million, and the total impact on operating profitability is anticipated at around $150 million.

For 2007, Revlon sees adjusted EBITDA of about $210 million, and says that its financial results next year will benefit from the changes announced Monday, between the estimated $34 million of annual savings attributable to the streamlining moves, and the fact that, as Kennedy said, while Vital Radiance "was a significant investment for us that obviously didn't pay off, we will be unburdened by that going forward. That will allow us to focus on our really strong brands - Revlon and Almay."

Credit amendment sought

Noting the expected impact on the company's adjusted EBITDA and operating earnings from the Vital Radiance discontinuation and from the corporate streamlining, and the charges against earnings that each of these events will produce, Revlon said that the Revlon Consumer Products unit will seek an amendment to its bank credit agreement to add back the charges in the calculation of its financial covenants.

It said that credit agreement amendment is expected to be completed before the end of the month, five days from now, subject to market and other customary conditions, including receipt of consents from the appropriate lenders.

Also on the financing front, Revlon said that as it goes through the process of the planned $75 million equity issue later this year or early next year, the $75 million "backstop" guarantee offered by its principal shareholder, MacAndrews & Forbes - the investment vehicle of the company's chairman, billionaire financier Ronald O. Perelman - will remain in effect to ensure that Revlon issues the new equity.

It also said that an existing $87 million line of credit from MacAndrews & Forbes - which was undrawn as of June 30 - will remain available to the company through the completion of the $75 million equity issuance.

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