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About Laughing Water Capital Private partnership formed in February, 2016 Began managing family SMAs in 2013 Concentrated value strategy: typically own 10-20 stocks Common sense approach to investing seek out good businesses that are dealing with structural and/or operational problems that are likely easily solved by an incentivized management team given enough time Patience is essential: typically invest with a 3-5 year view Volatility is NOT risk About Matt Sweeney 15 years in sales, trading, banking and research roles on the buy and sell side Sales experience covering hedge funds and mutual funds focused on small/mid cap names Learned what not to do: focus on short term, trade frequently, over-diversify Additional experience in change management consulting Learned the importance of people and culture, and that turn arounds often don t turn Almost my entire net worth is invested in the strategy Former Vice Chair, New York Society of Security Analysts (NYSSA) Value Investing Committee Chartered Financial Analyst
LWC s 5 Part Framework Is it a Good Business? What Happens When Something Goes Wrong? Are Management s Interest s Aligned? What is it worth? Why Does the Opportunity Exist?
2017
Investment Basics Easy To Understand Attractive, Recession Proof Industry Secular Tail Winds Competitive Advantages Strong FCFF Generation No Sell Side Coverage Underappreciated Recent Developments Temporary Problems Misleading GAAP Financials Large Margin of Safety
12/29/2014 1/29/2015 2/28/2015 3/31/2015 4/30/2015 5/31/2015 6/30/2015 7/31/2015 8/31/2015 9/30/2015 10/31/2015 11/30/2015 12/31/2015 1/31/2016 2/29/2016 3/31/2016 4/30/2016 5/31/2016 6/30/2016 7/31/2016 8/31/2016 9/30/2016 10/31/2016 11/30/2016 Stock Basics Stock Symbol REV $45 Stock Price $29.05 Shares Out (mm) 52.5 Market Cap (mm) $1,525 Cash (mm) $99 Debt (mm) $2,750 Enterprise Value (mm) $4,175 % Owned By Insiders 78% $40 $35 $30 $25 $20 $15 $10 $5 Current Yield N/A $0 52 Week Range $24.50 $37.97 *As of 12/28/2016
Company Basics 1. Combined company PF LTM sales Milestones Founded in 1932 by Charles Revson IPO in 1996 78% controlled by Ron Perelman Traditionally focused on mass market Expanded into Salon channel through 2013 purchase of Colomer Group Expanded into Prestige channel through 2016 purchase of Elizabeth Arden Stable of well known brands across major beauty categories Haircare 18% Color Cosmetics 31% North America 59% Category Mix 1 Geographic Mix 1 Fragrance 28% Nail 6% Latin America 5% Skin Care 7% Beauty Care 10% Asia Pacific 12% EMEA 24%
Is it a Good Business: Revlon Brand Strength Foundation Eye Liner #1 #1 Lipstick Lip Liner #1 #1 source: WWD Ranking of Beauty s Strongest Brands, Feb. 2016 / IRI
% Market Share % Market Share 1. source: Deutsche Bank :US Scanned Channel Revenue % Market Share % Market Share Is it a Good Business: Portfolio of Brands #2 in Nail Polish 1 #3 in Lip Cosmetics 1 20 19 18 17 23 22 21 16 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 20 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 #3 in Women s & Men s Fragrance 1 #4 in Eye Cosmetics 1 25 15 20 15 W 10 10 5 M 5 0 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 0 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Global Sales ($B) 1. Source: Company presentation 2. Source: BeautyPackaging.com based on 2015 revenue & adjusted for pro forma REV/RDEN & COTY/PG Retail Sales ($B) Is it a Good Business: Industry Recession proof revenues Above GDP growth Attractive position in consolidating industry Big enough to be a buyer Small enough to be bought 350 300 250 200 150 100 50 0 Global Beauty Sales 1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Top 20 Global Beauty Companies 2 30 25 20 15 10 5 0
Millions ($) Diversified Staples Diversified Staples Beauty Beauty Is it a Good Business: Profit & Growth Select Comps: Adjusted EBITDA Margin 1 Select Comps: Revenue CAGR 2 Estee Lauder 19.5% Coty 18.5% L'Oreal 21.8% Average 19.9% Colgate 28.6% Procter & Gamble 27.0% Unilever 18.1% Average 24.6% REV: Adjusted EBITDA Margin Estee Lauder 3.2% Coty 22.5% L'Oreal 5.4% Average 10.4% Colgate -4.4% Procter & Gamble -7.0% Unilever 2.0% Average -3.1% REV: Revenue Growth 22% 20% 18% 16% 14% 12% 10% Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 900 800 700 600 500 400 300 200 REV RDEN Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Key Takeaway: Revlon generates peer level EBITDA margins while growing significantly faster PF Q3'16 1. Source: Bloomberg T12M 2. CAGR from FY13 to PF T12M adjusted for periodicity
Why Does the Opportunity Exist? Structural Factors Limited float MacAndrews & Forbes, Ron Perelman s investment vehicle, owns 78% of the company Low liquidity Average daily volume of less than 60,000 shares over last 2 years Almost zero ETF exposure No sell side analyst coverage Different capital structure and capital allocation profile than consumer product peers LIBOR linked debt Big Picture Controlling Shareholder Leverage Profile Net Debt 6.7x T12M Core adj. EBITDA Net Debt T12M PF adj. EBITDA inc. Synergies 4.9x
Why Does the Opportunity Exist? Small Picture Macro Factors A strong USD acts as a drag on international earnings Historically rising rates have actually led to a lower USD over time Rising rates will likely hurt valuation for many dividend paying consumer staples, which have been treated as bond proxies in a low rate world Rising oil prices lead to higher input costs Trading Factors Likely a victim of year end tax loss selling Rotation in shareholder base after rumors the company was for sale Market likely surprised by company s decision to delay integration implementation until 2017 Key Takeaway: An investment in Revlon requires a multi-year time line, and the above factors have a way of smoothing themselves out over multi-year periods.
Why Does the Opportunity Exist? Recent Changes are Underappreciated Growth Profile After decades of stagnant growth, revenue has doubled in the last 3 years 1 Acquisition of Elizabeth Arden Not without challenges, but there are early signs of operational improvement Will take time to integrate, but improves mix and geography New Management CEO Fabian Garcia CFO Juan Figuereo Operational Picture 1. Pro forma for Elizabeth Arden transaction
A Brief Word on Leverage Many investors (especially quantitative strategies) automatically rule out investments in levered companies Leverage needs to be viewed in relation to the consistency of cash flows, not in a vacuum Recession proof businesses are well equipped to carry debt, which increases volatility to equity, but when used effectively juices returns to equity In an 09 like debt crisis, Revlon has levers to pull to increase cash flow Soft factors are impossible to quantify, but have qualitative value Perelman likely one of Wall Street s most valuable clients 5.1x 5.0x History of Quickly Paying Down Debt $1,750.9 Term Loan Libor +350 $439.2 6.25% Senior Unsecured 2024 Net Debt/Adj. EBITDA 4.4x 4.2x 3.5x 5.0x 2008 2009 2010 2011 2012 2013 Colomer Close Current Debt Stack Total Debt: $2,749.6M 4.4x 4.1x 4.9x 2014 2015 2016 PF inc. synergies $65.4 drawn on $400M ABL $493.5 5.75% Senior Unsecured 2021 $0.6 Spanish Gov't Loan
~ CEO Fabian Garcia, Q1 2016 earnings call What Else Might the Market be Missing? Increased Desire to Engage & Focus on Share Price Shareholder outreach Started doing 1 on 1 meetings with minority shareholders Street outreach Started participating in sell side conferences Possible the company will focus on stock liquidity Share split? Possible the company will attract sell side research coverage RDEN previously had sell side coverage Lots of M&A in the space research coverage could help position banks to win business Mr. Perelman could leverage his debt business to attract attention from banks my intention is to be as transparent as I can be and to engage with the stakeholders that of course include our investors. So the degree of that engagement and the frequency of that engagement will be different than what perhaps you have experienced more recently because, obviously, we want to all be sure that the Company is appropriately valued.
Are Management s Interests Aligned? MacAndrews & Forbes Ron Perelman #33 on the Forbes 400 On some level must realize REV is drastically undervalued Recent moves show he is focused on closing the gap Has not always been the best partner to minority shareholders Soft factors 73 years old No heirs in the business Noted philanthropist Signer of The Giving Pledge Beginning to consider his legacy? Management Fabian Garcia, CEO Left high paying job as COO at Colgate Palmolive (CL) Significantly higher salary than prior CEOs Company by-laws adjusted to allow for higher max annual bonus Company by-laws adjusted to allow for higher long term award bonus $10M stock grant will be priced March 2017 Juan Figuereo, CFO Gianni Pieraccioni, COO
1. Source: Company Presentation 2. Source: LWC Estimate *Bloomberg adjusted EBITDA and Earnings T12M except COTY Diversified Staples Beauty Current Valuation Shares Out 52.50 Price $29.05 Market Cap 1,525.1 Total Debt & Pension 2,924.4 Cash 99.2 Enterprise Value 4,350.3 T12M Core adj. EBITDA 1 395.5 T12M Core adj. Net Income 2 90.7 PF T12M adj. EBITDA inc. Synergies 1 546.0 EV/ T12M Core adj. EBITDA 11.0x P/T12M Core adj. EPS 16.8x EV/PF T12M adj. EBITDA inc. Synergies 8.0x Select Comps Valuation* EV/adj.EBITDA Core Revlon @ Average Comp Multiple* Key Takeaway: Even if the RDEN transaction is a disaster, the company is still dramatically undervalued vs. peers P/adj.E Coty FY17 15.7x 65.5x Estee Lauder 13.7x 23.4x L'Oreal 16.3x 27.0x Average 15.3x 38.7x Colgate 14.6x 43.1x Procter & Gamble 14.9x 22.8x Unilever 13.7x 22.2x Average 14.4x 29.3x Price Upside REV @ 15x EV/Core adj EBITDA $59.19 115% REV @ 25x P/Core adj E $43.18 49%
Bears: Its Cheap, and Has Been for a Long Time Business has been stagnant for 20 years You ll never get a comp multiple under Perelman Management turnover has been high in recent years Highly levered Point Perelman may try to take advantage of minority shareholders Counter-Point Revenue has PF doubled last 3 years EBITDA likely significantly higher in 3-4 years: no need for multiple expansion Perelman has paid up for quality management Recession proof business with a history of quickly paying down debt True but DE law offers protection, and strong minority shareholders would surely sue
RDEN: What Did We Buy? Background Category Mix Founded in 1910 by Elizabeth Graham Arden Formerly FFI Fragrance, which bought Elizabeth Arden from Unilever in 2001 and adopted the name Stable of well known brands across major beauty categories Has struggled in recent years due to over reliance on hit-driven celebrity fragrance business Core EA brands are underappreciated 7 consecutive quarters of revenue growth Fragrance business showing signs of life in recent Qs Growth at Designer & select Heritage brands Licensed Fragrances 59% North America 60% Geographic Mix EA Fragrances 16% EA Skin Care 20% EA Color Cosmetics 5% Latin America 3% Asia Pacific 16% EMEA
1. Euromonitor, company presentation RDEN: What Did We Get? Combined company greater than the sum of its parts Access to new channels (prestige, travel retail, spa, department store) Elizabeth Arden s cosmetics and skincare businesses should easily hit Revlon s system wide EBITDA margins Combined margins may be higher, as Revlon had unused capacity Increased exposure to China RDEN has succeeded where REV did not REV brands are mass market thus far China has been about luxury, but as the middle class develops, REV should over index Increased exposure to fast growing (but less predictable) fragrance business Global fragrance market expected to CAGR 8.6% through 2020 1 IPAR & COTY provide evidence that mid-high teens EBITDA margins are possible Opportunity to drive sales of Elizabeth Arden products through improved digital / e-commerce presence RDEN s Pre-acquisition internal improvement plan called for $132M in adj. EBITDA in 2019
RDEN: What Did We Pay? Purchase price of approximately $870M 6.2x expected cost synergies Elizabeth Arden brands including fragrance essentially justify entire purchase price, meaning non EA fragrance is essentially free Cosmetics & Skincare should easily hit REV margins, and justify 2/3rds of purchase price It will take time and work to match pure play fragrance co Inter Parfums, but eventually Fragrance by itself could justify the purchase price EA Brand Including Fragrance FY 16 EA Brand Sales $394.9 growth @4% $410.7 Potential EBITDA Margin 17% EBITDA $69.8 Implied Value @ 12.0x $837.8 Implied Value of non EA Fragrance $32.2 EA Cosmetics & Skincare FY 16 Skin care sales $191.3 FY 16 Cosmetics sales $50.4 Combined Sales $241.7 growth @ 5% $253.8 Potential EBITDA margin 19% EBITDA $48.2 Implied Value @ 12.0x $578.7 Implied Value of Fragrance Stand Alone $291.3 Fragrance Stand Alone FY 16 All Fragrance Sales $571.8 IPAR EBITDA Margin 15% Implied EBITDA $85.8 IPAR P/Sales 2.0x IPAR EV/EBITDA 12.3x Implied Value @ IPAR P/Sales $1,144 Implied Value @ IPAR EV/EBITDA $1,055
Millions RDEN: Cost Synergies Official estimate of $140M in cost synergies $100M expected to be realized in year 1 60% SG&A, 40% COGS Reasons to believe $140M is achievable Management has reconfirmed at least $140M $84M is <20% of RDEN s SG&A Reasons to believe $140M is low Revlon has a history of conservatism when estimating synergies RDEN s pre-acquisition internal improvement plan laid a path to $132M in standalone adj. EBITDA by 2019 CEO stock grant incentives low-ball estimate $36 $34 $32 $30 $28 $26 $24 $22 $20 History of Conservatively Estimating Synergies 1 2013 Colomer Acquisition $25 Identified $35 Realized NOTE: This presentation was finalized and recorded on 12/29/16. On 1/3/17 the company issued an 8K that noted, the Company has identified incremental annualized synergies and cost reductions that are expected to significantly exceed the previouslydisclosed $140 million in annualized synergies and cost reductions. 1. Source: Company presentation
RDEN: Revenue Synergies Officially, the company is not projecting any revenue synergies Management is incentivized to under-promise and over-deliver Reasons to believe there will be revenue synergies Pre acquisition the 2 companies had 36% overlap in their customer base China exposure Fastest growing global market Per capita cosmetics spend in China is estimated @ ~$25 vs ~$140 in US 2 Opportunity to improve Elizabeth Arden s digital / e-commerce presence Increased China Exposure 1 1 Morgan Stanley: http://www.morganstanley.com/ideas/china-beauty-market-consumer-boom 2 US Dept of Commerce
Revlon: Back of Envelope 2019 Valuation Revlon 2019 Sales 3,165 EBITDA margin 18.0% EBITDA 569.6 Multiple 10.0x 12.0x 14.0x Enterprise Value 5,696 6,835 7,975 -Net Debt & Pension 2,525 2,525 2,525 Market Cap 3,171 4,310 5,449 Shares 55.7 55.7 55.7 Price / Share $56.91 $77.36 $97.81 Debt/EBITDA 4.1x 4.1x 4.1x Upside 96% 166% 237% CAGR 25% 39% 50% Notes Assume 3% Annual Growth (no M&A, no revenue synergies, below expected industry growth rate) Note: Peak Margins ~20% - fragrance likely detracts, but capacity utilization likely higher than historical including RDEN Note: PF Adj. Combined EBITDA 9/30/16 = $546M 11.0x = Current Core multiple, 13x = Average personal care transaction multiple over last 5 years (per MS), 15.3x = Beauty comps, 16.0x = growth comps Assume $300M cash generated net of integration costs Assume 2% annual increase Other: disregard RDEN's pre-acquisition internal improvement plan that predicted $132M in adj. EBITDA in 2019 As leverage profile comes down, multiple should go up We are almost certainly wrong about something, but there is a very large margin of safety, even with conservative assumptions and without meaningful multiple expansion
Revlon: Platform Growth? Not a base case, but not clear why Revlon shouldn t be grouped with other market darlings based on recent growth Organic growth should be GDP+ M&A growth is industry standard as established players leverage scale and distribution We are not paying for inclusion in this cohort, so this is a free option that the market may get excited about Revlon at some point REV at a growth peer multiple = $116 Platform Comps 13-16 Rev CAGR EV/TTM adj/ebitda Potential Organic Growth Maybe 12x or 14x is attainable? Global beauty market expected to CAGR @7.3% through 2020 1 Recession Proof MIDD Restaurant Supply 16.4% 17.3x No FLT Payment Programs 26.8% 17.8x No ZAYO Connectivity/Cloud 19.7% 14.4x No CMPR Print / Customization 15.3% 15.5x No TDG Aircraft Parts 18.1% 15.2x No Average 19.3% 16.0x REV PF Cosmetics 22.4% 7.6x Yes Per capita spend in emerging markets remains well below mature markets 1. Source: EuroMonitor, company presentation
A Sale is Likely. Eventually. Bears argue that REV will only get a comp multiple in a sale That might be true but would likely be worth the wait Very rough estimates, guaranteed to be wrong can still be illustrative Point is that patience is usually rewarded in growing, slow changing businesses that are dramatically undervalued vs. comps and M&A multiples Sale in 12 Years (Perelman 85) Sale in 7 years (Perelman 80) Low Mid High Revenue CAGR 4% 8% 12% Exit EBITDA Margin 18% 19% 20% Exit Net Debt/EBITDA 2.0x 3.0x 4.0x Exit Multiple 12.0x 13.0x 14.0x FDSO CAGR 2% 2% 2% Exit Price $130 $215 $351 CAGR 13.3% 18.2% 23.1% % Upside 347.5% 640.1% 1108.3% Low Mid High Revenue CAGR 4% 8% 12% Exit EBITDA Margin 18% 19% 20% Exit Net Debt/EBITDA 2.0x 3.0x 4.0x Exit Multiple 12.0x 13.0x 14.0x FDSO CAGR 2% 2% 2% Exit Price $118 $162 $220 CAGR 22.2% 27.8% 33.5% % Upside 306.2% 457.7% 657.3%
Risks Mr. Perelman s future treatment of minority shareholders is a known unknown Despite recession proof cash flows, the company s high leverage will likely drive considerable volatility in share price in the near term. A long term, patient capital base is necessary Consumer staples stocks have arguably become bond proxies in recent years as rates move higher, it is possible that the sector will re-rate lower Interest payments on floating rate debt will be impacted by rising rates A strong USD will weigh on foreign earnings
If you are a patient, open minded investor that is not afraid to stand away from the crowd, we should talk. Please join our mailing list at: www.laughingwatercapital.com