Revlon Inc (REV) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's first quarter 2007 earnings conference call. At the request of Revlon, today's conference 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. Abbe Goldstein, Revlon's Senior Vice President Investor Relations and Corporate Communications. You may begin, Ms. Goldstein.

Thank you, [Perry]. Good morning, everyone, and thanks for joining our call. Earlier this morning we released our results for the first quarter 2007. If you have not yet received a copy of the earnings release, you can obtain one from our web site at RevlonInc..com. Here with me today to discuss our results are David Kennedy, President and Chief Executive Officer and Alan Ennis, Executive Vice President and Chief Financial Officer.

Before we get started, I would like to remind everyone that our discussion this morning might 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 our 2006 form 10-K and our first quarter 2007 form 10-Q, which we expect to file later today.

Our remarks today will include a discussion of adjusted EBITDA, which is a non-GAAP measure that is defined and reconciled to the most directly comparable GAAP measure in the footnotes and attachments of our earnings release that we issued this morning. In relation to marketplace performance, unless otherwise noted, our discussion this morning of market share and retail consumption is that of the U.S. mass market according to ACNielson, which excludes Wal-Mart and regional mass volume retailers. The ACNielson data is an aggregate of The Drug Channel, Target, K-Mart and Food and Combo stores and represents approximately 2/3 of the Company's U.S. mass market dollar volume. And finally, as a reminder, our discussion this morning should not be copied or recorded.

With that I will now hand it over to David.

Thank you, Abbe, and good morning, everyone. First I would like to review our financial highlights for the first quarter of 2007. Net sales of $328.6 million increased 1% compared to $325.5 million in the same period last year. Operating income was $3 million compared to an operating loss of 17.2 million in the first quarter 2006. Net loss was 35.2 million or $0.07 per diluted share compared to a net loss of 58.2 million or $0.15 per diluted share last year. Adjusted EBITDA was $32.3 million compared to 15.3 million reported in the same period last year. Results for the quarter included restructuring expenses of $4.3 million while the first quarter 2006 included restructuring expenses of $9 million.

Our performance this quarter was driven by modest increase in sales and a significant decrease in costs. Our net sales were positively impacted by an increase in net sales in U.S. beauty care and increases in each of our three international regions. These positive impacts were mostly offset by declines in U.S. color cosmetics, driven principally by the Revlon brand and the significant reduction in sales of Vital Radiance year over year. The improvement in our cost and expenses was a direct result of the restructuring actions we announced last year, particularly lower headcount and optimization of office space as well as continued control of expenses.

We generated positive operating income and our adjusted EBITDA more than doubled in the first quarter of 2007 compared to last year. Our U.S. beauty care business net sales growth was driven by continued growth from Revlon Color Silk hair color, shipments of Revlon Colorist, our new hair color product that we launched in the first quarter, and continued strength of Mitchum, including shipments of Mitchum Smart Solid, also launched in the first quarter of this year. Our international growth in the first quarter of 2007 was largely attributable to the Revlon brand, with especially strong Revlon brand performance in South Africa, Australia and the U.K.

In terms of U.S. marketplace performance according to ACNielson, the color cosmetics category grew a 0.5 of 1% in the first quarter of 2007 compared to the same period last year. Our U.S. mass color cosmetics $1 share decreased 1.2 percentage points to 20.3%. This decline was largely due to the 1.4 percentage point decrease in $1 share in the Revlon brand to 13.2%. The Almay brand increased slightly to 6.5%. Women's hair color share increased to 10.1%, up 1.3 percentage points. Antiperspirants/deodorants was essentially flat, and Revlon's beauty tool share, where we remain the market leader, was down less than 1 percentage point. The market share decline for the Revlon brand reflects a decrease in share related to products launched in prior years, offset somewhat by performance from new products launched in the second half of 2006 and the beginning of 2007.

Two new Revlon brand products are off to a good start, and they are ColorStay Soft & Smooth Lipcolor, which achieved a 4.4% share of the lip segment year-to-date and is benefiting from our advertising, which started at the time of its launch in the second half of 2006. Also, the Limited Edition collection is off to a solid start, albeit it remains early in the year. Across our portfolio, we have other solid new product performances. These include Almay Smart Shade Make-Up, which has shade-sensing smart beads that instantly transform into the perfect makeup shade. Smart Shade launched in 2006 with a strong media plan that started in January 2007. We plan to launch Smart Shade line extensions for blush and bronzer later this year. In addition, Smart Solid, a new product under Mitchum, which offers powerful protection and is unbeatable against white residue is in the very early stages of the launch and has achieved a $0.6 share year-to-date.

Also, early indications are that Revlon Colorist, which is an expert hair color and glaze system and Almay Hydracolor, a lipstick that provides rich color with refreshing hydration and nourishment, are doing well. Since September 2006 following the decision to discontinue Vital Radiance, our strategy has been to fully focus our efforts on building and leveraging our established brands, particularly the Revlon brand. We are taking actions intended to generate sustainable profitable growth, and to this end we are fully utilizing our considerable creative, marketing, and research and development capabilities in order to reinvigorate new product development and create consistently effective brand marketing across our portfolio of core brands.

In the first quarter of 2007 compared to the first quarter of last year, excluding Vital Radiance, we maintain the level of our brand support, including advertising spending as a percentage of net sales. Further, as we planned in 2007, we have supported all our individual brands at levels we believe to be competitive and expect to continue an appropriate level of support going forward. As you would expect, in the normal course we adjust spending depending on expected individual product performance and other market factors. We continue to execute our strategy, specifically our first priority is building and leveraging our strong brands. As I just mentioned, we recently launched products throughout our portfolio that are off to a good start. In the second half of 2007 in the U.S., we are launching a number of new products, including Revlon 3D Extreme Mascara, Revlon Renewist Lipcolor, Revlon Age Defying makeup primer, Almay Pure Blends Mineral Make-Up, and the Almay Smart Shade line extensions, which I mentioned earlier.

We have also taken actions to implement our marketing strategy for the longer term. We realigned our U.S.-based Revlon and Almay brand marketing groups in order to fully focus the organization on building and leveraging the Revlon brand worldwide and to continue the success of the Almay brand. And we are concentrating on continuing to improve our organizational capability to ensure we have the marketing and creative talent to continue to build and grow our brand. We are intensely focused on new product development and have instituted processes to fully engage R&D and marketing in new product development, including the formation of a senior leadership team, which I will lead, to accelerate new product development and importantly strategically manage our brand product portfolios for profitable growth over time. Further, we engaged in new marketing and creative agency for the Revlon brand to support our efforts in sharpening our brand positioning and communication and to assist us on our implementation of brand strategy.

To further build a Revlon brand, we recently announced that we have signed two rising stars, Jessica Alba, and Bo [Gairick] to serve as spokesmodels for our Revlon brand. Both Jessica and Bo are starring in the film, "Fantastic Four Rise of the Silver Surfer", being released this summer. These artists further complement our strong line up of spokesmodels which includes Halle Berry and Ava Mendez. Continuing our strategic focus we're improving the execution of our strategies and plans and providing for continued improvement in our organizational capability. Since our restructuring, we have expanded responsibilities of existing employees who have demonstrated capabilities and success in their existing roles, created new reward incentives and promoted from within our organization. In addition, we are recruiting highly capable people to join our team. We will continue to focus on strengthening our organization and enhancing our capabilities while staying true to our cost control objectives.

We are continuing to strengthen our international business, which has strong results in the first quarter in each of our three regions. This continues a trend of solid, profitable growth over the past several years. As I mentioned earlier, growth in international was driven primarily by the Revlon brand. Our international business will continue to benefit as we implement our plans to further strengthen the strategic marketing for the Revlon brand. We continue to focus on expanding operating profit margins and improving cash flow over time. As we have indicated, the results this quarter benefited from our restructuring actions that led to improvements in our operating profits and we fully expect these improvements to be sustained.

Improving our capital structure is a continuing priority. In December of 2006 we successfully refinanced our 2004 credit agreement, which is generating interest savings and increased our financial flexibility. Also in January 2007, we completed a $100 million equity writes offering, which we used primarily to pay down debt. We will continue to take opportunities to strengthen our balance sheet. Importantly, we remain committed to achieving adjusted EBITDA of approximately $210 million in 2007. Our focus remains on building the Revlon brand, the Almay brand, and our other key brands around the world, continuing to improve our execution by working with our retail customers and intensely controlling our costs.

So with that, let me hand it over to Alan who will take you through the financial results for the quarter.

Thank you, David, and good morning, everyone. As we normally do, I would like to review the financial results for the first quarter of 2007. Net sales in the quarter advanced 1% to 328.6 million. Excluding the impact of foreign currency translation, net sales in the quarter increased 60 basis points versus year ago. In the U.S., net sales in the quarter declined 2.5% to 193.3 million. This performance was driven primarily by lower shipments in color cosmetics, primarily in the Revlon brand, partially offset by higher shipments in beauty care products. In international, net sales in the quarter increased 6.4% to 135.3 million. Excluding the impact of foreign currency translation, net sales advanced 5.5% versus year ago. This growth reflected higher shipments in all three of our international regions, particularly we saw strong growth in Australia, South Africa, and the U.K.

Our gross profit margin for the quarter was 61.6% compared to 64% in the first quarter last year. The decline in gross profit margins was primarily due to unfavorable changes in sales mix and lower per-unit cost absorption of factory overhead compared to the year-ago period when we were building inventory to support the launch of Vital Radiance and the restage of Almay. We continue to pursue improvement opportunities in our costs of goods sold and gross margins. For example, as previously announced, we are closing our plant in Irvington, New Jersey, and consolidating Beauty Tools into our Oxford, North Carolina, facility. This, we believe, will result in cost saving synergies.

We generated operating income of 3 million in the quarter versus an operating loss of 17.2 million in the first quarter of 2006. Net loss in the quarter was 35.2 million or $0.07 per diluted share compared with a net loss of 58.2 million or $0.15 per diluted share in the first quarter of last year. The shares issued in the January 2007 equity rights offering impacted EPS in the first quarter of 2007 by $0.02 per share. Adjusted EBITDA more than doubled in the quarter to 32.3 million compared to 15.3 million in the same period last year. As David noted earlier, the improvements in operating income, net loss, and adjusted EBITDA were due to modestly higher net sales and significantly lower general and administrative expenses, which were a direct result of the restructuring actions we took last year. Importantly, we believe these cost savings are sustainable going forward.

Results for the quarter included restructuring expenses of 4.3 million while the first quarter of 2006 included restructuring expenses of 9 million. For those of you that would like to know the impact that Vital Radiance had on our 2006 results, this data has been posted on our web site. Specifically, in the first quarter of 2006, Vital Radiance generated 13.8 million of net sales and had a negative 2.8 million impact on operating loss. Cash flow provided by operating activities in the first quarter was 24.7 million compared to 8.5 million in the first quarter of 2006. Capital expenditures in the quarter were 2.7 million versus 4.8 million in the first quarter last year. We expect capital expenditures for the full year 2007 to be in the 20 to $25 million range, consistent with prior-year levels. Permanent display expenditures in the quarter were 23.8 million versus 48.3 million in the first quarter of last year. We currently expect permanent display expenditures for the full year to be in the 60 to $70 million range, compared to 98.7 million in 2006.

Our unutilized borrowing capacity and cash as of April 30, 2007, totalled 189.1 million, comprising 125.1 million available under the multi-currency facility, 50 million available under the MacAndrews & Forbes line of credit, and 14 million of cash and cash equivalents. With respect to our capital structure, as you know, the 167.4 million balance of the 8 5/8 senior subordinated notes are due to mature in February 2008. We have a history of highly successful financing and refinancing transactions, including refinancing our credit agreement back in December 2006. We are highly confident in our ability to refinance these notes prior to maturity.

Now I will update you on our progress with respect to our previously-announced restructuring actions. During the first quarter of 2007, we recorded restructuring charges of 4.3 million, substantially all of which related to the September 2006 restructuring program. In addition in the quarter, we received a non-cash benefit of 4.4 million from the reduction of a lease liability related to the consolidation of our office space here in our New York headquarters. This non-cash benefit is reflected within general and administrative expenses. For the full year 2007, we expect to record approximately 7 million in restructuring charges, most of which will be in the first half of this year.

We are on schedule to close our facility in Irvington, New Jersey, by the end of June 2007, and consolidate the packaging of Beauty Tools into our main Oxford, North Carolina, facility. In aggregate, including the impact of restructurings in February and September of 2006 and March 2007, we still expect to deliver total annualized restructuring savings of approximately 55 million. As David mentioned earlier, we remain committed to achieving 210 million of adjusted EBITDA for the full year of 2007. We look forward to updating you on our progress each quarter.

So with that we'd like to open it up to your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Bob Labick, CJS Securities.

Good morning.

Good morning, Bob.

How are you?

I'm well, thank you. A couple questions. First, clearly you've stated your intention to refocus on the core Revlon brand. Can you give us a sense of-- help set our expectations reasonably for the timing of a turn in U.S. share so we can judge this effort? In other words, how long between your shift in focus should it take before we start seeing that in U.S. market share data?

Bob, as you know, calling share inflection points are very difficult. The Revlon brand share has been in decline for some time. We've talked quite a bit about the reasons we believe that that's occurred. We've outlined very clearly actions that we are taking, have taken and continue to take in order to regain positive share momentum with the Revlon brand, but at this time I really wouldn't want to call out an inflection point.

I understand. I don't mean to peg you to a month, specifically, but if you could give us a sense of the timing through your pipeline of changes, it should take two to three quarters, it should take one year, 18 months, that kind of general sense as opposed to in July it's at -- and we're going to have a terrific August.

Well, with a lot of caveats on that, because it's difficult, again, to call, because it's not only what we do, but it's what happens in the marketplace, what our competitors do. There are a lot of factors that impact share, and I would just say, again, we've outlined the actions that we're taking and I would say that we would not be looking for share just for share gains. We're trying to get good balance and growth, profitable share growth, is what we would like to get, and we would hope to see some progress as we go forward, but calling a specific time period would be very difficult for us to do.

Okay, fair enough. Related to that question, obviously you mentioned part of the slip is attributed to the increased focus on Vital Radiance when it was in the Almay relaunch. Some certainly could be contributed potentially to steps by competitors in the market. What have competitors done that's been successful of late to gain share? And are there other methods you guys can take in terms of turning this around as well?

Well, we believe , first of all, in the concept of profitable share growth. So we want to get the balance right. Secondly, we believe that what drives share growth and profitable share growth are, first of all, very good innovative new products that consumers prefer, and a portfolio approach, such that we continue to build out product lines with extensions and other marketing innovations that create long-term good growth from a franchise. A perfect example are some of the franchises we have today. Super Lustrous has been around for years and years, remains to be profitable, Age Defying, which was restaged a couple years ago. And then, of course, there's products like Almay Smart Shade, a technology based product, that's patented. And we can take that technology and utilize that in building out a product line that creates sustainable share and profit over time.

The other thing that drives it really is good, sharp well-positioned, well-communicated advertising and promotion. Then the third thing that drives it is good execution, with your retail partners in store. So we believe that those are the elements that drive share. We're working down that path for all of those. You'll see that when companies get all three of those things working together, then there's a share

Terrific. That's very helpful. Last question, I'll get back in queue. Obviously, you showed good cost control on the SG&A line. You mentioned that you believe it's sustainable. Going forward -- again, broadly speaking, obviously, to return the Company to acceptable profit margins, I'll leave that to your definition of acceptable, not trying to pin you down, how much growth should be coming from the SG&A versus volume or leverage, other efficiencies in the cost of goods good lines. Where can we expect this growth in margins to come from, if you could quantify it broadly?

We do believe that, broadly speaking, that we would target to get topline growth, leverage then, our operating leverage off our fixed cost. We have a lot of capacity and capability, we think, across our cost base, and we would also want to continue to improve our cost of goods sold, our returns expense, all those items of expense and continue to control our G&A costs, our general and administrative costs quite tightly, and continue to be prudent and disciplined in our marketing support and attempt to get even greater returns off that support.

Bob, if I could just add a comment to that. If you look at our P&Ls for the quarter, you'll see that our selling, general and administrative expenses are about 23.1 million lower that quarter than they were for the comparable period last year. In terms of restructuring savings, clearly we're realizing those savings and would expect to be at a full-year run rate of that 55 million savings later on this year once we exit the Irvington facility. I would expect continued reductions in that line item, and as David mentioned, continue to drive synergies and cost of goods which will also be benefited by the consolidation of our Irvington facility into our Oxford plant into North Carolina.

Bob, we'll work across all of those dimensions that I outlined to you. We think we have opportunities to do that.

Terrific. Thank you very much. I'll get back in queue.

Thanks, Bob.

Our next question comes from Bill Chappell of Suntrust Robinson.

Hello, Bill.

Good morning. First question, just a clarification. Do you think that any of the Revlon share loss is a hangover from your retail relationships with Vital Radiance?

No, I don't, Bill. I don't think it's attributable to that. If you go back in time and you look at the Revlon share decline, it's actually been declining for some time, and I could give you a history of that. It was somewhat stable, although continuing to decline at a slow rate, over the past four, five years. That decline accelerated really in '06. I believe that it was due to our focusing our intellectual capital, our product development, our execution capability on the launch of Vital, as much as anything else, and now we're in the process of reinvigorating our new product development, certainly continue to work very hard to invest in our brand advertising, sharpening our communication. We're investing in spokesmodels, as you've seen, which we think is an important strategic factor to build the brand.

Sure. Is there any way you can give us an intraquarter progression on the Revlon brand. Did you see it start to stabilize as some of the new products took hold, maybe in the month of March?

Bill, I attempted to answer that, and I would really like to give you a very concrete answer, if I could, but it's virtually impossible to call the inflection point. I believe that if you would look at what we're saying about all the actions that we're taking, about how we're investing and how we're focused on the Revlon brand that you would get some sense of that yourself. I would also say that outside the U.S., the Revlon brand remains strong and we believe, although we don't have precise data, we believe that in the key countries, we've maintained our share at a minimum. So inside the U.S., we know we've got an issue. We have been communicating about it for six months. We've been taking actions about it, and again, we believe that at some point there will be an inflection point and that will lead to profitable share growth.

Okay. Just kind of turning, on your adjusted EBITDA,, from what I can tell in the quarter, it does not exclude the restructuring charges, so I assume your $210 million doesn't exclude any restructuring?

That's correct, Bill.

Do you have any kind of ballpark idea what restructuring will be for the full year?

Yes, as I mentioned in my comments earlier, we expect it to be approximately 7 million.

And is that -- so you've taken a majority of it in this first quarter with much less on the next, two, three?

Yes, we expect to take the preponderance of the balance in the second quarter.

Okay. And then, if I look at gross margin, I understand it was down year over year just because of, probably, some of the mix of the Vital Radiance, but it was down a little bit from two years ago in the March quarter. Is there anything going on there, or is that mainly mix?

Well, a couple of things. In the fourth quarter of 2005, we were in heavy production mode, as you know, ramping up for the both Vital Radiance and the launch of Almay. As you understand, cost accounting, when you're wrapping up production, you tend to allocate your fixed overhead over a larger number of production units. And so when those products get sold in the first quarter of the following year, i.e. the first quarter of 2006, they had a lower fixed cost rate applied to them. So part of it is almost artificial, if you like, I mean, it's appropriate accounting but it's almost artificial in that we had higher inventory levels in the fourth quarter of '05, and then we bled those through the P&L at a lower per unit cost in the first quarter of '06. In fact, if you go back and look at our inventory levels quarter over quarter, where inventory is down almost $50 million compared to the first quarter of last year. That's really the main driver, Bill, of what's happening with cost of goods.

Okay, that makes sense. Just one last. Can you give us an idea of what the fully diluted share count we should be looking to for the second quarter?

The fully diluted share count, let me see if I can get that for you. If we can't find it here I'll --

We can get it offline. That's great. Thank you.

Your next question comes from Kevin [Disewick] from Goldman Sachs.

Hi, it's Kevin [Ziets].

Good morning, Kevin.

I just wanted to talk about the SG&A spend or the marketing spend in this quarter: I think I heard you say that it was in-line with the prior year. Given that you think that the Revlon brand was sort of undersupported last year, I was wondering why, if it's just timing or why that would be sort of at the same level as last year?

I think what we said, excluding Vital Radiance, which I think is the right way to look at it, that we maintained our brand support as a percentage of net sales. And we haven't called out and wouldn't intend to call out how we'd spend against individual brands, other than to say that we maintain that brand support, including advertising. If you take out Vital Radiance, you'll get some sense of what our brand support was.

That's right. I was just thinking that maybe you would step that up as a percentage of sales in an effort to sort of behind all the new product launches and what not.

Well, we believe, again, that we spent at competitive levels and we supported all of our new products at competitive levels, so part of the spend is a function of the number of new products that you launch in any period of time.

Fair enough. The new products that are out this year, can you sort of characterize them from a pricing perspective? Are they offered at higher prices or lower prices versus the prior year?

The Limited Edition Collection is a fairly-priced but somewhat higher-priced item on average -- or items, I should say. And the other products are really priced competitively. I don't think there's anything really of note there.

No major changes. On the beauty tools share loss, I know it wasn't great for the quarter, but I think that's a change in trend where you had been gaining share. Could you talk about what may be going on in that subcategory?

Well, that category, as you know, is a fairly slow growth category, and we lost some share in the quarter. We were hurdling a very good quarter, I think, last year when we actually gained some distribution of our products. But I think that's the major reason. I don't know that there's anything else to comment on and our business remains very healthy. We've got good, solid new products launching this year. We've got a good, solid new product pipeline.

And could you comment on the broader category, just in terms of the growth that you're seeing? Is it sort of on trend with what we saw last year?

Broader catagory for beauty tools?

No, I'm sorry, just for general color cosmetics. And as a follow on to that, sort of seeing the impact of CVS focusing on the catagory, whether that's an opportunity for you all or a threat?

I believe according to Nielson, the category in the quarter grew about 0.5 a point, which is slower than what we've seen over the past few quarters. I don't know if that's a trend or not. It's difficult to say, so I wouldn't want to call that. That's about the only thing I can say about that particular statistic. I would say as far as customers' focus, we don't see anything different from there in all the channels and with the retailers that we do, with beauty and particular cosmetics is a focus category and we don't see any real changes there. It remains very important to them.

Thanks. Just one sort of housekeeping question. Could you comment on the RP basket in the senior notes, in the 9.5s, as well as any limitations on additional indebtedness in that indenture?

We don't specifically comment on that kind of stuff, Kevin.

Okay. Thank you.

Our next question comes from Karru Martinson of Deutsche Bank.

Good morning, Karru.

Good morning. In terms of store shelf space pressures, are we seeing any contraction? Obviously given some space for Vital Radiance, retailers are talking about Quasi House brands coming in. Is that contributing to the market share loss here?

First of all, no, it's not contributing to the market share loss. We've actually gained space, as you might expect, year over year. As always in the retail environment, it's intensely competitive, and you have to perform, and we go through line reviews with the retailers annually, and brands, as always in the normal course they are under a great deal of pressure to perform. But the market share decrease, I would submit to you, has nothing to do with the space.

Okay. Just in terms of Almay, we did the restaging last year, obviously, and we had some distractions with Vital Radiance. That's past us now. What are the plans to improve growth on that sector? I know we've talked a lot about the core Revlon business.

We think Almay in the United States and in the countries where we do business outside the U.S. is very well-positioned brand. So we will continue with the current strategy, continue to bring out innovative new products, build out the product lines. As we indicated, we launched Almay Smart Shade, which is doing extremely well in the marketplace with only three SKUs. We also launched Revlon Hydracolor Lipstick, which is also off to a good start -- I'm sorry, Almay Hydracolor Lipstick, which is off to a good start. So we will continue with that strategy and that marketing. And you should also note that subsequent to the relaunch, while we didn't do as well as we had expected to or wanted to, we still maintained our share and had some slight share growth this quarter.

And in terms of -- I'm sorry, go ahead.

No, that's all right, go ahead.

In terms of the new agencies that you hired for creative planning and so forth, when should we see kind of the full impact of their strategies on your business? In advertising?

Well, you're beginning to see it with the first ad for Revlon Colorist, the hair color product that we launched. We retained Sheryl Crow to be our spokesmodel for that brand, and that ad, which was previewed on the Super Bowl, is the first work that they did for us. We're very pleased with the ad. It was among the most-viewed on the Super Bowl and it got some very good reviews and we believe it supported our product very, very well. And that product is off to a good start, again, early, early in the year.

And just the decrease in permanent display spending on a year-over-year basis, is that just Vital Radiance, or is there something else there that I'm missing?

At the end of 2005, beginning of 2006, we had significant spending behind the Vital Radiance wall and the new Almay wall. It's really returning to the more normalized levels this year.

All right. Thank you very much.

Our next question comes from Filippe Goossens of Credit Suisse.

Good morning, David and Alan.

Good morning.

A few questions from my side. First one, U.K., is there anything special going on. We had Avon report, various results in that markets, Estee Lauder, the same thing. You guys are also pointing out U.K. Is there something going on, or just kind of a one-time event that supports that category right now?

In the U.K. market, specifically?

Yes, David.

I believe the category there is fairly healthy, that's one thing. Secondly, in terms of Revlon, we've been working at growing our business over there for some time and we think we've got a good model at this point.

Okay. Next question, David, you mentioned that you are well-positioned to continue to spend behind the brands. If we look at the success that Avon has had recently with their stepped up advertising spending, as you know, they have significantly stepped up that spending. Do you see any need as part of your strategy to revitalize the core Revlon brand through also stepping up your advertising spending? Particularly, what I'm focused on, as you know, Avon is restaging or relaunching their core cosmetics brand in the U.S. this quarter and there's quite a bit of step up advertising behind that. Do you see any need to become more aggressive given the solitary action that they have gotten to their business globally to their doubling of advertising spend?

First of all, I'm not going to editorialize or comment or evaluate what Avon's doing except to say that I believe that stepped up brand spending is off a relatively small base compared to their total revenue. So when you look at significant increases there, it's off a small advertising base, that's number one. So in absolute sense compared to their revenue, it's still a fairly small number as a percentage.

Secondly, from our standpoint, as we said, we've always, as long as I've been here, for almost five years now, spend at competitive levels around the world and we'll continue to spend at competitive levels. In my view, it's about profitable share growth. So clearly we need to have a positive inflection point on the Revlon brand share, but we also need to do that and generate margins at the same time. So to be quite direct, we're not going out and chasing share at this point and spending money to do that. We don't believe that's prudent.

Okay, that definitely makes sense, David. Then following up on an earlier question, CVS, as we all know, is intensifying its focus on the beauty category, although they seem to be doing it largely through some international brands. Walgreens is focusing highly on their own private label, IsaDora. Has there been any noticeable change, David, in the drugstore channel as it relates to the relative contribution to your sales over the last 12 months?

No, there hasn't been. Let me just talk a little bit about that. First of all, based on my knowledge of what's going on with CVS and Walgreens, in addition to some private labels, most of that activity that I think you're referring to has to do with skin care, skin treatment lines. That's number one. So in terms of color cosmetics, we see no real changes there in what they're doing inside their stores to any significant degree, and we continue to have very good relationships and a very good business, and it continues to be an important part of our overall channel mix of sales.

Okay. Then my final question, David. We've picked up some signs from some of our peers at Credit Suisse that cover the cruise line business, the airline industry, and even the retailers, seems to be some indication of a slowdown with consumers in terms of their intent to spend. Are you seeing anything to that extent, David, that higher fuel prices are starting to take somewhat of a toll on the business or all the fallout from the subprime mortgage business?

We haven't seen anything like that in our business. The category ,according to Nielson grew slower this quarter than it has for some time, but I don't know what that means at this point. You can't really call that a trend. Gas prices have been high now for, what, three years. We haven't seen any indications of an impact on that in certain channels. So, no, I can't say that I've seen anything at this point, we're obviously alert for that sort of thing, but in a way, I don't know that that would modify at all our strategies at this point.

Okay, great. Thanks so much, gentleman.

Our next question comes from Reza Vahabzadeh of Lehman Brothers.

Good morning.

Good morning, Reza.

Good morning. On these fixed cost absorption that you touched on, is that largely or entirely due to the lack of Vital Radiance production ramp-up? Or should we expect fixed cost absorption to be around, also because U.S. shipments may also be down organically.

Fixed cost absorption is a direct correlation to the number of units that you produce. First point, yes, we had significant production. Production increases in the end of 2005 and beginning of 2006 to support Vital Radiance and the restage of Almay. Since then, production volumes, obviously, come down and we've reduced our inventory commensurately. Going forward, it will be a direct factor on production volumes going forward to the extent that we increase production to support sales, then your factory overhead, if we could keep that constant would decline on a per-unit basis.

I see.

Also keep in mind that as we grow our top line, obviously that's going to increase the throughput, and we are just in the process of consolidating additional production and packaging related to the Irvington plant into our Oxford facility, and also as we've indicated in the past, we continue to work on efficiency improvements. So there's a number of factors there that will impact over time, our cost of goods, when we would certainly be targeting for a positive impact from those items.

I hear you. Then on the fixed cost absorption for the first quarter, did you call out the order of magnitude of the year over year change related to fixed cost absorption?

No.

Okay. And as far as cost savings for the year and how that would help you approach your 210 EBITDA target, is there a ballpark figure for your net incremental cost savings that you'd expect to realize?

As I mentioned earlier, we expect to be at our run rate -- our annualized run rate for our 55 million savings in the back half of this year. Obviously, if we close the Irvington facility in the middle of the year, then those savings don't start to become realized until after that point. From a pure timing standpoint, we executed the February 2006 program over a year ago, and so the majority of those savings are already reflected in our numbers. And then by the time we get to September of 2006, you can fairly assume that the majority of the savings--

'07, you mean.

September of '07, yes, you can assume that the September '06 program savings are at a run rate. It's really at the end of this year you would start to see the full run rate and then into 2008.

Right. With the market share losses for Revlon brand that you've experienced recently, is there any concern by senior management that that could gradually result in shelf based losses, which in return becomes a cycle in itself, (Inaudible) [volume because cost absorption] keep going lower?

As I've indicated, we are focused on the Revlon brand, building that brand back, regaining at a prudent pace and profitable share, we've indicated a lot of actions that we're taking. We've also said that share loss over time has not been due to space losses. I think it's important to step back from space just a moment, and space is really an outcome. It's an outcome of how well your brand and your products are performing in the marketplace and in and of itself is not a driver. So, you gain shelf space when you're performing well. And seeing that space when on the margin you're performing better than your competitors. So, again, we're very focused on building the Revlon brand, generating profitable growth, hence, that will ensure that we've got sufficient space as we go forward.

Thanks for that. Then working capital for the year, should that be a neutral source use?

We continue to manage our working capital aggressively. I wouldn't expect any meaningful improvements over the end of '06.

'07.

I wouldn't expect any meaningful improvements over the end of '06, is what I'm saying, for the full year.

I see. Got it. Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Lance Vitanza of Concordia.

Hi, thanks guys, thanks for taking the call. Good work on the quarters and good progress getting the restructuring stuff done.

Thank you.

Could you just start by just giving me the precise share count currently? I missed that if you went through it earlier.

I think the average share is about 486 million. I'll get you the precise share.

Yes. I'm not looking for average, I'm looking for today or whatever the most recent date is. Something that reflects all of the shares that came in with the rights offering and anything else that might happen?

The amount of outstanding shares?

Yes.

At the end of March, it was 477 million.

477. You don't have the full number?

Sorry, [477188940].

And no change, obviously, on the class B?

Correct.

Okay. And then, the liquidity, you went through this, but I just want to make sure I have it right here. Did you say available credit of 189.1?

That's correct. Well we say available credit, we have cash of 14 million and then available borrowings of the balance of that.

And that was 125.1 under the revolver?

Correct.

And 50 under the MacAndrews & Forbes line?

That's right.

Was there anything drawn on the revolver, or presumably not on the [Math Co] line, but?

We had some small drawings in the revolver, but not meaningful.

Okay. And the term loan, that doesn't start amortizing for a while, so that's still 840, is that right?

That's correct. It starts amortizing, I believe, in the first quarter of next year.

Okay. So, then, I could do this calculation but you probably have it so, what does that imply that the borrowing base then is, the borrowing base amount, so to speak?

Borrowing base for the?

For the revolver. For the-- it's the asset back line?

Well, I think you have all the components on our balance sheet.

Yes, I do.

One other point to note is we do have some letters of credit outstanding, not significant, but they obviously are a direct reduction of your available borrowing, but they are reflected in the 125 million.

Okay. And that, I think, at the end of December, was about 15 million?

That's correct.

Okay. Okay, the only other thing, I think, can you give me the amount of stock-based compensation in Q1, if any?

Yes, hold on. We can get it for you.

Our next question comes from Karen Miller of Bear, Stearns.

Hi, good morning. I wonder if you could comment for us on your international strategy. It looks like international, including Canada is now about 40% of sales, and it does seem to be driving your top line. Could you tell us what your plans are for international, if you're focusing additional resources on the international segment, product differentiation, could you give us a little bit more color on international, please?

Sure, I'll be happy to, but let me say that the strategy that I'm about to outline is one that we've been implementing over the past five years. As you know, I was the President of international business prior to being the CFO for a short time and then the CEO, so just put that into some context. The strategy is one, leveraging the Revlon brand, that's the key brand outside the U.S. So we continue to invest and build and make that brand a priority. Two, leverage and invest in the important national or multinational brands that we have around the world and controlling our costs and investing in those markets where we're going to get profitable growth and also having the correct business model. By that I mean simply that today we operate in key countries with subsidiaries, 100% owned subsidiaries. In most of the countries around the world, we operate in partnership with the distributor. And that business model works very well for us. We want to make sure wherever we go to the market, we've got the right business structure or business model around our business. So those are the headlines.

As far as what drives that, potentially the same drivers are present in the international business as they are in the U.S. business, and that's one new product very sharp, effective marketing communication and effective execution with our retail customers. We leverage off the Revlon brand marketing and research and development and new product pipeline and brand communication coming out of the U.S., so our Revlon brand group in the U.S. is really a worldwide brand group. We do some product adaptation, depending upon some product and marketing mix adaptation, I should say, depending upon what we understand and know works in a particular market. For example, in Japan, currently we have approximately, and it varies year to year, 30 to 50% of either adapted product coming out of the U.S. or locally or nationally developed product, which is unique for Revlon in the Japanese market.

So would you say if we had to look year over year as well as going forward throughout the rest of the year, has your investment in international been at the same level, or have you increased it or do you plan to increase it?

We've maintained a very healthy investment level outside the U.S. and we invest behind the strategy that I just outlined. I wouldn't anticipate, at this point anyway, any major changes in terms of the strategy nor what that strategy calls for in terms of investments. We think it's working very well at present.

Okay. My last question has to do with the subordinated notes that are due in February 2008. If I understand the indenture for the senior notes, provide that you have to refinance the subordinated notes with subordinated debt, is that correct understanding?

Yes, that's largely correct.

Okay.

We could --

You could also do a combination of subordinated debt and equity.

Okay, thanks, that's helpful. That's it for me.

We have a follow-up question from Lance Vitanza of Concordia.

Hey, thanks, guys. I think I got cut off there.

I don't know how that happened. We apologize.

I have the question to your answer, Lance.

Thanks.

You asked about stock compensation expense. There's two components, there's stock options and then there's restricted stock awards, but essentially, it will be in our Q, which we plan to file later today. Just to give you the numbers, in 2007 in the first quarter, we recorded an expense of 1.6 million and that compares to an expense in the same quarter last year of about 3.7 million.

Terrific. Okay, thanks very much, guys.

Okay, Lance.

Our next question comes from Mary Gilbert of Imperial Capital.

Yes. Just kind of following up on the subordinated debt question, you have a $50 million basket that you can still use from the equity offering, right? So you can use -- you can sort of draw down on the revolver and redeem another 50 million, and then with the balance, I guess 110 million, you could finance with subordinated debt and then --

Well, Mary, we're not going to get into the details of our debt nor how we would refinance the 8 5/8s at this point. We've got a number of different options, and as we said, we're confident that we can get that done as we go forward. But to discuss the details of our debt structure, I think, would be inappropriate on the call.

Okay. Is that something that you guys are targeting for the back half of the year at this point, or in the fourth quarter?

That debt becomes due, as you know, in February of next year. We've said that we're highly confident that we can get that done and refinance it.

Okay. The other question I had is on the working capital. You said you didn't expect a significant improvement this year. So you're really looking for working capital to be roughly flat year over year, is that fair to say?

That's largely correct. I think we're going to see, at least we hope to see some improvements in inventory levels as we go forward, but I wouldn't factor in any meaningful improvements in working capital. We brought working capital down significantly compared to the end of the first quarter, for example, last year inventory is down over 50 million compared to that period. So ,our objective, simply, is to keep working capital as a percentage of sales flat or lower over time and we're on track to do that.

Okay, great. Thank you.

Our last question comes from Filippe Goossens of Credit Suisse.

Yes, Alan, just -- hi, Alan, just one other question here. In terms of the reserves that you guys set up last year for product returns following the discontinuation of Vital Radiance, how is that tracking? Could we see a positive upward revision there, or how is that trending right now?

A couple things. Vital Radiance is now largely out of most of the retail stores. It's still in the small handful of stores, and we're starting to see the product returns come back in now. We did some analysis and we expect that the impact -- the full impact of discontinuing the Vital Radiance brand to be largely in-line of what we had said last year, which was around the 60 million mark. So I wouldn't expect any meaningful upside to that number.

Great. Thanks so much, Alan. Okay.

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

Thank you very much for joining us. If you have any additional questions, please feel free to call me back directly. Thanks.

Thanks for participating in today's teleconference and have a nice day.