Revlon Inc (REV) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's first quarter 2004 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 now like to introduce your host leading today's meeting, Miss Maria Sceppaguercio, Senior Vice President Investor Relations. Ma'am, you may begin.

Thanks, Lisa and good morning everyone.

Earlier this morning we released our results for the first quarter of 2004. If you haven't received a copy, you can get one on our Web site at www.revloninc.com.

As usual, our call today will be focused on the results of the quarter, although I will quickly touch on some recent developments regarding our capital structure.

As you likely know, on March 25th, we consummated debt-for-equity exchange offers resulting in the reduction of debt of approximately $804 million, and the issuance of approximately 300 million new common shares. This very significant first step to dramatically strengthen our balance sheet is now behind us and we are moving forward with additional actions in this regard.

Specifically, on April 19th, we announced a series of additional refinancing transactions designed to lower our annual interest expense and extend the maturities on much of our debt. In this regard, we commenced tender offers for our 12% Senior Secured Notes due 2005, and our 8 1/8 and 9% Senior Notes both due 2006.

We also announced plans to enter into a new credit facility and to privately place approximately $400 million of new Senior Unsecured Notes due 2011. These transactions are designed to extend to 2009 at the earliest the maturities on the refinanced debt, and to lower our annual interest expense.

Because of the private placement, we are limited in what we can say to what is included in our previous releases.

Finally, as a result of these capital structure improvements and recognizing the operating improvements that have been made in the business, both S&P and Moody's have upgraded the ratings on our debt with outlooks that are stable to positive.

Turning to marketplace performance, as usual, unless otherwise noted, our discussion this morning of market share and retail consumption is of the U.S. mass market according to A.C. Nielsen, which as you will recall excludes Wal-Mart and regional mass volume retailers. This data is an aggregate of the Drug Channel, Target, K-Mart and food and combo stores and represents approximately 70% of the company's U.S. mass market dollar volume.

For color cosmetics which as you may recall represents about 70% of our U.S. portfolio or just under half of our worldwide business, the category according to A.C. Nielson was down about half a point for the quarter. The Revlon brand registered a share of 17%, which was essentially in line with the 17.1% achieved in the year-ago period and up almost a full share point versus a 16.1 share achieved in the first quarter of 2002.

Importantly, Revlon brand strengthened considerably in March, registering a 0.4 share point gain for the month and this is before any benefit from our new advertising campaign that we just launched in April.

For Almay, share in the quarter was 5.4%, down a half a share point versus the same period last year, partially due to timing. In May 2003, Almay lost some key retail space at a large customer, and since then our comparables on share for this brand have been difficult.

However, due to improved execution performance at retail and our strengthening relationship with this particular customer, we successfully regained the space, which we will get back in May of this year. In addition, Almay recently launched its new advertising campaign featuring the brands' new spokesperson, Elaine Irwin Mellencamp who we believe is the perfect representation of the brand.

A final point on share. As we've indicated previously, we believe that the category strengthens considerably with the inclusion of all of the major mass retailers, which is not the case in either the Nielsen or for that matter the IRI data that gets reported publicly.

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 company's 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 10-K, 2003 quarterly reports on Form 10-Q and 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 now hand it over to Jack.

Thanks, Maria and good morning everyone. We appreciate your participation this morning, as always.

Let me begin by telling you how pleased I am with progress that we've recently made in strengthening our balance sheet. It's obviously something that has been very important to our company and we're delighted with this first step that we have completed in terms of the debt-for-equity exchange.

While we obviously have a lot of work to do to continue to grow and strengthen our company, I'm very confident that the top-line growth and the margin transformation actions, the actions to improve our margin structure over time, coupled with our improving capital structure, really do provide us a platform to achieve our objective of profitable long-term growth.

Turning to the quarter, we did continue to make progress. As you know and as we've talked consistently in the past, our objectives continue to be centered around strengthening our brands and restoring growth, building strong retail partnerships, and strengthening and building the Revlon organization. That's a more internally focused objective. So brands, customers, and our own organization.

During the quarter, we hosted an investor conference, during which we shared our outlook for the business for 2004. And for the first time since I've been here at Revlon, we provided you with an EBITDA target for the company for the upcoming year.

We also provided a lot of detail regarding our business plan and the various actions that we are taking, which are designed to deliver our target of $200 million in EBITDA this year. With a strong first quarter behind us, I continue to be confident that we are on track to deliver on this objective for the year.

In terms of first quarter business highlights, let me just share a few with you.

Net sales increased 6% on a reported basis and were up 3.5%, if you exclude the impact of last year's growth plan charges that reduced last year's sales. So 6% as reported, 3.5 if you back out last year's growth plan charges.

As Maria pointed out, the Revlon brand essentially maintained share for the quarter while Almay did decline. This decline was partially due to timing offset associated with a 2003 space loss at retail, which will reverse itself this summer.

We have a commitment from that particular customer to increase our shelf space back to where we were and that's very positive for us on the Almay brand.

In terms of our focus on strengthening our connection with our consumers, we've just launched a new what we believe to be breakthrough advertising campaign for the Revlon brand, which we believe will connect meaningfully and emotionally to our consumers in ways really that other categories like fragrances and prestige cosmetics already do. Building a more emotional connection really rounds out the full benefits of the brand in terms of helping women look and feel their best.

We believe we're actually pioneering this approach in mass cosmetics and we're very excited about the potential that this new advertising for Revlon has for us.

In terms of new products, we do have a solid lineup for the year. Although I will tell you that last year's, 2003's, first quarter new product program did involve a larger number of SKUs and larger initial shipments to our customers in the early part of 2003.

As a result of that, our slight sales decline in North America came about during the first quarter largely as a result of having less new products shipped.

As we've talked about in the past, we have made some conscious decisions about how we innovate and bring new products to the marketplace. And the way I've described our strategy to you is that we will do fewer, bigger and better.

Why? Because we believe we can actually maximize impact on the consumer and do it in a more profitable way that's more sensible for our business as we go forward.

But it did have a little bit of an impact in the first quarter. And I believe that as we move forward, the progress that we're making with how we innovate, how we bring products to the marketplace, will really evidence itself as you look out into 2005 and beyond.

And look for us as a consequence of that to reduce our returns and allowances by extending the lifecycle of our products.

Our most significant items for this quarter were Revlon Super Lustrous Lipgloss. Lipgloss was a gap in our portfolio, which we've now solved. A restage, kind of a reinvigoration of the New Complexion line of face makeup as well as Colorstay natural face powder and concealer.

We also introduced a product called Almay Lipgloss, which puts us again in the gloss category for the Almay brand. And these items are doing well in the marketplace.

On the sales side, we continue to make meaningful progress during the quarter to strengthen our relationships with our retail partners and building on top of some of the recognition that we've gotten over the last 12 months. We were recognized in a formal way by at least one more of our large customers, in this case it was Target. And we're very excited about that progress.

Internationally we delivered a strong quarter with particular strength in our business in Asia and the Pacific region. Yes, including the benefit of favorable foreign currency translation.

So I do feel good about the progress of our international business and some of you may remember the turn in profitability that we experienced in international between 2002 and 2003 and increasingly I think international will be an important driver for our business as we go forward.

Finally, we have made good progress in advancing and beginning the implementation stages of a lot of our, what we're calling margin transformation initiatives, actions to improve our margins. And we did lay that out in terms of the investor presentations that we made earlier this year.

And as a result, we do expect to significantly improve our margin structure over the next three to five years. And these things, just to remind you, involve how we purchase our raw materials and ingredients.

As an example, how we bring promotions to our retail partners, doing that in a more exciting and more efficient way. And those are a couple of examples of these margin transformation actions that we're taking.

As we said earlier at these conferences with investors, the benefits of these actions will be much more visible as you move out into 2005 and beyond. We're seeing some benefit this year as we get into early stages of implementation, but we're very much looking forward to our progress.

I should tell you that we recently added under Carl Kooyoomjian. Carl as you know heads up our manufacturing R&D capability. We added a person by the name of Bill Reis as our Chief Procurement Officer. Bill will help execute our purchasing strategies globally and Bill came to us most recently from Goldman Sachs where he was Vice President of Global Procurement.

So I believe, as I will consistently remind ourselves and external audiences, that while we've got a lot of work to do, I feel good about the progress that we're making and I'll turn it over to Tom now, who will walk you through our numbers for the quarter.

Thanks, Jack.

Starting with gross sales for the quarter, gross sales of $379 million were up 3% versus last year. Net sales of $308 million were up 6% on a reported basis and up 3.5% excluding the impact of growth plan related returns and allowances in the year-ago period. Driving the increase in net sales was growth in international due to favorable foreign currency translation and strength in several key markets.

Also benefiting the sales comparison in the quarter were lower regular business returns and allowances and $5 million of increased licensing revenue due to the prepayment by a licensee of a renewal fee. Partially offsetting these factors was higher brand support in the form of customer-specific sales incentives.

In North America, which includes U.S. and Canada, net sales of $206 million advanced approximately 1% on a reported basis and were down 2% adjusted for growth plan related returns and allowances in the year-ago period.

This performance primarily reflected higher brand support and modestly lower shipments stemming from new products with fewer SKUs this quarter versus last year. Partially offsetting these factors were higher licensing revenues and the benefit of lower regular business returns and allowances this year versus last year.

For international, net sales for the quarter advanced 18% to $102 million versus $87 million last year due to favorable foreign currency translation and growth in several key markets, excluding the impact of foreign currency translation, international net sales advanced approximately 4%.

The cost of sales, total cost of sales for the company, including the brand support component as a percentage of gross sales increased approximately 60 basis points to 30.9% in the quarter, largely due to higher brand support and unfavorable product mix, partially offset by the favorable impact of a modification to international medical benefits. Importantly, costs of sales are on track with our plan.

Gross profit as a percentage of gross sales improved 140 basis points, reflecting the benefit of higher licensing revenue as well as the impact of higher returns and allowances in the year-ago period stemming from the company's growth plan partially offset by the increase in total cost of sales. As we've discussed in the past, we believe we have a great deal of opportunity to lower costs in the manufacturing operations area and we're very aggressively focused on doing that.

Total SG&A, which includes departmental expenses and other G&A and certain components of brand support decreased approximately 7% the first quarter to $172 million versus $184 million in the first quarter last year. The decline in SG&A spending primarily reflects our aggressive focus on managing discretionary spending as well as the absence this year of growth plan charges which impacted SG&A in the year-ago period by approximately $5 million.

Also benefiting the comparison was lower consumer promotion spending stemming from a shift to customer-specific sales incentives and lower display amortization.

Operating income for the quarter was $20 million versus an operating loss of $4 million in the first quarter last year. Adjusted EBITDA in the quarter was $45 million, versus adjusted EBITDA of $23 million in the first quarter last year.

This improvement in profitability reflected the absence this quarter of growth plan charges, which reduced operating income and adjusted EBITDA by approximately $11 million in the year-ago quarter as well as due to the benefit of higher sales, including the lower returns and allowances and increased licensing revenues, which I mentioned earlier.

Lower display amortization impacted that as well and favorability of approximately $3 million associated with modification to international medical benefits. Partially offsetting these drivers of profitability improvement was higher brand support in the quarter.

Adjusted EBITDA, as you all know, is a non-GAAP measure. We define adjusted EBITDA as debt earnings before interest, taxes, depreciation, amortization, gains and losses on foreign currency transactions, gains and losses on the early extinguishment of debt and gains and losses on the sale of assets and miscellaneous expenses.

Attached to our press release, which is posted on our Web site, 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 from 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.

Net loss in the first quarter was $58.2 million or 63 cents per diluted share compared with a net loss of $48.7 million or 91 cents per diluted share in the first quarter of 2003. Net loss in the current quarter included a loss of approximately $33 million for the early extinguishment of debt associated with the debt-for-equity exchange offers, which we consummated during the quarter.

Let me turn to cash flow.

Cash flow used for operating activities was $35.6 million in the quarter versus cash flow use for operating activities of $60.5 million in the first quarter of 2003. During the quarter, we disbursed approximately $1 million associated with growth plan charges which were taken in 2002 and 2003.

Capital expenditures in the quarter were $2.7 million versus $4.7 million in the first quarter last year. And permanent display spending in the quarter was $20.6 million versus $21 million in the first quarter of 2003.

Cash restructuring spending, including executive severance, was $2.3 million in the quarter this year.

Cash interest paid in this quarter was $46.5 million and the composition of our bank borrowings outstanding at March 31, 2004 was our term loan facility, $179.8 million, our multi-currency revolver, $48 million, letters of credit that were issued but undrawn were $18 million.

In addition, we had no borrowings under the McAndrews & Forbes term loan or line of credit, which post exchange offers now total $151 million. At the end of the quarter, our unused borrowing capacity and unrestricted cash totaled approximately $249 million.

That includes $65 million under the McAndrews & Forbes $65 million line of credit, it includes $86 million under the McAndrews & Forbes $86 million term loan and it includes $66 million under the multi-currency revolver and also approximately $32 million in unrestricted cash.

As you may recall, the McAndrews & Forbes line of credit and term loan are currently subject to borrowing limits of $86 million pursuant to the support agreement that we have with Fidelity.

And finally, before I turn it back to Jack for some closing comments and Q&A I'd like to emphasize the significant progress that we've made over the past several months to address our capital structure and its role in providing a really solid platform for achieving our long-term business objectives. We continue to move very aggressively in this regard and we're very pleased with all the progress we've made in a short period of time.

With that, I'll hand it back over to you, Jack.

Thank you, Tom. Just a few quick thoughts before we open it up to your Q&A.

We do continue to make real progress to strengthen our business, and we're delighted that we've been able to take the steps that we have in our capital structure and fully expect that we will emerge from our current refinancing activities with a much-improved balance sheet and a much brighter long-term outlook. We are confident that our top-line growth and margin transformation initiatives, coupled with the balance sheet actions that we're taking, will put us in a position to drive our business forward in a way that will create value for all of our stakeholders.

Maria, with that, I guess we can open it up to Q&A.

Yes. Lisa, you can open up to Q&A.

Thank you. And at this time if you would like to ask a question simply press star one on your telephone touch pad. If you are using speaker equipment, please lift your handset prior to pressing star one. To cancel or withdraw your question it will be star two. Once again that will be star one to ask a question and star two to cancel. One moment while the questions register. Thank you. Our first question comes from Bob Labick with CJS Securities.

Good morning, excellent quarter.

Thanks Bob.

Thank you Bob.

A couple questions. One, it looks like you had very good cost controls and you discussed SG&A a little bit, I was wondering if we could elaborate further. Was there any seasonality to the marketing or did you hold any marketing back because of the new campaign launched in April, or should we expect a similar SG&A as a percent of revenue for the next, you know, at least Q2, Q3 and then obviously it's always a little better in Q4. Can you just give us a little more color on that?

Maybe I'll respond on the marketing side and Stephanie, if you want to build on that. With us today is Stephanie Peponis, our Chief Marketing Officer, and she and Tom probably will augment what I have to say here.

On the marketing side no, we're actually about where we thought we'd be on our plan. And in fact we indicated that we would be, you know, reasonably aggressive in terms of bringing marketing into the first quarter. So there's no real change in the pattern there.

You're right in terms of the Bellisimo campaign beginning to impact us in April in terms of the investment there, but there was no, we were up on brand support as Tom indicated, and we feel good about the investment that we're making in the marketplace. And it will be sustained.

And in Q1 what you saw in the marketplace was continued spots from our '03 advertising on age-defying and other products and in print, our red carpet campaign. So building up what Jack said, we continued to support in the marketplace. It was only in April that the new campaign came out but the support was in the marketplace in Q1 as well.

Okay. Great.

Tom, do you want to build on the question of cost and --

Yeah. I just, Bob, I would just add to that and say that, you know, we've got I think stronger and very good management practices in place over the portion of our spending which is mainly departmentals, the part that is discretionary and we've just taken a view that people don't have money to freely spend. We gear it towards specific spending and then we'll just manage that very closely this year and let it out as we see fit in terms of making those kinds of discretionary spending decisions.

Terrific. Now, in terms of shelf space gains you mentioned that Almay is going to get some space back in May you said. Is there any other space gains expected for the Revlon brand or rather for Almay and when should those hit?

Okay. We in fact have called out, as you may know, that we achieved significant space gains for 2004. And a lot of that, and essentially we achieved space gains across probably of our top eight customers in one way shape or form virtually all of our top-eight customers. And that would have been in the form of either increased shelf space on the Revlon merchandising wall or incremental points of availability in-store.

And, for example, at one large retailer we gained new availability at the checkout counters for our beauty-tool products. And so we're beginning to break some new ground in terms of incremental points of availability in-store. But the bulk of our space gains at least in this early stage were related to recapturing some of the shelf space that the company had lost in the late '90s and that's very positive.

In terms of timing, you begin to see the benefit of that certainly on an ongoing basis in certain cases April, May and as the year moves on, as reset schedules are completed. And it really depends on the retailer.

Terrific. Thanks. Okay. Then one question just on the overall category. I guess your mass was down slightly and it looks like Prestige cosmetics were up and should we look at this as a secular shift or is this more indicative of a normal cyclical recovery where mass would follow the Prestige and then therefore we could assume mass should be picking up sometime in the future? Could you just give a little commentary on that?

Yeah. I'll ask Stephanie to comment on that. I would say that in terms of where we were in the quarter, it really hasn't changed our outlook for the year when you look at the broader picture in terms of the channels in which we participate. But Stephanie, why don't you build on that?

Speaking to the mass numbers, Bob, obviously Nielsen doesn't capture the whole universe and in the Nielsen universe in Q1 the category was down. If you look at the broader channels with some estimates for other key retailers, we find that the category is up probably 2 to 3% for the first quarter, which is less than Prestige, which continues the trend that mass is not quite as robust as Prestige but is certainly well above levels from Q1 of '03. So for that, which Jack mentioned, we continue to believe it will be a good year for the mass color cosmetics category.

I think, Bob, it's important also to note that the new advertising campaign, you know, we recognize that Prestige is an attractive and growing channel for cosmetics. One of the things that as we did our consumer research, you know, that I guess would otherwise be apparent in the Prestige channel, retail customer had an opportunity to really experience the brand, there's almost a connection between the consumer and the cosmetician in-store.

And part of our strategy around our advertising, which we've now released, as I said earlier, it's not just the functional benefits of the product, which is traditional cosmetics advertising at mass, but there's more of an emotional connection which we're building. And our retailers are very excited because they see us being able to build a deeper connection with their customer at mass and we'll be pushing on that even harder as time goes on. Does that answer your question, Bob?

Yes, it does. Very helpful, thanks. I will get back in the queue. Thank you very much.

Thank you. Our next question comes from Karen Miller with Bear Stearns.

Yes, good morning. I wondered if you could talk a little bit about your permanent display spending? I know you were in a lot of doors last year and it's pretty much complete. Could you talk about where it stands for the rest of this year in terms of doors and maybe '05?

Sure.

Give us color. Thank you.

Tom or Maria, either one.

Yeah. Go ahead, Maria.

Well Tom talked about the permanent display spending in the quarter it was a little under $21 million, similar to the first quarter of last year. We do still have some additional Her Wall resets this year.

And depending upon how you look at them or how you count them it's probably a couple thousand more to go beyond what we may have done in the first quarter. So we will be putting in less doors this year than we did last year. And at the end of this year, we will essentially be complete with that process.

So does that mean that in '05 display spending, permanent display spending should considerably go down?

Well, what we've said this year is that we expect our permanent display spending to be in the 50 to $60 million range and we would expect that as we complete the roll-out that would come down further in '05. We just haven't quantified that.

Okay. Thanks. Then just one more question. Can you tell me, I mean your SG&A was down considerably. Where do you see on your R&D? I mean, is expenditures level?

Yeah, they're about level.

Because I know you've talked about being able to develop a product and coming to market quicker. I'm wondering if you've made any progress on that and is that perhaps one of the reasons that your SG&A is lower this year over last year?

That's not a factor, Karen. I think SG&A as we talked about on the call is there are a couple of factors driving that. But it's, you know, really a focus on discretionary spending and we don't consider R&D a discretionary type spending.

What we're doing on the new products development side is really discipline, execution and focus on putting processes in place. That's not an area where we're looking to cut our focus or our expense.

Okay. And in terms of new product, just one last question. Is it more heavily weighted towards the second half of the year, third quarter, fourth quarter, can you give us some guidance on that?

In terms of the consumption of the products or the shipments or --

The shipments, introduction.

Okay.

Why don't I answer that. The majority of our new products are being introduced in the first half of the year, so the difference versus last year is, as Jack laid it out, that we have a more focused new product introduction strategy, fewer SKUs with more sales per SKU, but we anticipate that the majority of our new products are first half based.

Okay. Thanks. That's helpful.

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

Good morning.

Good morning, George.

Hey, George.

A couple of questions to understand. In the press release, the 6 million bucks adjustment to net sales from the growth plan a year ago and the 11 million bucks adjustment in operating income totaled to 18. Should I look at this 18 as part of the total 29 million bucks growth plan charges in '03?

No. George –- Want me to take that one?

Yeah.

The way you want to think about it is there was an $11 million impact to operating income and EBITDA in the quarter. Six of it impacted net sales in the form of returns and allowances in the year-ago period and five of it impacted SG&A for things like professional fees and so on associated with the development and early execution of the plan. So in total, operating income was 11, the pieces were 6 at sales, 5 at SG&A.

Got it. And Maria, for the remainder of the year, are you going to give us the breakdown of the growth plan charges remaining for the three quarters so that we have kind of an apples to apples comparison when we look at the quarterly numbers in '04?

Yes.

And what I'm saying is ahead of reporting the numbers. What are you going to do with every time you report a quarter?

We haven't necessarily considered doing that.

It might be helpful from a modeling standpoint so we look at an anchor point that is adjusted already.

I don't see why we couldn't do something like that.

Okay. So I think that will be helpful for modeling purposes.

It's important, it's also important to point out George as we communicated publicly, we, for 2004, there have been no growth plan charges, nor do we anticipate, expect or plan for any growth plan charges in 2004, George.

Right. Understood, Jack, I was meaning for '03.

Sure, I understand. I just want to clarify that for the rest of the listening audience.

My second question is on the consumption. Someone, I'm not sure if it's Maria or you Jack, mentioned that if you include the Wal-Mart and regional MVRs, the overall category would have grown 2 to 3%. What would have been your consumption overall because according to A.C. Nielsen and IRI, your consumption was down close to 3.7%. Obviously, all-encompassing would have been flat, up or can you give us this number?

George as you know we don't disclose specific performance at specific retailers but we would have been up looking at the total universe.

Okay. And my last question Jack, overall, the 4% category growth hypothetically speaking let's assume that the category ends up being a little bit softer than you expect, do you have contingency plans so that you're still able to have your 200 million bucks in EBITDA, where obviously part of your 200 million bucks expectation relies on a certain category growth and you beating it from a top-line perspective and while you have some already good commitment from, you know, from a distribution standpoint, assuming the consumer doesn't get there, how confident are you to be able to hit the 200 million bucks in EBITDA, maybe via some other execution on the operating, maybe costs or some other methods.

I think first of all, George, based on the 2 to 3% for the first quarter, which obviously represents no more than 25% of the business for the year in terms of consumption, we haven't really changed our outlook on what we expect from the category for the full year. Having said that, you know, just as Tom outlined, in terms of how we carefully manage our expense commitments and lines, we're also carefully managing the revenue side of our business.

And I think the important thing for us is, you know, a year or two ago as you looked, once you were in the middle of a year, you know, our capability to build additional programs that would put additional sales pressure against the marketplace probably would have been a bit limited just in terms of the depth of capability we had within our own company and our sales force. But as we strengthen our organization, we always have the ability to look kind of down the track and say, okay, what's happening at a particular customer, what's happening within the overall category environment and take actions to strengthen ourselves. And given the ability to get more retailer support than we have historically as well, we can react more quickly than this company could have I think in the years past.

So importantly, though, we don't expect the category to be markedly different than we thought, but both on the expense side and on the revenue generation side, we would look to take actions to continue to augment the year. And as a consequence of that we are comfortable with our target EBITDA of $200 million for the year.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from Carla Casella with J.P. Morgan.

Hi. I wonder if you can talk about taxes, how much you expect to spend on taxes this year or your ability to use NOLs?

Yeah. On taxes this year, it's really pretty negligible. We will pay some taxes overseas, but other than that, we won't be paying taxes this year.

And do you have NOLs available going forward as well?

We have NOLs available. We were part of a consolidated return with M&F, which was McAndrews & Forbes which was broken as a result of the exchange transaction that took place, but we're still part of that consolidated return for the year as a result of that.

And, you know, it's, we aren't able to put an absolute number on what the NOLs are. It's laid out in excruciating detail in our 10-K, but that's roughly our situation.

Okay. And in the business that you had lost at Almay which you're getting back this May, who had picked that up in the interim?

Stephanie, do you want to respond to that?

In terms of the specific space, that's not something we can disclose net retailer, but overall Almay is the largest competitor in the healthy beauty category so it would have been the other healthy beauty companies that would have picked up that business, if not pieces of that space.

Okay. And then one last question. Can you just talk about, do you see any margin differential in your sales to mass merchants versus the Drug Channel, either on the gross margin or the operating margin side?

We really, you know, all those channels of distribution are very important to us from the standpoint of every line item on our P&L. But we wouldn't be in a position of wanting to breakout our relative margin structures there.

Okay. And, you know, I lied. I forgot one other question. You talked about the changes in your returns, can you just discuss any of the details of how your return policy has changed?

I'll comment on that. Our policies have not changed. Our attention to managing what happens with returns has become much more disciplined. And it's a function of how you plan what you ship, how you match demand at the SKU level with what you ship out and how you do things, such as promotional shipments. So it's more management and discipline around the whole product lifecycle, if you want to call it that, than it is, it's not a policy change.

Okay. Great. Thank you.

You're welcome.

Carla, let me just build on Tom's point. You may have seen a schedule that he showed at one point in time that showed our returns on both a reported basis and a normalized basis and I think if you saw that charge, you'll remember that we have made meaningful progress there in bringing our normalized returns to a lower level. And we expect that to continue to benefit us as we go ahead. That's one of the margin actions that we're taking as a company.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from Jeff Kobilines (ph) with Salomon (ph) Asset Builders.

Hi. Can you say what your returns and allowances percentage was in this first quarter this year and last year's percentage number?

Maria, do you want to speak to that?

We haven't in the past broken out the specific returns and allowances numbers and I would tell you that we have been, in our press release at the back we give you the $6 million charge associated with the growth plan that was in last year's number, but as a general practice, we haven't given out those specific line items between gross and net sales.

Okay. Can you say, are you at your normalized run rate, do you think, for this year in the first quarter?

We put the document out as part of our investor conference that we did earlier in the year that laid out our trends line for returns and it showed us at a historic level several years back of, you know, of 14.5% was the point that we had on there in the U.S. And so that kind of gives an indication of where we would be at in 2004. We're on that trend line.

Okay. Great. And can you say what percentage of the volume that was sold was sold on promotion by the company and by the industry in this year's first quarter?

Go ahead, Stephanie.

In terms of our promotional activity we were on par with the rest of the category and the category did not change significantly from where it was this time last year.

Okay. And then it was mentioned about SG&A being down and part of it was because there was lower consumer promotional spending, and you said you shifted to customer-specific promotional spending. You know, without giving away any of your competitive information, can you just comment about and just elaborate about that and is the industry moving that way or what your strategy is here?

I think that would be an issue of competitive sensitivity. I think it's safe to say that retailers generally are interested in developing their brands in a way that makes sense. And we've built some capability to work more closely with retailers to make sure that the investments that we do make in their stores really maximize throughput at their end and so without commenting on the numbers specifically, I think it's safe to say that we're working more closely with retailers to better align with their way to market. Stephanie, anything you want to build on that?

Yeah. I think one thing to think about is we have not seen nor do we anticipate any shift between sort of out of store brand support versus in-store brand support, nor have we seen that in the marketplace.

Thank you.

Thank you. Once again, that is star one if you would like to ask a question and star two to cancel. Our next question comes from David DeGroff (ph) with MFS.

Good morning.

Good morning, Dave.

I was wondering about the licensing revenue, if that's one-time and if that's 100% margin basically flow through.

Yeah, it is. It's a payment of a renewal fee and it's, it does flow straight through.

Okay. Will there be any more of that kind of activity for the balance of the year, is this pretty much it?

That's, you know, we don't have a plan for additional of these kinds of licensing revenues for the rest of the year. We have ongoing licensing revenues that are related to royalties that we do have in the plan for the rest of the year.

I will say that as we strengthen our brand, as we've been doing, and Stephanie has responsibility for the marketing side of those licensing possibilities, we are getting I would say enhanced interest in licensing arrangements. And I think that's certainly positive for us as we go forward.

Okay. How much higher was brand support year-over-year?

Maria, do you want to take that one?

Yeah. In the quarter brand support was higher in total when you look at all the individual components and while not specifically disclosing a number for competitive reasons, I will say that it was up in the high single digits.

Okay. And I had the number last year at about $100 million. I think that was a disclosed number, so --

I don't believe that we disclosed it but it might be a good estimate that you had. All I can tell you is that it was up in the high single digits. So you could run it off of that if you're comfortable with your number.

Okay. Thanks. And just within that I was wondering how much the consumer promotions were down to get maybe a better run rate of SG&A going forward, if that's going to shift back the other way?

I don't know. I, again, I don't think we want to comment on specific P&L line items, particularly in the, you know, highly competitive brand-support area. Our focus, as Jack indicated, I think as Stephanie indicated, is that, you know, we are focusing on developing programs that make sense for both us and our customers and, you know, we have had in the quarter a shift from the kind of national couponing to more customer-specific activity.

And, you know, whether or not that continues is going to be determined based on what's going on in the marketplace and what we think the best use of our brand-support dollars are going forward. So I wouldn't want to give you a forecast or anyone else at this point for that.

Okay. Then last thing. The comment on the cost of goods sold, gross margin on cost of goods sold was 30.9%, I guess I didn't quite follow that discussion.

I think what we said was cost of sales.

Okay.

As a percentage of gross was 30.9%.

Okay. As a percentage of gross.

However, our gross margin, our gross profit as a percentage of gross sales was up in this quarter.

Okay. Great. Thanks.

You're welcome.

Thank you. We are out of time for questions. This ends our question and answer session of today's call. We will now turn the meeting back over to Mr. Stahl for any closing remarks.

I don't really have anything to add. I think we are pleased with the start to the year, we are very focused on continuing to build our brands and strengthen ourselves with our retail partners as we talked about and, just as clear, we are focused on the margin actions that we've identified in the last three or four months and believe that we're on track to continue to move the business forward in a way that in fact will create value over a long period of time. We're certainly delighted again to have your interest and support along the way so thank you very much for that.

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