Revlon Inc (REV) 2005 Q2 法說會逐字稿

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

Thank you, Lisa, and good morning everyone.

Earlier this morning we released our results for the second quarter 2005. Included in the release was the news that we expected to launch two strategic initiatives in the fourth quarter of this year that are designed to accelerate our growth and further build our position in the mass-market color cosmetics category. In the event you have not received a copy of the release, you can get one at our website at www.revloninc.com.

The call this morning will focus on our results for the quarter and provide some context for you regarding the initiatives. Our intention in discussing the initiatives is to help you understand the magnitude of what we're planning and how we expect our actions over the upcoming quarters to impact our financial results for the balance of the year and into next year. We won't, however, get into very specific details of the initiative or strategy for obvious competitive reasons at this stage. We will update you on our progress and provide more detail as the year unfolds.

In making the announcement this morning, we indicated our plan to issue $185 million of equity, reflecting an increase to our previously committed plan to issue $110 million of equity by March 31, 2006. We also announced a debt financing to raise $75 million, the timing of which is expected in the third quarter of 2005. Under securities laws we cannot comment further on the debt financing. We will issue a press release in this regard at the appropriate time.

As we have indicated previously, proceeds from $110 million of the $185 million equity issuance would be used to pay down debt. The balance of the proceeds for the issuance would be available for general corporate purposes. MacAndrews & Forbes, our principal shareholder, has agreed to increase its back-stop commitment to insure that we issue the full $185 million. In addition, they have also agreed to extend the term of our existing line of credit with them, which now stands at $87 million of availability through the planned equity issuance to be consummated by March 31, 2006.

Turning now to marketplace performance, as usual, unless otherwise noted, our discussion this morning of marketshare and retail consumption is of the U.S. mass Market according to A.C. Nielsen, which excludes WalMart and regional mass volume retailers. This data is an aggregate of the drug channel, Target, Kmart and food and combo stores and represents approximately two-thirds of the company's U.S. mass-market volume.

The color cosmetics category, according to Nielsen, was up 2.8% in the quarter. We achieved consumption growth in the quarter up 5.3%, which was essentially twice that of the category. This performance drove our overall market share versus a year ago up 50 basis points to 22.3%. Almay drove this strong performance, with consumption up 18% in the quarter. This drove share for Almay up almost a full share point to 6.6%. The Revlon brand also grew consumption in the quarter, up 1% versus a year ago, which was somewhat below the growth of the overall category, resulting in a marketshare decline of about 30 basis points to 15.7.

Importantly, where we have taken specific action on of the Revlon brand to restage what were very important but declining franchises, in some cases the first such action in many years, we are giving a very good results. Specifically, our restaged Age Defying with Botafirm, restaged Super Lustrous lipstick, and our restaged core nail enamel are all doing quite well in the market. Age Defying, for example, achieved consumption growth versus a year ago of 34% in the quarter. And Super Lustrous was up 11%.

We continued to take action to strengthen the Revlon franchise and bring innovation to this business, and we will update you on our actions in this regard as we go forward. We have also made significant progress in other areas of our portfolio, including Revlon Haircolor, Revlon Beauty Tools, and Mitchum anti-perspirants and deodorants, each of which achieved marketshare growth in the quarter.

Before I turn the call over to Jack Stahl, Revlon's Present and CEO, and Tom McGuire, Revlon's 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 and cause them 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 10Ka, our quarterly reports on Form 10Q for the first and second quarters of 2005, the latter of which we expect to file next week, and other SEC files, 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. As always, thank you for participating.

As you recall, as we have talked about in the past, our strategy to strengthen our company has been focused on, number one, strengthening our brands and their connection to our consumers through better and improved brand positioning and brand imagery across every one of our marketing drivers. Our second core focus has been on building strong customer relationships through strength and execution and fact-based selling to or retailers. And third, strengthening the Revlon organization to build the capabilities we need to drive our long-term growth in the future.

Having put a number of necessary building blocks in place over the last couple of years, for us this becomes, as you might imagine, a very exciting time for our Company. Why? Because we're now able to broaden our focus to accelerating growth and value creation. The two initiatives that we announced this morning are really two great examples and important components of that effort and they underscore the real progress that we have made to strengthen our brands and our organization and to build strong partnerships with retail customers.

As we think about that, I do understand that you will have a lot of questions regarding some specific elements of these two initiatives and we will do our absolute best to help you. However, I must tell you we would love to share much more detail of what we're planning, but I hope you understand that we've got to be careful about really not giving away the store from a competitive standpoint at this point in time. So certainly as details unfold we will be sharing them with you and we'll try to be as absolutely helpful as we can today about these important initiatives.

First, regarding Almay, we believe the initiative focused on this important brand is very promising. We have developed a strategy for this business based on what we see as unmet consumer needs for simplicity, healthy beauty, and personalization. As you know, we've actually had the opportunity to test certain elements of this strategy this year with our launch of Intense i-Color. Based on this runaway success, coupled with our continued research and development of the strategy, and real deep consumer insights, we are planning to launch a much broader effort for Almay for 2006.

Our second initiative is designed to play right into key demographic trends. With the aging of the female population and the current lack of products formulated to meet her changing needs. We believe this broad range of cosmetics, which we will be bringing to the marketplace as part of this second initiative, will enable a currently underserved portion of the consumer base to really participate fully in the category in a fun and exciting way with a unique cosmetic system, great products, and terrific shades, all of which are designed with her specifically in mind.

As a leading player in this category we believe we are taking a leadership role, as we promised we would, to bring innovation and excitement back not only to our company but also to the broader cosmetics category. We believe we will significantly strengthen our position at retail in the process.

In terms of the financial significance of these two important initiatives, we believe they will add significant topline momentum to our business with an incremental $50 million or so benefit to net sales in 2005. This benefit is after taking into account significant incremental returns approximated at $40 to $50 million associated with the initiation of the launch. For 2006, we estimate that the combined net sales benefit could well be in excess of twice that of 2005. The sales benefit of these initiatives will begin in the fourth quarter of 2005, as we start shipping new products to retailers consistent with our usual cycle.

Importantly, given the magnitude of the initiatives, we also expect a positive significant sales impact in the first quarter of 2006 as we continue to fill the pipeline. We'll also then begin to see the benefit of the incremental consumption.

The returns impact that I referred to will primarily occur in the third quarter of this year and to a lesser extent in the fourth quarter, again consistent with the existing cycle of our business. We also expect some expenses associated with the launch to impact the second half of this year. Things like accelerated amortization on certain display fixtures, which we would estimate to be in the range of $10 to $15 million, and some up-front marketing and G&A expenses associated with development work and ramping up prior to launch. As a result, we don't expect the incremental sales impact for 2005 to result in any meaningful impact either positive or negative to our 2005 EBITDA Performance.

As we think about 2006, we would expect strong topline momentum with related significant investment spending to support the launch of these two initiatives. As is the case with most new product introductions, the upfront investment spending phase will subside over time and the full benefit of the meaningfully bigger topline will continue to fall through for the long term. For 2006 as a whole, we expect to generate solid EBITDA growth for the year.

In terms of the financing-related announcement this morning, as Maria pointed out, we intend to issue $185 million of equity. This is up from our previous commitment of $110 million. We expect the issuance to be completed by March 31, 2006, and we're also proposing a debt financing to raise $75 million, expected to occur in the third quarter of 2005.

Now let me quickly turn my thoughts on the quarter, and then Tom will go through a review of the numbers. And after that we will be happy to open it up for your questions.

In terms of some highlights for the quarter, net sales were up 1%. This was primarily due to continued strength and favorable currency translations in International, largely offset by lower licensing revenues in North America. North America's net sales performance also continued to reflect strong results from new products and lower returns and analysis -- allowances -- offset by some continued shipments softness in the base business, which we are addressing.

Importantly, regarding the Revlon brand, where we have executed specific marketing action, which I'll provide some details on in a moment, we're getting very positive results. We will continue to work aggressively to put energy behind those parts of the Revlon franchise that have not been supported over the years. We will continue to employ a strategy that balances both new products with relaunches and restages, and as we said, we expect our results on the this front to continue to build positively over time.

Our overall share for the quarter was strong, with Almay up significantly and Revlon down somewhat. As Maria pointed out, these results reflect a very strong performance from new products with some experience of softness on some of the base business.

In terms of some specifics, Almay Intense i-Color, as I indicated, is a clear home run in the marketplace. This is a great example of our improved internal capabilities and deeper understanding of our consumers. It also validates our strategy for Almay that we will be rolling into the marketplace.

Let me discuss some examples of Revlon products where we have executed specific marketing actions. First, Revlon Age Defying with Botafirm is a good example of understanding what our consumer wants and bringing technology and excitement together in a re-launched product targeted to a specific demographic. Again, this is a product that hasn't been re-supported or marketed for many years. For the second quarter, Age Defying consumption, in the face of this marketing pressure, was up 34% above the prior year.

Our ColorStay 12 Hour Eye Shadow is also doing quite well in the marketplace. Fabulash Mascara, which is holding its own in a very competitive segment, is now benefiting from impactful advertising and a waterproof extension that we just introduced in June.

Our restage of our core nail enamel business is now fully in the marketplace and beginning to take hold. And consumption on this business has improved from declined past years to solid positives over the last couple of months. Another example of a restage and how it can effective an important franchise.

Our restage of Super Lustrous Lipstick, which was phased in over the past several months, is doing quite well in the marketplace with consumption in double digits in the second quarter according to Nielson measure. So lots more to come on the Revlon brand.

Turning to International, which is a very important part of our business, the strength in International continued to demonstrate growth across all regions and reflects the inherent growth opportunities of this business and capable management across our business. We believe that International continues to represent a terrific opportunity for future growth. And as we continue to build exciting new U.S.-based initiatives, inevitably they find their way into our developed international locations.

Adjusted EBITDA for the quarter was up 2%, $24 million for the Company, and operating income was essentially break-even. Tom will take you through the drivers of this performance, but let me point out that these results include approximately $3 million of upfront expenses associated with ramping up for the two initiatives.

From a margin standpoint, we continue to make very good progress. Excluding the impact of the licensing prepayment in the year-ago second quarter, our gross margin as a percentage of gross sales advanced 100 basis points, from 49.5% to 50.5%. A similar improvement is evident on a percentage of net sales basis.

So we continue to make good progress advancing our productivity programs and we continue to expect to drive significant operating margin improvement over time. As I indicated, we absolutely expect to generate solid EBITDA growth in 2006.

So overall a solid quarter with much progress continuing to be made. We're very pleased with how far we've come and we're absolutely optimistic about the future.

With that I will now turn it over to Tom, who will take you through the numbers for the quarter.

Thanks, Jack.

Starting with gross sales for the quarter, gross sales of $395 million were up 2% versus a year ago. Net sales of $318 million were up 1% despite a $5.3 million benefit from the year-ago period from a licensing royalty prepayment by a licensee.

Driving the overall results was International, including favorable currency translation. For the quarter, foreign currency translation contributed approximately 2 points of growth to the Company. In North America, which includes U.S. and Canada, net sales of $198 million were down 4% versus a year ago, largely due to the aforementioned decline in licensing revenue. Also impacting the comparison were lower shipments of base products partially offset by strong new product shipment and lower overall returns and allowances.

For International, net sales for the quarter advanced 10% to $120 million due to shipment strength in all three regions and favorable foreign currency translation, partially offset by higher returns and allowances. Excluding the favorable impact of currency, International net sales advanced 5% in the quarter.

Total cost of sales as a percentage of gross sales decreased approximately 40 basis points to 30.1% in the quarter, largely due to lower cost-related brand support. Gross profit, as a percentage of gross sales, increased 100 basis points, excluding the approximately $5 million benefit in the year-ago period from the royalty prepayment. This improvement primarily reflected lower returns and allowances in the quarter.

Total SG&A was even with year-ago at $200 million, primarily reflecting lower brand support offset by higher distribution and increased general and administrative expenses related in part to the expected launch of the initiatives announced today. Operating profit was essentially breakeven for the quarter versus an operating loss of $1.8 million in the second quarter last year. Adjusted EBITDA in the quarter was $24.2 million versus adjusted EBITDA of $23.8 million in the the second quarter of last year.

This performance largely reflected the growth in net sales and lower brand support, partially offset by the impact of the reduction in licensing revenue and approximately $3 million of upfront expenses associated with the expected launch of the two growth initiatives. Adjusted EBITDA, as you know, is a non-GAAP measure, and we define adjusted EBITDA as net earnings before interest, taxes, depreciation, amortization, gains or losses on foreign currency transactions, gains and losses on the the early extinguishment of debt, 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 net income or loss in the most comparable -- which is the most comparable GAAP measure for us.

Net loss in the second quarter was $35.8 million, or $0.10 per diluted share, compared with a net loss of $38.8 million or $0.11 per diluted share in the second quarter of 2004. With respect to cash flow, cash flow used for operating activities was $39 million in the quarter versus cash flow used for operating activities of $65 million in the second quarter of 2004. Capital expenditures in the quarter were $6.9 million versus $5.4 million in the second quarter last year, and permanent display spending in the quarter was $11 million persons $12.4 million in the second quarter of 2004.

For the year, assuming the initiatives proceed as planned, our investment in permanent displays for the year, including existing business and new initiatives, is now expected to be in the the range of $85 to $95 million, continuing at that level in 2006 and returning to more normalized levels thereafter. Previously, as you'll recall, we estimated our display spending for 2005 to be in the $50 to $60 million range. This increase in spending is required to significantly increase and enhance our presence at retail, which will support the significant sales and productivity growth that we're anticipating.

Cash restructuring spending, including executive severance, was approximately $2.8 million in the quarter. And cash interest paid in the quarter was $23.8 million dollars. The composition of our bank borrowings outstanding as of June 30 of this year was a term loan facility of $700 million and letters of credit that were issued but undrawn of $16 million. We had no borrowings under the multi-currency facility or the MacAndrews and Forbes line of credit, which as of June 30, 2005, had availability of $152 million. That was reduced to $87 million on July 1st in accordance with its terms.

At the end of the quarter, our unutilized borrowing capacity and unrestricted cash totaled approximately $311 million, including $129 million under the multi-currency facility, $152 million under the MacAndrews and Forbes line of credit, and $30 million of unrestricted cash.

Let me quickly summarize the expected impact to our results in 2005 and 2006 from the strategic growth initiatives as we currently have them planned. Net sales would benefit by about $50 million in 2005 after accounting for approximately $40 to $50 million in incremental returns. You should note that the timing of the impact, as much of the returns provision hits us in the quarter before the gross shipment benefit. The way that will work is the returns provision is expected to largely impact the third quarter based on the usual timing of finalizing plan-a-grams with our retailers, whereas the gross sales benefit of the initiatives will impact the fourth quarter. This gross sales benefit associated with pipeline fill on the new initiatives will also benefit the first quarter of 2006, given the magnitude of our efforts in this regard.

Accelerated display amortization of $10 to $15 million is likely to largely impact the fourth quarter of this year with only a minimal impact on Q3. As it relates to working capital, we will be building in line with expected incremental shipments during the back half of this year and the first quarter of next year and expect working capital to return to normalized levels in relation to sales in the first half of 2006.

For 2006 we expect the initiative to accelerate our topline growth and to be driven by significant investment spending associated with the launch. In this context we would expect to generate solid growth in EBITDA for 2006.

With that let me hand it back to Jack for closing comments before we move on to q-and-a.

Thank you, Tom.

Suffice it to say we believe we are making continued strong progress on our overall strategy with our brands, our customers, and our own organization. And I believe both the results of the quarter and the initiatives that we're bringing forward today are just one indicator of that.

So we look forward two addressing your thoughts and questions on where we are. I'll open it up for questions at this point .

[OPERATOR INSTRUCTIONS] Our first question comes from Bill Chappell with SunTrust Robinson Humphrey.

Hi Bill.

Good morning. First question on the quarter, it sounds like even excluding the royalty payment the consumption tracked by Nielson was a little bit faster than your actual sales in North America. Does that mean inventory levels are lighter than you would like at retail, or kind of help us work through those.

I think we are seeing solid growth in consumption. As Maria pointed out, we're going at about twice the rate of the category. In North America, in particular, the shipments growth is lagging the consumption growth, and I don't think I would take that as an indicator that retailer inventories are lighter than we would like. I think, as a practical matter, year-over-year shipment timing patterns are always going to cause some divergence from consumption trends, but I wouldn't read into that that retail inventories our lighter than we would like.

Okay, and then in terms of the marketshare and your marketing and advertising, I would think you're putting more advertising on the Revlon brand then the Almay brand yet you are seeing better results on Almay. Are you thinking about shifting or how you are going to be marketing or advertising the Revlon brand going forward?

Let me give you a quick response to that and I'll let Stephanie Peponis, our Chief Marketing Officer, who is also here, address that. I think the key thing there, Bill, is there is a multiple number of factors that will drive or consumption in any particular quarter are over a long period of time. It's not simply the advertising.

In the case of Almay, we have what we think is a very unique consumer proposition with Almay Intense I. And that product has really sprung forward in a way that would have exceeded our expectations. Now it is supported by what we think is great advertising, but I wouldn't -- it's really a combination of the product, the advertising, and the in-store merchandising approach, which is driving that business. As it relates to our overall shifts that we might anticipate, I'll let Stephanie take that on.

Good morning, Bill As we look at the marketing pressure behind all of our new products, across all of our brands, Revlon and Almay, we feel very good about the results were getting on the Revlon side with Age Defying, with Fabulash Mascara, with the new advertising that hit two weeks ago. And that is the combination, as Jack mentioned, of the inherent value of the products, the spending that we put behind them, and how impactful the media itself is. And we feel equally good about the actions we've taken on Revlon and the allocation we spend as we do on Almay, again Intense I, and Truly Lasting Lip Color. We track that closely, but we look at it on a product by product basis as well as an overall brand basis and feel very good on both sides of the house.

Okay? Is there a next question? .

Our next question comes from Ilias Papazachariou with Lehman Brothers.

Good morning.

Good morning. How are you today?

Very well. I looks like lower brand support was the bigger driver in margin gains in both COGS and SG&A lines. Is that fair?

I'll let Tom address that question.

In the quarter that was a factor, although, as we look at the year and our whole brand spending plan as it has unfolded, we had significant advertising increases over prior year in the first quarter as we launched our programs a little earlier. And year-to-date our overall advertising spending and consumer spending has increased.

Can you give us a sense of the contribution from cost savings in COGS and SG&A?

I'm sorry, could you repeat the question?

What was the contribution from cost savings, from the cost savings initiatives in COGS and SG&A?

We don't provide that information specifically with respect to where we're headed in improving our COGS over time. The quarter continues to reflect our positive progress in that area. And our factory COGS, in fact, was right on track with where we expect it to be.

In terms of the timing of the benefits from the cost savings, which year should we expect to get the most benefit? In '05, 06, or should it be pretty much the same incremental contribution year after year?

Well, as we've said all along, with respect to the margin improvement contribution from COG, we expect that to contribute all the way through to our destination model through the year 2008. We had significant improvement year-over-year 2004 versus '03. We continue to see positive trends in that but it won't be a smooth line and I'm not projecting that you get necessarily an even contribution over time. So we've got -- we'll get there in 2008. It will be -- we'll have some years that will get more progress than others and we're just on track.

Some of that will depend on our re-investment patterns, as well, as we talk about.

Sure. Was their any contribution from a product mix, positive or negative, and from raw materials and packaging costs in the quarter?

We really wouldn't go into that level of detail with respect to COG.

I think the one thing you might reflect back on is the comment about gross margins improving by about 100 basis points in the absence of the licensing prepayment last year. I think that tells you something about COGS progress.

Okay. And in terms of the A&P spending, it looks like it declined. Did it decline year-over-year or can you tell us what the change was?

Total brand support, as we define it, which includes spending at retail, advertising, consumer promotion, was essentially even for the first six months of the year. It was down a bit in the quarter but it was about even for the first six months, and our advertising and consumer promotion spending, which is focused against the consumer and supporting the new product launches, is up year-to-date.

Okay, great and my last question, have you seen any recent step-up in promotional activity by competitors?

We haven't seen any dramatic shifts.

Okay, great, thanks a lot .

Thank you, our next question comes from Robert Labick would with CJS Securities.

Hi Bob.

Hello?

Hi, yes can you here us?

Yes, actually this is Gerry Gallagher. I have a couple of questions. Regarding raw material cost, how are you guys looking to collaborate better in the future with your supplier base to reduce your overall raw material cost? I mean, if you could provide a little color to us on the call.

Yes, that was specifically inside of one of our strategic initiatives around COG and we have, as we have talked about over the last year or two, formed what we believe is a capability in strategic purchasing which includes building value-based relationships with our suppliers. So we have a formal method of going out and RFIing all of purchases and we've built up value-based relationships with our suppliers, which tend to bring their costs down and in turn bring our costs down as well. So that's been firmly inside one of our initiatives that we continue to build on and will continue to build on throughout the next several years.

What I've noticed over the last five-plus years following your coming is that quality has always been a top priority and top initiative within your organization. What are you doing to make sure your suppliers are meeting your quality standards? Are you scorecarding them on a quarterly or monthly basis? Are you meeting with them to build up a supply forum? How are you making sure that they are meeting your strict deadlines?

In fact we do have a supplier evaluation system which has been initiated and we have a very clear set of metrics that cut across not just cost, but what we would assess to be the internal capabilities of suppliers to meet our needs in a quality way. We do have a very disciplined process around that.

What is your vendor/supplier feedback? Have most of your suppliers been open to partnering with you and work with you? Or do they feel like they're being squeezed knowing that there are alternatives out there? Whether it's suppliers for different raw materials, what's been your feedback overall?

Well, in fact, I, along with Carl Kooyoomjian, we meet regularly with our suppliers. We keep them very posted on our business progress. And I would say that the relationships with our supplier base, both not only on a cost basis and not only on a quality basis, but also in terms of our being beneficiaries of supplier innovation, are better than they've been in the last, probably in the last decade, based on my understanding. So we feel very good about the quality of those relationships and they continue to strengthen. .

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

Hi, Carla. Can you hear us? Hello?

Hi, can you hear me?

Yes, can you hear us?

Yes, sorry about that. The $110 million of debt reduction. Can you remind us how that gets allocated? Which debt?

Yes, we haven't specifically allocated that to specific debt but what we have said is that $110 million can be used only and is fully committed to pay down debt.

And it's not required to pay term loans first ahead of the bonds?

No, it is not.

And the increase in display amortization, have you changed the life on your displays or is that purely because of the increase in spending on these new initiatives?

With respect to that accelerated amortization, it is purely in connection with our efforts in these initiatives to enhance our overall presence at retail. So to enhance our look, we will be replacing some pieces that we've got out there and will accelerate the amortization on those.

Okay, and then the third quarter expectation for 40 to 50 million, or the bulk of those returns, to come in the third quarter, is that concentrated in any specific product line or is that pretty much across the board just clearing out product to make room for the launch?

It's related to -- it is related specifically to our new initiative and we haven't been brand-specific on that.

But I guess, what products are being returned? Would it be products in the same brands where the initiatives are being launched? I'm assuming that this product that you've sold into the channel that you have to take the return of so that this channel has space to buy in for the new products, is that correct?

Yes, specifically, one of our initiatives, as you've just heard, is focused on Almay. So we will be enhancing that and so the returns are related to Almay and creating that new look for Almay.

Okay, great, thanks.

I think it's important to just reinforce what Tom said. We're looking to enhance and increase our presence at retail.

Our next question comes from George Chalhoub with Deutsche Bank.

Good morning. I'm not sure if you mentioned this before are not. I was in and out of the call, but the 75 million, you want to issue in Q3, what form is that?

Well, all we said is that it's 75 million. We expect that to be in Q3. And, as far as the form, securities laws don't allow us to elaborate on that. At the appropriate time, we will come out with a separate press release to lay that out for you.

So you can't say right now if this is a senior or a senior stock just to make sure where it lays in the cap structure?

No, securities laws really prohibit me from going into any detail on that, George.

Okay. And the provisions coming in Q3, it seems to the tune of the major part of 40 to 50 million and it seems that net sales should go up in Q4 by 100 million giving us the net benefit of 50, that's in the press release. Is this the trend of the next few quarters to expect?

I think that's a reasonable calculation of the numbers that we just laid out.

And the 40 to 50 excludes the 10 to 15 increase in amortization?

Yes, it does. The 40 to 50 is returns currently.

The increase in working capital in anticipation of the initiatives launching going into Q4, obviously you said in the press release that it goes up and then it starts to go down to more normalized levels in the second quarter of 06. Can we get a sense of magnitude? Is that commensurate to the 50 million bucks overall net sales increase? How does it relate to that number?

I think you've done a good job on your calculations and it would -- it will be commensurate with the phasing of the shipments that go in. So you're correct on that. I will know finally what that looks like as I get final plan-a-gram and reset timings from the retailers, but it will be in line with those shipments, which would continue into the first quarter and then will tail off in the second quarter, will be back down to normal levels.

Okay.

That would be the right way to model it.

Okay, and that build up is going to clearly happen by -- I'm just trying to get a timing perspective -- should we see that ramp up significantly and not be surprised to see that go up by December or is this something that's going to take, you know, roll through into January and February of first quarter? Because it seems that some of those shipments are going to also benefit, according to the press release, the first quarter of '06 ship-in levels.

Well, we will have further shipments in January, but as I think your saying, we will have significant shipments in the fourth quarter of this year and will collect the cash at the beginning of the year next year. So between now and then, we will build up a working capital that would impact the period between now and the end of the year and we'll have significant shipments at the end of the year. We'll begin to collect cash on that at the beginning of next year.

Okay, and the 75 million, we should hear about within the next week, two weeks? Can you give us some kind of timing indication? Yes, we'll get that out as soon as we have to, which will be at the appropriate time. Okay. Thank you.

You're welcome .

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

Hi, guys, just want to clarify something on liquidity. At June 30th, you said it was 311? Is that right?

That's right and one of the M&F lines of 65 million drops off as of July 1st.

So at July 1, you're basically at 246?

That's correct.

Where are you today?

We're at 246 as of July 1st would be the right number and we wouldn't about a liquidity number beyond that.

Okay, and just to clarify what George was saying, you're expecting 100 million from new product launches the second half of the year and 50 million in returns, so a net positive 50?

Yes, what we're saying is that we're estimating approximately $50 million in incremental net sales for the year associated with the initiatives. The phasing is that we would take the returns of 40 to 50 million in the third quarter and the shipments related to that net sales increase would go out the fourth quarter.

Net effect on EBITDA we don't expect to be meaningfully positive or negative for the full year 2005.

Okay, thank you.

You are welcome.

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

Hi, good morning. I wonder if you could discuss a little bit about your initiatives on your non-core brands. You have talked about that in your previous conference calls -- that would be your beauty implements and Mitchum -- what's your strategy going forward on these brands?

Stephanie, why don't you give us an update on our strategy there?

Karen, in terms of the Revlon Beauty Tools business, which is a key part of our strategy going forward, we started taking action on Beauty Tools about 18 to 24 months ago, very much focused on bringing innovation to the category as well as enhancing our impact at point-of-purchase in the store. With those initiatives, we have been gaining share on the that business for the last 12 months and continue to do that strongly at this time. We intend to continue the strategy with a focus on break-through products with impactful merchandising in store and great support from our retailers in bringing that to life effectively.

On of the Mitchum brands and anti-perspirants and deodorants, as we discussed on a previous call, we did decide to support that brand this year for the first time in awhile and what we found is that the consumer and our customers have responded as we would have hoped. We're seeing nice growth in terms of consumption on the Mitchum brand after a couple of years of soft declining performance and a terrific reaction from our retailers in terms of us supporting a brand that is important to their category and differentiated to our consumers.

Can you quantify some of that for us? Perhaps in percentage contribution to topline, since you've been more focused on Mitchum and the few tools?

We don't break up that kind of information, Karen. I can say, as we communicated in the past, these "other" businesses are very important to our top-line and our bottom-line and contribute strongly to the business. One of the reasons we have up upped our focus on them and their contribution overall has been positive.

Okay, then, switching a little bit. In terms of your new initiatives, are your banks on board and where do you stand in terms of bank requirements for EBITDA? Could you refresh us on that, please?

Sure, we don't anticipate having to do anything with our banks. We're in good shape on our covenants so we won't be seeking any sort of amendment or anything like that.

And what is the bank EBITDA for year-end 2005 please?

We've got a ratio in place that is today is 5.5 EBITDA with respect to our senior secured, our secured debt. That drops to 5 times at the end of the year so 5 times EBITDA is our secured debt covenant.

And there's no longer an EBITDA minimum?

No there's not.

Okay, thanks a lot .

Thank you. Our final question comes from Bill Chappell with Suntrust Robinson Humphrey.

Yes, just wanted to follow up.

First, Stephanie, if you could give us some background on these initiatives in terms of how long have they been in the pipeline. It seems kind of massive and especially because we're just seeing them for the first time.

And then second, Tom, the $40 to $50 million in accruals for next quarter, basically, for returns, is that wide range just because you don't know how much you're going to have to bring back and how retailers will reset?

Bill, let me talk a little bit about these two initiatives. We have been working on these for some time. As we've shared in the past, our new product development process is about a two-year process. We're now fully on that plan. And so these two initiatives we have been dying to share first and foremost with our retailers, which we started previously in the year on their normal new product review process and this is the first time for competitive reasons that we have felt it appropriate to begin to communicate them publicly.

But we started -- we have an ongoing process of consumer research that identified these as big opportunities for the category for our business and appropriate for our brand. We then worked around the product offerings, the brand imaging, and the in-store presentation. We collaborated strongly with our retailers during that process, and have been working on this with great focus for some time now and are thrilled to have the opportunity to share them publicly starting today.

Great, I look forward to reading more about it.

And Bill, to the question on the the range for the returns, which we are calling at as $40 to $50 million and largely impacting the third quarter, it will depend on the timing of resets. Specifically, when we find out what the timing of resets are, what the consumption is that takes place with respect to certain SKUs between now and then, which all impact inventory levels. So there are a number of moving parts that cause us to think of it as a range and we'll do the specific calculation when we need to book the provision.

Okay, so that's kind of a $10 million swing, we should have a pretty good idea at the end of this quarter?

At the end of the third quarter, yes, we will have a much better idea. We'll have a lot more information.

Thank you.

Thank you, we do actually have one more question from Connie Maneaty with Prudential.

Good morning. Why does it seem that the opportunity or results are so much faster with Almay than with Revlon? Is it because it was smaller or maybe not damaged as much over the years as Revlon or every dollar matters to a smaller business? Can you explain that?

Sure, Connie it's Stephanie. It's driven off of two things. The first is, it is a smaller brand and therefore we view our new product launches not in light of the size of the brand but in the light of the power of the product. So Intense I was a strong a product as any in our mix. It was right to bring it to life with Almay around simplicity and the value-added experience. In doing that, it had a much bigger impact than the same-size product launch on Revlon, just by the relative size.

Unfortunately, your second thought isn't true. Almay was actually over time more damaged than Revlon. So having these kind of launches is critical for us to position this brand as a key contributor to our business and our retailers' business and Intense I and TLC have allowed us to do that. That is why you see the impact on Almay so strongly with that kind of a product.

Okay, on the the North American sales, what was the sales growth or decline if we exclude Canadian currency?

That would not have had a meaningful impact, Connie. Canada is a relatively small part of the North American business.

Okay, and then one final thing on 2006 EBITDA , which you qualify as solid, are you talking 5% or 15%? What qualifies as solid EBITDA growth?

We'll have to leave that to your judgement, Connie. We're not in a position to provide specific guidance on that at this point in time.

I think from our standpoint, the innovation pipeline is now full and beginning to crank very effectively. You will see more on Revlon in 2006. Just as you're beginning to on 2005 with the restages and the new products for Revlon. So you combine that with the the new initiatives, we expect very strong topline growth, related investment-spending with that, and at the end of the day, we do expect solid EBITDA growth for the year.

Just one final question, when do you expect North American growth to exceed international growth?

You know, as a practical matter, given the rate of development for International, I would always hope that both businesses are growing aggressively. But we've got such big opportunities, which we look forward to talking more about probably in the next 6 months are so, that I would always expect International to have strong growth as before.

But do you envision a time when the U.S. is really what the driver of Revlon is?

I think both businesses are going to the drivers, Connie, and they are connected to the extent that we have continued to ramp-up the innovation pipeline, as you are now seeing. David Kennedy, who is here with us today, would point out that what typically works from a brand standpoint, particularly on the Revlon brand in the U.S. travels very well internationally in major markets like Australia, South Africa, Mexico, the U.K. And David's pointing out that that's evidenced in the second quarter. So I think as North America continues to strengthen up, that will only have more impetus -- additional impetus for growth on international business. So I don't think it's an either/or think, I think it's an "and" thing for our total business.

One final question on the the cost-saving programs that you have going on this year, which are the major ones and which have you made the most progress on?

Connie, we have all of the initiatives that we talked about before in place. We continue to make progress and move forward our overall effort on initiatives. Frankly, we've got additional areas that we've begun to push on as well, so all the initiatives that we've started have been positive and we're doing them in a way that we believe are sustainable. So we're not focused on one or the other, we're really focused on the overall margin impact that were pushing them all at the same time it.

So there's not one or two that you can talk about to show us that you're clearly making -- it shows up in overall results but it's real hard to discern from the outside where things are moving. Are there one or two you could just give us examples of?

Well, we continue to make progress on COGS and things like we told you that we put in place, for example, strategic sourcing. We told you that we put in place rationalization of components. We did put those in place but we continue to make those have a bigger impact across the business as we move on.

That's kind of the way all the initiatives work if you think about what we've done in promotion. We have lowered the cost of the actual displays and components of promotions that we send. We've got other areas inside of there, inside of the whole promotional cost, that we are continuing to make progress on. We've put in place a new part of the organization that focused on indirect sourcing, which is all of our cost outside of COG. And that organization is working wonders inside of Revlon and continues to push our costs down.

So it's really -- we're not focused on one to the exclusion of the others, but all of the initiatives that we've got in place, and we continue to push forward and they're all, we believe, very positive for us. We're focused, at the end of the day, on improving that operating margin, however we get there, for the long haul.

Connie, I think some of the best examples of the progress is on product lifecycle management, which is one of the key margin initiatives. If you look at the success of Age Defying, Super Lustrous, and core nail, those are terrific examples of what we communicated we're going to do with the business and what we are now doing with the business. Which is taking some of the best franchises in the category, appropriately reinvesting in them, and giving the results that we expected.

Okay, thanks.

Thank you, Connie .

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

Okay, I think we've communicated the key points. I thank both in the quarter and on our overall business, we feel very good about the progress that we're making. We will continue to unveil our actions as we are ready to roll them out to the marketplace, but I would tell you, we are not at the end of this process.

We're still midway through a journey, but we feel very good about what we're bringing to the marketplace and about the response that we're getting from our retail partners, with whom we're working with, I think, in terrific collaboration, much like we've improved our supplier relationships. We'll continue to keep you posted and bring you more progress as we go forward. Thanks for your participation .

Thank you. This concludes today's teleconference.