Revlon Inc (REV) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Revlon's first quarter 2005 earnings conference call. At the request of Revlon, today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce your host leading today's meeting, Miss Maria Sceppaguercio, Senior Vice President, Investor Relations. Ma'am, you may begin.

Thank you, Lisa, and good morning everyone. Earlier this morning we released our results for the first quarter of 2005. If you haven't received a copy, you can get one on our Website at www.revloninc.com. As you likely know, during the quarter we successfully consummated a $310 million senior notes offering and subsequently redeemed in April our 8 1/8% and 9% senior note. We also used $100 million of the proceeds from the notes offering to prepay $100 million of our outstanding term loan under our credit agreement. These transactions extended the maturities on our debt that would have otherwise matured in 2006. They also reduced our exposure to floating-rate debt.

Turning to marketplace performance, as usual unless otherwise noted, our discussion this morning of market share and retail consumption is of the U.S. mass market according to 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. The color cosmetics category according to Nielsen was up 1.4% in the quarter. The Company registered an overall share of 21.9% for the quarter, down 0.2 share points or essentially even with a year ago.

The Revlon brand registered a share of 15.6% for the quarter versus 16.4% in the same period last year. While the Almay brand registered a share of 6.3% versus 5.8% in the first quarter of '04. Our new products are off to a good start with Almay intense eye color and Revlon Age Defying with Botafirm standing out as the two lead introductions at this early stage. Many retailers are still in the process of finishing up their recess, and we would expect a completion of this effort to benefit us us as we move forward. We will provide some additional insight on our new products a little later on in the call.

Now, before I turn it over to Jack Stahl, Revlon President and CEO and Tom McGuire, Revlon Executive Vice President and CFO. I would like to remind you that our discussion this morning may include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Information on potential factors that could affect the Company's results from time to time and cause them to differ materially from such forward-looking statements, is set forth in the Company's filings with the SEC, including the Company's 2004 annual report on Form 10-KA, our quarterly report on form 10-Q for the first quarter of 2005, which we expect to file next week and other SEC filed documents and press releases, including the release issued today. And finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I will hand it over to Jack.

Thank you, Maria and good morning, everyone. And as usual thank you for your participation this morning. We appreciate it very much. As you know, 2004 was a year during which we stabilized the business, improved our margin structure and dramatically strengthened our balance sheet. And we recognized that we did underperform in the area of new products. So as we finished last year, while we had a lot of work to do ahead of us, we feel very good about the progress that we made in 2004. For 2005, we've indicated that we expected to begin to benefit this year from new products. We also said that we would continue to benefit from our profit margin initiatives, recognizing that this year we expect to mostly reinvest the margin savings back into our brands. And we also indicated that we expect to begin to broaden our focus and thinking not only on enhancing the color cosmetics category for us, as well as the category, but also focus on growth from other parts of our business and how to do just that.

So with that background, we are pleased with our performance in the first quarter, particularly in the area of new products, which appear to be off to a very good start. In fact, as you know, it's still too early to get a definitive read but we feel very good about our 2005 program and we are even more excited about what our new capability in this area can mean to our future. I'll come back to this in more detail in a moment. I should point out that in the quarter our new products - - we had six of the top-20 performing new products in the marketplace. and actually the number one with Revlon age defying foundation with Botafirm. So those are just some early indicators and we recognize just that but we do feel good about the early start. We also continue to make good progress on our actions to improve our ongoing margins in addition to the progress we made in the first quarter to strengthen our capital structure with our refinancing. We're also pleased with the work that we have underway to develop actions that we believe will drive growth not only of our color cosmetics business but our other key categories. You'll hear more about our thinking in these areas as the year unfolds.

With that said, let me give you some highlights for the quarter. Net sales were down 2% due to lower shipments in North America. This stemmed from strong performance of new products, which was more than offset by a decrease in some of our base products. Last year's prepayment of a licensing renewal fee by a licensee, which benefited the first quarter of last year, was also a factor in the sales comparison in the quarter. You may recall we had about $5 million in the first quarter of last year, which we highlighted at that point in time. Adjusted EBITDA was $22 million in the quarter and reflected significantly higher advertising investment as planned. Our successful capital structure improvements made over the past year have resulted in a significant reduction in interest expense for the quarter. From some $45 million last year to under $30 million this year.

Turning for a moment to international, our business delivered another solid quarter with particular strength in our Asia-Pacific region and the benefit of favorable foreign currency translation. We continue to feel good about the progress that we've made on the international side of the business and I will believe it will continue to be a driver of growth for us as we move forward. In terms of margins, we continue to make progress on advancing our margin transformation initiatives. And as you will recall, we have particular focus in six key areas, which we believe will dramatically improve our margin structure over the next several years. As Maria pointed out, share for the Revlon brand was down in the quarter while Almay posted a strong increase. During the quarter, many retailers had not yet completed their wall resets and therefore the full benefit of our new products program is not yet being reflected in our share data to the full extent.

At this point in time, while it's still too early to tell, it would appear that Almay intense eye color is a home run in the marketplace. This is a great example of the benefit of our beginning to combine consumer insights and shopper insights with our new products development capability to tap into an unmet need in the market place. Revlon Age Defying with Botafirm is another good example of understanding what our consumer wants and bringing technology and excitement together in a relaunch product targeted to a specific demographic. For the first quarter, Age Defying consumption across all mass channels was up 25 to 30%. Our ColorStay 12-hour eye shadow also appears to be doing well and Fabulash mascara is holding its own, recognizing in a very competitive segment of the category this year. It's still too early to get a read on the restage of Super Lustrous lipstick, as it's being phased into the marketplace and will take time to be reflected in the results. But we feel very good about this particular innovation and packaging, which we showed you.

Finally, and this is an important point to make. We have an awful lot going behind the scenes to further accelerate our new product actions to drive growth. We believe what you see from us in the quarter in terms of the initial success of our new products is just one indicator but it is an important representation of our growing capability and how we are approaching the business to capitalize on untapped opportunities. One indicator of this, and as you may know, last week we spent a good deal of time with our customers. Probably had meetings with 25 of our largest customers. At the annual meeting of the National Association of Chain Drug Stores and at that annual meeting, this time around we discussed the category and our business, their feedback and support regarding our thinking and possible opportunities for our business was very positive; as they looked at possible opportunities that we're evaluating.

We are very confident that the opportunities and actions that we're evaluating can create real growth and excitement as we move forward. And, again, we look forward to bringing more to you on this later in the year. So with all of that, I'll turn it over to Tom, who will take you through the numbers for the quarter. Tom.

Thanks, Jack. And good morning. Starting with gross sales for the quarter, gross sales of $378 million were essentially even with a year ago. Net sales of 301 million were down 2% and this largely reflected lower shipments in North America and reduced licensing revenues that stemmed from last year's $5 million prepayment of a renewal fee by a licensee. Partially offsetting these factors was a favorable foreign currency translation contributing approximately 2 percentage points of growth in the quarter. In North America, which includes the U.S. and Canada, net sales of 194 million were down 6% versus year ago. Largely reflecting lower shipments and the impact of the licensing benefit in the year-ago period.

On the positive side, lower returns and allowances, including a decrease in the sales allowances component of brand support, also impacted the net sales comparison in the quarter. Shipments to North America benefited from strong performance of new products, more than offset by a decrease in shipments of base products, largely reflecting a combination of factors, including; timing of retailer planogram reset and related shipments and our focus in in the quarter on our new and restaged businesses where we are beginning to get good traction. For international, net sales for the quarter advanced 4% to $107 billion, due to shipment strength particularly in the Far East region and favorable foreign currency translation. Partially offsetting these positive factors was an increase in the sales allowances component of brand support for international. Total cost of sales, including the brand support component, as a percentage of gross sales decreased approximately 70 basis points to 30.2% in the quarter, largely due to lower COGS-related brand support and despite the benefit to COGS in the year-ago period of a modification to an international benefit.

Gross profit as a percentage of gross sales decreased 110 basis points, largely due to the benefits in the year-ago period of the licensing prepayment and modification to an international benefit, which was partially offset by mostly lower - - modestly lower provision for return. Importantly, including - - excluding the licensing and benefits impact, gross profit as a percentage of gross sales increased approximately 60 basis points in the quarter. Total SG&A, which includes departmental expenses and other G&A and certain components of brand support, increased approximately 9% in the first quarter to $187 million versus 172 in the first quarter last year. The increase in SG&A spending largely reflected higher brand support, driven by our planned increase in advertising. We generated an operating loss for the quarter of $2 million versus operating income of 20 million in the first quarter last year.

Adjusted EBITDA in the quarter was $22 million versus adjusted EBITDA of 45 million in the first quarter last year. As we anticipated, this performance largely reflected our increase in advertising for the quarter coupled with the benefits in the year-ago period of the $5 million licensing prepayment and the $3 million modification to an international benefit. Also impacting the comparison for the quarter were higher restructuring costs versus year-ago. 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, as well as miscellaneous expenses.

As you will recall, historically we considered adjusted EBITDA both a performance measure and a liquidity measure. And as a result we reconciled adjusted EBITDA to both net income and cash flow from operating activities. We currently view adjusted EBITDA as a performance measure and therefore in 2005 and beyond, we will reconcile the metrics in net income. Attached to our press release, which is posted on our Website, you will see a reconciliation of adjusted EBITDA to net income loss, the most comparable GAAP measure. Net loss in the first quarter was $47 million, or $0.13 per diluted share, compared with a net loss of 58 million or $0.63 per diluted share in the first quarter of 2004. Net loss in the current quarter benefited from a significant reduction in interest expense and lower costs associated with the early extinguishment of debt. In addition, the diluted per share comparison benefited from the Company's debt for equity exchange offers consummated in March 2004, which significantly increased our weighted average common shares outstanding in the 2005 period.

Turning to cash flow. Cash flow used for operating activities was 8 million in the quarter versus cash flow used for operating activities of 36 million in the first quarter of 2004. Capital expenditures in the quarter were 2.7 million, in line with our capital spending in the first quarter last year. Permanent display spending in the quarter was 17.5 million versus 20.6 million in the first quarter of 2004. Cash restructuring spending, including executive severance, was approximately $3 million in the quarter. Cash interest paid in the quarter was $36.5 million.

And the composition of our bank borrowings outstanding at March 31, 2005 was a term-loan facility, $700 million, and letters of credit issued but undrawn of 17 million. We had no borrowings under the multi-currency facility or the MacAndrews & Forbes line of credit. At the end of the quarter, our unutilized borrowing capacity and unrestricted cash totalled approximately $339 million, including 116 million under the multi-currency facility and 152 million under the MacAndrews & Forbes line of credit as well as $71 million of unrestricted cash. As Maria mentioned earlier, we made further progress during the quarter to strengthen our balance sheet with our most recent notes offering and subsequent redemptions. As well as the $100 million term-loan reduction, which reduces our exposure to floating-rate debt. These transactions are another example of our focus on strengthening our capital structure and positioning us for long-term profitable growth. With that, I'll hand it back to Jack.

Thank you, Tom. I'd like to leave you with just a few thoughts as we move to the question and answer period. And then we'll throw it open for your questions. We are pleased with all the progress that we've made to strengthen the company to continue to position us for long-term success. We do know we still have a lot of work to do and we know our progress will not always be immediately visible to you as our actions do take some time to become reflected in our results. Let me say with absolute confidence, however, that the progress that we've made to strengthen our brands, our relationships with our retail partners, and the capabilities of our organization, will become increasingly evident to you as we continue to move forward. We are committed to taking the actions necessary to achieve success in terms of creating long-term profitability and value that we strongly believe is possible and we are taking those actions. Along the way, we greatly appreciate your support and interest as we move forward. So with that, we'd be happy to take any questions that you all might have.

Thank you. [OPERATOR INSTRUCTIONS] . Our first question comes from Bill Chappell with Sun Trust Robinson company.

Good morning.

Good morning, Bill.

A couple questions. First, if you could maybe help us understand the timing of shipments and the new product rollout, if there's any way to quantify how much you've done or how far the rollout's gone in terms of 2005? And then along the same lines maybe when I look at the inventory number being up, kind of almost 12% year-over-year versus the sales growth, how does that reflect in terms of timing of shipments?

Okay. Maybe I'll start, Bill, and Tom if you'd like to add into that. First of all, I think the key driver, obviously, of our sales performance is our consumption as the lead driver there. And we did say that we're essentially growing in line with the category. The category's up slightly in Nielsen. And on a total outlet basis it's up even somewhat more than that when you include those that don't report into Nielsen. And unlike last year, where we liked the category, we are growing about in line with the category. There are a couple of things happening that do impact on the timing of shipments. And obviously the way that retailers schedule their shelves resets does impact on that.

And I would say by probably the end of March, we were certainly more than halfway through the process but there were a number of retailers who, for factors that were not related to Revlon, delayed their resets by a month or two. And that does delay the period of time when product does go to the wall and those kinds of activities can impact on the timing of shipments. In addition, there were at least one retailer that moved their resets up and that would have impacted on timing going the other way. So overall, I would say that those factors did impact on our gross shipments. Having said all that, I would say that our net sales were about in line with what we expected in the quarter. The inventory number that you point to, Bill, Tom, do you have any comments on that? I think it relates to the same factors.

Yes. As you pointed out, Bill, we're up about 15 million versus year-end. Actually, a small part of that would relate to slower shipments. Otherwise, it's pretty close to on plan and the relationship - - December is actually our lowest inventory month of the year at the end of December. Because we've shipped out all of our new products. So, that is typically, if you look back to '03, versus '04, it's our low month in inventory. So the increase from December to the end of March is normal. But it's a little bit higher than we would want it right now.

Okay. And just as a follow-up on the category. I guess this quarter was the last kind of tough comp for the category. We saw the categories kind of move south this time last year. What's kind of the outlook that you're seeing at the store level or - - for the consumers the rest of the year?

Well, I think you can start with where we already have reported in the quarter. Certainly having some category growth is a distinct change from where we were a year ago, so that's a positive, Bill. And, again, when you look at it on an all outlet basis it's even a little bit better. What happens over the remainder of the year, we're really not going to forecast that. I will say that there's certainly a lot of marketplace pressure and - - which is good and we're bringing a lot to the marketplace. Our competitors are bringing a lot to the marketplace. And I think that that's probably a good thing for the category as the year unfolds. But we're not going to be in a position to make a forecast there.

Okay. And one last question on beauty tools. I was a little surprised to see that kind of flat to slightly down year-over-year because that had been an area of growth. Anything going on there?

That's really just the timing of promotional pressure, Bill, and shelf set reset. That's a big factor there. As we continue to push more new-product development into that category, which we're now doing, the fact that shelf sets have been delayed does impact on the timing of our performance there.

Okay. Great. Thank you.

Thank you. Our next question comes from Ilias Papazachariou with Lehman Brothers.

Can you talk about the margin customization initiatives to gross margin and SG&A?

Okay. Maybe I'll let Tom focus on that one, Ilias.

Thanks.

Yes. Ilias, we continue to execute in a positive way our margin initiatives and they are producing results. We - - as we mentioned about COGS in the quarter, if you compare that year to year, you get a good - - a reasonable comparison. And last year in the quarter, we had a big impact from the - - from part of the $3 million benefit change. So if you factor that year on year, we actually ended up positive in COGS and our gross margins continue to improve.

What about SG&A?

In SG&A, that was really driven by our planned increase in advertising. So to the extent that we realized within SG&A, margin improvement as well. As we said early on, we're really reinvesting that in advertising and that's - - the advertising increase drove up SG&A in the quarter.

Okay. How much was growth in the international segment on a local currency basis?

Can you repeat the question again.

Growth international on a local currency basis.

In international contributed about 2 points of growth to the consolidated Company. It probably contributed about 3.5 points of growth to the international sector.

Okay. Thank you. And given that you had issues with customer inventory levels in the UK and lower sales in Germany and Russia in 2004, have you seen any signs of recovery in these markets?

Generally, our international business is performing well and tracking about where we would have expected it to in terms of overall performance. We haven't seen any dramatic change in the trends in Europe at this point in time. As we pointed out in the press release, Ilias, we're getting very good performance, however, from Asia, which as you know is a very important market for us.

Right. And my last question. Sales to Wal-Mart have been soft recently, how does that impact you?

You're talking about - - are you talking about Wal-Mart's overall sales to its customers?

Yes. And I'm wondering if you've seen any impact on cosmetic sales as well or your sales in particular?

Okay. Well, as you probably know, we really don't focus on sales to a given customer on - - in terms of our public communication, Ilias. I will say that the same marketing drivers that we're bringing to the rest of the marketplace, we're certainly bringing to Wal-Mart. And feel good about the programs that we're bringing to the marketplace with them.

Great. Thanks a lot.

Thank you. Our next question comes from Bob Labick with CJS Securities.

Looks like DSO's were down versus Q4 and a year ago. Is this a sustainable trend and where should we expect this going forward?

Receivables days says outstanding?

Yes.

Bob? Okay. Tom, do you want to --

You were looking at it versus what?

Versus year ago and versus the fourth quarter. It looks like you improved it on both and got some benefit. I wanted to know if it was more of a timing or if you have been working on that internally and made some improvements and if we should see that sustainable.

I would - - it's timing. There's nothing in particular that I would point out going on there. We really bring our receivables down in the first quarter as a result of selling in new at the end of the year. So we've got that big bubble and there's nothing in particular I would point out there.

Is there an opportunity to improve receivables going forward, or are they at a level that - - given obviously seasonality and everything else, but at a level where you think they're going to stay?

They're at a level that they will stay.

Okay. Great. And just one other question. If you could give us an update on the new initiatives that we generally speak about on calls, including carded wall, where we are as far as going forward with that or - - and/or Revlon Express, the beauty advisors, etc.?

I'll take a crack at that, just to say that all of the initiatives that we began, that we've talked about, we're pushing forward on all of those. We're optimistic that they'll continue to deliver the results that we planned. And rather than cut them out individually, since they all contribute, I think the best way to look at that is to track our performance in operating margins over time. I would just say that all of the initiatives that we have talked about that we've begun to execute, we still feel very positive about. In addition to other ordinary cote opportunities that we've - - that we executed at the same time. We feel very much on track to be able to reach our margin targets by the end of 2008.

Stephanie, do you have any comments about some of the marketing initiatives that go even beyond some of the margin initiatives that Tom focused on?

Yes. In terms of your question on - - Bob, on carded wall. We have two things that we're considering as we go into '06. Revlon ColorStay 12 hour shadow which is the number 3 product in the marketplace for 2005 is carded as part of our overall carded eye initiatives that we rolled out into the marketplace over the last 12 months or so. One of the reasons for success in addition to great shades and the terrific formula is being on a card and the way that that displays beautifully in-store. So we feel very confident that our choices about where to card and where to merchandise on trays continues to drive our business and our retailer's business. We get very positive feedback from the retailers in terms of in-store merchandise ability. Them being able to find products, keep them in stock going forward. So we feel, as we go into 2006, that carding for specific aspects of our business is a very positive part of the mix. And you will see in our 2006 new-product offerings that we will continue to make those choices.

Great. Thank you very much.

Our next question comes from Connie Maneaty with Prudential.

Given the results of the first quarter, has your EBITDA outlook changed internally for the year?

Connie, as you know, we really haven't made any forecast of EBITDA for the full year. We said that during the course of 2005, we've got good programs from marketing and a product standpoint that we're bringing to the marketplace. That we're going to continue to benefit from the margin initiatives, that we will reinvest much, if not all, of those savings back into our brands in 2005. One example of - - by the way, of that, is Mitchum antiperspirant and deodorant, which you can now see on air. Hopefully some of you have seen that. But we really have said that we will reinvest significantly into the business in in '05. So we've not provided any guidance for '05. So, therefore, it really would be difficult to comment on our outlook beyond what I just said.

I know you haven't talked publicly, but the question really is internally. I mean, are you tweaking your outlook, or is it changing in any way?

I think, Connie, I really need to just stand on what we've already talked about here, just to stay consistent with our outward communication.

Okay. When did the the relaunch of nail happen?

Stephanie, do you want to pick that one up?

Connie, the core nail relaunch is happening in two phases. The first phase is shade and formula. And that was a part phase and part hard launch. That is rolling out right now with the rest of the first half news. So as Jack mentioned at the end of March we're probably 65% reset at the wall with some new shades on core nail and the new formula across the line. Part of that is phasing in like Super Lustrous. The other important piece of the core nail relaunch is the new packaging and the gold wedding band consistent with Super Lustrous and Fabulash. That will be happening over the course of the summer.

Okay. How much was advertising up in the quarter?

Connie, what we don't really break out advertising itself per se, but what you'll see in our Q when we file it next week is that advertising and promotion together were up about $11, $12 million in the quarter.

And what kind of increase is that ?

We'll calculate that for you.

Let me get that for you.

Okay.

Connie, this is Tom. Just - - I think to answer part of what your original question was. Internally, I would just say that we ended up - - we met our expectations internally for the first quarter.

Okay. That's great. On the North American decline, if new product sales are doing okay, how much was core down and why was it down? I mean, were you really budgeting for core sales to decline?

Stephanie, do you want to take that one.

Yes. From a consumption standpoint, Connie, we are meeting our budget expectations. So the short answer is we are on track with where we anticipated to be. One of the important ways to think about our business is the core business is a changing dataset. What I mean by that is Age Defying this time last year was part of our core business and has been part of our core line for eight years. We have restaged Age Defying. It's the number 1 new product launch this year. This that then ends up getting calculated into our new business, which obviously has a rather dramatic impact if you want to compare core and net that out.

So I would caution in terms of trying to do core-to-core comparisons. They are not consistent in terms of that the base is moving. More importantly, however, the fourth quarter for us is a mix of results in terms of new and our marketing programs for 2005. As well as what was our innovation in 2004 and our business performance in 2004. As well as our reset; we have a true mix of lagging performance of '04 and increased performance in '05. That's what you see in the first quarter. We will continue to build through the second quarter. And we are on expectation in terms of consumption at this point for our business.

Okay. And one final question. I know you're up to a small part of the business, but sales down 10%, what's going on?

I'll let David comment on that. We really don't specifically break out by country, but David, do you have any comments about overall trends in Europe? David Kennedy is here who runs our international business as you know.

First, as you indicated, Europe is about - - is a smaller portion of our business. It's about 25% of our business in total in terms of net sales. The specific driver there is the United Kingdom and our continuing trends with Boots, which is our number 1 customer, along with many of our competitors, number 1 customer. And as they continue to adjust not only their support, cosmetics, but also their inventory levels that's a continuing struggle. So that's what's really underlying the trend there. Along with - - across the whole region, as you well know, in all consumer categories, growth is very slow in Europe as a whole.

So it makes sense that this kind of decline in Europe should continue until you get to easier comparisons in the second half?

Well, I wouldn't want to make any forecast. I think what's important is - - to note is that we're working very closely with Boots to drive the business and we're close to them. We think we've got good marketing programs but I wouldn't want to make a forecast.

Okay. Thanks.

Connie, let me just respond to your previous question regarding the percent increase on the $11ish, $12 million or so that I indicated. I ran the numbers quickly and I tell you, it's somewhere in the - - up 20% neighborhood.

Okay. Great. Thanks.

Our next question comes from George Chalhoub with Deutsche Banc.

My question is on the timing of the advertising versus the top-line performance. I think, Jack, you mentioned that some of the details are still - - or were still planogramming towards the end of the quarter and therefore the quarter stuff does not reflect the full rollout of the 2005 product line. Does that imply that you may have an advertised a little bit too early? And if that's not the case, Jack, should we see the advertising and promotional increase, that obviously is apparent in Q1, translate into topline growth in Q2?

Yes. Okay. Let me parch the question into two, George. No, I think we - - retailer resets are always - - it's all - - it's never something that you can perfectly predict going into a year. If a particular supplier is bringing something to the marketplace or is doing something in their section of the category that requires more work, sometimes the time slots can be adjusted. And I don't think that - - and there's nothing new or surprising in all of that. Our media timing is basically in line with our competition. And I don't feel like we were out too early. In fact, you know, you have to recognize, too, that products get to on-counter displays, which provide some degree of availability, if not full availability, as early as January. And so we did have some spending this year in January, really for the first time in many, many years. Whereas, in the past our products might have been on counter but we didn't have that kind of support behind them. And that's important to seeding the product in consumers' minds.

And I think that - - so I think that strategy is working for us. That's evidenced in the performance relative to our competition with having six of the top 20 new products in the quarter. And with Age Defying the leading entry there. So I think I feel good about the timing. It is earlier than in the past, but I don't think it - - I think it was a good spend for us. Again, coming back to the second quarter, that part of your question. Again, I don't want to make any forecasts of where we're going to be in the quarter, just as we really have not provided a forecast for the year. We do feel good about what we have out there. We feel good about the quality of our programming. And we're going to continue to bring that to the marketplace.

Can you at least, Jack, give us directionally - - I know you do not want to commit to a number for either Q2 - - neither Q2 nor the year. But it seems to me logically that if the brand support is working its way through effectively and Q1 has not yet reflected that at least from a topline perspective, probably should be in Q2. I mean, just directionally speaking, that logic, is it correct, or do you take issue with it?

Well, I guess I would come back to the comment that I made earlier. As our products achieve full distribution and we continue to put the marketing pressure behind them, we do expect our business will benefit. And as I pointed out, George, the advertising and our support most immediately is linked to consumption trends. And in the first quarter we did perform overall, there were some pluses and minuses, as we pointed out, overall we performed in-line with the category, which is a distinct change from a year ago. And as we continue to achieve increased availability in the marketplace, we do believe that our business will benefit.

Jack, in Q2, when do you expect the rollout to be complete? May be a moving target but can you give us an idea, is it complete by now or do you think it's going to drag a little bit more towards the end of the quarter?

The reset timing, George, will be complete probably in mid-Q2 with different retailers lagging and meeting the reset season, basically starts mid-January and end anywhere from late May to early June.

Okay. Great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Carla Casella with J.P. Morgan.

Hi. I don't know, you may have broken this out, but did you say what percentage of your sales you expect to come from new products versus core on an annual basis or for this year in particular?

We really didn't break that out. I will say that historically new products have ranged from anywhere from 5%, 6%, 7% of sales up to 18% of sales. It's hard to characterize it this year because as we work to rejuvenate and restage certain of our franchises, like we're doing with Age Defying, it's a question of definition. But traditionally, anywhere from 5% to 18%, we haven't put a number or a forecast on that for 2005, Carla.

Okay. And then can you talk a moment about pricing environment for both the core as well as new? Are you seeing competitors as they come out with new pricing, is there new pressure on new products, are you still being able to give price premiums for new and the same thing in core?

Carla, we haven't seen any change in overall pricing or promotional activity year on year from where we were at this time last year.

What about quickness in terms of copying new products? It seems like the development process - - cycle time has decreased significantly over the last 10 years? I'm wondering if you're still seeing that come in or do you think that's stabilized? Due to how quickly new technologies are copied?

We haven't seen a tremendous change in terms of innovation patterns over the last year or two. And at the core all of the manufacturers are working within the retailer lead times. So the overall timing over the course of the last two to three years has not changed in terms of bringing innovations to the marketplace.

Okay. Just two other. Do you see any new private-label offerings taking share or filing for share in the drug store specifically or in the supermarkets?

We continued to see, Carla, in the brand mix and if you look at this category over the last 10, 15 years, there's always a lot of activity in terms of new coming into the category gaining some foothold. There's very little evidence of brands over the last 10 years getting up above a three share. But there's a lot of activity, it continues to be robust. It brings interest into the category and we see that both in terms of new offerings as well as private label offerings and specific retailers.

Okay. And then lastly, just one financing question. I believe there's a [Mac-Fo] agreement to do a backstep to an equity offering by March '06, does that change given any of your recent financings?

There's absolutely no change to that. That is still intact as it was when we put it in place.

So do you have to do an equity financing of how much by March '06?

A minimum of 110 million.

And it's not then [Mac-Fo] puts in 110 million.

Correct.

Yes. That's right.

Okay. And would you consider if the market does not seem amenable to that, would you consider looking to some of your non-core cosmetic products to actually sell a line or brand to actually - - would that allow you to I guess meet that requirement without an equity financing? Or can you only meet that through an equity financing?

The 110 minimum will happen by the end of first-quarter 2006. It's a mutually agreed upon activity that we have to conduct. And we will get that completed in the next 10 months or so.

Okay.

Through an equity offering.

Okay. Thank you.

Our next question comes from Connie Maneaty with Prudential.

Hi. I have a couple of follow-ups. Can you give us an update on your Sarbanes-Oxley compliance and that material short shortfall on your internal controls, remember in the last quarter? Can you just give us an update on where all that stands?

Sure, Connie. Tom, do you want to take that.

Yes, I'd be happy to do that. We - - Connie, as we reported in our 10 K at year-end and in the 10-Q that you'll see filed early next week. We have put in place remediated procedures around that material weakness and this was in the area of our returns calculation. It is a procedure that only applies twice a year, at the end of June and at the end of December. And so we are not able to test our remediated control that we feel very confident does work and will work. And we won't be able to do that until the end of June. So as a technical matter, in our Q we are not able to state that we have - - that we fully remediated that material weakness. We must test that and as a - - just a matter of process, that happens at the end of the second quarter. We feel very confident, we believe that we've remediated everything.

Okay. I don't know if there's a diplomatic way to ask this. But is there anything lurking in the background since we're going to get another press release in a week or so, just like last time?

We feel like, Connie, we are communicating what should be communicated. And I hope that you feel the sense of the progress that we believe we are making. And if you look at some of the activity that is underway, the thinking that's underway, the planning that's underway, we feel very good about where we are and where we're going.

And just one final question. In what time frame would you expect all this activity to show up in strengthening market shares?

Again, Connie, we're not going to be in a position to provide a forecast there. I think if you look back at the things that we have as a Company have focused on over the last three years: We talked about the ability to strengthen our margin structure. The ability to stabilize our revenue base as a first step. Our relationships with our retail customers. The ability to fix the balance sheet. And each of those building blocks that we put in place, including improving our new-product performance in 2005, as we said we would do, I think we have made real progress on each of those areas that we called out. So certainly from my standpoint, while we're obviously not in the position to disclose everything that we're working on, we feel good that as we say that we're going to be bringing ideas and fresh thinking to the marketplace, that we do indeed have the capacity to do that and deliver upon that. Just as we've delivered on the other building blocks that we've talked to you about over the last three years or so.

I guess it's just that since the resets will be largely done in May and June, what's going on in the marketplace would then show up in shares July and August. Is that the best time frame, or would you expect to see whatever activity there is come in - - be visible a little bit sooner?

As you know, Connie, it's a pretty dynamic market, so we think that part of that second half new introductions coming into the marketplace beginning in June and July. So, again, probably not helpful to put a pinpoint month on what we expect to see and when. As we look through the year, we anticipate that our key products will continue to perform for us. And we we'll continue to monitor what happens in terms of competitive activity as well as retailer focus.

Are there new products for the second half that you can talk to us about yet?

Not at this point, Connie, from a competitive standpoint.

Okay. Thanks.

Our next question comes from Bill Chappell with SunTrust Robinson Humphreys.

Just one quick follow-up. You've talked about the positives. The new products launch. Are there any areas where you've lost share maybe in the first quarter or new products that you maybe are a little disappointed with?

I think overall, we feel good. There are - - obviously some of the products that we've highlighted are performing beyond what we might have thought. I would say the most competitive area is probably, as I highlighted in my comments, the eye category. And so that's an area that we're going to put focus on in terms of Revlon eye. And looking at the overall impact of our programs, that's an important area for us. But beyond that, I don't think there are any significant pluses or minuses that are worth calling out there, Bill.

And then just on Almay doing so well. Is that part of a greater trend going to more of the hypoallergenic-type products or is it just product specific?

Stephanie, do you want to comment on that?

With intense eye, highlights a big opportunity in the marketplace in terms of making beauty simple, particularly in the mass environment. And we feel intense eye with the collection of shadow, liner, and mascara tailored by eye color is a terrific innovation, perfect for Almay. Consistent with the heritage of the brand and important as we think about positioning Almay going forward.

You'll remember that was the idea around calling out the eye color of a woman at the wall and then if the eyes are blue, then we bring forward a shadow, a liner, and a mascara that really bring out the blue or the brown or the hazel. And that idea in its simplicity is working extremely well.

Okay. Thanks.

And at this time, this concludes our question and answer portion. I'd like to turn back the call to our host, Mr. Jack Stahl.

Okay. Let me just thank you for your interest, as always. Obviously, we feel like we've made continuing progress. And we've got a lot of work to do, as we always do and always will. But we look forward to keeping you posted on our progress along the way. Thank you for your participation .

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