Revlon Inc (REV) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Revlon third 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, Ms. Maria Sceppaguercio, Senior Vice President Investor Relations.

Thank you, Lisa, good morning, everyone. Earlier this morning we released our results for the third quarter 2004. If you haven't received a copy, you can get one on our website at www.revloninc.com. During the quarter we consummated a series of refinancing transactions that extended the maturities on much of the Company's debt and further reduced our annual interest expense. These transactions included entering into a new $960 million credit facility, which included an $800 million term loan and a $160 million unfunded revolver. The proceeds of the new facility were used to replace our previous facility to redeem all of our 12% senior secured notes and to cover transactional fees and expenses. As a result, during the quarter we recognized a charge of approximately $59 million associated with these successful and important refinancing transactions. Turning to marketplace performance. 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 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, were just under half of our worldwide business. The category according to Nielsen was down about 3.1% for the quarter. The Revlon brand registered a share of 15.5% for the quarter which was down 130 basis points versus the third quarter last year. As was the case last quarter, this performance reflected less share contributions from new products this year versus last year, while the existing Revlon businesses grew share solidly in the quarter.

For Almay share for the quarter was even with a year ago at 5.7% reflecting share growth on exiting businesses offset by less share contribution from new products. For the 9 month period combined market share for Revlon and Almay was 21.7% versus 22.6% in the same period last year. This performers -- this performance mirrored that of the quarter with less share contribution from new products only partly offset by solid share growth from the existing businesses. We would expect this trend to continue for the balance of this year and until the 2005 new products begin to show up in our share results in the second quarter 2005. 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 factor 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 currents annual report on form 10-K and 2004 Quarterly Reports of Form 10-Q and other SEC file, documents and press releases, including the release issued today. And finally as a remind, our discussion this morning should not are copied or recorded. With that, I'll hand it over to Jack.

Thank you, Marie, and good morning, everyone, and I appreciate your participation today. Let me start out by saying that overall we are making very good progress. We recognize we still have a lot of work to do, but, at the same time, we are absolutely taking the right actions we believe to create long-term value. Maria's comment about our recent refinancing activities I think is a good example of the actions and the progress that we're taking to strengthen the business for the long term. You know, it seems like a lifetime ago that we were taking questions from you about our available liquidity and whether or not we would have the time and the resources to turn this business around. And I think in reality, we're very much a different business today. As most of the you know, we set out a couple of years ago on a course intended to maximize long-term shareholder value by capitalizing on the underlying strength of our brands and we talked about doing that through improved effectiveness of our marketing investments, increased investment spending where that was appropriate, and where we believed it made sense for the long-term health of our brands, and strengthen customer relationships. We also made strengthening the capability of Revlon organization a top priority, given its obvious importance in our achieving long-term success. So as we close the books on the third quarter of this year and we're well into the fourth, I believe that we have made meaningful progress to position our Company for the future. We've dramatically improved both the fundamental underpinnings and the level of our EBITDA, and we fully expect to deliver approximately $190 million of EBITDA this year, which is up more than 20% versus the 157 million of adjusted EBITDA that we generated last year. As I indicated, we recognize we've got a great deal of work to do, but nothing that we've seen over the last few years from our consumers or our retail customers diminishes our confidence in the absolute resiliency of our brands and the power of our strategy.

There's no question that the economic environment over the past couple of years coupled with the recent run up in oil prices has had a dampening effect on our category trends and we also believe that the shopping experience for beauty products inside many mass retailers probably is not maximizing the potential for the excitement and the fun that shopping for cosmetics offers. And clearly this is something that we can help to address and we're very much focused on doing just that. We'll talk more about that. As it relates to the important role of new products, we remain confident that our 2005 lineup will be well received in the marketplace, and we've already gotten very good feedback from our retailers, and will be a positive contributor to the category and our longer term share performance as we move forward. As I've mentioned to you in the past, the new product development process is the longest lead time process to fix in a consumer products business, so the initial results of our investment in this process over the last 18 months will start to become evident to you in the coming year. In addition, we're taking very specific actions along with our key retail customers to strengthen our business and the category. You know, there's no question that the iconic nature of the Revlon brand positions us to drive growth and excitement in the category and our retailers expect that from us. We are creating and bringing to our retail customers innovative marketing approaches, which include our product, our advertising, promotions, and impactful in store merchandising, all of which are designed to bring the best of the shopping experiences of other channels into mass. For example, our new products advertising campaign and our in store experience with an action we're taking like carding our products, increased graphics at the wall, and our use of beauty advisors in certain accounts we believe will increase shoppers to mass and increase category conversion once in stores.

Let me give you just a baby of an example that I hope will bring that to life that, I don't want to give away the competitive store, but I think will help -- help you understand a little bit of our thinking about how to improve the shopping experience. I'm going to use an example of a new product that we're bringing to the marketplace in 2005. It's called Almay Intense Eye Color, Almay Intense Eye Color. It's being launched in '05 and the idea is in a mass environment it takes the guesswork out of choosing the right eye products inside the mass channel. As you know, in department stores a cosmetician works with the customer to choose the right shades based on eye color. What we're doing with Almay Intense Eye Color, and again this is just one example of the kinds of marketing actions that we're taking, is we've created collections of eye products consisting of eye liner, mascara and eyeshadow, an eye liner, mascara and eyeshadow. These 3 products that work together with particular eye shades. So, if the consumer has brown eyes, for example, she would buy the collection for brown eyes and it makes it very easy for us her to shop and enable us to sell complimentary products in a very easy way for the shopper. This is just one small example that will be in the marketplace in '05 and there will be others, but a clear indication that we're focused on improving the shopping experience at mass for our consumers. And there are other examples that I can get to in the Q&A if that might be helpful. Clearly as we continue to strengthen and build our own organization and capabilities, including our new product development process, we're increasing our ability to work with retailers who are focused on re-igniting cosmetics growth in the mass channel. Our other U.S. businesses including hair color, beauty tools, antiperspirants and deodorants, as well as fragrance, which as a reminder collectively represent about 25% of our U.S. revenues and and are very profitable, represent growth opportunities for us as we begin to put additional focus, resources, and energy behind these businesses.

Another example, 2004 was our year to begin to crank up on the beauty tools business, for example, where we have a very -- you know, we have about a 25% share of the beauty tools business. This business has already begun to respond to basic marketing efforts and our market share versus year ago is up almost 200 basis points on a year-to-date basis, up almost 2 full share points. Our international business, which is benefiting meaningfully from strong leadership that we've now put in place, improved organizational capabilities, and is pulling into the market solid U.S. marketing programs is performing well following a strong year last year, and I belive the international business does offer us significant growth potential as we go forward. So we're taking what we believe are the right actions to drive revenue. Obviously we haven't gotten as much growth as we would have hoped for, due to not having the category wind at our back, but we are confident that we're putting in place the right building blocks, including product, advertising, packaging, customer partnerships, and a focus against our other categories to drive longer term growth. On the margin side, we continue to make progress against our destination, profit model initiatives, and we continue to expect our margins to improve significantly over the next several years. As I've indicated to you many times in the past, while our progress to strengthen our business will be consistent year to year, our improving financial performance will not be a straight line trend. As you know, turn around situations often require short-term trade offs in investments that are sometimes outweighed by the longer term valuation potential of achieving success. So our focus will continue to be on seeking to drive long-term sustainable share owner value. Consistent with this, in order to accelerate our progress and the creation of long-term value, capitalizing on our brands, we plan to reinvest much if not all of our expected productivity savings in 2005 back into the business to drive our growth.

In terms of some of the specifics on the quarter, before I turn it over to Tom, net sales were down 7% for the quarter and approximately 1% for 9 months. Both periods, the quarter and the 9 months, were impacted by higher returns and allowances, which Tom will discuss with you and walk you through the detail. Gross sales, however, were up 2% for the quarter and 1% for the 9 month period, up 2 for the quarter and up 1 for the 9 month period. Adjusted EBITDA was $26 million in the quarter and $94 million for the first 9 months. And Tom will tell you -- take you through the details again, but let me say, again, that we remain confident in achieving approximately $190 million in EBITDA for the year, up from $157 million last year. As Maria pointed out, our market share is or was below year ago levels due to less contributions from new products this year as we refined in ramping up our new product development process. Importantly share of existing products, in other words products that we brought into 2004, has increased and we are confident that as we begin to reap the benefits of our new products development process in 2005 and beyond, and you'll see that in our '05 introductions, our overall share results will benefit. With that, I'll now turn it over to Tom.

Thanks, Jack. Starting with gross sales for the quarter. Gross sales advanced 2% versus year ago to $400 million with international posting growth and North America essentially even with last year. Net sales of $294 million were down 7%, driven by higher returns allowances and discounts combined, partially offset by favorable foreign currency translation contributing about 2 points of growth in the quarter. In North America, which includes U.S. and Canada, net sales of 192 million decreased 9.5%, with the key driver being higher provisions for returns associated with our 2005 new products launch. Also impacting the comparison in the quarter were shipments that were essentially even with a year ago. For international net sales for the quarter declined 2% to $102 million versus $105 million last year. This performance largely reflected higher provisions for returns, allowances, and discounts combined offset by favorable foreign currency translation and higher shipments stemming from strength in the far east region. Excluding the favorable impact of foreign currency translation, international net sales in the quarter were down approximately 8% versus a year ago. I would like to spend a moment on returns as this has been an important area of focus for us and an area where we've seen good progress. This quarter's increase relates in part to the unusually small increase to the provision at this time last year as we were cycling against the large provision we had established at the end of 2002. It also relates in part to the timing of how we forecast and provide for returns associated with new products.

As you may know, a returns provision is established as soon as we know of a discontinuance that will take place in the future, so the largest quarter in terms of provisions established is traditionally the third quarter, and to a lesser extent, the second quarter. This is typically when we know what products will be discontinued to make room on the wall for the upcoming year's new products. Based on estimated inventory levels at retail, we establish a provision to cover this future cost, then in the fourth quarter our returns provisions are typically much smaller relative to our sales, given the process that I've just described. For this year we're tracking higher than our plans for return. Our plan for this year did call for a modest uptick in returns, reflecting in part our much larger new products program for 2005 versus that of 2004. It's also worth noting that promotional products, to the extent that they do not fully sell through, also increased returns. With category and consumption softness in 2004, this has been a factor, although smaller, in our returns provision increase. Given both of these factors we're providing for a slightly higher than planned returns provision this year. And as we move forward on our business model and product life cycle management initiative progress, and that initiative progress is we continue to expect our returns as a percentage of sales will improve. Total cost of sales, including the brand support component, as a percentage of gross sales decreased approximately 290 basis points to 29.5% in the quarter. This was largely due to lower factory cost if sales stemming from improved operations management and favorable product mix. As a percentage of net sales, gross profit improved slightly to 60% from 59.8% in the third quarter last year.

Total SG&A was down 10% versus year ago to $178 million in the quarter. This decline primarily reflected lower brand support and the impact of growth plan charges in the year ago period. Partially offsetting these impacts were costs associated with amortization of employee equity brand. Operating loss in the quarter was $2 million versus an operating loss of $7.9 million in the third quarter last year. Adjusted EBITDA in the quarter was 25.7 million versus adjusted EBITDA of 14.6 million in the third quarter last year. This improvement reflected the absence this quarter of growth plan charges, which reduced operating income and adjusted EBITDA in the year-ago quarter by approximately 6 million and $5 million respectably. The improvement also reflected the benefit of manufacturing efficiencies in the current quarter and lower discretionary spending stemming from a reduction of brand support to more appropriately reflect top line and category trends. Partially offsetting these positive factors were the lower net sales and the impact of higher depreciation and amortization on operating income. 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/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'll 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. Net loss in the third quarter was $91.6 million or 25 cents per diluted share, compared with a net loss of $54.7 million or 78 cents per diluted share in the third quarter of 2003. As Maria mentioned earlier, net loss in the current quarter included approximately $59 million or roughly 16 cents associated with the Company's refinancing transactions consummated in the quarter.

Regarding the net loss per share comparison, the debt for equity exchange offers that we consummated in March of this year dramatically increased our share count impacting the per share comparison versus a year ago. Turning to cash flow. Cash flow for operating activities was $35.2 million in the quarter versus cash flow used for operating activities of 49.1 million in the third quarter of 2003. On a year-to-date basis cash flow used for operating activities was $135.3 million. Through the first 9 months of this year, we disbursed approximately $16 million associated with growth plan charges taken in 2002 and 2003. Capital expenditures in the quarter were 4.4 versus 6.5 million in the third quarter last year. For the 9 month period capital expenditures totaled 12.5 million versus 19.7 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 7.3 million versus 15.9 million in the third quarter of 2003 and for the 9 month period permanent display spending was 40.3 million versus 56.8 million last year. For the year, permanent display spending is expected to be about $60 million versus 73 million in 2003. Cash restructuring spending, including executive severance, was 4.2 million in the quarter and 10.6 million year-to-date. Cash interest paid in the quarter was 34.1 million and 110.9 million for the first 9 months. In the year we expect cash interest to total approximately 130 to $135 million versus the 161 million in cash interest paid in 2003. This reflects the partial year benefit of the refinancing actions we took earlier this year, and is partially offset by timing associated with an interest payment of approximately $14 million that now falls in the December of 2004 rather than in January in accordance with our new credit agreement. On a full year pro forma basis reflecting the full benefit of our refinancing actions completed earlier this year, our annual cash interest expense for 2004 would be about $110 million, a savings of more than $50 million versus 2003.

On the same basis, our P&L interest expense would also be approximately $110 million, a savings versus 2003 of about $65 million. The composition of our bank facilities outstanding at September 30, 2004 was a term loan facility of $800 million and letters of credit issued but undrawn of $22 million. We had no borrowings under the $160 million multi-currency revolver or the 152 million commitment from McAndrews & Forbes. At the end of the quarter our unutilized borrowing capacity and unrestricted cash totaled approximately $350 million including approximately $56 million in unrestricted cash. And with that, I'll hand it back to Jack.

Thanks, Tom. So we believe we continue to make progress to strengthen our business and are taking the right actions to create long-term growth and value. The building blocks that we're focused on relate to our new products, our advertising, our packaging enhancements, our retailer focus and beginning to focus on other elements of our product portfolio. We are confident in a our longer term outlook and we believe that next year reinvesting much if not all of our margin improvements back into driving longer term growth makes particular sense, particularly in the light of the product portfolio we're bringing to the marketplace. And we believe it's the right strategy at this stage of our turnaround. And as for 2004, we're very carefully managing our business to insure that we deliver our EBITDA target of approximately $190 million. So, with that we'd be happy to open it up to questions at this point in time.

Thank you and at this time, if you would like to ask a question, simply press star, 1 on your telephone touch pad. If you are using speaker equipment, please lift your handset prior to pressing star, 1 and to cancel your question is star 2. Once again, please press star, 1 to ask a question and star, 2 to cancel. Thank you. Our first question comes from Bill Chappell with SunTrust Robinson Humphrey.

Hey, Bill.

Good morning. A couple of questions. First, on the sales number for the quarter, I was somewhat surprised that you didn't attribute any of the shortfall -- I mean, any of the slowness to the hurricanes as most companies have these past few weeks. Can you talk -- did that have any impact in just retail sales with all of the stores being closed during the quarter?

Bill, we have not attempted to measure that. I think it's safe to say that in that part of the country, there probable was some impact. The great news is women under most situations want to look and feel their best and I think it would be probably -- I don't think we should attach too much significance to that factor in the quarter and we really have not attempted to measure that in any significant way.

Okay. And then second question, as you look to the fourth quarter and to next year, I'm just trying to understand your expectations for just category growth or decline. You know, it seems that you and Proctor and L'Oreal are all putting a lot of money to energize the category to next year. Do you expect some growth in the category as we get to first, second quarter or should it be, you know, longer before we see that?

Well, what we've said, Bill, is that for this year, '04, we expect to be about even, we expect the category to be about even with 2003. Recognizing that the total market for color cosmetics across all channels is actually showing some reasonable growth in 2004, it's the mass channel that's been about even. In '05, we're not actually forecasting or making, you know, a forecast of what the category is likely to do next year. You know, we're not necessarily building big growth into our plan. We're not -- we're not relying on that. I think the most important thing is that the actions that we're taking in terms of bringing our product to the marketplace, our connecting what's happening in store with our advertising campaign, those building blocks we think are coming together well for us, and we think we will certainly play our role in helping to create growth, but we're not going to try to make a forecast on what the category is going to do for 2005.

Okay. And then one followup. When you're talking about reinvesting a majority of the, I guess, productivity gains back into the business for next year surely makes sense, but are you implying that there's little to any EBITDA growth as we go to next year or, I mean, can you see some upside or is it more of an '06, '07 time frame.

We're really not -- I think the key thing, Bill, is that we feel good about the overall actions that we're taking. You know, this has been an -- 05 will be an important year as we link up all of our marketing drivers, and we feel very positive around that and have gotten very good feedback from the retailers. You know, the fact of the matter is if you look at the Revlon brand, if you look at the Almay brand, if you look at the Mitchum brand, these brands, we think, have been underleveraged and undercapitalized on for a while, and as we get the marketing capability inside of our company ramped up we think it makes sense next year to increase our brand support in a way that will maximize the value and power of these brands over the long term. I think, you know, as it relates to EBITDA, I think you'll have to really draw, you know, your own analysis around that. We feel good about what we're doing from a revenue growth standpoint. We are going to reinvest much if not all of the margin savings from our productivity actions, and I think we'll have to let you reach your own analysis on where that might leave us from an overall EBITDA standpoint.

Okay. Thank you.

Our next question comes from Bob Labick with CJS Securities.

Good morning.

Good morning, how you, Bob?

Doing well, think you. You touched briefly on a few of the initiatives. I was wondering if you could give us a little more color specifically on, you know, beauty advisors, and how you may be using them on the carded wall as an extension of the carded eye, and also on the Revlon Express, which I don't think we've talked about yet today, but if you could tell us, you know, a little color on how each of these are hopefully helping trends in '05.

Okay. Well, let's start with Revlon Express. For those of you who are not familiar with that, that is a much lower cost, much smaller plastic, lightweight plastic fixture, which we're using to gain new distribution of Revlon products in channels where we didn't have much of a penetration. As you know, for example, our market share in the food channel of distribution is very low, it's probably in the low teens, maybe just above 10%, so we've got a low penetration in the food channel. By using this Revlon Express fixture we're able to gain new distribution or a more focused range of SKUs in the food channel and we're getting many, many new doors for Revlon Express and that -- that certainly helps our top line growth and our profitability as we go forward. And we're gaining new doors in 2004 and expect to continue that in 2005. So it's a light weight plastic fixture with a more focused range of product. As it relates to -- and it's an example of just a new innovative action that we're taking to grow the business. On the beauty advisors. Beauty advisors represent a great opportunity for us in '05 as we bring new product to the marketplace, and, you know, we'll be taking increased use of beauty advisors in those channels that staff their stores in that way and they can play an active role in helping to explain to the shopper the product benefits that we're bringing to the marketplace. You know, an example of that that we've talked about is age-defying, which we're revitalizing next year. It has got some great press. We are bringing a new ingredient to that product, re-staging the line. We talk abut how it reduces the appearance of fine lines and wrinkles by up to 50% in 2 weeks, and when you can tap into a beauty advisor that can point that shopper to the wall, it's a great way to tap into our retailer marketing driver in that fashion. So we feel good about using those resources in that fashion. Does that address your question, Bob?

Yes, absolutely. Then the last one was just the potential carded wall, just an extension of the carded eye which had been doing very well and I assume it still is. If you can just kind of update us on that

Okay. We haven't -- we have not broken out our share -- well, let me say it this way. Carded eye, as we talked about on a year-to-date basis, we talked about the numbers, I believe through 6 months, and we were showing very strong growth, up over 20% on products that we carded at the wall, because they're visible to the shopper and they can find the right shade, as opposed to the eye liners, for example, being tucked away in cubby holes, which are very hard to find, and carded eye continues to do very well, and, you know, within those market share numbers that Maria cited, our eye business is actually showing very good performance in terms of market share and part of that is the carded eye performance. But, we'll be looking further and further at increasing our carding approach, probably be doing some testing in '05, at ways to extend our approach to carding in 2005.

Great. Okay. And just last question, could you give us your impression so far of the Bellisimo marketing and it's stickiness, if you will, and will you continue with that theme in '05 or what should we be expecting on that front for -- to stimulate sales?

Yeah, we feel very good about the direction of our strategy. You know, the notion -- think about the Bellisimo campaign as a tool or a tactic to drive the strategy of focusing on confident sexiness of the Revlon brand. That's what the Revlon brand, we believe, based on our consumer research, uniquely delivers. Our competitive set delivers some other unique benefits but confident sexiness is something that we are driving behind the Revlon brand. And the Bellisimo campaign was just, you know, a way of bringing that to life. We're absolutely going to stay on that strategy of confident sexiness in driving that positioning in 2005. The campaign will continue to evolve, as it should and as we put more and more layers around the idea of confident sexiness. So we will continue to evolve the campaign. Importantly, the consumer research that we've done on the campaign says that it is very effective at driving the attributes of the brand that we want. I think the best indicator of that is the market share number that Maria cited on our existing products that we brought into '04, our market share has increased during the course of the year and that's benefiting from the confident sexy approach to our advertising. So it will continue to evolve, but the core of our strategy is going to stay right there.

Great. I'll get back in queue. Thank you very much.

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

Good morning.

Hi, Connie, how are you?

I'm fine,thank you. Okay, in the fourth quarter given -- given the category weakness, are retailers increasing their orders, decreasing their orders, is the order flow as you expect it to be?

We haven't really and really don't provide kind of an interim update in the quarter in the middle of a quarter. I will say that, you know, we, as you would expect, every -- well, really, every day we look at trends and look at sales every day as reported out by our largest customers and all of that information that we've seen to date is factored into our conviction that we can reach the $190 million of EBITDA for the year. Obviously that does require us to have a strong quarter in the fourth quarter and in part that's driven by the level of new products that we ship in the fourth quarter for shelf set resetting, retailer shelf set resetting in the early part of '05. We did say in the quarter that our gross sales growth for the Company would be about 3% for the year, for the full year, and that net sales would be about even for the year for the Company as a whole.

Since the -- since the fourth quarter is so important to the full year, and I -- you know, for the new products that are shipped for next year, what percentage of next year's first half new products have you already shipped?

We haven't -- we haven't broken that out, Connie. You know, it would be -- it would be, you know, less than a -- if you want to think about it this year, of next year's consumption of new probably less than 30% of that would get shipped in the fourth quarter of the year. Now, that would depend on what the take rate is of the new products, which we feel good about, but, you know, by far the vast majority of new product shipments for '05 consumption does get shipped in year, but a good chunk of it does get shipped in the fourth quarter.

How would you rate your execution capabilities in delivering the products that have been ordered and shipped so far?

When you say execution, do you mean -- tell me what you mean by execution in this case, Connie.

Orders shipped on time complete.

Ah. Very good. You know, that's an area where 2 short years ago, you know, our what are called -- the way we measure that is customer fill rates, what percentage of the orders are shipped on time and accurately filled. We've probably added 10 to 15 points to our fill rates and we're typically in the 98% plus range with most of the our customers at this stage, Connie.

Okay. So if the orders come in you're confident that you will be able to ship them the way the retailer wants them.

Yes.

Do you expect sales to be cash flow neutral in the second half of this year?

Tom, you want to pick that one up?

Sure. We've used about 135 million through the third quarter. The fourth quarter is -- is a cash flow positive quarter for us. We do have, as we closed our refinancing in the third quarter, we've got an interest payment of about $14 million in December factored into that. So, you know, we haven't put out a forecast that would be more specific than that, at this stage, but we will have a cash flow positive quarter is what our expectation is.

Okay. And I imagine that still the fourth quarter would be a profitable quarter on the EPS line, as well?

We haven't made a forecast on that, Connie, but I think you could -- you know, if you look at our gross sales and revenue that's kind of built in to getting to the plus 3% for the year, that would certainly suggest we're going to have a good quarter.

Okay. And my final question is to an earlier question about EBITDA growth next year I think you're answer was not really satisfactory. We understand that, you know, that turnarounds, you make all sorts of choices in turnarounds, but have there been changes to the way you look at '05 from when you first outlined your destination model and it is a fair question, will EBITDA be up or down next year?

As we look at the -- the destination model where we outlined our margin initiatives going forward, no, our outlook has not change, we have absolute conviction in that model and what we've said was over the next 3 to 5 years we thought we could realize 8 to 10 margin points from changing our internal practices around cost management, our merchandising approach, our promotional strategy, all -- our international supply chain, all those key drivers. So our longer term outlook and our destination model has not changed. I would say that we have made the decision to invest in 2005 aggressively those savings because -- or much if not all of those savings in '05, because we believe it's the right thing to do for our business. So I think that is a -- a -- as we look forward into 2005 we believe that's absolutely the right thing to too, and that's tied to our product, it's tied to what we think we can do in some of our other categories, and we -- we have confidence that those investments will pay out over the next several years. So, I guess, that would be an element of our strategy that's opportunistic, it's some investment spending that we've brought forward into the plan, and I think, again, you're going to have to make your own judgment as to how that affects what would have been your outlook for '05 EBITDA.

Okay, thanks.

Okay.

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

Yes. Good morning. I wondered if you could discuss how your cash increased quarter on a sequential basis. It looked like you went from, you know, around 50 million to 83 million cash, yet you're a net cash user this quarter. Could you kind of go over the ins and outs of your cash flow?

I would like to just go ahead and top line that. The answer is relatively easy. We concluded and closed our refinancing during the quarter, so we closed on our $800 million term loan and we used the proceeds of that to pay off our previous credit. We also took out our 12% note and there was a cash component that came out of that. That is effectively what increased our cash balance fourth quarter.

Okay. And then also could you go over how much actual cash outlays you had related to your growth plan and your restructuring charges this quarter, that would be the cash on it?

Yeah, we -- let me just flip back to my page that we had just talked about.

Karen, cash restructuring?

Yeah, cash restructuring was 4.2 million in the quarter and that is a $10.6 million number year-to-date. And what was her other question?

And then the growth plan year-to-date is 16 million.

16 million.

16 and for the quarter was just 0.6? This is cash growth plan.

All right, the cash growth plan in the quarter, I could get that for you. I just have the year-to-date in front of me.

But the 16 million year-to-date is cash?

Is cash, that's correct.

Cash 9 months.

Okay. Thank you.

Okay?

Are there any additional questions?

Once again, that is star, 1 to ask a question. Our next question comes from George Chalhoub with Deutsche Bank. Good morning. Good morning, George.

I just want to understand the fourth quarter, Jack, from the, obviously, 9 month numbers and the yearly guidance that you gave on gross sales being up 3% and net sales being flat, we can clearly get to a net sales number for Q4. To get to the 190 EBITDA, the EBITDA for Q4 should be in the mid-90s, 95 to 96 million, depending on people's ad backs here. That's like a 25% EBITDA margin. So my question really is -- I mean, that could happen in 1 of 2 ways, either significantly higher gross margin, significantly lower SG&A, or a combination of those 2. Can you give us some indication as to, you know, what are the dynamics on those 2 line items in Q4 in getting us to the 95 - 96 million EBITDA in the quarter.?

Maybe I'll start and, Tom, you might want to fill in. I think, George, just in general, I think the key thing to think about there is when we set up the year for 2004, we pointed out that you do have the top line performance benefiting from the introduction of '05 new, and at the same time we pointed out that as you looked at our margin initiatives, our productivity initiatives, that those would continue to build during the course of the year and, you know, if you think about our cost of goods initiatives, for example, our international supply chain initiatives, all of those factors we said would continue to build as we put those actions in place during the course of 2004, so that would suggest the margin benefits that would be required to get you to the EBITDA levels that we've talked about. And finally we -- you know, as we've indicated in the past, the fourth quarter is typically not a tremendous amount of marketing support, because, you know, that's the retailer time of the year to focus on a lot of the holiday items and the cosmetics category, including us, has typically not spent a tremendous amount of money in the fourth and this year will be no different for us, so that benefits our SG&A, as well.

Okay. I mean, so is it a combination, Jack, of significantly better mix and a gross margin benefit from that and a significantly less brand support needed because you're in the midst of the sell through season and SG&A is lower, or is it more one than the other?

I think it will be a mix, George, it will be a combination of those factors.

And George just to build on what Jack said. As I had mentioned earlier in the presentation, the returns, you know, if you look at third quarter and then fourth quarter, our returns provisions are naturally lower as a percentage of the top line in the fourth quarter. And, you know, I think you can note when you look at where we're at EBITDA year-to-date and thinking back to how we had originally planned the year, we're pretty much on target, you know, with the exception of the bring down that we announced earlier in the year. So our fourth quarter is driven by 2005 new, that continues to be where we've expected it to be at.

Okay. Tom, it seems like the -- you took a lot of those return provisions and return on other, I shouldn't say on the return, it's a combination of many item, but a lot of provisions in Q3 not -- you know, there is a chance some of those could reverse in Q4, depending on the exact sell through versus the returns to you, so those returns and allowances could end up being lower and potentially net sales maybe even higher in Q4 than what you're anticipating right now.

Well, just to clarify that, George, the returns provisions are related to the discontinuances, the decisions about discontinuances that off the wall related to our introduction of 2005 new, so in fact, we made an estimate of what those will be. We won't really have different information in the fourth quarter, so there would be -- you know, I would not anticipate changing that provision. We're really in pretty much of a natural cycle at this point.

Okay. No, that -- . Last question, Jack, we would like on November 10th, today, is the quarter the way -- I mean, it's so lumpy right now, it's hard to say, that's why I'm asking the question, if you don't mind answering, if we look at the monthly distribution of sales and obviously EBITDA throughout the fourth quarter, are you significantly more weighted towards, for example, the month of November, December, or is it somewhere a little bit more in the October, November time frame that you sell more? I'm trying to understand if we're halfway through what you expect fourth quarter shipments, and/or sell through to be, or if we are 30% of the way there, or maybe 60% of the way there. Can you -- is that something you -- we can quantify?

Without providing a specific number, George, just remember that, you know, largely the retailer shelf sets are adjusted anywhere from late January probably through May, you know, the bulk of it probably finishes up in May, so that would suggest that your shipments of '05 new, for example, are weighted towards the -- a little bit towards the later part of the quarter. But you got your daily business which is occuring, so it would suggest some weighting towards the later part of the quarter, but I don't think I should be in a position of quantifying that.

Okay. Thank you very much.

Thank you, our next question comes from Connie Maneaty, Prudential Equity Group.

Hi. I just have a couple of followup questions. It sounds like in the third quarter you spent a little bit less on brand support than you anticipated. Was there a shift in that spending from Q3 to Q4?

No, Connie, that would have been a reduction that would stick, if you will, and that really relates to the -- as the overall category softness, we just thought it didn't make sense to spend or invest as much in that environment, but that will stick, if you will.

Okay. On these collections that you are putting together to improve the shopping experience, does that mean that these things are all packaged together? I mean how will consumers know that this a different approach?

That's a good question. The way it looks at the wall, it's actually -- it's a good use of the carded approach, where at the wall, there's a little merchandiser that says -- that points out and in effect what it says is amp up your blue, for example, if you have blue eyes, it says amp up your blue, and then adjacent to that particular card would be a peg hook that contains the mascara product, the eye liner and then the shadow, so the consumer is not -- doesn't -- isn't required to buy all 3, but it's very clear that all 3 get you the desired look and you've got -- what you've got is in colors that are designed to contrast and enhance your existing eye color.

Okay. So they're not packaged together, but they're so close together you just grab them.

Exactly, they're perfectly adjacent to each other. And the marketing suggests that you buy all 3.

Okay. Tom, now that the refinancing in the balance sheet is largely done, what's -- what's the outlook for interest expense for next year?

Our annualized outlook is about $110 million a year, Connie.

Okay. And, Jack, could you just tell us what your policy is of giving guidance? Do you intend to give guidance, or do it on an annual basis and we'll figure out the quarters, or how and when should we expect a little bit of direction?

The way I would think about that, Connie, is what I would like to try to do, you know, given the -- where -- where this Company is in its longer term journeys, I will try to give you some sense of the building blocks that will help you build up your models. And I recognize you've got to build a model and I'll try to give you some sense of the building blocks that would help you get there. And so maybe one -- I guess the other thing that I should say to you is we've talked about the margin initiatives, we've said that we're going to reinvest much if not all of the margin savings next year back, and then if you were working to your model, I think then you would have to make an assessment of top line growth, and what you would expect, or what you could project that we might be able to do in 2005. And again, I feel good about what we're bringing to the marketplace. We've gotten good response from our retailers and certainly our own consumer research on top of that, and we're not -- I'm not -- I'm not forecasting what the category is going to do. I think you have to make your own assessment of that, but we feel good about our marketing drivers, both in the U.S. and internationally. So I think where you get to in terms of your EBITDA level is going to be a combination of what you think the top line could do, and I think we've provided the building block round how we're going to reinvest margin savings back into driving longer term growth next year.

I'm assuming your budget for 2005 isn't finished yet. Is that correct?

Yeah, we're -- over the next 30 days or so, we're bringing the details of that together.

So that when you report your fourth quarter results, probably in February, will we be getting more information or this is it?

I don't envision being very much more specific, Connie. You know, what we want to do is do the right things to drive the value of this Company over the long term. That, you know, quite frankly, has been an approach that I think has been working for us over the last couple of years, in terms of our enterprise value, and it's an approach that we want to stay consistent on in terms of taking the right actions in the marketplace to drive growth, and the right margin initiatives over time. But I don't anticipate being much more specific in terms of the line item detail in our P&L. Tom, you want to make any comment there

The only build that I think I would have on that is that I think generally 2004 is reflective of kind of the natural business cycle, with the exception of some of the things that we pointed out throughout the year that are -- that are more 1 time in nature, you know, licensing revenue pops up in the fourth of 2004. I would -- you know, I think you always have to assume that those kind of things that are less predictable, you would think of smoothing out somewhat, but other than that, I wouldn't expect the overall curve to look dramatically different next year, with a strong fourth quarter, as usual.

Okay. So this year you provided an EBITDA target, but it sounds like for the future you're not going to be doing that.

Yeah, that's right, Connie. We, you know, as a practical matter, that is correct, we would not expect to do that. We, you know, we did that very specifically in '04 because we were in the midst of a refinancing and provided very specific guidance and very specific line item detail. What we will try to do in the future, and will do in the future, is give you a sense of the building blocks and do that consistently with you and in a very public way.

Okay. Thank you very much.

You're welcome.

Thank you. At this time, I would like to turn the call over to Mr. Jack Stahl for any closing remarks.

Okay. Thank you. Let me just first thank you all of you for participating. Again, this is a Company that we have absolute conviction has a lot of strong assets that we're building off of and as we continue to build our capability around our marketing and our cost drivers, both in the U.S. and overseas, we feel very confident that we're taking the right actions to create long-term value and we're committed to keeping you very much posted along the way. So again, thank you for your participation and for your support. We appreciate it.

Thank you. This ends the -- today's teleconference. Thank you for your participation. Have a great day. You may disconnect at this time. Thank you.