Revlon Inc (REV) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Revlon's fourth quarter and full year 2002 earnings conference call. At the request of Revlon, today's teleconference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce your host leading today's call, Ms. Maria Sceppaguercio, Senior Vice President, Investor Relations Ma'am, you may begin.

Thank you, Lisa. Good morning to all of you including those of you listening in via the web. As you know we released our results for the fourth quarter and the year earlier this morning. If you haven't received a copy you can get one on our Website at www.revloninc.com.

Our discussion this morning will focus on our results on an ongoing basis, which excludes one-time items such as restructuring and planned consolidation costs, executive severance and results from gains and losses on businesses sold. A detailed reconciliation to our as-reported results accompanies the press release we issued earlier today and is available on our Website.

In reviewing our financials, please note that results for 2001 have been reclassified to reflect the company's adoption in January of 2002 of the new accounting standards for sales incentives. In addition, regional results for 2001 have been reclassified to include Puerto Rico, previously reported as part of international as part of North American operations.

Last month the Revlon board of directors accepted a substantial investment from MacAndrews and Forbes that included both debt and equity components. Because we are on registration for the equity rights offering component of the investment, we must limit our remarks to actual results and information contained in our registration statement. Therefore, the Q and A portion of today's conference call will be strictly limited to Q4 and full year results.

Finally, before I turn the call over to Jack Stahl, Revlon President and CEO, and Doug Greeff, Revlon Executive Vice President and CFO, I would like to remind you our discussion this morning may include forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements for a number of reasons including those set forth in the company's filings with the SEC, including the company's annual report on form 10-K, quarterly reports on form 10-Q and press releases including the release issued today. And finally, as a reminder, our discussion this morning should not be copied or reported.

With that, I will now hand it over to Jack.

Thanks, Maria. And good morning, everyone. Thank you for participating today.

Before Doug walks you through the machines what I'd like to do is comment on our business in general and maybe give you some context about where we stand relative to our growth plan. And our performance against the strategy that we laid out for you in August of last year at our investor conference.

I believe we have accomplished a great deal in the past year. Obviously, we recognized that there's a tremendous amount of work still to be done, but I think the progress that we're making in the marketplace and the plans that we've laid out while they come at a heavy cost, no doubt, as you obviously see reflected in our numbers, we absolutely believe these investments are the right actions to take today and going forward as we work to position our company for long-term profitable growth. So we're investing aggressively in the business, there's no question about that, but we are beginning to see the early indicators that we're moving with our consumers and retailers in the right direction.

Now, as you may recall, our growth plan involves what we laid out as three distinct phases. The first phase, what we called cost rationalization, that phase was largely completed in the year 2001. And as you'll recall, that involved closing production locations and reducing departmental and administrative costs in our company. And that phase was largely completed in 2001.

The second phase of our growth plan, which is where we spent our time in 2002, we developed that plan, and we heavily market researched that plan. And the second stage we're calling stabilization and growth and we're now in the midst of beginning to execute that plan and that strategy. There's no question this second phase of our plan, stabilization and growth, this is the heavy investment stage of our growth plan, and it involves increasing our advertising and media spending. It involves increasing the effectiveness of our wall displays, really to increase and improve the in-store experience for our consumers, and at the same time it involves adopting some revised pricing strategies. Also during the course of the last year, we've begun to strengthen our new product development process, and we're focused on developing our organization to make sure we have the skills and competencies that we need to carry us forward. So that strategy involves heavy investment in the marketplace, building our organization, and it's all based on research and marketplace testing.

The third phase of our plan that we will ultimately evolve to, we would call the accelerated growth phase, and at that point we would expect all the drivers of our business to work effectively together to deliver strong revenue and earnings performance over the longer term.

But we are at this point in the process, no doubt, in stage two. Now, during the last 12 months or so our focus was on taking the necessary steps to position our company for success. For the first time in many, many years, we really did extensive consumer research and comprehensive in-market testing. And we talked about that back in August. We did significant in-market testing of our strategy on the Revlon brand last year. We believe we gained great insights into our consumers and our customers and all the way through our brand strategy.

Initially, as I indicated, this work was focused on Revlon, and now this same process is well underway on the Almay brand, and we're very excited about what we're getting back from consumers and customers in this particular area as well. Almay.

So we also undertook a very extensive review of our business. We established some very integrated objectives and action plans, and we established, I would say, three overriding principles that will guide us going forward.

First we're going to develop and create the most consumer-preferred brand portfolio in the industry. We have absolute conviction that that's where we're going to go. Secondly, we want to be a very, very valuable and important partner to our retailers across the U.S. and around the world. And third, becoming a place where we're considered to be a top company where people want to work inside of this industry.

So as we close 2002 and look back, we clearly exited the year a much different company than the one that entered it. I believe we strengthened the Revlon management team and organization. We added seven or eight key people at the senior levels, all of which have very strong track records of delivering profitable growth, whether it be in marketing, sales and other areas. We market tested a strategy, and we began to achieve some early results in the marketplace that suggest that we're heading in a positive direction.

As we move through 2003, the actions and things that you will observe in the marketplace will begin -- you'll begin to see more happening in terms of our in-store presence and see what the look and feel of Revlon and Almay in-store in creating what we're calling a 360-degree total brand experience for consumers, as we talked about in August. As an example, as you'll see in the coming weeks, you'll begin to see our new advertising and positioning roll into the marketplace. This work was done based on extensive research that we conducted over the last 12 months.

Now, there's no doubt that our continued progress requires continuing strong levels of investment in the business. And particularly, when you think about comparisons against year ago levels of brand support that were relatively low in the first half of 2002. But importantly, as Maria mentioned earlier, we recently secured significant liquidity from MacAndrews and Forbes to help fund the heavy investment phase of our growth plan, which, again, we absolutely believe will deliver very positive long-term results for our company.

In terms of specific progress, we are experiencing at this stage of the growth plan, I'd like to focus on three particular areas, gross sales, consumption, and market share. On each of these measures, we've made progress to date, and we'll continue to focus on these areas as we move forward. Over the last year we also made progress in our ability to execute not only with our retail customers but in the critical day-to-day operational activities that really distinguish good companies from great ones. We've now made the development of our organization and our people a critical area of focus for 2003, and we'll continue to seek out opportunities to strengthen our team as we go forward.

Let me give you some quick highlights of the quarter to demonstrate our progress. First of all, we achieved a very important milestone in the fourth quarter. One that I believe many of you and particularly us has been waiting to see. Our consumption growth in the United States, our consumption that dollars of retail consumption in the U.S. mass market channel has translated into gross sales growth in the quarter. That's the first important milestone in terms of beginning to strengthen our P and L. It's a very important step and evolved out of the retail dollar consumption that we were seeing in the second half of last year, which was beginning to increase, particularly for Revlon. So gross sales growth in the fourth quarter. An important step was stabilizing our market share and obviously that depended on increased consumption which we must do consistently over time. As we move forward as our business strengthens, our focus will increasingly be on driving for profitable growth.

In terms of market share performance, the Revlon brand finished the year with a 40 basis point increase in market share, all of which was achieved in the second half of the year behind increased and beginning to be more effective brand support that we initiated in late August. The second half share gain was strong enough to reverse the declining share trends of the first half of 2002. And that trend had been in place for a longer period of time before 2002, as you know. Specifically, Revlon's share in the first half of 2002 averaged 16.2% and was down a half a share point versus the first half of 2001. In contrast in the second half of the year, Revlon brand share averaged 17.3% and was up 1.3 share points versus the second half of 2001. And we had share growth in each of the four segments of the category. In other words, lip, nail, eye and face. We had share growth in all four segments in the second half of 20023.

And I think it just demonstrates that the Revlon brand and soon to be the Almay brand is very responsive to increased support and more effective support. So in fact, Revlon market share has been up considerably versus year-ago levels every month since August when we began to execute our plans and programs. Importantly, this momentum has continued into 2003 with our January share for the Revlon brand up 1.5 share points versus the first month of 2002, and we were at 17.9% in the month of January. And our February share was up almost 1 full share point to 17.3% in the month of February. Actually, up .9 share points versus February a year ago. Likewise for Almay, our share in both January and February was up .3 share points, not a lot, but a trend that is pointing us in the right direction, much like the trend for Revlon began back in August of last year. So we were at 6.2% in January and 6% in the month of February for the Almay brand.

During the quarter we did announce the proposal by MacAndrews & Forbes to invest $150m in Revlon, and at the -- after the process was complete, we had, in fact, MacAndrews & Forbes has now agreed to provide up to $190m of additional liquidity in 2003 and an additional $25m beyond the 190 that would be available to us in 2004 if required. This substantial investment will be used to help fund our growth plan.

Another key highlight in the quarter, we talked earlier about our exclusive global promotional partnership to support the 20th James bond film which starred Revlon spokesperson, Halle Berry, and we were delighted with the buzz that we created particularly with our retailers in the quarter, in many ways, it said that Revlon was in the business of creating excitement and enthusiasm for their consumers in their stores and the promotion was well received in the marketplace.

In terms of new products introduced during the quarter, Color Stay Overtime lip, which is really a unique dual ended product which provides eight-hour lip color with shine, we actually previewed in a limited way that product in December, and we launched nationally in January of this year, and the early indications are this product is off to a great start.

LipGlide, which we talked about last year, continued to perform well. We had a 3.2 share of the market with LipGlide in the fourth quarter. And for the year, LipGlide was the number three new product in the cosmetics category in total.

In terms of new products recently launched in January, we launched for Revlon ColorStay stay natural face makeup, which is a very natural looking long-wearing foundation.

We introduced ColorStay Always on nail enamel, which is a ten-day-wear nail enamel and it resists chipping, cracking and fading, it’s a great product, getting great feedback from consumers, and we’re launching Moisturous, which is a 24-shade line of really hydrating lip color. You can think about it as refreshing, hydrating and has a triple-patented effect that infuses lips with a significant degree of moisturization.

Also in January we introduced on the Almay brand Almay Bright Eyes, which is an exciting new line of eye products that creates the illusion of bigger and brighter looking eyes. And we -- one of the products there is called Bright Eyes Color Creme Shadow, another is a Bright Eyes mascara. And finally, a Bright Eyes defining color dual eyeliner. So these are great products in the eye category.

And at the same time we introduced a product called Almay Nearly Naked, which brings a unique touch-pad technology to the mass channel for the first time, and we're very excited about the results we're seeing there. So these products are off to a great start. And importantly, we're building on our capability in the new product development area as I indicated earlier.

So a lot of early indicators of progress that are evolving out of the investment that we're making in the marketplace. These actions will continue to gain traction as we go forward.

On the organization side, before I turn it over to Doug, it's worth noting that last month we announced the appointment of Paul Murphy to the position of Executive Vice President of North American Sales replacing Larry [Aaronson]. Paul is a very active, aggressive sales leader and joins us from Coca-Cola, and I believe he'll be another great addition to our leadership team. In the room with me today I should point out that in addition to Doug Greeff, with us are Debra Leipman-Yale, Executive Vice President who has responsibility for the Revlon brand, Liz Kenny, who has responsibility for the Almay brand, and David Kennedy, who has responsibility for our international business. The last three of which are all new strong hires to Revlon within the last 12 months. So we continue to build the leadership team.

So to summarize, we are making very important progress against this important phase of our growth plan. We believe we've attracted the resources we need to execute this plan, and we are absolutely making the investments necessary to position Revlon for long-term profitable growth.

Finally, in accordance with Sarbanes Oxley, Doug and I will certify, without qualification, that our annual report on form 10-K does fairly present our financial conditions, results of operations and cash flow, and that we've assessed our disclosure controls and procedures and that they do work for their designed purposes. And that we're not aware of any insignificant deficiencies in our internal control mechanisms. So that's the story.

Doug will walk you through the financials, and then we'll take your questions and I'll finally have some closing thoughts. Doug?

Thanks, Jack. Before I get into the details, I think it is important to define various aspects of our accelerated growth plan in the stabilization and growth phase of the plan and define where the related charges are reflected in the income statement.

As Jack discussed previously, there are various key actions and investments to support the stabilization and growth phase of our plan. These actions encompass, one, increased advertising and media spending. Two, increased effectiveness of the company's in-store wall displays, mostly by streamlining our assortment and reconfiguring product placement. We believe that these actions will make the wall easy to merchandise and stock. The third action is revised pricing strategies to better align the company's pricing with product benefits and competitive benchmarks. The fourth area is an enhanced cross-functional new product development process. The fifth area is the implementation of a program to better develop and train our company employees.

In December 2002, the company announced that it would accelerate the implementation of the stabilization and growth phase of the plan. Revlon started implementing several of the actions in December of last year. We also announced that we would incur various charges related to these actions in the fourth quarter 2002, 2003, and possibly into 2004. When we are discussing our plan and the related charges in the stabilization and growth phase of our plan, we include the following items. Sales returns for discontinued SKUs that were in addition to our normal 2002 SKU discontinuance list which was released in the summer of 2002, specifically in the United States. These sales returns, as you know reduced net sales.

The next area is sales allowances. Sales allowances for selected price adjustments which also reduces net sales. Costs of rolling out our reconfigured wall displays, which is mostly merchandiser labor to recon figure the wall. This area and action increases SG&A. We have inventory write-downs for discontinued SKUs which increased costs of goods sold. We also have returns and inventory write-downs relating to the reduced distribution of the Ultima brand as we reposition Ultima and as we refocus more resources on Revlon and Almay. We also have expenses for professional resources relating to research, development and the execution of the plan. These expenses increase general and administrative expenses, and we have other miscellaneous expenses. We estimate that the charges related to the above, I just described, will be no greater than 160m over the period 2002 to 2004. In the fourth quarter of 2002, the company recognized charges of approximately $100m related to the specific actions noted above.

It is important to note that these estimates of the growth plan charges do not -- let me repeat -- do not include any increased brand support expenses for any increase in training and development costs for our employees. In accordance for generally accepted accounting principles, there is no differentiation or segregation of these charges in our GAAP financial statements.

With that background information let me walk you through the details of our financial results for the fourth quarter market share data and summarize the results of our financing efforts. And let me remind you that my remarks and the numbers will be on an ongoing basis.

Let's start with sales. The company's total gross sales advanced 6.8% to $416.5m in the quarter, compared to $390m in the fourth quarter last year. This growth was driven by North America and importantly, our gross sales growth began to track our consumption growth.

Moving down the income statement. Returns, allowances, discounts and other revenues combined increased $136m to $204m in the current quarter versus $68m in the fourth quarter last year. This increase was almost entirely driven by higher returns and allowances which were up $132m in the quarter. Largely due to the initiation of the actions associated with the stabilization and growth phase of our plan which I just outlined in detail as well as higher brand support spending in the form of sales incentives and higher returns and allowance not directly related to the growth plan. These actions were taken in support of our long-term growth plan and had the effect, as expected, of reducing net sales considerably in the quarter. Specifically, net sales of $212.6m in the fourth quarter of 2002 were down 34% versus $321.7m in the same period last year.

Let's move now to the fourth quarter 2002 North American sales summary. In North America, which includes the U.S., Canada and Puerto Rico gross sales in the quarter advanced 10% versus year ago to $291.5m, driven by double-digit growth from both color cosmetics and hair color. Importantly, this growth in gross sales has begun to track consumption trends.

Moving to international sales. For international, gross sales advanced 1% to $125m, largely driven by growth in the far east and the UK, almost entirely offset by continued difficult conditions in Latin America, particularly Venezuela and unfavorable foreign currency translation. Excluding the impact of currency translation, international gross sales grew 4% in the quarter.

Moving down to operations. Total cost of sales including brand support as a percentage of gross sales increased 280 basis points to 36.8% versus 33.9% in the prior year. This increase largely reflected an inventory write-down as discussed previously associated with our growth plan.

Moving to SG&A. Total SG&A, including departmental and other G & A and certain components of brand support increased 20% to $190.7m in the fourth quarter of 2002 versus $158.4m in the fourth quarter 2001. This increase was largely driven by higher general and administrative expenses, including personnel related expenses such as medical and pension costs, and professional fees associated with the research, development and execution of the company's growth plan as well as higher brand support. These expenses were partially offset by lower distribution costs stemming from our facilities consolidation program last year and the benefit this year of the elimination of goodwill amortization.

In the fourth quarter, we generated an operating loss of $131.2m, versus operating income of $31.1m in the fourth quarter of 2001. And EBITDA was a loss of $105.0m versus EBITDA of $57.4m in the fourth quarter of 2001.

The decline in profitability was largely due to the charges of approximately $100m associated with the company's growth plan and related actions as I previously discussed. Also impacting profitability in the quarter was higher brand support spending versus year ago higher returns and allowances not directly related to the company's growth plan and higher general administrative expenses to support the business. Partially offsetting these expenses was the benefit of higher gross sales in the fourth quarter of 2002.

For the year, we generated an operating loss of $90.3m versus operating income of $100.4 in 2001. EBITDA for the year was $17.5m versus EBITDA in 2001 of $200.2m.

Now moving to net income. The net loss in the fourth quarter was $173.8m, or $3.33 per diluted share compared with a net loss of $6.5m, or 12 cents per diluted share in the fourth quarter of 2001.

For the year, the net loss was $260.9m, or $5 per diluted share versus a net loss of $51.4m, or 98 cents per diluted share in 2001.

Now let's turn our focus to cash flow and liquidity. Capital expenditures in the quarter were $6.6m versus 4.7m in the fourth quarter of last year.

For the year, capital spending was $16m versus $15.1m in 2001.For 2003, we expect our capital spending to be approximately in the $25m to $30m range.

Moving to permanent displays. Permanent display spending in the quarter was $12.4m versus $8.4m in the fourth quarter 2001. For the year 2002, permanent display spending was $66.2m versus $44m in 2001. For 2003, we expect our permanent display spending to be approximately $75m to $85m. Cash restructuring spending, which includes additional consolidation costs and severance payments was $7.7m in the quarter. For the year, cash restructuring spending was $33.3m. For 2003, we expect cash restructuring spending to be approximately $10m to $15m.

Turning to liquidity. The composition of our bank credit agreement borrowings at December 31, 2002, was, under our term loan facility, we had $116.6m outstanding, on the multicurrency revolver, we had outstanding of $106.8m , and we also had letters of credit issued but un-drawn of $25.3m. Our liquidity at the end of the quarter last year from all available liquidity sources was approximately $111m, which includes unrestricted cash of $70m.

As you know, on February 1, we announced that the Revlon board had accepted an enhanced proposal from MacAndrews & Forbes to invest up to $190m in Revlon in 2003 with an additional $25m of liquidity available to us in 2004. As of March 7, our total liquidity from all available sources, which includes MacAndrews & Forbes investments was $213m.

Moving to interest expense. For the quarter, interest expense was $40.6m versus $35.7m in the fourth quarter of 2001. For the year, interest expense was $159m.

Let me take a moment to provide a few details of the recent investment from MacAndrews & Forbes. M & F has provided Revlon with liquidity of $190m to December 31, '03, increasing to $215m through December 31 [2004]. The specific form of the investment is as follows. $100m senior unsecured term loan with a 12% annual interest rate, but with no cash interest payable until final maturity on December 1, 2005. We also have a commitment to participate in a $50m rights offering with an agreement to backstop the offering by purchasing all of the shares offered but not purchased by other stockholders. And the last key component is a senior unsecured line of credit of up to $40m through December 31, '03, increasing to $65m through December 31, 2004, with an interest rate 25 basis points lower than our credit agreement.

In terms of our bank credit agreement, Revlon gained the support of our bank group with respect to the M & F investment and obtained the necessary amendment to our credit agreement to complete the transaction. Specifically, we obtained a waiver to our EBITDA and certain other financial covenants for the four consecutive fiscal quarters ending with the fourth quarter of 2002. The elimination of such covenants for the first three quarters of 2003 and a waiver through January 31, 2004, of our financial covenants for the four consecutive fiscal quarters ending with the fourth quarter 2003. The agreement was also amended to provide a minimum liquidity covenant of $20m from all available resources through January 31, 2004, and we also had a 50 basis-point increase in the interest rate on our bank loan. Details of the M & F investment, including a registration statement for the rights offering, the M & F loan documents and the amendments to our credit agreement have been filed with the SEC.

Now let me turn to some detailed consumption and market share data. As Jack discussed, we gained meaningful traction in the marketplace during the quarter. Behind the strength of improved execution and more and better brand support. As you know, our market share and consumption data is of the U.S. mass market, according to AC Nielsen, which excludes Wallmartand regional mass volume retailers. This data is an aggregate of the drug channel, KMart, Target and food and combo stores and represents approximately 60% to 65% of the company's U.S. mass market dollar volume.

In terms of consumption for color cosmetics, the company registered a 6.9% increase versus year ago in dollar consumption for the quarter fueled by the Revlon brand. The Revlon brand specifically grew consumption 12.4% during the fourth quarter, marking the fourth consecutive quarterly consumption for the brand. This growth and consumption outpaced the category resulting in share gain for the company of 170 basis points to 23.6. The Revlon brand grew share 220 basis points in the quarter to 18% versus 15.8% in the fourth quarter of 2001. Almay share for the quarter was essentially flat at 5.4% versus 5.5% in the fourth quarter of 2001.

In other categories during the quarter, the company gained share versus year ago in hair color and antiperspirant and deodorant while share declined in skin care and implements.

Finally, as Maria mentioned earlier, because we are currently in registration for the equity rights offering, we are extremely limited by SEC regulations with what we can discuss with you today. Therefore, I remind you that the Q and A must be limited to the results of the quarter and the year. Now, let me turn it over to Jack before we start the Q and A.

Thanks, Doug. And I appreciate your walking through the numbers in that fashion. Obviously a lot to digest, but important in terms of where we are. Just to summarize, before we throw it open to Q and A, we do believe we are making absolute progress in this very important stage of our growth plan. We're beginning to see some early signs of progress that Doug outlined in terms of market share growth, consumption growth and growth and growth shipments in the quarter. And we believe we've significantly strengthened our organization and our connection to retailers across the country. And that's very important to our progress going forward. And finally, we have attracted the resources that we need to make the necessary investments. And there are those necessary investments to position us for long-term profitable growth. So that's where we are as of today. And obviously we're going to continue to keep you posted as we move forward. Maybe we can just throw it open to questions and answers at this stage.

Thank you. At this time if you'd like to ask a question, simply press star-1 on your touch-tone phone. If you're using speaker equipment, please lift your hand set prior to pressing star-1. To cancel your question is star-2. Once again, that's star-1 to ask a question and star-2 to cancel. One moment while the questions register. Our first question comes from Mitchell Spiegel with Credit Suisse First Boston.

A lot of information to digest. I've got a couple questions. First, can you talk a little bit about the higher returns and allowances not related to your phase two plan and what's driving that, and can you quantify it? And then Doug, is there any way you can allocate in the fourth quarter where the

$100m hit? Is it in cogs,

is it SG&A? And then with the

allowances and adjustment from

gross to net sales, that full $132m probably doesn't all apply to fourth quarter revenues.

Can you give us a sense on how they would be allocated for the prior periods?

Why don't I -- this is Jack. Why don't I start out by talking about the question on returns and allowances. We can't specifically break out the difference between kind of the accelerator program, if you will, and otherwise. But we would say, if you look at the return increase overall, probably more than half was due to the growth plan , and the related actions. If you look at the total $130m increase in returns and allowances, probably more than half of that total increase in returns and allowances was due to the growth plan. And probably the balance being due to brand support, and some portion of that would have been due not directly related to the growth plan. But we can't break out the return split there. We will break out, as I indicated, to say that more than half of the total $132m increase in returns and allowances was related to the growth plan.

To the extent that kind of the base business returns are higher, I think it's important to say that, you know, we're taking a very, very close look at maximizing our in-store experience and, you know, we've talked about the fact that we're strengthening how we look and feel to customers coming into our retailers' cosmetics aisle, and that involves taking a hard look at what the wall looks like the planogram looks like and making sure we've got exactly the right product on the wall, in the right configuration, and making sure that we're focusing on our faster selling SKUs and properly positioning products on the wall. So some portion of that higher returns and allowances just relates to strengthening the in-store experience. The other part of it is we did have some higher returns related to some of our promotional activities, and finally, just as we look forward, the number of

SKUs that are impacting on the provision for the base business is somewhat higher than in prior years. So all of those factors, getting the right in-store experience, some of our promotional returns, and just the absolute number of

SKUs that we're kind of pulling back as part of the base

business is somewhat higher. Doug , you want to pick up on the other comments? The other areas?

Why don't you repeat the next question so I can answer it.

The one part related to the 100m of expenses that impacted fourth quarter, just if you could give a ballpark percentage of what line items they hit in the P & L, and then as to the adjustment in

returns and allowances from gross to net sales, how much of that relates to prior periods

and how much was that to fourth quarter?

Well, I think it's going to be hard for us to break out specifically the total charges because in those charges are anticipated resources to execute the strategy. And, you know, some portion of those will go into returns. There's other elements of the strategy which hit different lines on the P & L. And I think we're going to be reluctant to provide that much detail for fear that we're kind of tipping our hand where we're concentrating our resources on that.

But just to help you a little bit, Mitchell, by far the bulk of the approximately $100m charges in the fourth quarter are hitting returns and allowances. They're -- the next section would be costs of goods sold to a much lesser extent and then even smaller than that is the SG&A component. It's kind of hitting all over the place. But the bulk of it is reducing net sales.

Okay.

Something that would impact cost of goods , just to give you a feel, if we pulled back on an item, Mitchell, and we had some components that related to an SKU that we were discontinuing , that would flow through cost of goods sold, just to give you a flavor for that. And then I think if -- that's probably the -- a good example

for cost of goods.

But I'm confused. Are you saying that the 130 -- the charges that ramped up the P & L the way that I read it was $132m adjustment in gross to net sales and then a separate $100m of expenses that ran through below net sales. Is that incorrect?

Yeah, that, I think that's incorrect. The approximately $100m of charges is included in our normal income statement. So in the $132, the bulk of that is related to the growth plan $100m we were talking about. So in no place are any of these charges separated. They're just in the normal returns provisions. So in returns we have a provision for let's call it base return. And then we have, you know, added to that the provision from

the December SKUs that were discontinued as part of the accelerator plan.

So included in the $132m are charges related to the accelerator plan. Does that help?

Yeah, that helps a lot.

Okay.

Thank you.

Thank you. Our next question comes from

Cathy Imm with Salomon Smith Barney.

Hi. Over a year ago you changed the way you went to market with retailers. Can you give us an update on how your trade initiatives are going and specifically I guess how your promotional spending has changed and also your inventories at your top customers?

Okay.

Let me take that one. This is Jack. And Doug, you can comment on the inventory levels. First of all, I think you're -- you may be referring to the change -- first of all the change in trade terms that we undertook what would have been about two years ago now. And those changes were implemented with our retailers

in order to focus our efforts -- Revlon's efforts and the efforts of our customers on building consumption and growing top-line consumption which ultimately translates through to shipments and profitability. And we changed a number of terms in part, some of that related to returns. And some elements of our promotional allowances at that point in time. You know, after a period of adjustment, I would say , and it took some, you know, a lot of discussions with our retail partners, those trade terms are now in the marketplace, and I think they're working effectively, and they're achieving their desired effect. In terms of our overall relationships with the retail trade, I think we've moved dramatically in the last 12 months. You know, I remember meetings with retail partners early last year where they were calling out a number of issues where Revlon had an opportunity to be more responsive. It may have been around packaging issues, it may have been around the quality of our in-store promotional activity.

Their desire to see us step up our brand support, our advertising support, and to help bring our brands to life in a great way across the retail trade. Whether it be drug or mass. And I would tell you, having spent a tremendous amount of time with our customers over the last 12 months, the movement in our relationships, I would think is meaningful over that period of time. And thankfully our retailers, I believe, believe in the strength of the Revlon brand, and they have been very supportive and are pleased with the results that we're making there. So overall, I think we're making very good progress, and it's reflected in the fact that I think our company did a good job protecting our retail presence and our shelf space for 2003 across the trade.

And we look forward to continuing to improve that as we go forward. So I think overall we've made a lot of progress in that important area.

So given all the moving pieces, you have not lost any shelf space at retailers?

There are -- there is one or two examples where a customer moving to a more tailored local marketing set reduced our space in certain areas. But in the -- if you look at our shelf space as a whole, I actually -- if you took the total shelf space that's out there in the retail trade and took footage by customer across North America, we have essentially protected our space for 2003.

And in terms of -- it sounds like you're making some pricing adjustments on products. Was that driven by your retailers putting pressure on you to change some of your pricing on select products, or was that just to realign your pricing in line or to be more competitive with your competitors?

Okay. I think I'll let -- or ask Debra Leipman-Yale to answer that question because it's an important part of our strategy. Debra?

Yes, as I think we've indicated, we have reduced prices in selected products in three of our core categories. But it was not at all driven by pressure from our retail partners. It was really driven as we went through our analysis and research phase in terms of our relationship with the competitive products that offered similar benefits and similar types of products to the consumer. And we were out of position in certain cases, and those products to really maximize our consumption and be competitive in that particular benefit set. So it was really driven by putting us back in a position vis-à-vis the competitive products rather than pressure from our retailers.

And it was -- and Debra's strategy there around our pricing was borne out by marketplace testing and consumer testing that we did during the course of 2002. You want to make a comment on inventory levels?

As we mentioned in a lot of detail last quarter, our customers -- and we usually talk about inventory in our top seven customers -- our customers are increasingly improving their inventory management systems and changing their estimating methodologies. And therefore the data we receive is not always on a consistent basis with previous reporting periods. But if I had to summarize most of the [chains] are adding inventory to these numbers. They're not decreasing. So for instance, one customer had a promotional inventory for the first time. Another customer did the same thing. So in anything, we're adding to this. Having said all of that, in the fourth quarter, estimated inventories our top seven customer was down versus the fourth quarter 2001 by approximately $15m, and it's more than that because we didn't restate the fourth quarter 2001. So it's probably well in excess of $15m. In terms of the third quarter 2002 comparing to the fourth quarter, the inventory levels are slightly down by $2m to $3m. So we continue to see decreasing inventories at our top customers and we'd expect that, you know, to continue slightly into the future.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from George Chalhoub with Deutsche Banc.

Good morning. I wanted to -- the all available sources, the position probably changed in '03 versus '02. So if you don't mind telling us if you include with this the three line items that you mentioned, the $100m on the secret line of credit that that's offering and the $40m , and then when we're talking about the $85.8m in cash on the balance sheet of which $70m is unrestricted, obviously I don't have -- I don't think you can tap the line of the banks anymore. So just want to understand exactly, how do you compute the all available sources and the availability at December 31 versus at March 7?

Okay. Just -- I want to make sure I'm clear. It's exactly on the same basis. So let me -- I can walk you through the exact numbers, I think it's relatively simple. In terms of at the end of December '02, we basically fully drawn down all our bank facilities. At that time we had a $40m line of credit from Mac

Andrews & Forbes, and we had approximately $70m of excess cash, unrestricted cash. So effectively, you take the 70 cash, add it to the 40 line of credit from M & F, and you end up with 110.

Okay.

The same exact facilities, but with the additions of the investments from M & F. So at March 7, '03, we had availability that we hadn't borrowed, because we paid down our revolver daily, borrow daily pay down daily as a practical matter. We had about $12m of availability on March 7. We had the $40m line of credit. We had the delay draw term -- the $100m term loan facility of which we had drawn down 10, so there's 90 available. We count the preferred stock rights offering 50, okay, because if the rights offering for whatever reason doesn't occur, M & F has agreed to make a preferred stock investment, and that's been detailed in previous things. And at March 7 , '03, we had approximately $21m of excess cash. So it's something like about $12m , and our credit facility 180 from [napco] holdings and 21 of cash and hopefully that adds to about 213.

Okay. So the $40m at December '02 is the same $4m we're looking at in December '03 at this point in time?

Right.

Is there any chance we can get the breakdown of the cash versus non-cash items of the $100m?

Yep. Of the $100m, I was talking just about specifically the $100m charge in the fourth quarter. We expect that 70% or slightly more to be cash over 2003 to 2004, period. Okay? In 2003, however, we expect that approximately $50m to $60m will be paid out in calendar year '03.

Okay. And that doesn't include -- the $60m as part of the 100 doesn't include the additional 60m charge, it would be taken yet?

Yes. Well, we don't know what the charge will be. We said specifically up to $60m, but it's very difficult to me to provide more insight into that because we're still trying to figure it out as charges materialize and we refine our plan, do more market testing, et cetera.

Okay. But the upper portion is yet to be had is what I'm saying?

Right. That's exactly right.

And obviously, looking on the balance sheet you have a big jump in accounts payable to about $117m, that's obviously part of the whole restructuring efforts here. Is this number -- this is at the end of December. So I'm going to take it that this reflects the 11m doesn't reflect what's yet to be had?

No. What's in the liability section of our balance sheet is most, you know , I'm going to say all the charges that we booked in the fourth quarter, as a practical matter, we haven't paid out anything.

Right.

So for instance, if we have increased returns, we hit returns expense, and then the liability for that return is actually booked into accrued expenses.

Right. What I'm driving at, Doug, is you have a jump of 417, and you expect to pay only 60. I'm trying to understand exactly what's the discrepancy?

Well, we're going to pay for these expenses in the hundreds over '03 and '04.

Okay. And last question, Doug, what was the under-funded pension at the end of the year versus last year?

You'll see much more detail in our 10-K. You know, we'll provide all the required information. But to answer your question specifically, as of September 30 '02, the date we reported, you know, our 2002 10-K, the unfunded pension liabilities were approximately $210m versus approximately $140m reported at 9-30-01.

Okay. Thank you very much.

Thank you, George.

Thank you, George.

Thank you. Our next question comes from Mitchell Spiegel with Credit Suisse First Boston.

Hi. Sorry. Just a follow-up to clarify something. Doug, when you're walking through your cash restructuring for '03, you only said $10m to $15m , I thought. But then based on your conversation with George just now, it sounds like you're expecting $60m outflow?

Okay. Let me stop you for a sec, Mitch and try and make this clear. The $100m we'll call charges from the plan that we booked in the fourth quarter. None of that is booked into restructuring. Under GAAP, none of those charges are allowed to be differentiated or segregated separately. Therefore, all of those expenses are in our normal income statement, operating income statement. Okay? The $10m to $15m in restructuring is basically the payout of restructuring costs that were initially incurred in prior periods. So an example would be, if we laid off some employees or severed somebody, they might have a two-year severance agreement, as an example. So we paid part in 2002 and say part in 2003. But it's important to note that none of that 100 that we have been discussing in detail is classified as restructuring. It's all above the line.

Okay. And so but you booked it -- there's an accrual on your balance sheet, right?

Right, that’s basically what I said. Our working capital components are on the liability side are much higher because we booked -- remember, we booked these expenses in '02, but we're paying for them over '03 and beyond that. So as I said, answering George's question, the biggest piece of the 100 is returns and allowances. In returns specifically, you book the returns expense, and then you book an accrued liability for the same amount. As those returns come into Revlon, because they physically are received, when we receive them, then we pay for them.

Okay. So net-net, there's an additional $60m going out the door in addition to cap ex display, restructuring and interest expense?

Right. It's just like any other normal expense. But because we broke it out for better understanding --

Yeah.

-- we will pay out about -- I said $50m - $60m in '03, and then the remaining balance of the cash piece of that in '04 and beyond.

Right. But it's already hit your P & L?

Yep.

Okay. Thank you.

Next question?

Thank you. Our next question comes from Brian [Slong] with Chesapeake.

Hi. I had a question on the 132m in the additional returns and allowances. Is this a trend that we should see continue, or will your reported sales numbers get back to more normalized levels?

You know, as I said before, in the $132m, you know, the bulk of that is from this $100m of charges we talked about before. Which -- and because we're discontinuing more SKUs as a practical matter. And there's pricing adjustments in there for the pricing decreases we talked about. And then also in there are increased returns on our base business, which was basically in part due to the increased promotional returns that Jack talked about and anticipated returns in the future for the non-plan ordinary course discontinuance. We effectively have more discontinued SKUs right now for '03 than we did in prior periods. And it's very hard to predict exactly how many SKUs we're going to discontinue each year. But if I had to guess right now,

the future discontinuances would be much less than what we put in 2002.

Let me build on that from an operating standpoint. Recognizing we're in registration, so we can't really forecast particular numbers. But just a couple of underlying business drivers, I think if you look back over the last eight or nine months or so, we're taking a very disciplined approach to new product development. And our marketing generally, much more market-based research, consumer testing, and I would say a heavy fact-based approach to our new product development process. All of those things, and a much more -- very disciplined approach to recognizing that we want the retailers to be successful with Revlon. We want the retailers to improve their productivity on our products and our brands. So it's all about bringing the right products to the marketplace and the right amounts at the right time or the right promotional support and the right advertising support which is tied to the positioning of the brand. When you add up that stream of focus and activity, it should have a positive impact on the productivity of our business. And which is part of the reason we believe we can move this to a very profitable business model over the longer term. And that flows through various lines of the P and L.

Thank you.

You're welcome.

Thank you. Our next question comes from

Robert Wittenhall with Lehman Brothers.

Hi. Good morning.

Good morning.

Two questions. Why the relatively significant increase in cap ex and permanent display spending next year? And my second question is can you run through the waivers that you received for EBITDA during the coming year?

Let me try and answer specifically cap ex and displays. Cap ex is basically made up of two kind of buckets. One is basically cap ex for our factory in Phoenix, and then information systems is a practical. As our gross sales grow and we grow this business, we basically have to spend a little bit more on cap ex in the factories. So for instance, we need a new hair color line because we're increasing sales so dramatically. It's mostly cost reduction things and putting in more equipment to meet the increased demand. On the other side of the ledger is I.F. In terms of I.F., we announced last year that we're going to an SAPERT system. We are putting in small components of that this year. As an example, we are putting in the accounts receivable system. It's not a big change. We've also upgraded all the personal PCs in the United States for all of our employees which had not been done probably in five or six years. So I would consider these kind of normal type things. Now, in terms of display spending, what is occurring is if you remember, display spending is made up of various buckets, basically new product trays, new door openings by our customers , and then the rollout of what we have called in prior years the her wall, last year we installed the her wall, the new wall, of somewhere around 6,000, 6,500 doors were stalled. In 2003, we expect that number to be somewhere between 7,000 and 9,000 doors, you know, based on customer demand and things like that. So there's increased door count for the her wall. And then we also have additional cap display expenditures mostly on the graphic panel side as we reconfigure the wall will spend a little bit more money replacing parts and things as we do that in 2003 and 2004.

Let me -- thanks, Doug. Let me make that our last question. And just to wrap it up, I think we're -- we are pleased with the initial results that we're seeing in the marketplace, you know. To drive the profitability of a consumer branded company, you've got to start with the consumer. And I think we've made tremendous amount of progress over the past year. In understanding the consumer, testing our market strategies, hauling out the required investment that's going to drive the growth, securing funding around these strategies, and getting great support from our retail partners across the United States and moving to execute the strategies. I think, as a practical matter, as we work to grow the top line of this company, you know, this is an attractive industry and it’s a company that has an attractive cost structure given the moves that were made over the last couple of years to consolidate manufacturing facilities and overhead expenses.

So as we drive growth, I think you all understand the value of marginal profitability. And we understand our commitment to create that over a period of time, and we think that we are positioning ourselves to do that with the right investment, with the right organization, and executing against our plans as we move forward. So we will keep you posted. And we very much appreciate your interest in our company. Thank you very much.

Thank you.

This concludes today's teleconference. Thank you for your participation. And have a great day.You may disconnect at this time.