Revlon posts Q2 loss but sees benefits of recent "decisive" debt transactions

By Paul Deckelman

New York, Aug. 3 - Revlon Inc. reported a second-quarter decline in net sales from year-ago levels Tuesday and a slightly wider net loss - but the New York-based cosmetics maker was basking in the luxurious after-glow of its recent balance-sheet makeover, which saw nearly $1 billion of bond debt peeled and scraped away like dried, dead skin in two big transactions, a massive debt-for-equity exchange in the first quarter and a somewhat smaller, but still substantial tender offer completed last month.

The chronically cash-strapped company is also enjoying ample liquidity for the first time in a long time, thanks to new credit facilities and other financing moves.

"We took what we believe was decisive action," declared Revlon's president and chief executive officer, Jack Stahl, in a morning conference call with investors and analysts following the release of the results, "and since the beginning of this year we have completely transformed our capital structure and we will continue to strengthen it as we move forward."

Revlon reported a net loss for the quarter of $38.9 million (11 cents per diluted share) on net sales of $316 million versus a year-earlier net loss of $37.8 million (68 cents per diluted share) on sales of $322 million. The company explained that the considerably lower per-share loss figure in the most recent quarter was due to the much larger equity float following the issuance of millions of new shares in the debt-for-equity exchange earlier in the year.

But while the company remained in the red on a net income basis, adjusted EBITDA (net earnings before interest, taxes, depreciation, amortization, gains or losses on foreign currency transactions or on the sale of assets, and miscellaneous expenses) was $24 million for the quarter versus $21 million a year ago, the gain in the latest period attributable to the absence of growth plan charges which reduced adjusted EBITDA by $13 million in the year-ago quarter. For the first half, adjusted EBITDA totaled $68.2 million, well up from $44 million for the cash-flow measure a year earlier.

Holds to EBITDA target

Stahl told analysts on the call that Revlon continues to target top-line [revenue] growth for 2004 in the range of 3% and EBITDA in a range of about $190 million, consistent with what the company projected in a mid-quarter presentation about six weeks ago.

The CEO noted that the fourth quarter is "traditionally a very strong contributor to our EBITDA, and in 2004, in support of the $190 [million], we certainly expect the fourth quarter to be a very strong contributor and to have an even larger relative share of total year EBITDA due to the strength of our 2005 product program, much of which ships in the last quarter of the year, and the fact that our productivity initiatives have an increasing impact as the year progresses."

Among the factors Stahl outlined in predicting that the 2005 product program would do well, and thus help to swell EBITDA in the fourth quarter and beyond, were new market research methods the company had not used previously; Revlon's new "Bellissimo" advertising campaign, which the CEO touted as "the most elegant and upscale campaign" in the cosmetics industry; its increased use of in-store "beauty advisors" and other tactics aimed at working with retailers to create a more favorable buying environment for Revlon's products at major stores; and the company's abandonment of its traditional practice of introducing more new products every year than most of its rivals - a venerable strategy which in retrospect had unwittingly created a climate of customer and retailer confusion, cannibalization of existing product-line sales and greater retailer returns of product to the company.

"Those are some of the reasons why our fourth quarter will be more important in its share of full-year EBITDA than you might have seen in the past," Stahl added.

Interest costs to fall $40 million in '04

Revlon's chief financial officer, Thomas McGuire, told the analysts on the call that cash interest paid in the quarter was $30.3 million, and $76.8 million for the first six months. For the year, he said, Revlon expects cash interest expense to total about $120 million, a savings of some $40 million over the $161 million paid out in interest in 2003 - and that's without the benefit for the full 2004 year of all of the debt-reduction and debt-repositioning transactions that Revlon executed this year. When the impact of those transactions is felt for a full year, starting in 2005, "that will further reduce that number going forward," McGuire said.

Specifically, Revlon - which in mid-February had announced plans to eliminate some $930 million of debt, or roughly half of its debt load by March, 2006 - first wiped some $800 million off its books. This consisted of $630 million of its Revlon Consumer Products Corp. subsidiary's 8 1/8% senior notes due 2006, 9% senior notes due 2006 and 8 5/8% senior subordinated notes due 2007, which were exchanged for cash or new class A common stock, as well as $173 million of existing loans held by MacAndrews & Forbes, in exchange for additional shares that strengthened the Ronald Perelman-controlled majority Revlon owner's grip on the company. Those transactions were completed in mid-March.

Revlon followed that up with another set of transactions, completed in July, which saw the company repurchase $298.4 million of the Revlon Consumer Products 12% senior secured notes due 2005, funding the bond buyback with a portion of the proceeds from a newly completed $960 million credit facility from a syndicate led by Citicorp USA Inc. and Citigroup Global Markets Inc. Besides buying back the notes, a further $292 million of borrowings on the facility were used to repay Revlon Consumer Products' old facility. Revlon also announced that it was calling the remaining $64.5 million of 12% notes for redemption on Aug. 23.

Maturities extended

While the repurchase of the notes and the repayment of the old facility with proceeds from the new facility did not result in a net decrease in the debt load as the earlier debt-for-equity/cash transaction had, the July transactions "extended the maturities on much of the company's debt and reduced its annual interest expense," Maria A. Sceppaguercio, Revlon's senior vice president for investor relations, said on the call.

CFO McGuire, noting the dramatic impact that the July transactions had on the company's debt and liquidity picture, compared the structure of Revlon's outstanding bank facilities as of the end of the second quarter on June 30 and a month later, following the closing of the various July financing transactions.

As of June 30, Revlon had outstanding a term loan facility of $179.8 million, a multi-currency revolver of $110 million, letters of credit issued but undrawn of $18.3 million and in addition, $4 million outstanding under a $151 million funding commitment previously given by McAndrews & Forbes.

Its un-utilized borrowing capacity and unrestricted cash at the end of the quarter totaled about $176 million, consisting of $147 million under the McAndrews & Forbes credit line, $4 million under the multi-currency revolver, and $25 million of unrestricted cash.

After the closing of the July transactions, he said, Revlon had a term loan facility of $800 million, a $160 million multi-currency revolver which was undrawn and letters of credit issued but undrawn of $18.6 million. In addition, company had no borrowings under the McAndrews & Forbes commitment. As of July 30, un-utilized borrowing capacity and unrestricted cash totaled $369 million.

"Well positioned' financially

With much debt cleared off the books entirely or at least extended in maturity and reduced in interest rate under the two series of transactions, and ample liquidity in the till, "we are well positioned financially to continue executing our plan going forward - to drive top-line growth and margin improvement, as we continue to build additional capability," McGuire asserted.

CEO Stahl said that the second quarter "was another very important one for Revlon as it relates to further strengthening our balance sheet."

After noting that when he came to the then-struggling company after a successful lengthy executive stint at Coca-Cola Co., "our first focus was on stabilizing the business, which was losing critical retail space and experiencing significant market-share losses virtually every month for a number of years." Stahl said that with Revlon's business at least now "stabilized and better-positioned, our focus broadened to include addressing our balance sheet," including the March and the July transactions.

"Given all the progress we have made, and while recognizing that we still have a lot of work to do to position ourselves to drive consistent and profitable growth," he said, "I am absolutely confident that our short-term plans and our longer-term plans keep us very much on track to create value creation for the long term. "

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.