Revlon Inc (REV) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Revlon's third 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'd now like to introduce to your host leading today's meeting, Ms. 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 third quarter 2005. In that release, we provided an update on our new major brand initiatives and our outlook for the balance of this year. If you haven't received the copy of the release you can get one on our Web site at www.revloninc.com.

By way of background, one of the initiatives involved the complete the re-launch of our important Almay brand. The strategy is centered around meeting her needs for simplicity, healthy beauty, and personalization, and creating a totally new in-store experience for her. In effect, we tested certain elements of this strategy this year with our Almay Intense i-Color launch which has been a runaway success.

The 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 have developed under a new brand name a complete line of products that we believe will work for her changing skin and bring her back into segments of the color cosmetics category that she once enjoyed and participated in.

Jack will provide more insight on these initiatives and the related success we have achieved for the upcoming sell-in for 2006. I am also pleased to tell you that in the next couple of months as retailers begin their recess, we plan to share with our new walk(ph) and product lines and to give you a firsthand look at just how significant an exciting these initiatives are.

Turning to marketplace performance, usual unless otherwise noted, our discussion this morning of market share and retail consumption is of the US mass market according to AC Nielson, which excludes Wal-Mart 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 US mass-market dollar volume.

The color cosmetics category was up 2.9% versus year ago in the quarter. Our consumption growth of 4.5% in the quarter significantly outpaced that of the category resulting in our gaining 30 basis points of market share to 21.6%. Almay drove this strong performance with consumption up 11% in the quarter and share growth of 50 basis points versus year ago to 6.3%.

The Revlon brand also grew consumption in the quarter, up 2% versus a year ago, but below the category resulting in a market share decline of about 10 basis points to 15.3%. Our new and re-stage products continue to perform well in the market. Specifically, each of our re-stage products, namely Age Defying with Botafirm, a Super Lustrous Lipstick, and re-staged core nail enamel, each which had been in decline, achieved double-digit consumption growth in the quarter.

Age Defying for example, has achieved a 28% increase in retail consumption in the first nine months of this year. Our totally new products, namely Fabulash Mascara, ColorStay(r) 12-Hour Eye Shadow, Almay Intense Eye Color and Almay Truly Lasting Color Lipcolor, also posted strong results in the quarter. Importantly, we will continue to take action to strengthen the Revlon franchise and bring excitement and innovation to this important business.

Jack will be sharing some specifics with you regarding our plans in this area for 2006. In other areas of our portfolio, we also achieved share growth including Revlon Hair Color, which was up 20 basis points versus year ago in the quarter to 8.4%, and Revlon beauty tools which was up 70 basis points to 25.3%.

In antiperspirants and deodorants we held share at 6.1%. Finally in October and we filed a shelf registration statement with the SEC to register up to $250 million of equity securities. This filing will provide the company with the flexibility to tap into the equity market on an as-need basis.

Before I turn the call over to Jack Stahl, Revlon President and CEO and Tom McGuire Revlon Executive Vice President and CFO I would like to remind you that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provision 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 reports on Form 10-Q for 2005, including the third quarter 10-Q which we expect to file next week. 8Ks and other SEC files and furnished documents during 2005 and press releases including today's release. And lastly our discussion this morning should not be copied or recorded. With that I'll hand it over to Jack.

Thank you Maria and good morning everyone and as always thanks for your participation on the call. Today I'd like to begin my discussion with a quick snapshot of our overall business, including our outlook for our two major new brand initiatives and what we expect to see for our overall business.

With me today in addition to Tom and Maria are Stephanie Peponis, our Chief Marketing Officer; Paul Murphy, who has responsibility for North America Sales and Customer Marketing; Paul Khonjun (ph), who has worldwide manufacturing and R&D responsibility; and David Kennedy, who as you know heads up our international business. And each of these people are playing important roles in helping to lead our progress and to the extent that there is an opportunity I'm sure they'll help fill in details around our progress today.

First let me say that as Maria indicated, we are making significant progress in the US market place across all of our key categories. And importantly in color cosmetics, our progress is helping to create growth for the entire category, which is a change from where the category was about a year ago. In addition retailers have responded to our major new brand initiatives, Vital Radiance and Almay, with significant merchandising support for 2006.

From a financial standpoint, we do expect that EBITDA after two years of solid growth to a level of 193 million in 2004 will be below that level in 2005 due to launch costs related to our two major brand initiatives as well as our continuing to see our growth be slowed by franchises that we've yet to re-stage, but that we will re-stage in the future and some retailer cautiousness on overall inventory levels.

Importantly, as we look forward, we believe and expect that our marketplace progress and our continuing focus on costs and margins will enable strong revenue and EBITDA growth, and will drive continued long-term value creation.

In terms of the snapshot of the business that I'd like to provide and our two major initiatives, let me start with a discussion of our underlying franchises. As Maria indicated our actions to focus on strengthening our underlying franchises in color cosmetics in particular is working very well and we're putting renewed and focused energy into these existing and important parts of our business.

Obviously we have more work to do in this area. And 2006 will be our second year of executing this strategy. To that end we are re-staging in 2006 our important ColorStay franchise as part of our 2006 new products program for the Revlon brand. These new items will begin shipping next month with our other new products. To put that into perspective for you, ColorStay is an even larger color cosmetics franchise that our newly re-staged face makeup franchise Age Defying which this year as Maria pointed out is up 28%, as a result of new package new formula and new marketing energy.

So with our 2006 actions now in progress, we are well into our strategy to continue to re-stage important existing franchises. And we expect to get continued growth based on what we've seen in the last year. Other parts of our business, namely Hair Color, beauty tools, and Mitchum are benefiting from focus and resources we've put behind them over the past year. We expect them to continue to do well in the market as we move forward.

International has been and we expect will continue to be an important area of growth for the company and we're making excellent progress in our major international markets. And we'll continue to execute our strategy of building on brand strength where we have it in our key countries and reducing our cost structure and creating efficiencies wherever we do business.

The two major initiatives that we're going to talk about today are very important building blocks for us as we move forward because they represent significant opportunities both to expand our top-line and are longer-term profitability and importantly to lead the category in innovation. We believe reinvesting behind our Almay business to position the brand as the easy to shop, healthy beauty authority at mass, is absolutely the right strategy. The healthy beauty segment is absolutely undeveloped -- relatively undeveloped in the mass channel compare to other channels of distribution for color cosmetics.

Likewise, we believe our new brand focused on the aging consumers will create another segment in color cosmetics. This new brand will have dedicated retail presence in-store and stand out as the only brand that is specifically formulated and marketed in a dedicated way to the 50-plus woman. Last quarter, you'll recall that when we unveiled our major brand initiatives, we share with you some of our working assumptions regarding their magnitude on our business in 2005 and beyond. We've since finalized many of those working assumptions, including our expectations regarding customer acceptance, retail space, related product returns and allowances liability along with other aspects of the launch.

As you can imagine our outlook in all of these areas is now more developed than it was three months ago and we're extremely pleased with the level of retail participation of the launch of these initiatives and the resulting dramatic 25% increase in our retail footprint that we are now expecting as we move into 2006. We have confidence that these two brand initiatives will be important building blocks along with our new products program for Revlon continuing to re-stage important core franchises that these two building blocks will help benefit the color cosmetics category and help move the company forward in a positive and sustainable way.

In terms of the financial significance of these initiatives, we believe that they will add significant topline momentum to our business beginning next quarter and will meaningfully contribute to our earnings over time. For 2005, we have revised our net sales outlook for these two initiatives to the $30 to $40 million range after accounting for the incremental returns and allowances provisions that we are now estimating at around $40 million.

As you recall, we have been forecasting net sales this year for these initiatives at about $50 million, but as you'd expect -- as we've continued to work with retail customers and review our financial models, we've taken that estimate down a bit in the last several weeks. I must tell you that we are extremely pleased with achieving what we believe is probably an unprecedented 25% increase in space for next year. And we expect to play an important role in driving value for the entire category and value for our retail partners in the process.

In terms of the specific bottom line impact of the initiatives, we had been planning for a neutral impact for EBITDA in '05. However, the revised sales outlook we just discussed has resulted in some up-front spending that won't fully be recovered by our topline outlook as we see it today.

Additionally our overall outlook for North American shipments is being affected by our base products, which have yet to be re-energized along the lines of Age Defying this year or ColorStay next year. And as a result they're somewhat softer than we would have expected, and finally as I indicated retailers are tightening somewhat their inventory management practices and certain of our customers. So all of this leaves us for 2005 at a forecasted adjusted EBITDA of $170 million, which is somewhat less than we were targeting.

However, all of this is in the context of our significant progress to strengthen our underlying business and the value of our brands, create exciting new products as evidenced by the new initiatives and to continue to position ourselves strongly with our retail customers, all of which we think positions the company well as we go forward. For 2006, we anticipate strong topline growth, significant investment spending to support our brand launches and strong EBITDA growth.

With most initial launch year costs and investment spending behind us, and with more exciting marketplace progress ahead of us, we believe we'll be well positioned to meaningfully improve our profitability and drive significant value for our business over the long term, and we as always look forward to updating you on our progress.

With that, let me turn it over to Tom, who will go through a review of the numbers for the quarter. And after that we'll open it up to your questions.

Thanks, Jack. Starting with gross sales for the quarter, gross sales were down 2% at $392 million, net sales of $275 million were down 6% and this net sales decline primarily reflected the $32 million of provisions for the anticipated incremental return of allowances that we took related to the initiatives and lower shipments in North America. Partially offsetting these factors were lower returns and allowances on the base business and strengthen international including favorable FX.

For the quarter, foreign currency translation contributed approximately 2 points of growth to the company. In North America, net sales declined 17% to $159 million, largely due to the aforementioned $32 million of returns and allowances provisions and lower overall shipments, partially offset by lower returns and allowances on the base business. As was the case last quarter, our shipments in North America for the quarter reflected strength of new and re-staged products, which did not entirely offset soft shipments of base products.

For International, net sales have been up 14% to $117 million reflecting shipment strength in Asia-Pacific and Latin America as well as favorable FX and lower provision for sales incentives. Excluding the favorable impact of currency, International net sales advanced 11% in the quarter. Total cost of sales as a percentage of gross sales was approximately 40 basis points higher than last year at 29.9% for the quarter due to higher cogs-related brand support, which more than offset a 30 basis point improvement in factory cost of sales.

As you know margins are a big area of focus and opportunity for us. For the quarter, excluding the impact of the initiatives, we made progress specifically on this basis. We expanded our gross margin as a percentage of gross sales by over 400 basis points, largely driven by lower base business returns and allowances. Total SG&A increased 7% to $191 million, primarily reflecting upfront costs associated with the new brand initiatives as well as higher brand support on our base business.

The upfront costs are largely related to accelerated amortization on certain existing walls(ph), staffing and marketing related spending and higher distribution. We generated an operating loss of $32.3 million including some $40 million of costs associated with the initiatives. This 40 million included the 32 million of incremental returns and allowances provision and 4 million of accelerated amortization related to the brand initiative among other upfront costs. The operating loss in the year-ago quarter was $2 million. In addition to the initiatives, also impacting the year-over-year comparison were higher brand support, higher distribution expenses, and the decline in shipments. On the positive side, we had lower returns and allowances on the base business reflecting our continuing focus on fine-tuning our promotional strategy in gaining efficiencies in this area.

Adjusted EBITDA in the quarter was a negative $6.1 million compared with adjusted EBITDA of 25.7 million in the same period last year. This performance was driven by largely the same factors that impacted the operating income comparison, excluding, of course, the impact of the change in depreciation and amortization. For the quarter depreciation and amortization that impact EBITDA declined by $1.4 million, reflecting about 5.6 million lower D&A on the existing business partially offset by about 4.2 million of accelerated amortization associated with the brand 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 and losses on foreign currency, transactions, gains and losses on the early extinguishment of debt and gains and losses on the sale of assets and miscellaneous expenses. Attached to our press release, which is posted on our Web site, you'll see a reconciliation of adjusted EBITDA to net income or loss, the most comparable GAAP measure.

Net loss in the third quarter was $65.4 million or $0.18 per diluted share compared with a net loss of 91.6 million or $0.25 per diluted share in the third quarter of 2004, which included about $0.16 per diluted share for the early extinguishment of debt last year.

Turning to cash flow, cash flow used for operating activities was $69 million in the quarter versus cash flow use for operating activities of 35 million in the third quarter of 2004. This increased use reflects as expected our working capital build associated with the initiative, and also reflects the impact of lower than expected shipments in North America.

Capital expenditures in the quarter were $6.4 million versus 4.4 million in the third quarter last year. And display spending in the quarter was $10.2 million versus 7.3 in the third quarter of 2004.

For the year, we now expect our investment in permanent displays, including existing business and the new initiatives and to be in the $75 to $85 million range, which is $10 million lower than our previous estimate. For 2006, we continue to expect spending performance displays to be in $85 billion to $95 million range, returning to normalized levels in 2007.

Cash restructuring spending, including executive severance, was approximately $4.1 million in the quarter. Cash interest paid in the quarter was $31.9 million. And the composition of our bank borrowings, outstanding as of September 30, 2005, was a term loan facility for $700 million and letters of credit issued but undrawn of $16.5 million. We had no borrowings under the multi-currency facility or the MacAndrews and Forbes line of credit, which as of September 30, 2005, had availability of $87 million.

At the end of the quarter, our unutilized borrowing capacity and cash totaled approximately $259 million, including 144 million under the multi-currency facility, 87 million under the MacAndrews and Forbes line of credit and 29 million of cash excluding cash in compensating balance accounts.

Let me quickly summarize what we've mentioned regarding the expected impact to our results in 2005 and 2006 from these new brand initiatives as currently planned. Net sales would benefit by about $30 to $40 million in 2005 after accounting for approximately $40 million in incremental returns and allowances.

As we've already recognized the vast majority of the provisions or returns and allowances in this third quarter, the expected benefit of the shipments becomes quite significant in Q4. As we indicated last quarter, the gross sale benefit associated with the pipeline fill of the initiatives will also meaningfully benefit the first quarter of 2006.

Total loans outstanding and other launch costs are expected to total $75 million in 2005, of which approximately 44 million impacted our results so far this year. Components of the 75 million in upfront launch costs we expect for 2005 include the 40 million for returns and allowances and approximately 10 million for accelerated display amortization.

The $25 million balance reflects upfront spending or staffing and other marketing-related activities, incremental distribution expenses and other operational costs associated with the startup. As it relates to working capital, we expect to build a working capital through year-end and into the first quarter of 2006 with levels beginning to become more normalized during the second half of 2006. So an overall good year expected in 2006 in the context of significant investment spending to support two major brand launches, which we believe, will favorably drive our performance.

With that, let me hand it back to Jack for some closing comments before moving to Q&A.

Thanks. While we obviously have continued work to do we are very pleased with our progress, and we look forward to continuing to accelerate that progress as we move forward. So with that, we'd be happy to open it up to your questions.

(Operator Instructions). Our first question comes from Bob Labick with CJS Securities.

Hi, Bob.

Good morning. How are you?

I'm doing well. How about yourself?

Doing great. Thank you.

Good. First question, I wanted to -- Tom just began to touch on this, could you just walk us through the timing of your revenues and cash flow, particularly associated with the significant retail space gain a 25% gain, which is, obviously sounds great. It sounds like it's going to be a use of working capital. Could you walk us through for Q4 and for next year how we should see this balance out and what your expectations are for the full-year next year of working capital usage?

Sure. Bob, you can note in the results so far this year we have increased inventory levels through the third quarter. We'll continue to build inventory which will ship -- a large part of it will ship primarily in November, December. And so being in the formal of our accounts receivable at year-end, we will continue to be shipping in pipeline on these new initiatives during the first quarter of next year. We will also collect a significant amount of cash during the first quarter.

As we move through the year next year, we'll be in reset mode in the first and second quarters. So we'll be using cash to install displays as well as during, probably the end of the first quarter, primarily in the second quarter, the returns that we mentioned, the 40 million provisions that we're taking, this physical returns will come back and we'll pay out cash on that basis. As we move through the year of 2006, the resets scheduled during the first and second quarters will begin to work down into our inventory level, and we'll be back into more normalized mode during the second half of the year.

Great. And just to clarify without putting any numbers on it, you obviously changed your guidance next year from solid EBITDA to strong EBITDA growth. Where would you say your EBITDA expectations are for -- obviously it's off a lower base, so are your expectations basically flat with what you have previously had or do you think '06 will be higher than you had though or lower than you had thought previously?

This is Jack. Bob, let me take that one on. I think we're going to -- I think we certainly pointed to the 170. Previously we had been talking about strong topline growth for next year and solid EBITDA growth, and I recognize this is an exercise of language because we don't want to be too precise in a situation where there's, obviously, a lot of important variables that we think are going to move for us. But having said that, we're now looking for strong topline growth and strong EBITDA growth.

So I think the change in the inflection should tell you something that we are looking for strong EBITDA growth, recognizing we're coming off a base of 170. The only other thing that I would say there is I think - as you think about the base of 170 off of which you project for next year, remember there were, as we talked about some unrecovered launch costs in the base for 170. So depending on how you want to think about that you might want to think about your base a little bit differently off of which you project strong EBITDA growth for 2006.

Okay. That helps a little bit there. Thank you very much. Congratulations on the shelf-space gain. It sounds great.

Thank you. We're very proud of it.

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

Good morning.

Good morning, Bill.

Good morning.

I guess first, looking on the next quarter on kind of the sell-in, is that just with timing of shipments to retailers or are you getting less shelf space than maybe you thought or -- help us understand why it's not as big of a ship-in going for this next quarter?

Well, I think there are a number of factors there. First of all, as you move through the summer and fall, you're in constant dialogue with retailers about what their plans for the category is -- for the color cosmetics category is for the upcoming year. And that obviously helps you refine your estimates on space.

The other thing that happens is that the timing of resets depends on retailers' schedules in 2006. So if they reset early in the year as opposed to later in the spring that would affect the timing of our pipeline shipments, whether it happens in the fourth quarter of this year or the first quarter of '06. And then there is the question of how much product they actually take in for each of the new product lines. How much products they put on their shelves in a given amount of space?

So there are a number of variables in there. There was no single variable that was dramatically off of what we expected. We're certainly delighted with the merchandising support that we're getting. But net-net-net, when you add it all up, you're talking about a launch that's huge. And our estimates have changed somewhat but not dramatically.

Got. You. Second on guidance, is there anything that you're seeing right out there in terms of cost or sell-in change your longer-term goal of 12 to 14% operating margin by '08?

No. We believe that when we set out that course a couple of years ago, we fully expected to be aggressive inside this category and drive -- help to drive our business and retailer business. And these two initiatives over time certainly help us build scale, which is one factor in margin ability.

Got it. And last, just maybe for Stephanie, can you help us translate the 25% shelf space in terms of what does that mean in terms of market share? And then also, where is that shelf space coming from? Is it smaller competitors or is it new shelf space within the store, where are we seeing that?

Hi, Bill. In terms of the second question, that is a retailer-by-retailer set of decisions in terms of how they decided to make room for these new initiatives and getting into it by retailer is not something that we would be in a position to do. It is a combination of all of those factors, and they have been terrific partners in working with us to work this through.

In terms of how does the space play out in market share, again, we're not going to be giving forward-looking guidance in terms of market share performance. We would fully expect a 25% space gain to be positive in terms of our share performance in 2006, and look forward to sharing those results with you in the year to come.

Okay. Well actually I had one other. You talked about a little bit of softness in your current trends, and I didn't quite understand that. You look like you're outpacing the category growth and even in most recent Neilsons, you also seem like you're pretty strong. Were you expecting strong results in terms of shelf space or market share gains right now?

I think it's safe to say that we are very pleased with the support that we are getting, and I think that's the critical thing. Our retail partners want to drive this category. They want to do it in a way that is profitable and certainly we do. And these ideas are consumer based and we're thankfully getting great response from our retail partners.

In terms of the consumption side of things, we've said that we're certainly happy to be gaining share across our categories. Obviously, we're looking to make continued progress in that area because a number of our franchises are yet to be re-staged or energized, and I think as that happens, I think we'll get a benefit to our performance relative to the industry as we move forward. Age Defying is a terrific example. It was in decline, now it's up 28% year-to-date. Super Lustrous was in decline and it's running out close to 10%. So as we continue to work through these existing franchises, I think that has positive implications for our performance going forward.

Okay. Thanks.

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

Hi good morning.

Good morning, Karen.

Couple of questions from me. First of all, in terms of the $110 million equity injection, have you made any decisions as per the timing or the application of the proceeds?

We haven't made a decision as far as the timing. The timing of course will be by the end of March next year 2006. And specifically, on the application of the 110, we have not made a decision, but it will be used to pay down debt. And the total offering would be a number that's $185 million, so it's the $110 million plus a $75 million addition to what we had talked about a long time ago.

So then, can we assume that the total $185 million will be applied to pay down debt?

No, the 110 will be, and the other $75 will not be -- it will be used for general purposes including the funding of the initiatives that we've got going on.

Okay. Great. And then in terms of your lower EBITDA estimate or outlook for 2005, does that bust any bank requirements or covenants or are you in compliance?

No, not at all. We're in total compliance. So we're in very, very good shape on that front.

Okay. Great. And then secondly, if you can just talk you mentioned that you had higher distribution costs. Could you talk about that and then just in general how are you seeing higher energy prices affecting you in terms of just your inputs for year '06 and on transportation and then even how it impacts maybe the consumer spending?

Sure. In the quarter, you can split higher distribution costs into two pieces. One, there were some higher distribution costs related to the ramp up of our new initiatives.

But on the other hand, as we said on the base business, there were higher distribution costs and that would be related to things like -- fuel obviously is driving up to some extent, our distribution costs. The other thing that bears for us on distribution are -- how much promotional activity do you have? Now moving forward, our deal on fuel costs is, obviously - we're exposed to the same pressures as everyone else. But we believe that we have got opportunities to largely offset those costs, with the positive opportunities that we have available.

Okay. Are you seeing just any impact on consumer spending as a result of the higher energy prices?

That would be - this is Jack -- that would be difficult for us to kind of fully tease out consumption trends as we've talk about are reasonably good. I think it's safe to say that retailers are being cautious as they make their own forward-looking forecasts about what could happen or is likely to happen. But our consumption performance as we've talked about has actually improved significantly compared to prior years.

Yes. That looks -- does of course the categories up. Okay. That's great. And one last thing, when can we expect to see the new product on the shelves?

Murph, you want to speak to the timing of that?

The products will become available in January, and most of the home department resets will be completed by the end of the first quarter in the US market.

Okay. Good. I'll look for it then. Thanks a lot.

Thank you.

(Operator Instructions). Our next question comes from Connie Maneaty, Prudential.

Hi, good morning.

Good morning, Connie

Good morning, Connie. How are you?

Great. Am I the only one who hasn't heard the name as the new line for older women, is it the Vital Radiance?

That's what's been rumor Connie. We are going to have a probably a separate press announcement on that.

Didn't you mention it this morning?

Oh, I couldn't contain my enthusiasm, Connie. With my Public Relations person kicking me all the way through.

So you said that you are going to show it to us at some point in the next couple of months. Are you scheduling then an investor meeting or something?

We will likely do that, yes. Because I think it's important that we walk you through things in a way that you can see it and feel it and touch it and get behind some of the underlying thinking there in more detail.

Do you have a date set?

Not yet, Connie. We'll be working on that and we'll be back to you with specifics.

Okay. When does advertising start for the new Almay and Vital Radiance?

Hi, Connie. It's Stephanie. I think you can expect to see our advertising pattern similar to previous years. Obviously for competitive reasons we won't discuss exact timing, but the patterns that you've seen so, as Murph mentioned the product will be in store during the first quarter. Certainly, we will be supporting them as they hit the shelves.

As I think this year we saw advertising in February magazines maybe even some January ones. Was that right for this year?

That would be correct. And I think you've got all -- all of the media impact starting around that timeframe this year.

Okay. The size of the pipeline fill. I think when we were looking at that $50 million of incremental sales for this year, we were figuring that that was the size of the pipeline fill. Now it's 30 to 40. Is the size of the total fill closer to 50 but spread over a longer timeframe, or is the pipeline fill now smaller than that $50 million?

Connie, the pipeline fill is again, with your numbers you would add the returns number, which is today about $40 million back to that. And then any other assumptions about minor deductions. So the pipeline fill, it will stretch over the two quarter, and the fourth quarter, and the first quarter of next year. Overall, as Jack mentioned it's a little bit smaller than it would have been in our numbers last time around, but it's still very, very large with the 25% increase of sales.

That 30 to 40 is the net sales impact --

That is the net sales.

-- of pipeline in the fourth quarter.

Right. And that other 50 million that you talked about months ago, that was also net?

Correct. And that was also in the fourth quarter. There will be an additional benefit in Q1 that's above and beyond the fourth quarter benefit related to the magnitude of these initiatives and the fact that as retailers reset later -- those that we set later in the first quarter will get their shipments associated with the initiatives early in the first quarter as opposed to late in the fourth quarter. So there is a timing difference, but the 30 to 40 are all an '05 impact and we haven't quantified the next year's impact, but it is a significant one in the first quarter.

Okay. You mentioned the Final Radiance that is going to have a dedicated retail presence in store, what do those words mean, other than shelf space?

Murph, do you want to speak to that?

I think what we mean when we say that is that this brand will be spotlighted in a way in our retailers so that shoppers for this brand will find an array of products, merchandise together that exclusively meet their needs.

I liked that word spotlighted. Okay. When you -- the ColorStay re-stage was that planned for 2006 or was it accelerated into '06 to jumpstart the base?

It was planned for '06 as we've discussed in previous calls. Our new product development process is now fully in place it is a multi-year process and ColorStay was targeted for an '06 launch at the beginning of that process.

Okay. And just one last question with the ColorStay re-stage what percentage of base business will have been re-staged and what's left to re-stage?

Without getting too precise on that, I think it's safe to say that if you were look back two years ago the vast majority of our portfolio would have been yet to be retouched if you will with a new formula, or a new package, or a new advertising claim, or a new product positioning. And as you get into '06 less than -- meaningfully less than half of the portfolio would be in that position that remains to be done. So we'll be -- as you look at '06 and '07, I think you can assume we're going to be at normalized levels thereafter, and very competitive, I should add.

Okay. Many thanks.

Thank you. Our next question comes from Walter Branson with Regiment Capital.

Thank you. I had a couple of questions. Let me go back to the 25% addition to shelf space. Are the commitments fully in place for that additional shelf space, and is it designed to be permanent space rather than space, specifically, for the launches? And also are you getting the same incremental space roughly across all retailers or are some giving you significantly more than 25% and some giving you significantly less?

Yes. Let me just address one part of that. It is set as permanent space, yes, that's an important element. But Murph, do you want to build on that in any fashion?

Let me see, if I can remember your points. Yes, as Jack said, the space is permanent space. As with -- as is the normal practice in retailing here in the US, there is variability in the space commitments from all of our retailers. But I would say that overall, we are very pleased with this merchandising support that our retailers are giving us across the board, against both of our new initiatives.

Okay. And are the commitments fully in place at this point?

The commitments are as fully in place as you'd expect at this time. There's always a possibility that things could shift as retailers continually and everyday make assessments of their merchandising plans for upcoming periods of time. But our expectation today is that -- the answer is yes. By and large, these commitments are fully in place.

So -- I guess, my question is how did you convince your retail partners to give you 25% more permanent space for what are basically now some untested concepts?

Let me start with the beginning of that question with Stephanie, and then I think Murph can play it through from a retailer connection standpoint.

As we went through the development of these initiatives, we built them off of differentiated insights in the marketplace. And we have found huge appetite with our partners around things that they have confidence will drive their category. And although they have not been fully tested, as we discussed onAlmay, Intense Eye was a terrific in-market test of where this concept will take us.

And as we go through this process, we always partner with the retailers around other sources of confidence, whether it's consumer research or planogram research, all of these kinds of things are intended for us to learn and for them to have an understanding of what to expect and to bring some concreteness into that process. They have been terrific in their response and we partnered with our key retailers on creating these concepts. So this was in prototype many, many months ago, and it has been vetted with them and discussed with them. And with that, let me turn it over to Murph.

I would just add to what Stephanie said that as our retailers make decisions for space, particularly in the US retailers are so sophisticated in terms of how to provide their shoppers the products and results that their shoppers need to drive their revenue and in turn drive ours as a manufacturer. They are very, very focused on ideas and products generated from consumer insights that grow their category of business. They are much less enthused by ideas that just cannibalize current sales.

So I believe that our retailers have looked at our propositions and had determined by and large that these consumer insight-driven ideas have great potential to expand cosmetics category gross sales. And, therefore, they're making this investment in merchandising space in their stores.

And I think the one additional add to that is each initiative is grounded in a major socio-economic trend. So, for example, the offerings for 50-plus is very much grounded in the aging demographic. The offering for Almay is very much grounded in the continued and accelerating trend around health and wellness, which had a lot of resonance with our retail partners.

Well that 25% certainly is impressive. Could you break that down roughly between how much of that comes from Vital Radiance and how much comes from the Almay line?

We really can't -- we could, but we, for competitive reasons, won't do that at this stage. Although, early in January, you'll be able to certainly see that in the marketplace. But both brands are going to be extremely well represented.

Thanks very much.

It's also important to point out in this process as we think about retailer participation for next year. The space -- the 25% is the net change for the corporation in the US. It actually includes a slight increase for Revlon space as well. So these initiatives have not come out of the back of Revlon. Importantly we are actually slightly increasing our space for Revlon in 2006 as well.

Thank you

Thank you.

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

Yes. Just two follow-ups on the new initiatives. What will the gross margins look like for those businesses, will they be a little bit higher than the existing business or about in line? And then second, hey Tom, as I'm looking out on interest expense, and kind of your expectation with rate changes, how should we model that for next quarter or next year?

Yes. Let me comment on the new brand initiatives and to your - to the first part of your question. We of course, designed these to contribute positively to the bottom line, so that we expect them to add significantly over time to EBITDA, Bill. And just, I guess, for the obvious reason of the scale that they will create that will have a positive impact on margins. At this time, certainly, we don't want to go out and talk about what the margins are on these individual products or any of our others. So we're not commenting on that right now for competitive reasons. But you can count at a minimum on the scale of these -- pure scale to have a positive impact.

And then on interest expense --

As far as interest expense goes, our debt level will to come down in the first quarter after we do the equity offering and bring that down. We -- I don't have a projection. I'm looking at the same information that you are with respect to where the market will go next year and just modeling out what I hear plus and minus, trying to manage what we will do within the range of possibilities. I don't want to preempt the real economists on this. I read their information.

Can you just remind me what the debt is fixed versus floating?

About 700 is floating and the remainder would be fixed.

Great. Thank you.

Thanks Bill.

Thanks, Bill.

Thank you. I show no further questions. This ends our question-and-answer session. And I'd like to turn the call over to Mr. Stahl for any closing remarks.

Jack Stahl. No, I think that's it. Thank you for your participation. We're obviously very pleased with our progress. We've got, as I said earlier, lots of work to do to continue to drive our business forward in a profitable and value creating way. But we're certainly happy with this step along the continuum. And again we appreciate your continued support and we look forward to continuing to update you. Thank you.

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