Revlon Inc (REV) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's second-quarter 2006 earnings conference call. At the request of Revlon, today's call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Ms. Maria Sceppaguercio, Senior Vice President, Investor Relations. You may begin.

Thank you. Good morning, everyone. Earlier this morning, we released our results for the second quarter 2006. If you haven't received a copy, you can get one on our website at www.revloninc.com.

On July 10, we preannounced our preliminary results for the quarter and provided our outlook for the business for the balance of this year, as well as a roadmap for you in thinking about our performance for next year. The actual Q2 results that we announced this morning came in better than we were expecting, largely due to timing and some favorability in SG&A.

In terms of the balance of this year, we continue to expect profitability in the second half of this year to be up considerably versus the second half last year, largely due to cycling against last year's large returns provision associated with the Almay restage, and other upfront launch costs in support of Vital Radiance in Almay. We also expect the second-half comparison to benefit from our aggressive cost reduction and productivity program.

On the capital structure front, as you likely now, last week we consummated the previously announced amendment to our credit agreement, adding $100 million to our term loan, and while not required, modifying certain covenants to provide us with additional flexibility to execute our business plans. You will also recall that we are planning to conduct a $75 million equity issuance late this year or early next year.

So in terms of some highlights for the quarter, net sales in the quarter advanced 1%, primarily reflecting an approximate 10% gain in gross sales, almost entirely offset by higher returns and allowances, including a $17 million returns and allowances provision related to Vital Radiance. The gross sales performance reflected double-digit growth in the U.S., with each of our key categories, namely color cosmetics, hair color and beauty tools, up double digit in the quarter.

Adjusted EBITDA in the quarter was a loss of $20 million versus last year's Q2 adjusted EBITDA of $24 million. Operating profitability in Q2 this year was negatively impacted by approximately $40 million related to Vital Radiance. You will recall that adjusted EBITDA and gross sales are non-GAAP measures that are defined and reconciled to their most comparable GAAP measures in the footnotes and attachments of our press release issued this morning.

Net loss in the quarter was $87 million or $0.20 per diluted share, versus a net loss of $36 million or $0.10 per diluted share in the second quarter last year.

Turning to marketplace performance, as usual, our discussion this morning of market share and retail consumption is a of the U.S. mass market according to ACNielsen, 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 70% of the Company's U.S. mass-market dollar volume.

For the quarter, the U.S. color cosmetics category grew 4.2% versus a year ago. During this period, the Company grew its color cosmetics consumption by 3.3%, resulting in a share of 22% versus 22.2% in the second quarter last year.

The Revlon brand registered a share of 14.2% compared with 15.7% in the year-ago period, while the Almay brand essentially held share in the quarter at 6.4% and Vital Radiance achieved a quarterly share of 1.4%.

On Vital Radiance, as we've previously disclosed, the new brand is underperforming in certain stores within large format retailers, and we expect to give up some of the Vital Radiance space we gained as a result. Even with that, we do expect to retain a significant portion of the space for this new brand. Vital Radiance has performed better in several of our key food and drug customers, with the brand achieving a share at some customers approaching 3% in the month of June, having been in the market only several months.

In terms of our overall 22% retail space gain we achieved earlier this year, we expect that it will be reduced by the Vital Radiance reductions, although we do expect to maintain most of the increase.

In other key categories, we maintained our momentum in the quarter. Specifically in women's hair color, our consumption was up 9% in a category that advanced 3%. As a result, we gained a half a share point to end the quarter at 9.0%. In beauty tools, we grew consumption 12% in a category that advanced 6%, resulting in a 1.4 share point improvement to 27% in the quarter. In antiperspirants and deodorants, we essentially maintained share for the quarter at 6.4%.

Before I turn the call over to Jack Stahl, Revlon's President and CEO, and David Kennedy, our CFO, I want to point out that during the quarter, management responsibility for our business in Canada was transferred to the European operations of our international region in order to leverage the talents of Chris Elshaw, an executive who currently runs our Europe region. As a result, all associated historical references and comparisons have been reclassified such that Canada is incorporated into international.

I would also like to remind you that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Information on potential factors that could affect the Company's results from time to time and cause them to differ materially from such forward-looking statements is set forth in the Company's filings with the SEC, including the Company's 2005 Annual Report on Form 10-K; our Quarterly Report on Form 10-Q for the second quarter of 2006, which we will be filings shortly with the SEC; and other SEC filed and furnished documents during 2006, including our Form 8-Ks and the press release issued Tuesday.

And finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I will hand it over to Jack.

Thanks, Maria, and good morning, everyone. As we discuss our quarter and full year 2006 this morning, which, as we previously announced on July 10, are below what we and many of you had been expecting earlier in the year, I really do believe it's important to provide some important context.

First of all, we have made a great deal a progress over the past several years to strengthen our brands in the marketplace. As one indicator of how far we have come, you will recall that in 2005, in each of our key categories in which we compete in the U.S., we outgrew the category. This includes the important color cosmetics category, as well as our beauty care business, which includes beauty tools, hair color and antiperspirant and deodorant categories.

We've also made significant progress in building relationships with our customers across the world, as well as strengthening our international business. On the cost side, we have made progress and we continue to believe this area represents significant opportunity for us as we move forward.

Finally, we have made very good progress as well on improving our capital structure and reducing our debt, which you will recall was as high as 1.9 billion at year end 2003, and now stands at 1.4 billion. And you can be sure that we will continue to evaluate opportunities to further strengthen our capital structure as we move forward.

In 2006, in addition to numerous actions across our portfolio, we launched two initiatives to tap into underserved segments of the color cosmetics category inside the mass channel. This effort was made possible due to the progress we've made coming into 2006.

In launching the initiatives, we received broad retail support as our customers recognize the strategic relevance of the actions we are taking. Both initiatives, Vital Radiance and Almay, are generating growth, although the growth is below what we had anticipated. As we have discussed with you, the Vital Radiance launch in particular is well below plan, and the most significant factor in our second-quarter EBITDA shortfall versus year ago, as well as our revised full-year outlook that we shared with you last month.

Obviously, this is disappointing. However, we have responded very quickly to modify our go-forward plans for the brand, and we believe that our optimized approach will result in a substantially improved financial performance for the brand in 2007.

Beyond Vital Radiance, I think it's also important to recognize the balance of our portfolio continues, in 2006, to make good progress. In other key categories in the U.S. and our international business, we've made meaningful progress over the past several years, and each of these businesses is performing well in 2006 versus a year ago.

Our restage strategy for the Revlon color cosmetics business has significantly strengthened important franchises within the Revlon portfolio. In 2006, the brand is cycling against two such restage events that occurred in 2005 -- the very big and successful relaunch of Age Defying, as well as Super Lustrous, last year -- versus just one relaunch to date this year.

As you know, we relaunched the ColorStay face makeup franchise early this year. That is our most significant franchise underneath the Revlon brand. And results to date have been very strong, with the franchise growing consumption in the quarter by more than 50% as our marketing activities take hold.

We are relaunching the ColorStay lip franchise in the second half of this year. We're now moving that product into the marketplace. And we expect trends for this part of the ColorStay franchise to also improve as a result.

As we enter 2007, we will have restaged several very large, important Revlon franchises, which by definition does take time, and we believe this provides us a solid platform for the Revlon brand going forward. Overall, next year, we plan to capitalize on this strengthened Revlon brand platform with a significant marketplace focus behind our most important brand.

Our Almay business, which generated double-digit consumption growth last year, is growing again this year, albeit not as much as we had planned. We are confident that our restage strategy -- and this is reinforced by our retailers -- which leverages the brand leadership in healthy beauty at mass provides a strong platform for us as we move forward.

So we have made progress on our important color cosmetics business, and we are continuing to aggressively grow our beauty care business, including, again, beauty tools, hair color and antiperspirants and deodorants. Our international business also continues to make progress. While our progress in '06 overall is not what we had expected, we believe we are taking the right actions for the long term, and we expect to be back on track financially in 2007 and beyond.

For 2006, you will recall that we are expecting adjusted EBITDA for the year to be approximately even with or somewhat below the 167 million we generated in 2005. This reflects the previously announced negative full-year impact of approximately $60 million from Vital Radiance, as well as the previously announced $10 million restructuring charge taken earlier in the year.

For 2007, without providing specific guidance, we are planning for and have confidence in achieving strong financial results for the year. We expect 2007 to benefit from, number one, the revenue-generating actions we are planning in 2007 to leverage our important Revlon brand across our categories; secondly, the substantially reduced operating loss we expect from Vital Radiance next year; and third, aggressive cost reduction actions we are taking to enhance our profit margins.

Let me just take a moment to discuss the margin opportunity that we are focused on in our business. As you know, we have very specific initiatives underway in these areas, including how we purchase -- we call that strategic sourcing; packaging rationalization; promotional redesign; product life cycle management, which is designed to improve the life of our products, which minimizes returns over time; and we are also focused on our international supply chain, just to name a few initiatives.

These initiatives and others are focused on reducing our cost of goods sold -- and you see the progress that we've made there over the last several years -- product returns, as well as lowering our selling, general and administrative expenses. We have made progress to date in each of these areas. However, we have increased our marketing spending to reinforce and build our brands and drive top-line growth, so the results are not evident to you always. As we move forward, we have every confidence we can continue to make progress and that this progress will translate into significant margin growth over time.

So while we still have much work to do, we are making progress in many areas. As I indicated earlier, we expect 2007 to benefit from the top-line actions we are planning to take; the substantially improved financial performance from Vital Radiance, given the brand's optimized go-to-market strategy and reduced retail footprint; and the cost reduction actions we are aggressively pursuing to improve our margins.

We also believe we are taking the right actions to capitalize on opportunities to build the brands, reduce our cost structure and create long-term sustainable value.

And finally, it is important to note that we recently successfully consummated a $100 million term loan add-on to our bank credit facility. This provides us with additional financial resources and flexibility to execute our business plan.

With that, I'll now turn it over to David Kennedy, who will take you through our performance for the quarter.

Thanks, Jack. And I will start with net sales. Net sales were up approximately 1%, reflecting an approximate 10% increase in gross sales, almost entirely offset by higher returns and allowances, which included a provision amounting to $17 million related to anticipated Vital Radiance space reductions and expected modifications to the brand offering in 2007 in connection with new products. Also impacting the comparison were higher allowances and discounts, primarily related to the Almay and Vital Radiance initiatives.

In the U.S., net sales of $180 million were down slightly compared to the year-ago quarter, reflecting double-digit growth in gross sales, offset by the Vital Radiance returns and allowances provision and higher allowances and discounts. As Maria indicated, the gross sales performance was primarily driven by double-digit growth in color cosmetics, beauty tools and hair color, and more modest growth from antiperspirants and deodorants.

For international, which now includes Canada, as Maria indicated, net sales for the quarter advanced approximately 3% to $141 million, largely due to growth in Latin America and favorable foreign currency translation. Excluding the favorable impact of foreign currency translation, international net sales advanced 2% in the quarter.

Turning now to gross profit, as a percentage of net sales, gross profit declined approximately 5 margin points in the second quarter to approximately 57% versus 62% in the second quarter last year. This performance largely reflected the impact of the returns and allowances provisions for Vital Radiance we discussed previously, higher allowances and discounts principally related to the launch of Vital Radiance and the restage of Almay, and a provision for estimated excess inventory largely related to Almay and, to a lesser extent, Vital Radiance. Excluding the $17 million Vital Radiance provision and the estimated excess inventory provision, gross profit as a percentage of net sales was essentially even with the second quarter of 2005.

Turning to SG&A expense, as we expected, SG&A increased significantly in the quarter due to higher advertising and other brand support amounting to approximately $35 million, and higher display and stock option amortization expense. These factors were offset in part by lower compensation and other general and administrative expenses.

In the quarter, we generated an operating loss of $46 million versus essentially breakeven operating results in the second quarter last year. Adjusted EBITDA in the quarter was a loss of 20 million versus adjusted EBITDA of $24 million in the second quarter last year.

This performance included the negative impact of approximate $40 million in the quarter for Vital Radiance, as well as significantly higher brand support in the U.S. behind the balance of the portfolio, most notably Almay, and the aforementioned provision for estimated excess inventory. Partially offsetting these factor were higher gross sales and lower compensation and other general and administrative expenses.

Net loss in the second quarter was $87 million or $0.21 per diluted share compared with a net loss of $36 million or $0.10 per diluted share in the second quarter of 2005. The additional shares issued in March 2006 equity rights offering impacted the diluted per-share comparison in both the quarter and six-month period.

Turning now to cash flow, cash flow used for operating activities was $104 million in the quarter versus cash flow used for operating activities of $39 million in the second quarter of 2005. Primarily driving the increased cash usage in the current quarter versus the year-ago quarter was the larger net loss and higher permanent display purchases.

Let me take a moment to discuss inventories. At the end of the quarter, our inventory position was $230 million versus $221 million at year end. This increased inventory level largely reflected our build associate with launching Vital Radiance and restaging Almay and the lower-than-expected sales of these two initiatives that we have experienced.

In the quarter, we recorded a provision for estimated excess inventory primarily related to Almay and, to a lesser extent, Vital Radiance. Let me assure you that we are focused on actions to control inventory levels to projected demand, and accordingly, our expectation continues to be that we will reduce our inventory to more normalized levels in relation to sales during the second half of the year.

Capital expenditures in the quarter were $6.5 million compared with capital spending in the second quarter last year of $6.9 million. Permanent display spending in the quarter was $20.6 million versus $11 million in the second quarter of 2005. For the year, we expect permanent display spending to be approximately 105 to $110 million versus the 95 million we had been expecting. This increase versus expectation was primarily due to changes in the timing of delivery requirements among several of our key customers for merchandising related to new product launches in 2007.

Cash interest paid in the quarter was $40.2 million. The composition of our bank borrowings outstanding at June 30, 2006, was the term loan facility of $700 million; multicurrency facility, $105 million; letters of credit, $14 million.

And as we reported last week, we successfully consummated a $100 million add-on to our bank credit agreement which increased our term loan facility from 700 million to 800 million. The net proceeds of the term loan add-on were used to repay amounts outstanding under the multicurrency facility without any reduction in the commitment under that facility.

And at the end of the quarter, we had no borrowings under the McAndrews and Forbes line of credit, which, as you will recall, remains in effect until the consummation of our planned $75 million equity offering in late 2006 our early 2007. Our unutilized borrowing capacity and unrestricted cash at July 31, 2006, totaled approximately $212 million, including $121 million under the multicurrency facility, $87 million under the McAndrews and Forbes line of credit, and $4 million of unrestricted cash.

And with that, I will hand it back to Jack.

Thanks, David. I'd like to leave you with just a couple of thoughts before we turn to questions and answers. We are taking what we believe to be the right actions to drive long-term sustainable growth and value creation. And while 2006 will come in below what we had been expecting earlier in the year, we do believe and have confidence that we are very well-positioned for 2007 and beyond.

So with that, we are happy to open it up for your questions.

(OPERATOR INSTRUCTIONS). Bill Chappell, SunTrust.

I guess a few questions on the returns and outlook for the back half of this year. Can, first, you remind us what the returns impact was in 3Q of last year?

I believe, and we will check the numbers, about $37 million in the third quarter verily related to, and I think all of it relates to Almay retail space.

And then it sounds like with some of the plans you have for the Revlon brand next year, you are not expecting the same type of initiatives that you did for Almay in terms of taking returns and revamping the whole wall?

The answer is you are correct, Bill. The Almay restage was a significant relaunch of the brand, where we took back virtually all the product in order to create the simple shopping experience that is now out there in the marketplace. And there is no -- what we are focused on next year is we've got major activities behind the Revlon brand. But it is not a restage of the brand in that sense that would involve abnormal return requirements.

Got it. So I guess if I'm looking towards the new initiatives for the Revlon brand, will I see that in fourth quarter of this year in terms of shipping new products prior to the reset, or is that more throughout 2007?

Well, the normal pattern there is that depending on the timing of retail resets and when they are going to be in the marketplace with our new products, some of that, as you know, comes into the fourth quarter in order to get either shipped directly to store or into a retailer's warehouse. And then if the resets are later in the first quarter, some of that pipeline gets shipped in 2007. And then as consumption occurs, obviously, then retailers will replenish their stocks during the course of the year. And that is the normal pattern.

And then maybe for Stephanie, can you maybe give us a little more of an update on what you've done over the past couple months on Vital Radiance and where it is working or why it's not working in some places, and how you have tweaked kind of the advertising or marketing?

We've monitored the performance of Vital Radiance and been in conversations with our retailers about what is working and what isn't working. As I think we have communicated, the footprint has been adjusted and reduced in several of our large format retailers. In those retailers, we were not meeting their expectations or ours in terms of the flow-through in those stores.

And as we have also communicated, the timeline for which to evaluate that performance was fairly short in the marketplace. But at the end of the day, the right decision was for us to create a reduced footprint in those large format retailers from which to build going forward.

So we are in the process. As you know, this is line review season with our retailers, and we're in the process of optimizing our in-store sets and sharing our marketing plans for 2007.

In the formats where Vital has performed better faster, that is primarily in the drug and the food channels in key select accounts, and as we have mentioned, in our key retailers, we have achieved more like a 3 share on the brand. And in the very important face category, which is the largest color cosmetics category, we have achieved over a 4 share.

So as we look at the performance in the marketplace, space and our prepared [step], which is the incremental add to the category at mass, with primers and other key prepared products, that is where we are seeing the strength in the brand. And it is around those products and those key retailers that we will be driving the brands going forward.

In terms of the marketing tools, with a new brand like this, obviously awareness is a key driver. And what we have found is both the TV and the print are good drivers. The print is particularly a good driver on this brand. We have been advertising in very targeted publications for 50-plus and seeing a real drive of the business.

So as we go forward into the second half and particularly into 2007, we will be driving against those marketing levers that are best for the business in the footprints that we have, which will be a revised mix from what we've had through the first half of 2006.

The other key driver is the beauty center. We have optimized how we provide those services so that we get absolutely the best service at the lowest possible cost. We continue to get thousands of calls a day from interested shoppers who want to know more about the brand and receive a sample. We have distributed almost 1 million samples on the brand to date direct to consumer.

So we continue to seed this brand. We have research around the performance of the beauty center. And over half of the women who call buy, and they buy well above the category average in terms of product. So for us, the two drivers of awareness building with the key piece being media, and the beauty center in terms of education and assisted sell in mass, we will continue to support going into 2007.

The third critical piece is we build a database with information on how to reach these women. Our retailers also have terrific databases and systems that we can partner with to target her directly. And we are already doing those kinds of activities and will be doing more of that as we go into '07.

And just final two and I'll turn it over. I guess first, on Vital Radiance, has the missteps or whatever you want to call it for the first six months -- has that hurt your retail relationships for going into next year and trying to launch new products?

And then also on the overall category and with Max Factor gone and your market share staying the same, but the category growing, where are the pockets of strength? Is it all Cover Girl, or are there smaller brands picking up share?

In terms of the first question, I think as part of our progress over the last couple of years, we have made significant progress strengthening our retailer relationships, which in part, with our expectations for the brand, led to their expectations for the brand, which is why we had the launch planned that we did.

As we have worked through the disappointing performance in several of our key retailers with our partners, they haven't been the easiest conversations, nor would you expect them to be. We have as strong relationships with our retailers and probably more in-depth relationships at this point than we did before.

In launching new initiatives in the marketplace, it goes without saying we compete in very competitive categories. So during line review and reviewing our marketing plans for the following year, it is very competitive out there. But we are having very strong conversations around our initiatives for 2007 and actually have been having those conversations probably since January or February of this year. And that will continue until January 1, 2007. And we are in the marketplace.

So retailers are appropriately focused and questioning and applying pressure to get the best out of their suppliers to drive the business in their stores. They are in a very competitive environment as well. So we feel like those relationships are strong and continue to be strong, and are a platform for us to continue to drive growth in their stores. We are bringing innovation into the marketplace. And for that, the retailers continue to want us to bring innovation into the marketplace.

And who might be gaining share?

In looking at the performance in the marketplace based on the Nielsen, it is interesting -- of the majors, there's not a lot of change in share. You look at Cover Girl, Maybelline, L'Oreal, it's a 0.1 here and a 0.1 there. It's not a big change. The big winners in the marketplace year to date, based on a terrific innovation in the marketplace, are Neutrogena and Physicians Formula. They hit on a minerals product in the face category that, given the size of their business, has been a real driver for them in the marketplace. So it is smaller players, Bill.

Bob Labick, CJS Securities.

First question -- first of all, thanks for breaking out the impact of Vital. That helps us understand what's going on a little better. If you take out that $40 million impact this quarter, EBITDA was still down year over year. It sounds like most likely the biggest driver there is the inventory provision for Almay.

First, is that likely the biggest driver there? And regardless, could you just give us a little more color behind that inventory provision, what caused it, why now, and what should we look for going forward? How does this impact you going forward?

Let me start and then David will finish. Just in terms of the overall performance in the quarter, the other factor there, Bob, that you did not mention would have been just the investment behind the Almay relaunch. So year over year, you've got the returns provision on Vital Radiance. You've also got the investment behind Almay, as we have now restaged the brand. And then the inventory obsolescence is also a factor there. And David can certainly speak to that.

On the inventory obsolescence, as I'd indicated in the comments that I made earlier, we do have higher inventory levels. As we do every month and every quarter, we go through and look at what is likely to become obsolete excess inventory. So based on our judgments and estimates about inventory on hand, primarily finished goods, we recorded provisions primarily related to Almay, but also related to Vital. And those provisions in the quarter amounted to approximately $10 million.

That should basically clear you up? You think what you have is good now and we shouldn't see additional charges going forward?

As you know, those are estimates based on projected demand and the level of inventories that we've got in place now. We feel highly confident that we are focused on managing our production to demand. But those estimates could change as we go forward. But based on everything we know at this time, we are certainly adequately provided.

Next question -- if you could help me understand maybe the timing of share? Obviously you had significant shelf space gains this year, but share ticked down in the quarter. What is the -- just to set expectations properly for myself and other people out there, what should we expect in terms of share gains? Should there be share gains related to more shelf space? It seems logical. But what am I missing there? And what's the timing that this would flow through and that we would see that in?

Bob, in terms of share, clearly, share is something that we track, and we will continue to work to drive category growth, which results in share increases over time.

In terms of shelf space gains, it is interesting. Having a presence at retail in order to fully showcase your products is our objective and our retailers' objective in order to drive their businesses. It is not a one-to-one relationship. And I think, particularly in the beginning, it takes time to see the results of that additional shelf space in your share position. And we have seen that as other manufacturers have gone up and down in space over time. It plans to not be an instant reaction in the marketplace.

So we fully expect to build the positions of new brands as we go forward relative to the space that they have earned in the marketplace, because we are acutely aware and fully supportive of the productivity required for every foot of space you do gain at retail. It is very straight math. It varies by retailer, but we are acutely aware of wanting to meet and exceed those objectives in terms of productivity. That does take some time to build in the marketplace

The other factor, Bob, year to date that we mentioned in the last call is that the competitive pressure in the marketplace in color cosmetics year to date is up significantly from what we have seen in the past. So that is another factor that impacts in terms of what gets shown in share as your initial (technical difficulty) into the marketplace.

Great. We look forward to seeing you at our conference.

Filippe Goossens, Credit Suisse.

A couple of questions here for both Jack and David, if I may. Jack, my first question, as you probably heard on Monday when Avon reported their results, somewhat of an acceleration in the slowdown in North America largely blamed on higher fuel prices. Can you just share with us, perhaps, what your impression is in terms of how higher fuel prices are perhaps impacting also your business?

I believe their sales were actually reported to be even during the period. Having said that, there is some linkage there between consumers' buying power and the growth in the category. I don't think it's a major factor. In years past, as fuel prices have increased, certain large format retailers have talked about how higher gasoline prices as they approached $3 a gallon impacted on people's shopping patterns.

Certainly at lower income levels, an increase in fuel prices does have a disproportionate effect on consumer spending power. And that does -- you could argue does benefit the lower end of the market in terms of lower price point products. But we haven't seen a significant effect from that factor.

Then my second question -- I know you are up against some restagings of core Revlon products this year, hence the decline in market share that you have reported for the first half of the year for the core Revlon franchise. But to what extent do you think there might also be a little bit of an impact of perhaps you losing share to Vital Radiance? Is there some kind of a cannibalization here at work? Or we should not overemphasize that?

I wouldn't overemphasize that. I think it's interesting to note that in the face category, for example, if you were to look at reported market share data, we are actually showing growth for the Revlon franchise in terms of consumption growth in the face category. That's actually the category that Stephanie pointed out, where Vital Radiance is proving to be strongest.

So there is obviously -- any time you introduce a new brand, there is some factor of cannibalization from your own products and others in the marketplace. And we actually believe we are generating incremental growth for the category. This year, the category is up close to 4%, which is the strongest performance in several years. So I wouldn't overplay the cannibalization factor there.

And if you look at our key categories, the area where Revlon has probably been softest year to date, and we are not significantly off where we would have planned to be in the year for the Revlon brand -- part of that is driven just by the overall competitive level in the marketplace. Part of it is also driven, as we have mentioned, that we have a major second-half launch in the Revlon brand, which we do not -- which we haven't done in the past. So our flow of innovation is more spread out through the year rather than all first half based. So that's another consideration in terms of as you look at the share points.

But in terms of where the competitive wars are being waged, in lip, and our second-half launch is a lip launch, which we fully expect to positively impact the trajectory of Revlon's business, as well as the category, there's been a major launch by Maybelline in the long-wearing lip segment, which is the first value entry into the dual-ended long-wearing lip segment.

That has probably impacted our Revlon lip business more than anything else in the marketplace. And that is a Maybelline launch. So we look at this category by category, competititor by competitor. And there are probably four or five key launches that are having an impact on our Revlon business from the other majors.

Then my final question for Jack. Jack, you mentioned in your prepared comments that you're looking at additional ways to enhance the capital structure. I read that to mean above and beyond the 75 million secondary offering.

And if you then also kind of take in consideration your earlier comments, as well as Stephanie's comments, in terms of a more intense competitive environment -- we hear people talk about a potential slowdown in the economy here. It is clear that you need to move quickly to return to positive cash flow and further reduce the debt. And I am sure you fully concur with that.

Given that as a context, the need to really further improve that balance sheet and get more towards positive cash flow to enhance your financial means to compete, to what an extent do you believe Mr. Perelman would be open to consider selling some non-core assets or perhaps even to bring in a strategic partner?

Well, I think all those questions are interrelated. Let me start with the actions that we're taking to drive the business. As I stated both in the press release and in my comments, first of all, we do believe that with the actions that we are taking as we look into '07, we've got a significant opportunity to energize the Revlon brand across categories. That is a major focus for us in 2007. And as Stephanie indicated, we are in excellent dialogue with our retailers about those initiatives.

Secondly, we also have a significant cost focus underway, and I would say very aggressive. We are looking at every opportunity and alternative for strengthening our margin structure, the way we purchased goods and materials, our cost of goods, our administrative costs -- we have a very strong focus underway. And I am very confident that we will identify a number of steps to really accelerate our progress in this area in short order.

So the combination of the revenue expectation, along with the cost focus and actions that we are taking, we believe will have a very positive impact on our cash flow as we go forward. And it is that positive impact on cash flow which I think does increase our alternatives relating to strengthening the balance sheet. And so we are taking -- putting one step in front of the other, and we are moving very quickly and aggressively.

As it relates to selling off non-core assets, our portfolio at this stage I think is pretty tight. And I think it is probably safer to say we're focusing on our existing portfolio -- how do we maximize that? How do we improve our cost structure around that? -- aiming towards improving and strengthening our cash flow. And I think that is our core focus as opposed to selling off any particular asset.

And I think it as it relates to Mr. Perelman, I think it is the focus of the Company to strengthen our balance sheet over time. We recognize the importance of that. But we are focused on doing that in a way that leverages the existing assets of the Company in order to strengthen our financing alternatives and maximizing long-term value as opposed to any other alternative.

And if I just may conclude with two quick questions for David -- David, with the new $100 million term loan now, if my math is correct, about 60% of your capital structure is now exposed to floating interest rates. Is there anything that you can do to shield yourselves at least somewhat from potential additional rises in the overall interest rate environment?

You are correct. We are about 60/40 now. And there are things that we could do. We are in the process of evaluating some of those. At the same time, 60/40 is not necessarily a bad place to be. So if we stayed 60/40, we think that is all right. At the same time, we are always evaluating what we could do if we decided to become more fixed. We've also got to put that in the context of what we do in our overall capital structure and our debt structure as well.

And then my final question, David, the 270 million in availability that you gave us under the three facilities -- that is after taking consideration the $100 million increase to term loan, correct?

That is correct. That was as of July 31. So we tried to give you the most -- we did give you the most current information that we had.

Lori Scherwin, Goldman Sachs.

Can you talk a little bit more about the focus on the Revlon brand next year? Jack, I think your exact comments were that you were going to capitalize on the Revlon brand platform with a market focus. What exactly does that mean? Is it just going to be new launched of new products? Or should we also be looking for changes in packaging or advertising, marketing, etc.?

Stephanie, do you want to take that one?

Sure. Lori, in terms of the focus on the Revlon brand, we get the best bang for the buck in the marketplace by looking at every piece of the marketing levers. If you think about what we did with Age Defying, we changed the formula, we changed the packaging, we changed the advertising, we changed the in-store. We come at all of this with a comprehensive marketing approach.

And as we look at strengthening the Revlon brand in 2007, you should expect to see, across all the categories that the Revlon brand competes, the full strength of the brand brought to life as appropriate in the imagery, in the packaging, in the formulations and in the overall consumer experience.

So as you are thinking about this, is this sort of more extreme than the restages? Because I think by the end of this year, you will have restaged a large majority of the larger brand franchises within the Revlon brand.

I would think about it the way that Jack said, which is we have created a very stable, strong foundation for the Revlon brand with all of the restages that we have done explicitly over the last couple of years. We are now in a place to bring news and innovation and excitement to the brand across all the categories -- color cosmetics, beauty tools and hair color -- in 2007. So you are correct -- it is not a relaunch.

And when you think about the allocation of marketing spending next year, is it going to be more concentrated on the Revlon brand than this year, where it was spread across more categories? And just how are you thinking about maximizing that next year?

As we think about our spend, we will continue to drive these brands aggressively in the marketplace. And we have four important brands that we drive. The most important and the most comprehensive in categories is Revlon. So the spend will be appropriate to that. We will also continue to drive against Almay. We will continue to support and grow the business on Vital Radiance as well as on Mitchum.

And just turning to Almay for a minute, why do you think this will relaunch -- isn't as successful or as strong as maybe the Intense i rollout was and may have suggested initially? Is there something different about the other categories or something you may need to modify going forward?

Well, I think the comparison of a full relaunch of a brand to the launch of a specific product on a brand is actually two very different, distinct undertakings. The success of Intense i in 2005 was terrific. It was 12 SKUs. It drove the business very hard. What it is did was provide a platform around simplicity that the consumer and our retailers had a lot of energy for and wanted in their aisle.

It also disguised a lot of franchises on the Almay brand that were not performing well. Over time, Almay had become a very fragmented, multi-franchise business that during the years where the Company was in steep decline, Almay was in even steeper decline.

So Intense i was a wonderful innovation, but we took the opportunity to relaunch the rest of the brand into a platform that was much stronger. Unfortunately, in this business, you can't count on an Intense i every year. As you look at the manufacturers, everybody gets one every couple of years. But it's not -- lightning in a bottle doesn't strike every year.

So we want to frame the business around a solid concept that you can innovate around and drive around and not have to hope for something that changes the category the way that Intense i does. We certainly work toward creating that.

As you do a relaunch, as Jack said, we took back almost every SKU on the brand. We also reduced the number of SKUs as we went to a set that is more carded, easier to merchandise, less expensive in terms of merchandising investment. So there were benefits to the relaunch of Almay that were not only in top line. It is throughout the P&L for us and our retailers. And you won't see all of the benefit just by tracking the consumption.

But I guess as you think about going into next year, because it sounds like the relaunch hasn't been as strong as you may have hoped, are there the things you need to modify?

We are always looking at our plans and modifying our plans. Again, we are in the heart of line review with our retailers and looking at our marketing launch. We are very confident that the platform of healthy beauty with Almay as the lead horse all around hypoallergenic is exactly the right positioning for the brand. Our advertising tests very well and drives the business. And we have terrific innovation in the pipeline being launched in the first quarter to reinforce the position that we've built.

And you're right, Lori, it hasn't built as quickly as we would have liked. But we are driving the business, growing the business. And we have a differentiated position at retail that our retailers are pleased with.

And just to clarify, lastly, on the inventory obsolescence provision related to Almay, is that for old product pre-restage? Or are there new products in the restage that are included in that?

That is for primarily new product as part of the restage. And it has to do with the out-of-balance in inventory between what we had built against what we had anticipated that we would sell against our actual projected demand.

But, I guess, why would that be an obsolescence, then, if it was new --

Because we would expect it to become obsolete because of shelf life, just based on the levels of inventory that we have versus the projected demand.

Can I just ask if that is in color or in skincare or somewhere else than the Almay portfolio?

To tell you the truth, I don't know the exact SKUs. But I don't believe it is necessarily focused in any one area.

I would want to just add one piece of information to what we just talked about, to provide some context, particularly on Almay. Last year, Almay's consumption was up 12% versus year ago. And this year, year to date, it is up 3%. So while 3% isn't as much growth as we would have liked to have seen in the marketplace, we are getting growth on very strong growth last year, which I think it's important to have that context.

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.

Let me just thank you for participating today. We are very much focused on tracking towards a strong 2007. And we will look very much forward to keeping you posted on all the actions that are going to get us there. So thank you for your participation, and we will look forward to talking to you soon.

Thank you. This concludes today's conference. You may disconnect at this time.