Revlon Inc (REV) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's second 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, Mr. Maria Sceppaguercio, Senior Vice President, Investor Relations. Ma'am, you may begin.

Thank you and good morning, everyone. Earlier this morning we released our results for the second quarter 2004. If you haven't received a copy, you can get one on our website 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.

On July 9th, we consummated a series of refinancing transactions that extended the maturities on much of the Company's debt and reduced our annual interest expense. In this regard we entered into a $960 million credit facility which included a $160 million unfunded revolver. The proceeds of the new facility were used to replace our previous facility, to repurchase or redeem our 12% Senior Secured notes outstanding, the balance of 64.5 million of which will be completed on August 23, including accrued interest and tender costs, and to cover transactional fees and expenses including those associated with our debt for equity exchange offered in Q1.

Turning quickly 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 AC Nielsen which excludes Wal-Mart and regional mass volume retailers. This data is an aggregate of the drug channel, Target, K-Mart and food and combo (ph) stores and represents approximately 70% of the Company'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 Nielsen was down about 3.4% for the quarter. The Revlon brand registered a share of 16.1% for the quarter which was down 40 basis points versus the second quarter last year. This performance reflects less share contribution from new products this year versus last year while the existing Revlon business grew share solidly in the quarter. For Almay, share for the quarter was down 5.6% -- I'm sorry, share for the quarter was 5.6% which was down about 40 basis points versus year ago. This performance also reflects less share contribution this year from new products as well as timing associated with lost retail space at a key customer in Q2 last year, which the brand recently regained.

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 sent forth in the Company's filings with the SEC including the Company's currently Annual Report on form 10-K, 2004 quarterly reports on form 10Q, 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 hand it over to Jack.

Thanks, Maria, and good morning, everyone, and thank you for your participation today; we appreciate it very much. Before I comment on the quarter, I would like to briefly comment on our recent refinancing actions. As Maria mentioned and as you know, the second quarter was another very important one for Revlon as it relates to further strengthening our balance sheet. When I joined Revlon about 2 years ago, our first focus was on stabilizing the business, which as many of you will recall, was losing critical retail space and experiencing significant market share losses virtually every month for a number of years. And at that time as you'll recall, our priorities were very clearly centered around a number of key building blocks which we have made tremendous progress on.

First, improving basic execution in virtually every aspect of our business, including getting our products to our customers on time, displays built properly, advertising on the air, at the right time, matched up with product availability, a fundamental building block we put in place. We then set about clarifying and strengthening our brand positioning and you're seeing that come to life with our new Bellissimo advertising campaign and bringing that to life in our packaging as we are doing today and we will continue to do as we go forward. A third building block was quickly and really dramatically strengthening our relationships with our customers. Another key building block was strengthening our new product development process, which involves designing and then implementing an entirely new process by which our Company, Revlon approaches innovation. And as you'd expect and as a practical matter, this is always the longest lead time process to impact and to see results in the marketplace in a consumer products business like Revlon, and that was new products development. And that one, we have progress that we've made, but more progress to come and you'll see real evidence of that in 2005 and beyond. And the last key building block was building the capabilities of Revlon in each of our cross functional areas. So execution, brand positioning, customers, new product development and strengthening the organization. Those were our major priorities.

So, with the business stabilized and better positioned, our focus broadened to include addressing our balance sheet. We took what we believe was decisive action and since the beginning of this year we have completely transformed our capital structure and we continue to strengthen it as we move forward. Given all the progress we've made and while recognizing that we still have a lot of work to do to position ourselves to drive consistent and profitable growth, I am absolutely confident that our short term plans and our longer term plans keep us very much on track to create value creation for the long-term. So more work to do, but we are tracking to create value over the longer term.

In the terms of the recent softness of the category, and as you know, we about 45 days or so ago, we revised our outlook for the year as the current trends in the category remained soft. Our longer term outlook for both the category and our top line performance remains strong. And what I would like to do is spend just a few minutes with you sharing exactly what stands behind our confidence.

First, as it relates to new products, we made meaningful progress against building our new product development product process, which will yield its initial lineup of new products in 2005. As you may know, in this industry, the new product development process is really the longest lead time process to fix because it takes anywhere from 18-24 months to bring a product from consumer insight all the way through design, development and bringing it to the marketplace. So our investment in this new product development process will become evident to you in 2005. Retailer reaction to our 2005 new product development program, which was based on better consumer insight and developed by a cross functional team, has been extremely strong in customer meeting after customer meeting. And as a result, we expect to get significant in store support for these new products from our retailers in 2005. Importantly, the new competency that we are building in this area of new product development will continue to build with time and experience. Our 2005 products in terms of retail or acceptance are already off to a very strong start. And we believe they will be very successful in the marketplace. And we know that we will get even better from there.

As it relates to 2004, our 2004 lineup was not developed with a benefit of our new product development process and the level of consumer insight that we now have. We are doing robust consumer research and we are connecting it now to the technology that we have in-house inside of our research and development labs. It is also important to note and we talked about this at the time that we did the investor road show, that in 2004 we have made an important change in our go to market strategy for new products, to reduce the overabundance of introductions, which historically at Revlon resulted in churn in product and churn in product return levels that resulted in our being uncompetitive from a profit margin standpoint. And this year we did eliminate the practice of introducing new products at the rate of twice the rate of our competitors unfortunately, historically with half the hit rate. We were out there twice the rate historically with half the hit rate. And we are beginning to see the benefits of this in our profit margins. This important and necessary change has resulted in less share contribution from new products this year versus last year, which may result in our color cosmetics business not growing quite in line with the category this year. Nevertheless, we have every confidence in our lineup for 2005 and believe that new products will be an important share contributor next year, balancing that along with continuing to support products that we bring into 2005. At least 1 of our competitors has a much better and more balanced model, balancing new and supporting existing products to a very profitable model and that's the model that we are moving towards.

We have dramatically strengthened our advertising and related brand imagery. That's another important point behind our confidence. I should tell you that our ad testing, which we have been tracking over the last 60 days, shows that our new Bellissimo commercials are building both purchase intent and brand equity and driving our confident, sexy positioning. So any time that you can bring out a campaign that is beginning to build both brand equity and purchase intent, it does say that we're on the right strategy, driving the confident, sexy positioning of Revlon. And in fact our brand tracking studies show positive impact on all key brand attributes, including Glamorous, a brand that I want to be associated with, modern, contemporary and other important attributes to build for the Revlon brand. We do expect that the sales effect of this advertising strategy will build as exposure to the campaign grows in 2004 and 2005. So those are some of the key drivers behind our internal confidence about our business going forward -- new products, our brand positioning, strengthening customer relationships.

As it relates to our outlook for the overall category, we believe that color cosmetics is in fact a great category to participate in. We also believe that our strategy and our actions, along with Revlon's brand importance to retailers, continue to make us, and will make us, an increasingly important contributor to overall category growth. We do recognize that the mass segment has been challenged over the last 24 months ago. Some of that we believe is due in part to the economic environment, including the impact of the recent increase in gasoline prices, which impacts low end consumers. We also believe that the relatively low level of excitement and innovation at the mass channel in the color cosmetics category has probably contributed to some of the recent softness. So at Revlon we are increasingly playing our part to reinvigorate the category by creating and bringing to retail partners innovative marketing approaches. And in that I would mean product and I talked already about our products for 2005, our advertising which is very elegant and more upscale and we think lifts the entire color cosmetics category at mass; our promotions and our impactful merchandising. All of these are designed to bring the best of the shopping experiences of other channels into mass. So, for example, our new advertising campaign, as well as our new improved in-store experience like carding of product, increased graphics at the wall to educate the consumer on our product benefits, and our use of retailer beauty advisors, we believe all of these factors will help reattract shoppers to the category at mass. And that historically has been Revlon's role to help build a category. And as we strengthen our capability as we are doing, we have every confidence that we can do that as we have done in the past. So, as we continue to build and strengthen our own organization, our own ability to work with retailers who are focused on reigniting color cosmetics in the mass channel will continue to build.

Another factor behind our future outlook relates to our ancillary businesses, which we are just beginning to scratch the surface on. These other businesses include hair color, where we have a 7% share of a more than $1 billion industry in the United States; beauty tools, where we have a 25% share; antiperspirants and deodorants, where we have a 6% share of a more than $1 billion category; and fragrance; all of these collectively represent about 25% of our revenues. We are now beginning to shine a strategic spotlight and begin to focus on implementing plans and actions just as we did around color cosmetics which as you know was our initial focus.

Beauty tools, for example, has already begun to respond to some very basic marketing efforts, and our market share versus a ago was up almost 3 full share points in the second quarter. So by bringing some talented people, some innovation to the beauty tools business, our market share was up 3 share points in the second quarter. It is an example of what we can do in these ancillary categories. Another key building block is our international business. And I should point out to you that not only is Stephanie Peponis, our Chief Marketing Officer, here today, but so is David Kennedy, President of our International Business. That business is already benefiting meaningfully from strong leadership, improved organizational strength and solid U.S. developed marketing programs, and is delivering a strong year in 2004.

And I believe the international businesses, like our North American businesses, offer significant growth potential as we go forward. The last building block that I would focus on is our margin transformation initiatives, which again we outlined earlier this year, some of which are already beginning to deliver savings. And these margin transformation initiatives will improve our profitability significantly over the next few years. You may recall these include cost of goods reductions through more effective purchasing and rationalizing of packaging and SKUs; indirect sourcing which relates to how we buy and stores all of our overhead expenses and the things that are not directly connected to product; designing our whole promotional strategy and mix that relates to things on promotional displays in the stores and a significant portion of our marketing budget; our international supply chain, in other words, where and how we manufacture internationally. Our product life cycle management project, which revolves around reducing returns and product churn, and extending the life of our products. And that's an important element of our strategy; and in-store merchandising, how our products are merchandised in-store, the cost of our fixturing and planogram approaches. These 6 areas make up our productivity initiatives and as we talked about, offer significant margin potential as we go forward. And we are making very good progress on implementing those in 2004 and expect continued progress going forward. So our top line drivers coupled with our ongoing margin initiatives do give us confidence in our outlook for both our top and bottom line growth as we move forward, recognizing that we have continued work to do and continued focus.

As for 2004, we continue to target top line growth in the range of 3% as we have called out earlier and EBITDA of approximately $190 million consistent with what we pointed out about 45 days ago. And as you know, and this is important as you look forward to 2004 and 2005, Q4, the 4th quarter is traditionally a very strong contributor to our 4th quarter EBITDA and in 2004, in support of the 190, we certainly expect the 4th quarter to be a very strong contributor and have an even larger relative share of total year EBITDA due to the strength of our 2005 new product program, much of which shifts as it always does in the last quarter of the year; and the fact that our productivity initiatives, as we have indicated to you in the past, have an increasing impact as the year progresses. So that's some of the reasons why our 4th quarter will be even more important in terms of its share of full year EBITDA than you might have seen in the past.

In terms of some of the specifics on the quarter, before I turn it over to Tom, net sales were down in the quarter by 2% on a reported basis and off 5% excluding the impact of growth plan charges that reduced last year's net sales. For the 6 months, net sales increased 2% overall on a reported basis and were down approximately 1% excluding the impact of growth plan charges last year. Adjusted EBITDA was $24 million in the quarter and $68 million for the first 6 months of the year. Tom will take you through all the details behind the number, but let me say that we continue to carefully manage all of our discretionary spending in light of the top line trends, and we believe that this focus in addition to our ongoing margin initiatives, will enable us to achieve our profit target for the year. As Maria pointed out, our share was below year ago due to less contribution from new products this year as we refined our go to market strategy in 2004.

And this is an important point and I do think it validates our strategic approach. But in 2004 our share of our existing products was strong. In other words, products that we brought into 2004 that we are continuing to support and invest behind and strengthen, an important part of our strategy of extending the life of our products, the share of these products that we brought into the year is strong and above last year's levels, well above last year's levels. And as we begin to reap the benefits of our new product development process that will first evidence itself in 2005 introductions, our overall share results will benefit. And we have absolute confidence in that.

So, with that overall background, I'd like to turn it over to Tom. I'll come back at the end and make a brief closing comment or 2 and then we'll take your questions. Tom?

Okay. Thanks, Jack. Starting with gross sales, our gross sales for the quarter were $388 million. That's down 2% versus last year. Our net sales of 316 million were also down 2% on a reported basis. Excluding the impact of growth plan charges that reduced net sales last year by about $9.5 million, net sales were down 5% in the quarter. Driving the decrease in net sales were comparatively lower returns and allowances in the second quarter last year as well as lower shipments in North America. Partially offsetting these factors were growth in international and a $6 million increase in license revenue, largely due to the prepayment by a licensee of certain minimum royalties. In North America, which includes the U.S. and Canada, net sales of 207 million decreased 8% on a reported basis and were down 12% adjusted for growth plan charges that reduced North America sales in the second quarter last year. This performance primarily reflected lower color cosmetic shipments and higher returns and allowances which were partially offset by higher licensing revenues. The lower color cosmetic shipments primarily reflected category softness and our more focused new products offerings this year as we refined our new product development strategy and process to enhance innovation and improve overall profitability moving forward. As we mentioned earlier, this new process in strategy which we implemented in 2003 will produce its first lineup of cross functionally conceived and developed new products in 2005.

For international net sales for the quarter -- advanced 12% to $109 million versus 97 million last year due to growth in the Far East and several key markets around the world, as well as the benefit of favorable foreign currency translation. Excluding the favorable impact of foreign currency translation, international net sales advanced approximately 6%. Total cost of sales, including the brand support component, as a percentage of gross sales decreased approximately 110 basis points to 30.5% in the quarter, largely due to lower factory cost of sales stemming from improved operations management and favorable product mix. Gross profit as a percentage of gross sales improved 110 basis points, reflecting the benefits of the lower cost of sales and higher licensing revenues. Total SG&A, which includes departmental expenses and other G&A and certain components of brand support, was essentially even with a year ago at $200 million in the quarter. The $200 million reported last year included approximately $6 million of charges associated with the growth plan last year.

Operating loss for the quarter was $1.8 million versus an operating loss of $3.1 million in the second quarter last year. Adjusted EBITDA in the quarter was $24 million versus adjusted EBITDA of 21 million in the second quarter last year. This performance reflected the absence this quarter of growth plan charges which reduced operating income and adjusted EBITDA by approximately $15 million and $13 million respectively in the year ago quarter.

Also impacting the comparison were the decline in sales and higher returns on allowances, partially offset by the improved manufacturing margins and higher licensing. Adjusted EBITDA, as you know, is a non-GAAP measure, and we define adjusted EBITDA as net 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 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. We also provided in the tables that accompany the press release, a reconciliation of reported net sales to net sales excluding growth plan charges. Net loss in the second quarter was $38.9 million or 11 cents per diluted share compared with a net loss of $37.8 million or 68 cents per diluted share in the second quarter of 2003. Net loss in the current quarter included approximately $2.4 million associated with the cost of the Company's refinancing transactions that did not materialize and were later consummated via the $960 million transaction Maria discussed previously. Regarding the net loss per share comparison as you will recall, we consummated a debt for equity exchange offer at the end of the first quarter and as a result, our shares outstanding increased dramatically.

Turning to cash flow, cash flow used for operating activities was $64.5 million in the quarter versus cash flow used for operating activities of 74.3 million in the second quarter of 2003. On the year to date basis, cash flow used for operating activities was $100 million.

Through the first 6 months of this year, we dispersed approximately $11 million associated with growth plan charges taken in 2002 and 2003. Capital expenditures in the quarter were $5.4 million versus 8.5 million in the second quarter last year. For the 6 month period capital expenditures totaled $8.1 million versus 13.2 million last year. We expect full year capital spending to be in the $20 to $25 million range. Permanent display spending in the quarter was $12.4 million versus 19.9 million in the second quarter of 2003 and for the 6 month period, permanent display spending was $33 million versus 40.9 million last year. For the year, permanent display spending is expected to be in the range of $50 to $60 million. Cash restructuring spending, including executive severance, was 4 million in the quarter and 6.4 million year to date.

Cash interest paid in the quarter was $30.3 million and 76.8 million for the first 6 months. For the year, we expect cash interest to total approximately $120 million, a savings of some $40 million versus the 161 million in cash interest paid in 2003, and without the full benefit of all the transactions that we executed this year that will further reduce that number going forward. The composition of our bank facilities outstanding at June 30, 2004, which was prior to our recent refinancing, was a term loan facility of $179.8 million, a multi currency revolver of $110 million, letters of credit issued, but undrawn of 18.3 million and in addition we have 4 million outstanding under the 151 million commitment from McAndrews and Forbes. At the end of the quarter our unutilized borrowing capacity and unrestricted cash totaled approximately $176 million including 147 million under the McAndrews and Forbes lines, 4 million under the multi currency revolver and approximately $25 million of unrestricted cash.

Given its significance, I'll quickly provide the composition of our bank borrowing and liquidity post the refinancing. As of July 30, our outstanding bank borrowings were -- a term loan facility of $800 million, a multi currency revolver which was undrawn, and letters of credit issued but undrawn of $18.6 million. The multi currency which is undrawn is a $160 million revolver. In addition, we had no borrowings under the McAndrews and Forbes commitment. As of July 30 our unutilized borrowing capacity and unrestricted cash totaled approximately $369 million. We are well positioned financially to continue executing our plan going forward to drive top line growth and margin improvement as we continue to build additional capability. And with that I'll hand it back to Jack.

Thanks, Tom. I'd like to leave with you just a few thoughts as we move into the q and a. We do continue to make progress to strengthen the business. While we obviously have a lot of work to do in this respect to drive long term growth, we are taking what we believe are the right actions and actions we think will be effective to help reinvigorate the category at mass and drive our position within the category. We are positioned in our longer -- we are very confident in our longer term outlook and we believe that the top line drivers that we discussed with you today together with our ongoing margin initiatives will deliver strong results as we move forward. At the same time, we're very carefully managing our business today to deliver against our commitment for 2004. So with that we'd be happy to open it up to q and a.

Thank you. And at this time, if you would like to ask a question simply press star 1 on your telephone touch pad. To cancel your question will be star 2. If you are using speaker equipment please lift your handset prior to pressing star 1. Once, again that is star 1 to ask a question and star 2 to cancel. Our first question comes from Bob Labick with CJS Securities.

Morning.

Morning, Bob.

Hi, can we go into a little more detail on the macro environment for U.S. mass cosmetics? Specifically, Jack, you mentioned beauty advisors. Are those instituted by the retailers or is Revlon doing that? And what, if anything, are the retailers doing to stem (ph) the weakness in the category right now?

Okay, well certainly if you are familiar with a shopping experience in department stores they are the norm. Cosmeticians, for example, help create a very rich experience for a woman, kind of diving into the cosmetics category at department stores. A number of retailers in the U.S. already use beauty advisors in one way, shape or form. Now, typically they are there to offer advice, to offer counseling. They are not doing full makeovers as you would see in a department store, but they can play a very important role in providing product information and pointing a woman to the wall to find the appropriate product or shade. There are a number of retailers that already use advisors and increasingly retailers are beginning to explore those that don't today, increasing their commitment, and some are. And because they realize that if they can create a much more interactive experience in-store, then they can attract people to the aisle and to the wall much more effectively. So that can be an important element there. And what we're doing is we're working with the beauty advisors, for example, to develop sampling programs, to put educational materials in their hands so they can play a role in communicating the benefits of our products, particularly new. And it is an important part in strengthening the category at mass. Other factors -- and Stephanie is with me today, she can add on to some of the things that I describe here -- I already talked to you about our Bellissimo advertising campaign. We think this is the most elegant and perhaps upscale campaign within the mass market cosmetics channel out there today. And what it does do is it speaks to the emotional benefits of cosmetics. It helps you look and feel your best. And it reminds people of how great they can look and feel with the benefit of color cosmetics. And we demonstrate that in our advertising with out great spokes talent and it is not simply a product benefit focused, a technology-focus, which is the historical pattern inside of this industry. And our retailers have consistently said this is very good in terms of elevating the category within the mass channel, and positions it better to compete with department store channels. There is also a number of things that we are doing in store and maybe I'll turn it to Stephanie to help describe some of those actions as well.

Question Bob, in terms of whether we do it with our retailers in-store in addition to fully leveraging beauty advisors or in common with our retailers? We are working with our retailers to make the overall shopping experience more enjoyable. If you think about a prestige shopping experience it is a treat. It is a pleasure. It is something that women enjoy doing. If you look at the retailers that are actually leading the color cosmetics category growth they are very focused on enhancing the in-store shopping experience. What you will see and a couple of them have partnered with us as working advisors on how to best do that is to improve the atmosphere in the aesthetics section, differentiate it from the rest of the store and to enhance shopability. One of the areas where we have worked closely with them to enhance shopability is for example on our eye section, where we went from fixtures to cardings to allow consumers to more easily find our products and allow our retailers to keep our products in stock. And we have been in need of a major (technical difficulty) growing the eye business and that kind of (technical difficulty) overall is to make this a more compelling shopping experience both with the imagery and the emotional connection as well as the in-store experience. And we are working with our retailers to bring our Bellissimo imagery in-store and that will be fully in store in 300 (technical difficulty).

That's very helpful. Thank you. Next question regarding the AC Nielsen data, it appears your share was reasonably stable in April and May, but June seemed to drop off. Was there a change in June? Is this more onetime in nature or is this a sign of July and August, and how should we look at that?

I think, Bob, probably the year to date measures are the most indicative. It is always difficult to look month by month at share data, as you know. That said, one of the things that happens in the June time period, in the past, the impact of the new product introduction tends to be heaviest in the June time period. As you know it gets introduced in-store promotionally usually in the January and February timeframe. New products then go to the wall during the recess at the retailers. So it tends to start in February to kind of string out during the course of February, March and April. So, by the May and June timeframe, not only do you have the new products at the wall and fully available, you also have the full impact of the advertising around them. So as Jack and Tom both mentioned as well Maria, given our shifts in our go to market strategy on new this year, June has been the most impactful month of that shift, given where the competitors have been heavier on new. And it seems to mirror trends in the past about when new becomes fully impactful during the course of the year.

Thank you. Our next question comes from Bill Chappell with SunTrust Robinson.

Good morning. Thank you.

Morning, Bill.

A couple questions just to try to understand on versus last year on some of the higher allowances and returns. I mean, was that outside of what your expectations were or does this reflect the abnormally low returns and allowances from last year?

Tom, why don't you pick that one up?

Yeah, Bill, our returns on allowances this year are on plan for the quarter and year to date. So it is on a comparative basis to last year is what is driving the higher rates. And last year when we evaluated the reserves that were in place, they were adequate and we simply didn't have to add to them significantly in the quarter (technical difficulty).

Okay. And then the second question, just trying to understand, I mean, I think I understand from your commentary that the later introduction of new products is part of the reason why you're not seeing the market share maintain where you had thought. Is there anything else there or is it really just new products drive the category so much that it's more of a waiting game?

This is Jack, Bill. It is not so much that the products were introduced later. It is actually the overall volume or number of new products. And I'll just reinforce the point. Historically if you look at our Company's pattern over the late 90s, probably right through the last -- up until the last 18 months or so, the idea was the Company introduced twice the number as the rest of the industry on average. And typically what would happen would be introduce big numbers of new products, marketing support would last for perhaps 12 months and then support would be withdrawn and placed against the following year's new products. The result of that is the sustainability of those products was significantly less and the hit rate or the success rate was about half the industry. And that resulted in significant margin disadvantage and really made the operating model not optimal as we talked about with returns. So it is less volume of new -- less number of SKUs, if you will, than would have been the historical pattern. And in addition, until we get into 2005, did not have the benefit of the more disciplined consumer research approach on each of the categories, eye, lip, face and nail, that stands behind the innovation that we'll be bringing forward to the marketplace in the future.

Yeah, I guess my question is, are you seeing some of your competitors still doing the same old game of introducing new products and that's the rationale for some of the lost market share?

Well, it's actually interesting. I'm not going to -- I won't speak to a particular competitor by name. But I will say that at least several of the competitors have introduced, continue to introduce new product volumes at reasonably high levels. I don't think they are getting the lift from that that they would have expected given their share performance. There is 1 competitor who has very much stayed on their model of introducing a good balance between new products and existing products. And they would be the competitor who's performing at least on a relative basis, better than the rest of the category. And it is a balance between new and existing products which are driving their success. And that model is one that we are moving closer towards, if not all the way in the months and years ahead.

Great. One final question, have you seen any change in category trends in kind of the month of July?

We really haven't gotten under the trends in the month of July yet. We don't have the full look at the month. And typically what we would do is once we have that, we would give you that in the course of our normal quarterly earnings call and update.

Okay. Great. Thank you.

You're welcome.

Thank you. Our next question comes from Connie Maneaty with Prudential Securities.

Good morning. I have a couple of questions. I'm surprised by these retail beauty advisors also. Who paid for them?

Well, that would depend on, Connie, who the retailer is. And I think you should think about beauty advisors as being an important part of the in-store marketing mix. And typically we would work with each customer on a basis that we say we're going to bring you a certain level of support and if it makes sense to support some element of that, beauty advisors in-store as part of our overall support which is balanced across customers, then we would do that. So it really would depend on our overall marketing support, where we think we're going to get the biggest bang for the buck in terms of who funds that.

So, are beauty advisors new or is it just striking me as new? Because I don't know.

In some of our key retailers, Connie, they have been around for years and years. They are probably continuing to optimize how they are allocated in store, how many hours they work and such. But beauty advisors in this channel are not new. What is new Connie, is that I think other retailers have looked at that model and have looked at some of the opportunities to further drive growth in this category and see beauty advisors as something they either want to test or are beginning to introduce into their mix in-store.

Okay. What explains the seasonality of your CapEx and permanent display spending in the second half? And what will you be spending that money on?

Connie, there is not really a seasonality as much as there is a plan that we have got in place for the year. As you know, last year we were kind of at a peak of installing new doors with the Her Wall. This year we are much lower because we're at the tail end of that initial plan. And then what drives our ongoing installation needs are the number of new doors and new accounts. And then we have maintenance level installation that we do.

Is this normal though that most of the CapEx, is it related to the sales or is it just related to the projects you are doing?

Well the CapEx piece is related to the projects. And so that would fall into the area of eye-key (ph) projects, some of those that we execute, new equipment that we put in our plant in Oxford, and last year, which was somewhat higher, we were in the process of moving our office space. So that would have influenced us last year.

Okay. Given the weakness in the category, do you think third quarter sales will be up or down?

Connie, I think rather than pointing to a particular quarter I think it is safe to say that if we're looking for the full year to be up at the rate of 3%, that would imply that the second half of the year in terms of gross sales and net sales would have to be slightly better than what we have seen over the first part of the year. That makes sense in terms of our model because as we look at the 4th quarter in particular we have the benefit of 2005 new and we already have an indication of retailer acceptance of those products. And we know we are going to have significantly more new shipments at the end of '04 for '05 that we had at the end of 2003. So -- and so that would tell us that the second half logically will be stronger without breaking it down between the third and the fourth quarters separately.

Well, because it sort of looks to me like you generate a good half of your EBITDA if not more in Q4? But, I don't know, I think it is sort of fair for us to have an indication at least in the third quarter if sales are still tracking the way they were in the second quarter, or not?

Well, I think I'm going to simply stand on the notion that the second half will be stronger. I think -- there's no question that the second quarter was impacted pretty significantly by the category trend. And I think you would expect it -- retailers also are particularly cautious in that environment about their own buying patterns, and that there probably were, you know, you are probably seeing retailers kind of smarten up in the course of the second quarter. But as we look over the last half of the year, we feel confident that we are going to achieve the revenue growth necessary to get to the 3%. I think it's safe to say that one key driver of that is the fourth quarter new, which obviously suggests something about the balance between the third and the fourth quarter.

So would most of your new products ship in December? Is that what is typical?

Yeah, to the extent that sometimes they get up on promotional displays for kind of a fourth quarter preview, they might get up and be actually on counter in December. You can get a little of that in November as well.

Okay. On the 8% decline in North American sales, can you split what percentage went to category weakness and what went to your -- how disappointing the share growth was in new products? I don't know if I asked that right. But can you split them between the 2 things that contributed?

I think there's probably a balance between the category performance and our own performance within that. I think the category growth itself, we cited as being down in the quarter 3.4%.

Right.

So that would suggest something about its importance to the overall decrease that we saw. So I think it would be a balance between the two, Connie.

Okay. On the growth plan charges in 2003, is it possible -- we don't have to do this on the call, but is it possible for us to get a breakdown of where they hit in the P&L, whether it was sales or cost of goods or SG&A. Can we get that so we can plug those into our models?

Yes, we can provide that. Connie, we will get that to you. That is actually -- most of that information was already 8K’d in one of our previous filings, but we can certainly make that available to you.

So we'll do that, Connie.

We'll actually be posting that on the website.

Is that helpful, Connie?

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

Hi, George.

Good morning sir. Just to make sure, I thought we had already the breakdown check. My understanding is if you adjust for 9.5 million increase to net sales and the 6 million that Tom mentioned as the hit to the SG&A in 2Q of '03, that would have made Q2 ’03 adjusted fully for the one-time growth plan related charges, right?

That would be -- excuse me, George, it is Maria. That would be correct for the quarter. There was a small impact on cost of goods in the quarter. So, you know, net/net you were going to get really close to doing that. But what I think Connie was asking for and we can certainly provide was give you the breakdown by P&L category for the full year, 2003 as well as even the 4th quarter of '02, so you have it all in one place and make it easy for you.

Okay. So, here is my question then, I think the significant plan (ph) item check that probably needs to be explained is the SG&A. If I make the adjustment to the SG&A, the 2Q '03 SG&A as a percentage of sales was 57.8%. For 2Q '04 it is 63.1%, obviously a big jump. I think that's clearly what's contributing here to the declining EBITDA. The sales decline is, I think, a lesser impact, actually, on the EBITDA decline year over year on a fully adjusted basis than the SG&A impact. So while I clearly understand the category softness check and I see it in the market share data, I was wondering what exactly transpired in the SG&A line to make it so high?

George, the SG&A line, which on a reported basis was about even, 200 million in each quarter, and last year it did include $6 million in growth plan charges. So we've got an increase you could say of about $6 million. And that does reflect a couple of items that go on. We had some -- you've got an FX impact from international when you consolidate everything that boosts that up. So you have got to take that into consideration. We expense things like our restricted stock into that line. So a couple of things like that. We really were keeping our costs very, very flat with last year. So that's the way I would think about it.

Understood, Tom. The only thing is, I mean, it is higher by 6 million, but on a sales base of, you know, 316 versus 332, I mean, that to me is the probably the main point, the main question more so than the absolute dollar value of the SG&A.

I think you’d have to get underneath the FX effect in there, George, as well in the quarter. And I think given that we have provided some detail on its affect on net sales, Maria can probably give you some help on understanding the SG&A affect related to foreign exchange as well.

Okay. My second question, and last question, Jack, is on the outlook for the category. Obviously, I follow market share data, it seems to me the softness in the category continued into at least most of July. I'm not sure exactly how the second half is going to transpire, but it seems to me that we don't have a catalyst, Jack, for the category itself, not Revlon, just the category itself to start to hit an inflection point and grow. And therefore my fear is, you know, you might find yourself fighting a bitter uphill battle from a category standpoint in the second half of the year. What gives you the confidence, Jack, that that will not happen? Or if it does happen you will be able to somehow compensate?

Well, first of all, George, there is nothing in our comments today that suggest that we're depending on a significant inflection point in the category for the year. We are expecting somewhat better performance, but nothing meaningful in terms of a change in trend for the category. I think the most important thing is we do continue to manage our business very closely and very carefully. Not all, but some of our spending relates to volume. Some of our spending with customers relate or is directly tied to volume. So there is some mitigating effect there if the category should not perform as well as we would have hoped. But I think the more fundamental thing over the longer term, George, is we continue to take the actions to drive a better in-store experience, bring more innovation to the marketplace in a very focused way and do the things that Revlon has the ability to do as we build capability, we think we are going to have an important role to play in the category. And I think our retailers understand that. That's why they are consistently supportive of all the actions that we have been taking to drive growth in this industry.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from John [Humphrey] with Citigroup.

Hi, guys. I was wondering if you could expand upon the licensing revenue or royalties revenues that you talked about as being one-time. And I just wanted to sort of understand that better. Meaning, one-time meaning seasonal or one-time meaning it didn't occur last year? And also, does that just flow right to the EBITDA line or was there a margin against that that we should be aware of?

Sure. The licensing revenue is an item that occurred in this quarter and did not occur last year. So that would be the kind of one-time nature of it. And it's a -- occasionally we have a licensee who wishes to prepay minimum royalties and that's what happened -- that's what happened in this quarter. It's something that happens occasionally and therefore I would not project those kinds of things to repeat, it's difficult to tell when --

And the revenue impact of that was what?

It was about $5 million, and it does effectively fall straight down through. There are no other costs that are significant that are directly involved in it.

So in looking at year over year, one could or should exclude that number in terms of looking at a year over year comparison because we probably won't see that continue throughout ‘04?

Yeah, if you were taking that one transaction that would be the right way to think about it.

Great. Thank you.

One thing I would -- this is Jack. One thing I would build on that though as you think about our licensing business, you know, it is probably one of those unutilized areas inside this Company. And as we have strengthened the Revlon brand, it's very interesting to see a number of potential licensing partners have come into us in categories that are relatively close in, that offer good licensing opportunities for us and will generate future revenues for us, even with the backdrop of, your question and Tom's comments.

Great. Thank you.

Thank you.

Thank you. This ends our question and answer session of today's call. We will now turn things back over to Mr. Stahl for closing remarks.

Thank you very much. I simply want to say that I do appreciate your participation today. You know, we do believe that we are making the right kind of progress to continue to build our business for the long term. We've got a lot of work to do. We're on it. We've got the right people focused against it. And importantly both here and internationally our customers are working very closely with us to help us position this business for solid, consistent growth as we move forward. And we will continue to keep you updated along the way. So we appreciate your interest and participation. Thanks a lot.

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