Revlon Inc (REV) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Revlon's fourth quarter 2003 earnings conference call. At the request of Revlon today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your host leading today's meeting, Ms. Maria Sceppaguercio, Senior Vice President, Investor Relations. Ma'am, you may begin.

Thank you, Lisa and good morning, everyone. Including those of you listening in via the web. Early this morning we released our results for the quarter and full year 2003. If you haven't received a copy, you can get one on our website at www.revloninc.com. We also announced our program to dramatically strengthen our balance sheet by significantly increasing equity and reducing debt. The plan includes a debt for equity exchange involving but not limited to Fidelity and our principal shareholder, Ronald Perelman.

Our call today will focus first on our results of the fourth quarter and full year and then turn to the details regarding the debt reduction program. We have scheduled an investor conference for next Wednesday, February 18th, to take you through our 2004 business plan and longer-term outlook, as well as some information regarding the debt reduction program we announced this morning. We will provide you with all of the particulars regarding the investor conference later today. We are certainly hopeful that you can make it an we are very much looking forward to sharing our outlook with you. Regarding our bank credit agreements, last month we announced that we secured an amendment to the credit agreement providing for, among other things, the approval of the $125 million of senior unsecured loans from McAndrews and Forbes and the waiver of our EBITDA and leverage ratio covenants through January 31st, 2005.

Let me turn now to marketplace performance, which is usual unless otherwise noted the discussion this morning of market share and retail consumption is of the U.S. mass market according to AC Nielsen, which excludes Wal-Mart and regional mass volume retailers. This data is an agregate of The Drug Channel, Target, K-Mart, and Food and Combo stroes, and represents approximately 70% of the company's U.S. mass market dollar volume. For the year, Revlon and Almay combined outgrew the category by about 1 growth point, which is significant because as you may recall, Revlon and Almay previously had underperformed the category by as much as 10 growth points during the 1999 to 2001 period. This performance is very important to building the foundation for the future. For the quarter, the color cosmetics category continues to be soft with total consumption down 1.3% versus a year ago and for the year, the category was down 2.2% versus a year ago.

In a departure from trends in the previous five quarters, consumption for Revlon and Almay combined trailed the category resulting in a quarterly share decline versus a year ago of 1.4 share points to 22 .0%. However, as you may recall, we achieved a 2.1 point share gain in the fourth quarter last year as we dramatically ramped up our marketing investment to meaningfully reconnect with consumers after a long period of underinvestment. Importantly for the year, we achieved our objective of share growth for Revlon and Almay combined, which improved 30 basis points to 22.4%, marking the first such gain since 1998. For the total company market share of 22.5% for the year declined 10 basis points versus a year ago, reflecting a 30 basis point gain for Revlon and Almay, offset by a 40 basis point decline for Ultima, which as you will recall is currently sold only at select retail outlets in the U.S. and direct to consumer.

Before I turn the call over to Jack Stahl, Revlon President and CEO and Tom Mcguire, Revlon Executive Vice President and CFO, I would like to remind you that 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. Information on potential factors that could affect the companys results from time to time and cause them to differ materially from such forward looking statements, is set forth in the company's filings with the SEC, including the company's current annual report on form 10K, 2003 quarterly reports on form 10 Q, other SEC filed documents and press releases, including the release issued today. And finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I'll turn it over to Jack.

Good morning, everyone. I'm really thrilled to be able to provide with you this report today and I'm also very happy that so many of you are on the line today. As we walk through not only our earnings for the fourth quarter, which we are delighted with, but I think even more significantly the dramatic move that we're making to reshape our financial future and really position us to begin to build value for all of our constituancy as we go forward. So I'm very pleased to have this time with you today and I appreciate your participation.

I would like to just start by saying how really delighted I am with the actions that we announced today to strengthen our balance sheet through the debt reduction transactions that Maria referred to earlier. This is an extremely important step in our journey to achieve long-term profitable growth for our company. And as I suggested in the past, great brands that are well managed will attract the resources we need. And as I think you can tell from our announcement today, I think our debt reduction program really does demonstrate that. In a sense, we're going to reduce approximately half of our debt in this program and close to $780 million virtually immediately, or certainly over the course of the first quarter. So we feel very positive about what we're doing and we've positioned ourselves for the future.

Today we'll take you through the various elements of the program, but let me just emphasize to you that we are delighted not only with Fidelity's commitment to our program, our new financial platform going forward, they will be a great investor in our company and we're obviously thrilled with McAndrews and Forbes continuing support of our company. This is clearly an important day for Revlon and every one of our stake holders. Even more importantly to me, and we recognize that we've got a lot of work to do to continue to strengthen ourselves operationally, but there's no question in my mind that we've made a tremendous amount of progress in beginning to leverage the underlying strength of the Revlon brand. We've got strong people in place. We're strengthening the team, both internally and externally. We've made progress in the marketplace with market share, as Maria indicated. We're gaining shelf space with our important retail customers, and importantly, we have a plan going forward, which we'll outline for you in detail next Wednesday that calls for both top line growth and a combination with that of matter enhancement actions, which we're confident will add tremendous value to all of our stake holders as we go forward. So we're going to be very much looking forward to describing that to you next week.

As we discussed in the past, our focus for 2003 was centered around three key business drivers, strengthening our brands and restoring growth, building strong retail partnerships, and strengthening and building the Revlon organization. When we were on a call early last year we said we had three primary objectives for the year, moderate sales growth, full year market share growth for Revlon and Almay combined, continuing strengthening of our retail partnerships and one additional. That was the continuing building of the capability of the Revlon organization. As we look back on 2003, I'm very pleased to report that we've made meaningful progress on all of those initiatives and we achieved those specific objectives that we set out to achieve. So against those initiatives our focus going forward, whether it be with our brands, our customers or our organization, we're going to continue to take the actions that have been stabilizing and beginning to grow this company.

In terms of the fourth quarter, we did end the year on a strong note, delivering solid fourth quarter EBITDA and year end liquidity ahead of expectations. Tom will walk you through the specific numbers for the quarter and the year a bit later, but let me say that notwithstanding the softness of the overall color cosmetics industry, which Maria referred to, which clearly dampened our growth for the year, I'm very pleased with our finish in 2003. In fact, I believe our strong finish to the year, particularly in terms of EBITDA, is a leading indicator of what you can expect from us in 2004 and beyond.

In terms of 2003 highlights, net sales for the year increased 16% on a reported basis and 9% when you adjust for the growth plan charges that we took in both 2002 and 2003. This is the first year Revlon has achieved a net sales increase since 2000. As Maria pointed out following year's of trailing category growth, trailing industry growth by an average of some 10 percentage points, Revlon and Almay retail consumption combined out paced the growth of the category by about a percentage point in 2003, following the achievement of growth in line with the category in 2002. So I think really by any standard an 11 point change from the historical trend is quite significant and points to the underlying strength of our brands and I believe the actions that we're taking. As I've said earlier, I've continued to be pleasantly surprised with the responsiveness of our brands to enhance marketing and really the responsiveness of our customer relationships.

As Maria mentioned earlier, market share of the Revlon and Almay brand combined increased .3 share points to 22.4%, the first share increase in about five years. In terms of new products and with us today beyond Tom is Staphanie Peponis, our Chief Marketing Officer, but beyond our growth, we do have new product success for 2003. In fact, we held -- within the mass market category as measured by Nielsen, we captured 8 of the top 20 now product performers in 2003, 8 of the top 20. In fact, Color Stay Overtime Lip was the best performing color cosmetics launch in 2003. Color Stay Always On nail enamel, Lip Gilde Sheers, Almay Bright Eyes, and Almay Nearly Naked all were among the top 20 products for the year and while we will continue to strengthen our new product development capability, we're taking lots of actions to do that, we're very pleased with the results from 2003.

At the same time, our strength in sales and customer marketing organizations under the leadership of Paul Murphy were very successful in gaining incremental shelf space at retail for 2004. As our key customers, to whom we are always very thank full, are increasingly willing to partner with us to drive growth in their stores. So we're delighted by this increase in shelf space. It's the best demonstration of support a retailer can give you, as I'm sure you can probably appreciate, and we're going to capitalize on that in 2004.

Our international business, which is led by David Kennedy, who is here with us today, is also making very solid progress. We've improved the way that we're managing our business outside of the U.S. we've tightened up on our management processes and disciplines. We're growing our market share and important development markets an we're just beginning to tap into what I believe is a huge international opportunity as we go forward. And finally, as I've indicated, we've dramatically strengthened the internal team at Revlon, not only by capitalizing on the strengths of the people that were here, but also by bringing some people from outside of our business, bringing in new and additional perspectives. This whole process is critical to ensuring that we have the capabilities to deliver our plans and deliver long-term value creation.

So while we have much work to and we're hard at it, we're make very good progress an strengthening our business and importantly, as we move into 2004, the significant one-time investments of 2002 and 2003 are behind us and we'll begin to reap the benefits of those actions. Those investments were required to stabilize and begin to show growth. We achieved that, but those one-time investments are behind us and we will reap the benefits of those as we go forward.

You will here more about this on Wednesday but very importantly, we've now begun to implement a number of strategic initiatives that are focused on improving our effectiveness and efficiency, and dramatically improving the underlying margins of our business. We've talked a lot about our top line initiatives surrounding our brands but we will begin to focus, not only with you, but take aggressive actions as we're already taking around the underlying margin structure of our business. We'll talk about those actions in a little bit today but certainly next week.

Some benefits will accrue to us in '04 but the lion's share of the improvements we will expect to benefit us in 2005 and beyond. These productivity initiatives involve virtually all aspects of our business model. They include efforts such as improving the effectiveness and efficiency of our promotional process, which is a very intense and expensive process to market promotionally in stores, we have ways that we believe can make that process much more efficient and much more profitable for us. Well talk about that next week. Initiatives to reduce our global manufacturing and supply chain costs, which are underway. Another important initiative is to rationalize our packaging and other elements of our cost structure. Again, teams are committed against this effort to rationalize our packaging and really begin to effectively manage the life cycle of our products, which effects product returns. And Carl Kooyoomjian, who is Head of Manufacturing and Operations as well as R and D worldwide, is also here with us today and is helping to drive these actions based on his long experience in these areas.

So when you add it all up in terms of our top line and our margin expectations going forward, in 2004 we expect top line growth in the 7 to 8% range and expect to drive operating margin improvements of approximately 200 basis points. This translates into an EBITDA target of approximately $200 million and that $200 million target will benefit from enhanced marketing instore and on air in all forms of building our imagery around the Revlon and Almay brands; increased effectiveness in terms of executing our programs with our retailers inside their stores; our new product activities; incremental retail space, which is very important to us; improving margins, building on top of the margin improvement that we already demonstrated in 2003, stemming from the initiatives which I just highlighted, which will improve efficiencies; category growth of the U.S. color cosmetics business and select price increases which have already been implemented.

So around those initiatives its probably important to point out those productivity initiatives -- it's worth pointing out that we did a tremendous amount of work over the past 12 months to position us to execute these initiatives and we work to understand what was possible in our industry as a result of doing detailed cost break downs vis-a-vis other players within the industry and gives us tremendous confidence that we can improve these elements of our margin structure. And again, we'll cover much of this next week.

So when you combine what we believe is a significant margin opportunity from where we are today, combined with our ability to grow our top line, capitalizing on our brand strength, we believe that over time we have a significant opportunity to grow our earnings base and create value. Lots of work to do but we do have every confidence that we can achieve it. With that, I'd like to now turn it over to Tom McGuire, our Chief Financial Officer, who will take you through the numbers for the quarter and then for the year. Tom.

Thanks, Jack and good morning. I'll cover the numbers for the quarter and the year and then we'll turn to the details of the debt reduction plan that we announced this morning. Starting with gross sales for the quarter, gross sales of $424 million were up 2% versus last year and for the year gross sales advanced approximately 3%. Both periods benefitted from favorable foreign currency translation.

For the quarter, net sales grew 73% to $369 million, largely due to a significant reduction in returns, allowances and discounts stemming from both growth plan charges recorded in the fourth quarter last year, and lower regular business returns and allowances in the current quarter. Also benefiting net sales in the quarter was favorable foreign currency translation and a $5 million increase in licensing revenues. Excluding the impact of both growth plan charges and foreign currency translation, net sales advanced approximately 20% in the quarter, primarily due to lower regular business returns and allowances, sales growth of color cosmetics and higher licensing revenues. For the year, net sales grew 16%, again, reflecting the impact of growth plan charges and lower regular business returns and allowances as well as favorable foreign currency translation and higher volume. Excluding the impact of both growth plan charges and foreign currency translation, net sales advanced approximately 6% for the year.

In North America, which includes U.S. and Canada, net sales more than doubled in the quarter to 249 million, compared with 115 million in the same period last year. This growth primarily reflected significantly lower returns and allowances, stemming from growth plan charges, which dramatically lowered net sales in the fourth quarter last year as well as lower regular business returns and allowances in the current quarter. Also benefiting the net sales comparison for the quarter were higher licensing revenues and higher shipments of color cosmetics. Excluding growth plan related returns and allowances, North America net sales increased 31% in the quarter. For the year, North America net sales advanced 17%, excluding the impact of growth plan charges, North America net sales grew approximately 8% in 2003, due to lower regular business returns and allowances and growth of color cosmetics. Partially offsetting these positive factors were lower full-year licensing revenues.

For international, net sales for the quarter advanced 22% to $120 million versus $98 million last year, due to favorable foreign currency translation and lower returns and allowances, largely stemming from growth plan charges taken in the fourth quarter of 2002. Excluding growth plan related returns and allowances, international net sales in the quarter grew approximately 16% versus a year ago with favorable currency translation contributing approximately 15% of the growth. -- 15 points of the growth. For the year, international net sales grew 14% to $359 million, due to favorable foreign currency translation, strength in several key markets and lower returns and allowances, largely stemming from growth plan charges taken in 2002. Excluding the impact of growth plan-related returns and allowances, international net sales grew approximately 12% in 2003, with favorable foreign currency translation contributing approximately 9 points of growth.

Total cost of sales, including brand support, as a percentage of gross sales decreased 440 basis points in the quarter to 32.4% versus 36.8% in the fourth quarter last year. This improvement was largely driven by the impact of growth plan charges and to a lesser extent, lower factory cost of sales in international. Excluding the impact of growth plan charges, cost of sales as a percentage of gross sales improved by 70 basis points in the quarter. Total SG&A was includes departmental expenses and other G and A and certain components of brand support decreased approximately 1% in the fourth quarter to 190 million versus 192 million in the fourth quarter last year, reflecting our focus on managing discretionary spending while sustaining an increasing SG&A brand support, which we initiated just prior to the fourth quarter last year.

In the fourth quarter, operating income was $36.5 million, versus operating loss of 136.8 million in the fourth quarter last year. Adjusted EBITDA in the quarter was 63.6 million versus adjusted EBITDA of a negative 110.4 million in the fourth quarter last year. This dramatic improvement was largely due to the impact of approximately $100 million of growth plan charges recorded in the fourth quarter last year, as well as lower regular business returns and allowances in the current quarter, the favorable benefit of foreign currency translation and higher licensing revenues. Included in operating income in the quarter were charges totaling 5.4 million for restructuring and additional consolidation costs while the prior year quarter included growth plan charges of approximately $100 million, as well as $5.6 million for restructuring, additional consolidation costs and executive severance. Similarly, adjusted EBITDA in the current quarter included 5.1 million in charges for restructuring, while adjusted EBITDA in the fourth quarter of 2002 included approximately $100 million of further plan charges as well as charges totaling 5.4 million for restructuring and executive severance.

Adjusted EBITDA as you know is a nonGAAP measure. We define adjusted EBITDA as net earnings for interest, taxes, depreciation, amortization, gains and losses on foreign currency transactions, gains and losses on the sale of assets and miscellaneous expenses. Attached to our press release, which is posted on our website, you will see a reconciliation of adjusted EBITDA to what we believe are the most comparable GAAP measures, which are net loss and cash flow from or used for operating activities. Also provided in the tables that accompany the press release is a reconciliation of reported net sales to net sales excluding growth plan charges.

For the year, adjusted EBITDA was 122 million versus a negative 6.3 million in 2002. Included in adjusted EBITDA for the full year 2003 were growth plan charges of approximately 29 million, as well as additional charges totaling $6 million for restructuring, while adjusted EBITDA of 2002 included growth plan charges of approximately $103 million, as well as additional charges totaling $23.8 million for restructuring, additional consolidation costs, and executive severance. Excluding the aforementioned growth plan and other charges, adjusted EBITDA in 2003 was $157 million, up approximately 30% versus adjusted EBITDA of $121 million in 2002. This improvement was due to lower regular business returns and allowances, favorable foreign currency translation and higher volume, partially offset by increased brand support and higher general and administrative expenses. Net loss in the fourth quarter narrowed to $12.6 million or 18 cents per diluted share, compared with a net loss of 179.4 million or $3.36 per diluted share in the fourth quarter of 2002.

Let me turn to cash flow. Cash flow provided by operating activities was $17.5 million in the quarter, versus cash flow used for operating activities of $1.4 million in the fourth quarter of 2002. For the year, cash flow used for operating activities was $166 million, including approximately $80 million related to growth plan charges accrued for at the end of last year, compared with $112 million used for operating activities in 2002. Of the $135 million of growth plan charge expensed to date, including the fourth quarter charge last year, we expect approximately 80% to be cash charges with the balance being noncash. In 2003 as mentioned, we disbursed approximately $80 million associated with the plan, in addition to the 5 million we disbursed in 2002.

Capital expenditures in the quarter were $8.9 million versus 6.6 million in the fourth quarter last year. For the year, capital spending was $29 million, versus 16 million in 2002. Permanent displaced spending in the quarter was $16.1 million versus 12.7 million in the fourth quarter of 2002. For the year, permanent displaced spending was $73 million versus 66 million in 2002. Cash restructuring spending including executive severance was $3.8 million in the quarter, and for the year cash restructuring spending totaled 14.6 million versus 31.6 in 2002. Cash interest paid in the quarter was 38 million. For the year, cash interest paid was 161 million versus 155 million in 2002.

At December 31st, 2003, the composition of our bank borrowings outstanding was a term loan facility of 115.4 million, our multicurrency revolver of 101.9 million, and letters of credit issued but undrawn of $22.3 million. In addition, the $100 million term loan from McAndrews and Forbes that we obtained in 2003 was fully drawn as was 15.5 million of the 65 million McAndrews and Forbes line of credit. At the end of the quarter, our unutilized borrowing capacity and unrestricted cash including the 125 million in the new M and F senior unsecured loans recently approved by our board and bank group, totaled approximately $217 million, including approximately 50 million under the M and F 65 million line of credit, about 8 million under the multicurrency revolver and approximately $34 million of unrestricted cash. As of February 9th, our unutilized borrowing capacity and unrestricted cash, including the 125 million in the new McAndrews and Forbes loan totaled $182 million.

At this point, I'm going to turn the call over to Bob Kretzman our Executive Vice President and Chief Legal Counsel, whose part of our team was instrumental to refinancing the balance sheet. Bob will take you through the details of the announcement earlier today with respect to the debt reduction plan.

Thanks, Tom. As indicated earlier today, we announced major debt reduction actions, which ensure approximately 930 million in debt reduction by March 31, 2006. Through a debt for equity exchange followed by public equity offerings. At least 780 million will be reduced by March 31, 2004, 830 million will be reduced by December 31, 2004, and 930 million will be reduced by March 31, 2006. I will review these steps briefly, full details will be included in the exchange offer documents, which will be available within the next two weeks. I would note that we have signed definitive agreements for all of these reductions.

The first step involves a debt for equity exchange, which will result in a debt reduction of approximately 780 million. As I said, this step is expected to be completed by March 31st, 2004. In this step, Fidelity will exchange approximately 155 million in face amount of our unsecured senior notes and senior subordinated notes for class A common stock at exchange rates which Fidelitiy negotiated with the company. Those rates are for the 9% senior notes, 400 shares for 1,000 face amount. For the 8 and one eighth% senior notes, 400 shares for 1,000 face amount. And for the 8 and 5 eighths senior sub notes, 300 shares for 1,000 face amount. Additionally, McAndrews and Forbes will exchange approximately 475 million in debt for class A common stock at the same rates and an on the same terms as Fidelity. This 475 million is comprised of approximately 285 million in eight and five eighths senior subordinated notes and 1 million in senior notes, 110 million of principal amount and accrued interest under the senior term loan made in 2003, approximately 55 million, which we expect will be drawn under the new McAndrews and Forbes 125 million term loan at March 31, 2004 and 24 million in subordinated notes due to McAndrews and Forbes.

So to recap, up to this point Fidelity will exchange 155 million and McAndrews and Forbes will exchange approximately 475 million for a total of 630 million. Additionally, McAndrews and Forbes will exchange its 55 million in series A preferred stock at 40% of face or 160 shares per 1,000 at face value.

Now, at the same time and as part of the first step, we will provide any and all holders of our eight and one eighth senior notes, 9% senior notes and eight and five eighth senior subordinated notes with the opportunity to exchange their notes for class A common stock at the same exchange rates as Fidelity and McAndrews and Forbes. We will also offer the opportunity for the public note holders other than McAndrews and Forbes and Fidelity to receive cash subject to proration with a cap of 150 million in face amount of notes, which may be exchanged for cash instead of class A common stock. This cash limit will be reduced by the total face amount of notes that are exchanged for stock. The cash exchange rates are $830 per 1,000 face amount for the 8 and one eighth notes, 800 per 1000 face amount of the 9% notes and $620 for one,1000 face amount of the eight and five eighths notes. These exchanges will be effected through an offer exempt from registration under the securities laws. We expect to launch the exchange offer by March 1, 2004 and close it within 30 days or so.

Finally, the last part of the first step is that McAndrews and Forbes has agreed to back stop at least 150 million in additional debt reduction. That is in addition to the 630 million of Fidelity notes and McAndrews and Forbes notes in debt which will be exchanged. What this means is that to the extent that less than 150 million in face amount of notes are tendered in the public exchange, McAndrews and Forbes will subscribe for class A common stock for cash at 250 a share to make up the shortfall and Revlon will use the proceeds to reduce debt. So at the end of step one, which is expected to be by March 31, 2004, we will have reduced debt by approximately 780 million as follows: 155 million of public notes held by Fidelity, 285 million of public notes held by McAndrews and Forbes, 189 million of additional loans by McAndrews and Forbes, and 150 million of additional notes in the exchange offer back stopped by McAndrews and Forbes.

The second step of our debt reduction actions will take place by December 31st, 2004 and will involve reducing debt by an additional 50 million through rites offerings if necessary. To the extent McAndrews and Forbes has back stopped step one and purchased shares of class A common stock for cash, we intend to offer shareholders of record prior to the exchange the opportunity to purchase class A common stock at 2.50 a share on a prorata basis. There could be a second rights offering before the year end at a price to be determined at that time by the board. The purpose is to raise proceeds of an additional 50 million to reduce debt. The 50 million is also back stopped by McAndrews and Forbes. The 50 million is reduced to the extent debt reduction in step one exceeds 780 million and by the proceeds of the first rights offering. So at the end of this step, that is by December 31st, 2004, we will have reduced debt by approximately 830 million.

The third and final step involves additional offerings before March 31, 2006 to reduce debt by an additional 100 million. We will do these offerings to the extent that the amount of notes tendered in step one exchange in addition to the McAndrews and Forbes and Fidelity 630 million and the proceeds of rights offerings and other debt reductions are less than 300 million up to that date. By the end of step three, that is by March 31st, 2006, 300 million of debt will be reduced in addition to the debt and notes exchanged by Fidelitiy and McAndrews and Forbes in the step one exchange offer for a total of 930 million in debt reduction.

Let's take a few examples which may help you understand how these transaction, work. First, assume 100 million in notes are exchanged for class A common stock in the debt for equity exchange in addition to the 630 million of McAndrews and Forbes and Fidelitiy notes. In that case, McAndrews and Forbes will back stop and purchase 50 million in stock and we will use that 50 million to reduce debt.

Second, assume 175 million in additional notes are exchanged in step one. In that case, the 2004 rights offerings are only required to raise 25 million to reduce debt and at the end of 2004, we will have raised 200 million over the 630 million in notes and debt exchanged by Fidelity and McAndrews and Forbes for a total debt reduction of 830 million.

Third case, assume that 100 million in additional loans are exchanged for stock and a hundred million in notes are exchanged for cash. Since the 150 million face amount of notes, which may be exchanged for cash is reduced by the face amount of notes exchanged for stock, the face amount of notes which may be exchanged for cash will be 50 million, so the 100 million who tendered for cash will be prorated unless they elect to take stock for the other 50 million.

Finally, assume 300 million in additional notes are exchanged in step one. In that case, there will be no need for any further equity or rights offerings since a total of 930 million in debt reduction will have been achieved. As I said, complete details of these transactions will be included in a 3 A 9 exchange offer document, which will be available in a few weeks, and in any event not later than March 1st. Finally, as part of these investments announced today, we have agreed with Fidelity to continue to maintain a majority of independent directors and as Fidelity may designate two directors and one member of each standing committee. With that I'll hand it back to Jack for some closing comments before we open it up to Q and and A.

Thank you, Bob. And also with us today are our Treasurer Steve Schiffman and Doug Greef who worked on this transaction with us. And we look forward to taking your questions about our earnings and our debt reduction program in just a few moments. I just -- If had I to summarize, I would say that we absolutely continue to make meaningful progress to strengthen our business. We think the progress that we're now making around our capital structure gives us another leg to the stool in terms of building a foundation for growth as we go forward. And again, while we recognize we do have a lot of work to do, we absolutely believe the actions that we have taken over the last 18 months are beginning to leverage the underlying strength of our brands and have put us in a position to really drive our business forward in a way that will create values for all of our stake holders, whether that be our debt holders, our equity holders, as we go forward. We are simply taking the steps to drive the value of this business. So with that, we would be delighted to take any questions that you all have at this stage.

Thank you. And at this time, if you would like to ask a question, simply press star one on your touch-tone phone. If you're using speaker equipment, please lift your handset prior to pressing star one. To cancel or withdraw your question is star two. Once again, that's star one to ask a question and star two to cancel. One moment while the questions register. Our first question comes from George Chalhoub with Deutsche Bank.

good morning.

Hey, George.

Hi, George, are how are you?

I'm well, how are you?

We're doing great.

Jack, a question regarding the earnings. It's a little bit of a comprehensive question, but I thought I'll hit all the points in one of them, you know, in one shot. This quarter was -- the sales and the EBITDA performance was, you know, beyond obviously my expectations and I guess abnormally high by the standards of the prior three quarters of the year, and what jumps at me from looking at this, Jack, and I would love an explaination on these key points if possible, is, you know, we had market share declines in the quarter and consumption was down 8% in Q4 of '03 versus Q4 of '02 while sales were, you know, hugely up year over year. That's kind of point one. Point two, the returns, discounts and allowances was unusually low. It it was in the mid 70s for the better part of the year. It's down by close to 20 million bucks to the mid 50s in Q4. So an explanation there as to how did that happen and obviously that's one of the major factors why, you know, the EBITDA is up so much. I think that would help, also, understanding why did we have suddenly such a big number in Q4 and maybe if we have some good explanations on this front Jack, maybe any concerns that, you know, I may have, that this is, you know, a spiced up quarter ahead of a transaction will be completely, you know, gone before you guys head into it.

Okay. Very good, George. You've asked a comprehensive question. Let me try to give you a comprehensive answer. A couple of things, first of all, I think as you think about our fourth quarter, I think you have to remember that in our industry the fourth quarter in terms of our sales volume, our underlying sales volume, is historically, and it will be going forward, as long as we have such a large color cosmetics business, going to be the biggest quarter in terms of our underlying shipments. Remembering that in the quarter you're anticipating the upcoming year's new products and you begin to ship in the fourth quarter the new products for the -- in this case for 2004. You do that to get them into the customer's warehouses so that as they reset their shelves beginning in -- say January 15th, those products can make it into the stores to be available to consumers. So first and foremost, you've got the seasonal pattern of the color cosmetics business and that may be less true for other players within the industry because they may be less weighted towards color cosmetics than is Revlon but that's a -- that's a pattern that will continue certainly until such time as we begin to really build the other categories, like antipersiprants and deodorants, the hair color business, et cetera. That's the first factor. So you got a seasonal pattern that is normal and will continue. The second key point, as it relates to your question about consumption, my guess is you're citing IRI numbers --

No, the consumption actually, Jack, is purely from the last page in the package that came out of the company this morning.

Okay. So --

I'm just comparing consumption numbers Jack, for 4Q of '03 versus 4Q of '02 and it's a decline of 8%. This is as you guys have released to us. This is not market share.

Okay. I had assumed you were using your own numbers there George.

No, I -- It was another point, Jack, saying that the market share in the quarter was down reflecting the -- you know, a reduction in sales an consumption as well, which supports what you guys sent this morning.

I got it. Let me address that. I think a couple of things you have to realize. First of all, as you know, our Nielsen numbers don't include those growth rates of our largest customers and without naming that largest customer, I think you can imagine who that is, they represent as we've disclosed 30% of our business and importantly, with that large customer, when you add that into our consumption performance, our consumption patterns would be meaningfully stronger than Nielsen would indicate. That's number one.

Number two, keep in mind that implicit in Tom's numbers an implicit in the net sales numbers as we indicated, our returns and allowances are below last year meaningfully and we're at a much more normalized level, if you will, in the fourth quarter of 2003. Last year's fourth quarter included a fairly significant bite of returns related to promotions and that went beyond -- outside of separate and apart from the growth plan charges that we took. So we are comparing against a period a year ago, both in the U.S. and internationally where you did have high returns from our regular business and in the fourth quarter of this year we got back to more, call it more normalized levels, which does bode well for the future.

but, Jack, the -- sorry to interrupt but the -- My problem in understanding this, and I'll with you completely on the year over year, but in the prior three quarters your returns and allowances were much higher on significantly lower sales, lower gross sales. Here we have significantly higher growth sales an I understand the seasonality and that is fine but we have this much higher growth sales number and a much, much lower returns discounts and allowances netting out of it, which to me is kind of -- is kind of a little bit abnormal because those have to move somewhat in tandem with the gross sales numbers.

Right.

That's -- and, you know, the year ago was 203.9. That was clearly -- there was a big chunk of the of the growth plan issues there.

Right, I think the key thing there, George, that reflects a fundamental improvement in our business in terms of how we're able to anticipate new product launches for the upcoming year. In any given year you're going to be introducing, call it 100 SKUs into the market place. That represents a significant portion of your returns obligation for which you have to accrue in a given period of time. And as we went into the fourth quarter of 2003, as we looked forward and set up our liability representing anticipated expense, sell through of the products that we were expecting to be returned was more positive than we would have expected. Why? Because we began to be more aggressive using other means to move that product through the pipeline, anticipating discontinuances. It's a better economic model for us and it does have a positive impact on the P&L. And that's what you're seeing in the fourth quarter. But we did better than we would have hoped for as a result of managing our returns liability more effectively. It's a fundmental better business practice that will benefit us going forward, George.

OKay Jack. And it sounds like this -- we should see it -- we should see it continuously happening. I mean, this is not something that suddenly as we head into '04, we see a reversal back to what we were -- you know, experiencing in the first six months of '03 in terms of that dynamic and exactly, you know, the trends between gross sales and net sales and obviously the EBITDA because, you know, the exchange also for the most part is going to be determined in the first quarter of the year.

Yeah. Let me --

Obviously -- I'm sorry, go ahead, Jack.

Yeah. As we -- let me put it to you this way, George. As you look forward, we said in our press release that we expected 7 to 8% top line growth as we go forward and we were focusing there on net sales. We did not make any distinction there between gross sales and net sales and that would suggest that those two numbers would move more in line as we move forward in the future. So there's nothing that was done to in your words spice up the fourth quarter. We had a fundamentally extremely strong quarter. The dynamic that you talked about in terms of returns does create the gap in this quarter between call it consumption and net sales, but that would have fallen out as a result of the business practices that we have -- that we have taken steps to improve.

Okay. And Jack, one more question. I'm not going to take too long. Next week, I think it's Wednesday or Thursday, I forgot which day. We're going to have an '04 plan laid out. Is that going to be fairly specific or is it going to be, you know, just what you mentioned today in terms of yearly numbers, which obviously the second half of the year is the more important part than the first half. How -- what should we expect for guidance from the company for '04?

Well, we're -- we're in an unusual situation that I think is one that I think is certainly very positive in that we will disclose in our 8 K next week the substance of the conversations that we had with the investors that were -- that are now exchanging their debt into common stock, so you will have the benefit of that presentation. As it relates to guidance for '04 and beyond, the guidance that we will provide essentially is -- takes the form of the top line growth of 7 to 8%, the expected continuation of our margin improvements and what we will do at the meeting, we will not quartize that in the meeting because obviously we want to have the ability to run our business and make timely decisions in the competitive marketplace but what we will do is tell you the actions that we are taking to drive that 7 to 8% top line growth, as well as the actions that I quickly highlighted today to drive margin improvement. So you will be able to take your -- that top line guidance if you will, and get some confidence and I believe tremendous confidence from seeing the actions that we're going to take to create that kind of growth in '04 and certainly beyond.

Thank you.

You're welcome, George.

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

Just two quick questions. First, can you give us the composition of the 155 million in notes that Fidelity is exchanging between seniors and subs and can you fast forward and give us a pro forma equity share outstanding number, please?

Bob, do you want to address or can we address the composition of Fidelity's holdings?

Perhaps what I can do. There was an 8 K filed this morning with the documents that we signed for our debt reduction program. If you look at those documents, I think you will get the information which is publicly available regarding the holdings of Fidelity and the holdings of McAndrews and Forbes.

Okay. If it's publicly available, then you can probably just say it on the call.

Okay. You have -- we believe that Fidelity has 75 million in face amount of 8 and one eighths senior notes, 48 million in 9% senior notes, 32 million in eight and five eighths senior sub notes.

Great. And then pro forma share account?

I think if you -- as you go through the details of the transaction, you have to make -- to determine that, you're going to have to make your own judgment as to how much debt would be tendered for common stock and so therefore, it's going to be very difficult for us to do a pro forma share calculation today.

Let's just do it on the 630 million that we know for sure.

Well, if you -- yeah, if you want to do on what you would know for sure, you would take, in the first stage it would actually be $780 million because that would include the McAndrews and Forbes back stop committment. Then you would have to make some assumptions about what form of debt comes in, whether it be subordinted debt or the senior notes because the exchange ratios are different. So it's -- it becomes pretty complicated as you can see. So I guess I'm -- you know, I think it would be safe to say if you were to do the math and were you to make some assumptions which you're certainly capable of doing, you would be in the plus or minus 350 million share range.

Okay.

I hope that helps.

Yeah, that's very helpful. Thanks a lot.

It depends on a lot of assumptions, but maybe that gives you a sense of it.

Yes. Thank you.

You're welcome.

Thank you. Our next question comes from Walter Branson with Regimen.

Thank you. I would like to turn to the table provided as part of the press release indicating as reported sales adjustment for growth plan and as reported without growth plan. Please explain to me what the growth plan adjustment is . Is that adjustment for for the amount of growth plan charges taken net of the reserves from the growth plan charges taken previously that were utilized, or is it simply the growth of plan charges taken without any reduction for the amount of utilization. And regardless of the answer, could you give me the charges taken and the reserves utilized for each of the quarter ended December 31st '03 and year ended December 31st '03 period and the prior periods?

Tom do you want to focus on the growth plan charts to help him reconcile that to the extent that we can.

Yeah, the growth plan charges as -- in the quarter, reflect the -- well, look at 2002 and they reflect the charges that were taken in this table that impacted net sales. Okay. So those would have been growth plan charges relating to our SKU rationalization and some pricing actions which were relatively small on that number. And those would -- those were charges that were taken, put up on the balance sheet at the end of last year and of course as we mentioned, they come through actual returns for example and the cash was -- went out during the year this year. What you see for the quarter in 2003 is -- reflects the fact of you've got a -- you've got a charge in international but if you're looking at North America, that reflects the fact that we've experienced better than expected results in terms of actual returns coming back. We've -- you know, that's a combination of experience with better sell through and so on and so forth. And so in the quarter, the reserve requirement at the end of the year related to the growth plan charge is less than we expected.

Okay. What I'm trying to ask about though is the reserves utilized during the quarter and during the year. Do have you that?

We don't -- we don't specifically -- Walter, hi, it's Maria. We don't specifically break out the reserves by line item of the P and L. What we have continued to talk on on the quarterly calls is how much of the charge to date has been what we expected the cash component to be and how much was taken to date. So I guess if you wanted to go back to last quarter's conference call, you would find out what we -- what we disbursed to date, we can look at with a we disbursed to date in this conference call and the Delta would be the -- the utilization of or the, you know, -- releasing of the reserves that were put up, the actual expenses against that or disbursements against that.

Right.

But as it relates to line item detail, we just don't get into that level of detail.

Well, then let's not talk about line item detail. Do have you that Delta number?

I don't have it here in front of me. It's all public information if you want to give me a call later, I would be more than happy to help you with that.

Do you know what it was for last year for the fourth quarter?

I don't have that with me. Yes, yes, I do a matter of fact. Last year for the fourth quarter, while we booked somewhere in the neighborhood for the year $104 million in growth plan charges, we only expensed about $5 million. So there was a $5 million cash outlay -- it would be in the fourth quarter of last year versus, you know, whatever the number is going to be that I'll give you and versus what we talk about now which was about $80 that's been disbursed in 2003.

Okay.

So all told, there's been $85 million cash out the door.

Okay. So -- and so in the current -- in the fourth quarter of 2003, you didn't take any growth plan charges, is that right and then you disbursed whatever that Delta was?

The net effect of our actions in the growth plan in the fourth quarter of 2003 resulted in a zero bottom line impact to the P&L. That would be correct. That has nothing to do with cash disbursements associated with charges taken in previous periods.

Right.

Those are completely unrelated.

Got it. Thank you.

Thank you. Once again, that is star one if you would like to ask a question. And star two to cancel or withdraw your question. One moment please. Once again, star one to ask a question and star two to cancel our withdraw your question.

Lisa, considering that we've gone for over an hour at this point, why don't we turn it back to Jack for some closing comments and, you know, save people a little bit of time because it's running kind of late.

Thank you.

Let me just tell you, number one, I appreciate your participation today and we are really very, very positive, as you would expect, about this move. From an enterprise value standpoint, this gives us the ability to focus even stronger on our brands and customers and our margin improvements actions as we go forward and from our perspective, pulling well over $900 million, you know, $930 million of debt off the balance sheet insured, if you will, is a huge move for us and it will benefit from our standpoint not only our -- the remaining debt holders but certainly our share owners as we pull all of that contractual obligation out from underneath them or out in front of them. So it gives us the ability to begin to create real value for our share owners as we go forward. And we'll look forward to laying out for you all the actions we're going it take. We're very excited and look forward to your involvement, increasing involvement with our company as we go forward. Thank you for participating today.

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