Revlon Inc (REV) 2006 Q3 法說會逐字稿

Good morning, Ladies and gentlemen. And welcome to the Revlon third quarter 2006 earnings conference call. At the request of Revlon today's conference call is being recorded. [OPERATOR INTRUCTIONS] I would now like to turn the call over to Miss Maria Sceppaguercio, Senior Vice President, Investor Relations and Corporate Communications. Ma'am, you may begin.

Thank you, Lisa, and good morning, everyone. Earlier this morning, we released the results of the third quarter 2006. If you haven't received a copy, you can get one on our website at www.RevlonInc..com. Here with me today to discuss the quarter is Revlon's President and CEO, David Kennedy and our Senior Vice President Corporate Controller and Chief Accounting Officer, Alan Ennis.

As you know on September 25th, we made several significant announcements that we believe will meaningfully improve our financial performance beginning in 2007. That said, we also indicated that these actions, namely a broad organizational streamlining, the discontinuation of Vital Radiance and the leadership change at the Company will result in substantial charges that would negatively impact our financial performance this year. Importantly we also indicated that we believe these actions will accelerate our path to becoming net income and cash flow positive which, remains a very significant area of focus for the company. On the capital structure front, during the quarter, we consummated the previously-announced amendment to our credit agreement. These amendments enable us to exclude from our EBITDA covenant calculations charges we incurred in relations to restructuring the discontinuation of Vital Radiance and executive severance cost. The amendments also provided for additional flexibility in our senior secured debt-to-EBITDA covenant and the add-on of $100 million to our term loan.

You will also recall that we're planning to conduct a $75 million equity issuance by the end of the first quarter next year. Turning to market share, you will recall that our discussion of market share and retail consumption is of the U.S.mass market, according to ACNielsen, which excludes Wal-Mart and regional mass volume retailers. It's data is an aggregate of the drug channel, Target, K Mart and food and combo stores and represents approximately 70% of the company's U.S. mass market dollar volume.

For the quarter, starting with color cosmetics, the U.S. color cosmetic category grew 5.7% versus a year ago in the quarter. By brand, the Revlon brand grew consumption 1% in the quarter, resulting in a share of 14.5%, compared with 15.3% in the year-ago period. The Almay brand grew consumption, 5.4% in the quarter, resulting in the brand holding share at 6.30%. Vital Radiance contributed share of 1.3% in the quarter. In our other key categories, our consumption of women's hair color was up 13% in the quarter in a category that advanced 1%. As a result, we grew our share a full point to 9.4%.

In beauty tools, our consumption was up 7% in a category that advanced 2% resulting in a 1.3 point share gain to 26.6%. And antiperspirants and deodorants, we maintained our share position at 6.1% in the quarter. Let me quickly provide some key data we believe will be helpful to you in understanding the drivers of our performance in the quarter. Net sales in the quarter advanced 11%. Significantly driving the performance was the impact of the returns and allowances provision we took in 2005 quarter to completely restage Almay. Which reduced our net sales in the third quarter last year by about $32 million. On the other hand, the negative impact of Vital Radiance reduced our net sales in the 2006 quarter by about $15 million.

So putting these two factors aside, net sales were up about 4% in the quarter reflecting strength from internationals. The total impact of Vital Radiance on our operating profitability in the quarter was approximately $49 million and the impact on adjusted EBITDA was approximately $44 million. On a year-to-date basis, Vital Radiance reduced our operating profitability by approximately $92 million and our adjusted EBITDA by some $84 million. For the full-year, we expect the total impact of Vital Radiance on operating profitability to be approximately $100 million and the impact on adjusted EBITDA is expected to be approximately $90 million. The company's organizational streamlining announced in September resulted in charges of $14 million in the quarter for severance and related expenses. These charges impacted both operating income and adjusted EBITDA and will result in cash payments over the 2006 to 2008 period.

On a year-to-date basis, the company's first quarter 2006 organizational realignment and the current quarter streamlining resulted in combined restructuring and related charges totaling some $23 million. For the year, we expect to incur a total of approximately $30 million in restructuring and related charges related to these programs. And an additional $8 million in 2007. In addition to the severance related to the 2006 restructuring program, the third quarter was also impacted by approximately $9 million in executive severance related to the change in leadership at the company. The impact on adjusted EBITDA was approximately $6 million. So, taking all of these factors into account, adjusted EBITDA in the quarter was a loss of $25 million. Alan will walk you through more of the details of the numbers a little later. You will recall adjusted EBITDA is a non-GAAP measure that is defined and reconciled to net loss to most directly comparable GAAP measures in the footnotes and attachments to our press release issued this morning.

Before I turn the call over to David, I would like to remind you 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 as set forth in the company's filings with the SEC, including the company's 2005 annual report on form 10-K, our quarterly reports on form 10-Q during 2006 and other SEC files and furnished documents during 2006, including our form 8-Ks in the press release issued today. And finally as a reminder, our discussion this morning shouldn't be copied or recorded. With that, I will hand it over to David.

Thank you, Maria and good morning everyone. As you know, this past quarter was a very significant one for Revlon. We initiated an organizational streamlining and we're transitioning to a flatter, leaner structure that enhances collaboration, communication and decision making while improving empowerment and accountability. Clearly making these changes is always difficult but the Revlon organization is extremely resilient and I believe there is a growing sense of optimism and excitement on two fronts.

First, via capable people are now playing broader roles and having a greater impact on the direction of the business than they did before and as a result, I believe that this is leading to a renewed sense of energy and passion to the business, which is driving more critical and innovative thinking regarding the go-forward plan and the future of the company. Another significant development during the quarter, as you know, was our decision to discontinue Vital Radiance due to the brand's under performance and the likelihood that Vital Radiance could lose additional retail space, including potentially losing some space at some of the brand's best accounts. As a result of this reduced retail footprint going into 2007, we determined that the resources and focus required to continue to support and grow Vital Radiance coupled with the deteriorating financial profile for the brand made discontinuing the brand the right strategic and economic choice for the company.

So as we look to the future, we're focused very aggressively on leveraging the potential of our established brand, particularly Revlon and Almay across the categories in which we compete. Importantly, to completely restate, the Almay brand represents a terrific platform for continued growth. You will recall that in 2005, we grew Almay's consumption by 12% and so far this year, it's up about 4%. This is not all the growth we were hoping for for this year, but we're pleased with Almay's leading physician and healthy beauty color cosmetics and we fully intend to leverage it. The Revlon brand is by far our largest and it's truly a global brand with a presence in virtually all developed markets around the world. In terms of scale, the Revlon brand is a billion-dollar brand and, generally, it enjoys very high consumer awareness. Our strategy moving forward will tap into the strong underlying fundamentals. Importantly, we have successfully restaged several large and important Revlon franchises over the past couple of years, so we believe we have a solid platform from which to build value going forward.

You will recall, for example, in 2005, we restaged our age-defying makeup franchise and grew its consumption that year by 28%. So far in 2006, we're holding on to much of that growth, moving forward, our strategy to support important Revlon brand franchises will continue to be an important element of our plan and we will focus on maintaining the momentum of our initiatives for more than the first year. Another example of this strategy was the 2005 restage of our large and important Super Lustrous lipstick franchise. Behind our restage efforts and following several years of decline, we grew consumption of Super Lustrous by 12%. So far this year, we are holding on to all that growth.

More recently, this year we restaged our ColorStay face makeup business and results today have been very strong. With consumption for the franchise up 50% year-to-date. In addition, we broadened our ColorStay lip business with the second half launch of ColorStay soft and smooth lip color. As a result, our total ColorStay lip franchise was up 36% in the third quarter. So our efforts to strengthen key Revlon brand franchises are clearly working. However, this growth has not been sufficient to offset the larger-than-expected decline of some of our other Revlon brand franchises. Going forward, I can assure you that the Revlon brand will be the primary focus to drive growth and value-creation. Turning to other key Revlon branded categories, namely hair color and Beauty Tools, our results have been quite strong with share continuing to grow nicely this year on top of strong share growth in 2004 and 2005. And our international business continues to be an important contributor and we believe strongly that it will continue to be so in the future.

So in terms of the numbers for the quarter, Alan will take you through the details. Let me just say that our results for the quarter did come in somewhat better than we had been expecting, although our outlook for the year remains unchanged. Specifically on the outlook, we continue to expect net sales for the full-year 2006 to be approximately $1.34 billion and adjusted EBITDA for the full year to be in the range of approximately 75 to $85 million. As we indicated in our press release this morning, restructuring action, Vital Radiance and executive severance did negatively impact our results in the quarter in nine months and are expected to reduce our adjusted EBITDA for the year by approximately $125 million. Looking out for 2007, our outlook has not changed and we continue to expect adjusted EBITDA for the year to be approximately $210 million. Our confidence in this level of performance is based on the business plan we are pursuing for the year as well as the benefits of the restructuring action we're taking in the elimination of losses for Vital Radiance.

Beyond 2007, we continue to believe we have a good deal of upside given the significant opportunities we discussed with you in the past of margins and our plans to really leverage the strength of our existing brands to drive profitable top-line growth. Moving forward, our guiding principles will be first to aggressively pursue innovations and marketing opportunities to generate excitement in our categories in a way that leverages the power of our established brands to drive both the top- and bottom-line. Second, we will also aggressively pursue the significant margin improvement opportunity we see in the business and, importantly, we will focus on ensuring those savings flow through to the bottom line. And finally, we will drive the efficient utilization of our cash mature, the revenue growth regenerate and the margin improvements we achieve translate into improved cash flow. So with that, let me hand it over to Alan.

Thanks, David, and good morning, everyone. I would like to take you through the financial results for the quarter. Clearly as already noted by David and Maria, there were a number of significant items in both the current quarter and in the comparable quarter last year that warrant discussion and clarification in order to better understand our underlying financial performance. I will clearly call out these items as I go through the results. In overall terms, the results for the quarter came in stronger than we'd anticipated when we last spoke with you on September 25th. This reflects lower costs and timing in relation to Vital Radiance, as well as timing between the third and fourth quarters in relation to overall brand support. It also reflects the stronger-than-anticipated performance from our international business in the quarter.

We expect our international business to deliver results in line with our previous expectations for the full-year with the fourth quarter being somewhat softer than previously anticipated. Consequently, given all of these factors, as David noted, we're maintaining our full-year adjusted EBITDA range of 75 to $85 million as previously communicated. So moving into the income statements, net sales were up approximately 11% to 306 million in the quarter, versus net sales of 275 million in the quarter last year. Net sales in the 2006 quarter were reduced by approximately 15 million due to Vital Radiance. Resulting from the fact that gross shipments in the quarter were more than offset by a provision for product returns that we booked in relation to the discontinuance of the brand. It's important to note that net sales in the 2005 third quarter were reduced by approximately $32 million due to returns provisions related to the complete restage of the Almay brand. Excluding both of these factors, net sales were up about 4% year-over-year driven primarily by our international business.

In the U.S., net sales advanced 13% to $160 million versus net sales of $142 million in the third quarter of 2005. Excluding the aforementioned returns provisions related to the Almay restage of 2005, and the negative impact of Vital Radiance in the 2006 quarter, U.S. sales were essentially even with prior year. In our international business, net sales for the quarter advanced 9% to $146 million with strength in each of the company's three geographic regions, excluding the impact of foreign currency translation. For the quarter, foreign currency translation added less than 1 percentage point to international growth. Turning to gross profits, as a percentage of net sales, gross profit declined approximately 6.2 margin points in the third quarter to 51.3% versus 57.5% in the third quarter of last year. This performance largely reflected the significant unfavorable impact in the quarter of Vital Radiance, partially offset by the impact of last year's gross profits from the Almay restage.

Turning to SG&A expenses, SG&A increased approximately $10 million in the quarter, reflecting significant spending for Vital Radiance and the aforementioned 9 million in executive severance charges related to the change in leadership at the company. Excluding these factors, SG&A for the quarter was down slightly due to lower general and administrative expenses, as a result of our restructuring savings and reductions and discretionary spending. As Maria noted, adjusted EBITDA in the quarter was a loss of approximately 25 million. Including the impacts of restructuring, Vital Radiance and executive severance that collectively reduced adjusted EBITDA by approximately $64 million in the quarter. Versus the year-ago adjusted EBITDA loss of $6 million, the performance in the current quarter reflected the aforementioned three items, as well as higher cost of sales, primarily related to increased provisions for estimated excess inventory.

Partially offsetting these unfavorable factors were improvements in the current quarter from favorable, general and administrative expenses, stemming from a structuring savings and reductions in discretionary spending, as well as higher sales and lower overall brand support excluding the spending behind Vital Radiance. Finally, as already noted, also impacting the year-over-year comparison you will recall the 2005 quarter was negatively impacted by approximately $32 million in provisions for returns related to the Almay restage. Net loss in the third quarter was 101 million or $0.24 per diluted share compared with the net loss of 65 million or $0.17 per diluted share in the third quarter of 2005.

In addition to the factors that impacted the adjusted EBITDA in the quarter, the net loss comparison also reflected approximately $6 million in higher net interest expense in the current quarter due to higher average debt and interest rates. Turning to cash flow, cash flow used for operating activity was $29 million in the quarter versus cash flow used for operating activities of 69 million in the third quarter of 2005. This performance largely reflected the significant use of working capital in the 2005 quarter related to Vital Radiance and the restage of Almay, partially offset by the increase in net loss in the current quarter. Capital expenditures in the quarter were approximately $4.2 million compared with capital spending in the third quarter last year of $6.4 million. For the year, we expect capital spending to be in the 20 to $25 million range. Permanent display spending in the quarter was $12.5 million versus $10.2 million in the third quarter of 2005. For the year, we now expect permanent display spending to be approximately $100 million. Cash interest paid in the quarter was $31.3 million. The composition of our bank borrowings as standing as of September 30, 2006, was our term loan facility of 800 million, our multi-currency facility of 51 million and letters of credit issued but undrawn of 14 million.

At the end of the quarter, it's important to note that we have no borrowings under the $87 million McAndrews and Forbes line of credit, which you will recall remains in affect until the consummation of our planned $75 million equity offering in late 2006 or in the first quarter of 2007. Our unutilized borrowing capacity and unrestricted cash on October 31st, 2006, totalled approximately 154 million, including 61 million under the multi-currency facility, 87 million under the aforementioned McAndrews and Forbes line of credit and 6 million of unrestricted cash. With that, I will hand it back to David.

Thanks, Alan. And before we take your questions, let me reiterate a couple of points. First, the importance of the organizational changes that are taking place at Revlon. Not only was the streamlining important and necessary from a cost standpoint, but it was also important in that it empowered very talented people to meaningfully participate in the decision-making and direction of the company. I believe this change is already beginning to have a positive impact on quality of dialogue and decision making at Revlon, and I expect that it will only improve with time. In addition, as you think about Revlon moving forward in the strategy, we will likely pursue, let me remind you how I think about it. First, our approach to innovation and growth will be centered around leveraging the power of our established brand. Second, we will aggressively pursue the significant margin improvement opportunity we see in the business and importantly we will ensure those savings flow to the bottom line. And third, we will drive the efficient utilization of our cash to enure the revenue growth that we generate and the margin improvements we achieve translate into improved cash flow. So with that let's open it up to your questions

Thank you. [OPERATOR INSTRUCTIONS] Thank you, our first question comes from Bill Chappell with SunTrust Robinson Humphrey.

Good morning.

Good morning, Bill.

First question, I guess, on the Revlon brand. Can you talk about - - you talked about a few areas where you're seeing good growth. Can you maybe talk about where you're not seeing the growth which is slowing the overall brand growth and what could be done maybe over the next six months to try to energize that?

First of all, Bill, we outlined several areas of growth behind the restage and relaunch strategy and we have talked about that in the past. And that strategy and those plans and what has been implemented has worked very effectively in the marketplace. At the same time, in the areas of the overall brands where we have not focussed, of course, we have not seen the growth, we have seen probably greater than anticipated declines in certain areas and in other parts of the franchise, we have seen somewhat declines that we had expected. As we go forward, clearly, we'll do a couple of things. One is we'll continue to support the restage and relaunch brands. We will continue to innovate with new products to layer on the restages and provide growth, profitable growth and at the same time, we'll be evaluating as always our portfolio strategy and determine where we want to focus, how much support we want to give to the individual product line and which product lines we think are not economically worthy of further support.

The example, is LipGlide, the product we launched about four years ago around the world that has done extremely well for us and we have had very good sales growth in the first year or two. We chose not to focus on that product in the last couple of years and, of course, we have had decline. So obviously as we go forward, we would be evaluating LipGlide as part of the portfolio and making decisions about what we need to do to further extend it or support it or whether that's economically feasible.

Okay I guess looking at it in a different way, looks like the category growth, 5.5 or 5.7% is faster than historical averages. Are there areas where Revlon and Almay - - they're missing right now that you need to step up to try to catch up with that category growth or is it just more timing of restages and relaunches.

Well in the Revlon brand, I believe it's more timing and probably focus. If you look back, perhaps, if we had focussed more on certain products that were in their second and third years, we might not be seeing those declines, so where, for example, we made the clear choice to focus on Vital Radiance and to a certain extent even on the relaunch of Almay and those are clear choices that we made and at the same time, perhaps looking back, they could have cost us some growth on Revlon.

Okay, and just final and maybe I missed it, but is there any reason why you're expecting greater softness in the fourth quarter than you thought a couple of months ago or is it just a high level of conservatism with what is going with Vital Radiance and the final returns there?

Well, with respect to Vital Radiance, I can address that. Is you the know when we made the announcements on the 25th of September, we had not at that time discussed the phaseout plans, if you will, the exit plans with our customers. So as we closed out the quarter, we were able to complete those discussions and those plans then caused us to change our estimates, which were favorable.

Also the accounting, we completed the evaluation of how we were going to account for this and that changed the timing of certain [Inaudible] So in terms of the vital both the exit plans resulted in slightly more favorable estimates as far as the costs were concerned and also the timing changed somewhat as we solidified the accounting. As far as the other elements that caused the favorability, one was just some timing in the U.S. on brand support, moving from third to fourth quarter, if you believe, and that just had to do with the marketing challenge or changes and third with respect to the international business where we had a very strong third quarter and as we solidified our forecast for the fourth quarter, we're anticipating it not being quite as favorable as we had thought back in September.

Okay. So that helps. Thanks so much.

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

Hello bob.

Good morning. I wanted to follow up a little bit on the Revlon discussion. It sounds like as you restage you are obviously getting good growth from those products but the remaining portfolio is climbing faster than expected. What are, I guess your retailers saying or consumers saying that is causing the decline from those other non-restage focussed categories and what is the solution to that other than spending, you know, more money or restitching more things. How else can you address that without impacting profitability?

Well, the key will be our portfolio strategy as we go forward, and as we have indicated our focus will be much more on the Revlon brand than it has been in the past in order to solve the problems that you indicate. So, in terms of the portfolio strategy, again, we will be layering on new products, innovative new products and we have a strong pipeline we believe going out all the way into '09 at present and, of course, we continue to work to develop and can solidify that pipeline as we go forward. So part of it is innovative new products which we have always had in this company. I think we have a history of innovation in this area and with increased focus on the Revlon brand. I think you will see even more innovation. That is certainly our intention and our plan.

Secondly, as you think about products where we restaged or innovative new products in their second or third year, we'll be looking and evaluating in terms of the portfolio what sort of support would make sense. Certainly we don't want to lose money supporting the new products or product in the second or third year, but it could make - - be good economic sense to extend the life cycle as we say on those products. So that will be another important element on the focus on the Revlon brand and then there are certain products which will decline naturally and we'll discontinue. That's been the history of the business. We will continue to do that. So again, it will be a matter of our portfolio plan going forward, focusing innovative new products, focusing more on the evaluation and support of products in the second and third year, if it makes sense to extend the lives and then making sure that we're focussed on products that are going to win for us, not focussed on products that are - - where it doesn't make sense economically to support them.

Great. That was very helpful.

By the way the same will apply for Almay.

Okay. That makes sense. Absolutely. In terms of guidance for next year, you put out 210 million EBITDA, which if you back that all the way, is essentially the same as this year. Obviously you have some cost savings, annualized savings from the restructuring, so. If you could give us a sense what head wins you're baking into that guidance and then conversely, if you were to outperform, what areas would you think would do better than, you know, potentially expected [inaudible] room for upside, if you were to outperform what, areas would it come from?

First of all, as we have called out the 2-10, we're at this point, we're highly confident and we're working on our '07 plans and some levels of details. As with any plan, there are pluses and minuses as we go forward. And certainly, I'm not going to go into detail on the call about what those are at this point. We'll be talking more about that as we go forward in the year. So there are always risks and opportunities to a plan and where a plan can be successful, obviously, if your new product's work or if your support - - your products work better than you expected. In other words, if you get better consumer offtake than you expected, the plan can result in some upside.

On the other hand, yeah. If you don't get the consumer offtake, if the consumer doesn't prefer your product, then there is always some risk, so I would say that the risk and the upside really center around the success of our new product and we try to call that in a reasonable way at that this point. Also in terms of cost control as you know, we're very focussed on our general and administrative expenses. We have taken the step to restructure this business this year and a couple of crotches you might say and we think that that is obviously going to be a contributor and the other part of that will be the brand support that we provide and our ability to manage that brand support and adapt that brand support for the realities of the business.

Great. Thank you very much. I will get back in queue.

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

Good morning.

Good morning, Connie.

Could you tell us what U.S. teller cosmetics grew in the quarter, or U.S. sales grew excluding hair care and beauty tools?

Yeah, I think we can provide that. Maria, you want to - -

Yeah. On a consumption basis, Connie, the category as we indicated grew 5.7% in the quarter and that is total cosmetics and Revlon grew, Revlon's company grew 8.3% in the quarter. That would exclude hair and any of our other categories, that's purely color cosmetics.

And, of course, it includes Vital Radiance, too.

Okay, but in terms of your sales, I think you said that excluding - - you know if we break down the geographies, international was up and the U.S. was slashed, is that right?

That's correct. Right. We strip out those, the impact of vital and those returns from Almay in '05, I think that's what we said.

So what was the U.S. sales decline excluding beauty tools and hair coloring?

In terms of our net sales, we said, again, so we're all on firm ground, we said that U.S. sales as adjusted as we called about were flat in the quarter compared to last year overall.

We didn't provide a break down.

We don't provide a break down and haven't provided a break down between cosmetics and other categories.

Okay, but I mean logically, cosmetic sales had to have declined, right?

Well it depends on the timing of shipments. If you're trying to draw conclusions from consumptions, that's always a little dangerous because of the timing of shipments versus consumption which never quite match up.

And consumption you're talking about retail sales, right?

Correct. That's right.

No I'm trying to figure out your own shipments.

Right, no I understand that.

Okay so you're not going to tell us then, right?

I'm sorry, Connie.

Okay, since you discussed with retailers what the asset plans are for Vital Radiance can you give us some detail on that?

Well, they're fairly straight forward. I go back to the fact that it's September the 25th, we had just made the decision, just announced it. We haven't had the opportunity to discuss it in any detail with any customers. We now have had that opportunity and generally speaking there is the stock shipment date we have agreed to with all of our customers, which will be in the fourth quarter at certain times. The customers exit dates will actually vary and you could see Vital Radiance up in stores all the way into the first quarter of next year, so obviously once those plans are set, that drives the accounting, for example, we amortized the displays over the period that they're going to be in the store. So you will see very minor charges even in the first quarter of next year for amortization of those displays. Is that helpful? Is that enough.

That's helpful. So are retailers just going to discount this greatly to move it off the shelf?

There will be various - - various approaches to that. There will be discounting and there will be other promotions associated with it so each retailer will have agreed a plan with us that will vary.

So you're not taking everything that is out in the trades back in, right?

Well, we'll take everything that doesn't sell by whatever date that they decide to take it off the shelves, we'll take back hence our accounting estimates at this point.

Okay. Thank you very much.

Thank you. Our next question comes Reza Vahabzadeh with Lehman Brothers.

Good morning.

Good morning, Reza.

On shelf space, do you have any indications of how your shelf space, vis-a-vis, retailer planner grams, will shake out and in the coming 12 months versus the preceding 12 months excluding Vital Radiance?

Yes, we've got a pretty good indication And at this point, we're looking at an increase over '05, which I think is the right way to look at it, of approximately 7 to 8%. So if you think back or if you go back to what we announced with the restage of Almay and the launch of Vital Radiance, we announced about a 22% increase in space. And now, with the discontinuance of Vital, we're looking at about a 7 to 8% increase. Now, there is pluses and minuses across the retail spectrum, but nothing really significant.

Okay, but just to be clear on that, you were up 22% in the current calendar year, up by about 22%.

Yeah, and most of that was due to Vital.

Right, but excluding Vital, how's your shelf space because - -

That's what I'm saying. Ex-Vital.

Okay.

Take Vital out of the equation, compare it back to '05 when Vital obviously wasn't on shelves.

Right. We're going to be in '07 - - we expect to be up 7 to 8% in space versus '05. Okay how about '06?

'06, you have to strip out Vital, it's about the same.

Okay. I see. Right. As far as your 210 million EBITDA, what does that require in terms of consumption for market share or in terms of marketing spending so AMP spending?

We haven't gone into those specific details at this point.

Okay. Well, just on that topic, you mentioned LipGlide launched four years ago.

Approximately four.

Right. Give or take. Did well in the first two years.

Actually did all right in the third year and it's done all right, it's just we haven't focussed any support on the product around the world.

Right. But I guess what level of marketing spending is required to keep all of your product lines relatively fresh not only only - -

Well that is a judgement that we have to make. I mean there is an elasticity there of marketing stand against what we think will drive the growth of the product. So that's part of what I term portfolio strategy where we look out several years and we have got a pretty good understanding, although it's judgmental about given the success of a product and how it's doing, what level of stand and the nature of that stand.

We may change the mix. You certainly wouldn't probably support generally speaking a color cosmetic line like a LipGlide and ancillary kind of impulse product with TV in say the third year but you might consider using print or maybe even shift over and supporting more with in-store activities. So those are judgements that are made across the product line and that is part of the portfolio strategy, and we think we have a pretty good feel for how to make that call in terms of what's going to be, what is going to really drive economic profit for us, which products we want to extend the life cycle on, how much to spend and what the mix of that spending is.

Got it. Any initial view of Cap Ex and displacement in next year?

Well we said - - I think we said that you could expect that capital expenditures will be probably 20 to 25 million and we said that permanent display fitting will get back to more normalized levels, which if you refer back to the prior years, heck, I'll just let Alan maybe recite those to you so you will get some sense of that, but keep in mind that we have restaged Almay and we have invested in the Revlon walls in prior years, so now we're back to - - and by the way, recall that most of the Almay wall is carted now and a high percentage of the Revlon walls is also carted. So, we would expect then to have, as we say, more normalized spending against permanent display. Alan, you might just give them some prior-year numbers.

Yeah just in terms of the context, as I mentioned earlier, we expect permanent display spending to be approximately 100 million in 2006. If you go back over the last three years, 2003, we spent 73 million, which did include some remaining her wall. In 2004, we spent 56 million and then in 2005 we spent approximately 70 million including the rampup for the Vital Radiance and the Almay restage. So that should give you some context to be able to guestamate what display spending will be going forward.

I see. Thank you.

Thank you, our next question comes from Mary Gilbert with Imperial Capital.

Hello, Mary.

Hi, how are you doing. This is actually Tom for Mary.

Hey, call.

Hey I was just hoping you could give us an update on the refinance of the 858 subnotes where that stands?

Well as we've indicated into September and we continue to indicate where we're continuing to evaluate our options to refinance those, we're highly confident that we'll be able to refinance those in due course again and they're a number of options that we're considering. Alan, anything you want to add to that?

Well I'll say in addition, as you know we have communicated our intention to conduct the $75 million equity offering between now and the end of the first quarter which would obviously be available for reduction of debt.

Okay, so you'll be using that to reduce the balance there a little bit before you refinance?

It would be available to us to reduce that debt in general.

Okay, great. As far as any timing on that, is it - - can you give us a ball park or anything like that? When you - - where this falls in your priorities?

On the 75 million or the - - .

No, the refinancing.

Well, it's a high priority for us. Now, as we consider our options, we'll have to also consider market timing as well.

Yup. Okay, thank you.

Thank you, our next question comes from Filippe Goossens with Credit Suisse.

Yes, good morning.

Good morning.

Good morning. A couple of questions for you, David, If I may. Looking back at Almay, obviously the overall cosmetics category the way I have looked at it this year has performed better than what I expected. Almay has showed in that growth but yet your market share is still pretty much what it was last year. You're hovering around, let's say 6.3, 6.4% for and now about, gosh, six, seven quarters. In retrospect, David, what could you have done differently with the restaging so that actually other than kind of maintaining market share, you could actually have grown market share?

Well, I would say that when you look at Almay's performance - - I will probably a couple of the products that we introduced didn't performance perform up to expectations. Could we have done better or worse, it's one of those risks of the business that we, that when new products are developed, we believe they're innovative, we have launched them and we support them fully and sometimes they don't quite work up to expectations. So that's generally what happened at Almay this year. Getting points of certain new products that haven't performed up to expectations.

So, again, that's part of the risk and the opportunity to both learn from those, those products that didn't perform as well and assess what went wrong and also the opportunity to bring out and introduce the more innovative new products. Remember, also, that Almay grew 12% consumption in '05. So we had a very good year behind, very strong and products with intense eye care. And we have held on to that growth and actually grown. So, we did have a fairly significant hurdle raised as well.

Okay. And my second question, David, now that, I know you're competing in different channels, but as you know, JC Penney just started with the rollout of the four store within a store.

Right.

Which will open the cosmetics category to perhaps a broader range of customers. To what extent do you see that your customer is kind of looking perhaps for a little bit of a different business model, what I'm trying to say is that I think with the focus on skin care, the category is perhaps becoming a little bit more difficult in terms of self-service. Products are a bit more complicated, perhaps the customer she needs a little more help. Do you think in the channel that you operate, which is basically the discount and the drug store channel, that perhaps aside from what you tried with Vital Radiance, which was the 1-800 number, that perhaps one way to boost sales would be to explore ways to provide more assistance to the customer when she's making that decision in terms of what product to buy versus the competition or perhaps what channel to go to, the JC Penney format versus your format.

Have you given that any thought whether you need to come and rethink a little bit how you go to market, given that the competitive environment is getting more intense as there are more options available to her.

First, I would point out that the Nielsen growth this year in the mass channels is very healthy. When you get between 5 and 6% growth, that's extremely healthy and in fact if you recall when you look at the trends, the mass channel growth has increased over the past couple of years over where it was. I don't see any problem with the channels that were in at all. They seem to be very healthy in growing and they're driven by new product innovation, primarily. If you look at what has really grown the market this year, you look at a couple of the smaller competitors, that's where the growth has really come from in terms of the overall color cosmetics category with some very innovative new products.

Look back at Almay last year. We grew that healthy 12% consumption level from an extremely innovative but fairly straightforward new product Intense Eye and we've maintained that growth and got more growth this year. So I don't - - I don't think the growth formula has really changed. What we need to do is get more of that growth and we need to get it in our established brand.

Okay. That's helpful. The other question i had for you, David, I think everybody in the investment community is convinced about the tremendous margin opportunities that you have. I mean if you just look at your margins and your benchmark and against your competitors, it's clearly a tremendous opportunity. I think what would be helpful for us as analysts or investors is to get a better view from you in terms of the dollar amount that you can achieve, what categories you can make progress in, a timeline.

I mean I know in the past you have said a kind of percentage that you wanted to achieve in terms of operating margin that has since been kind of abandoned, I understand why. But would it be possible to give us a little bit more, something more to hold our hands on in terms of, look, this is what we see as an opportunity. We're committed to achieving it by this time and this is specifically what it's sourcing what it's distribution or what it's marketing. Is that something that you would be willing to do to kind of help the investor and give people more comfort that in deep, there is that a tremendous margin opportunity.

Well, of course. We believe strongly that there is that margin opportunity there and we have discussed in some level of detail where we think that margin opportunities - - where those margin opportunities are in the business and we will continue to pursue them aggressively. I'm not prepared to at this point to go quite as far as perhaps the analysts community would want me to go, but as we move forward, we'll certainly keep that in mind because it's our goal to not only achieve those margin opportunities, but also to make sure that there is visibility to those.

What our problem has been here before is that there have been several things that have masked the progress that we have made. For example, in cost of sales, where we believe that we have made progress to a large extent, that's been offset by both inflationary increases and underlying commodities that have impacted and also the fact that we had these charges right off some connection with the Vital Radiance. So, it's very difficult for us, without really going into significant details, and the numbers beyond where we would want to from a competitive standpoint, to point all that out. But I certainly acknowledge that -- the need for more visibility in achieving those margins and as we move forward, we'll certainly be attempting to do that.

Wonderful. I much appreciate it. Then in closing, just one final question, David, if I may. Obviously your international business has done wonderful and we expect that to continue to do so. Now, in order to even better capture that potential that is out there, particularly in the emerging market when is you look at some of your competitors. Given that you may not have the same kind of money to spend beyond marketing some of your larger competitors, have you, and I think you and spoke about this in the past, David, is there any way to explore a way to even better tap that international opportunity, whether it's a strategic alliance, whether it's exploring different channels of distribution. I mean how can you better tap that still tremendous opportunity that is out there?

Well, currently, our strategy is clearly focussed on building our brands and leveraging our brands and we, we think that that is the best way to tap into the opportunity. We're doing that along with dimensions of country opportunities and market opportunities as well as the brand opportunities and we're allocating our resources appropriately, and let me just remind you that we have business models in place today that we believe work very well, and I have called this out in the past and in India today, we have a very, very successful joint venture for which we own about a third. And that joint venture is profitable, has good margins and is gaining growth as incomes grow in India. And the joint venture has a plant there, is very well-structured and extremely well-managed by our partner. Indonesia, we have a similar contractual joint venture there that has been very successful.

In what we call our distributor markets, recall that around the world we got approximately 16 operating subsidiaries. And then, but we're in or we sell our products through distributors or joint ventures in almost every country in the world. So, that business model works for us very, very well, assuming we have the right partners and so we're constantly working and have been working over the past few years to get the right partner. And I would say aside from a few places today, we got very strong partnerships, either in the form of joint ventures, contractual joint ventures or distributors around the world.

And so that's part of the strategy in internationals to make sure we have the right structure around the business and we believe that is part of the success of the international business as well. But key, again, is the billion-dollar Revlon brand as we continue to focus on that brand, build that brand, remember that we leveraged that brand worldwide, not just in the U.S. So that will be an important value-building, growth-building strategy to go forward.

Great, thank you so much, David, for that clarification.

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

Hi.

Morning.

I had a question about market strategy. Give when happened with Vital Radiance and Almay seems to be doing well now, but given what you have learned from the launches in the last few years, are you changing all your go-to-market strategy or do you think you have to focus your returns on a shorter time frame or anything different the way you deal with displace settings?

Well, if I understand your question, I don't think Vital was necessarily a problem of the broader go-to-market strategy. Vital was something that just didn't gain consumer traction rapidly enough and the retailers for a good reason, I think, made the call that they were going to reduce the space. And I think you have to consider Vital as a new brand and consider the way it was launched in very broad distribution as opposed to maybe a slower bill. Vital is kind of a separate case. I think our go-to-market strategy in the U.S. and around the world is in broad terms, reasonably sound.

I think it's more about focusing on building the Revlon brand, leveraging the Revlon brand, leveraging the Almay brand and leveraging those local or national brands around the world where we've got strong positions. So I don't think the go-to-market strategy itself is broken or needs to be redefined. Obviously, it continues to improve your execution and the implementation of the go-to-market strategy and there is always, always room for improvement there.

Okay, so definitely you will focus, continue focusing more on your existing brands as opposed to try something completely new like Vital was?

I believe that's what we said. Yes.

All right and then in terms of displaced spending, as you do that is it, I guess is it cheaper from a displaced spending perspective or do you need to continue to spend even when you're just revamping your existing brands?

Well, you need to continue to spend. But it will be what we call a more normalized level. So because we're not interested - - introducing a new brand, because we're not restaging Almay, for example, we won't have those one-time or over-time big increases in that capital spending or displacing.

Okay. And then are there any - - in your process where you're looking at your options to refinance the subordinated notes. Would you or are you considering any potential asset sales or sell non-core businesses?

No.

Okay. And one last question on the implement side and the nail category, you continue to see growth there and is there any - - are you seeing any retaliation for the growth you have gotten in that category from any of your competitors.

It's a competitive category and continues to be that way and you you always get some competitive response, but we have been very successful in the past three years, I think, in growing share. So we feel like we have a great position there in the U.S. and certain places around the world and we have a great platform for good profitable growth.

Okay, great. Thank you.

Thank you, this ends our question-and-answer session of today's call. We will now turn things back over to Mr. Kennedy for any closing remarks.

Thank you for all your questions. And I think again that I would want to emphasize a couple of things. I have talked about them but I want to continue to repeat them so that you will understand where we're going and that is first our approach to innovation and growth will be centered around, leveraging the power of our established brand and that means the Revlon brand globally where we have strong local or national brands leveraging those as well around the world. Second, focusing on the significant margin opportunities that we have and, third, driving the efficient utilization of our cash and I would just close by saying that we spent some time over the past month as you can imagine, really focusing on our organization as we have gone through a significant reorganization, restructuring, call it stream lining here in the U.S. We believe that at this point we're very optimistic that that restructuring has been implemented very smoothly and we believe our organization is in very good place to propel our profitable growth as we go forward. Thank you.

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