Revlon Inc (REV) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Revlon's second quarter 2007 Earnings Conference Call. At the request of Revlon, today's conference call is being recorded. If you have any objection, you may disconnect at this time.

I would now like to turn the call over to Miss Abbe Goldstein, Senior Vice President of Investor Relations. Thank you, Miss Goldstein. You may begin.

Thank you. Good morning, everyone and thank you for joining our call. Earlier this morning, we released our results for the second quarter 2007. If you have not already received a copy of the earnings release, you can obtain one from our web site at www.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 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 second quarter 2007 form 10-Q, which we expect to file later today. Our remarks today will include discussion of adjusted EBITDA, which is a non-GAAP measure that's 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 market place performance unless otherwise noted, our discussion this morning of market share and retail consumption is that of the U.S. mass market according to ACNeilson which excludes Wal-Mart, and regional mass volume retailers. The ACNielsen data is an aggregate of the drug channel, Target, Kmart, and food and combo stores, and represents approximately 2/3 of the company's U.S. mass market dollar volumes.

And finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I would like to hand the call over to David Kennedy.

Thank you, Abbe. Good morning, everyone. First, I would like to briefly review our financial highlights, for the second quarter of 2007. As compared to the same period last year. Net sales grew to $349.2 million from $321.1 million. Operating income increased to $16.9 million, compared to operating loss of $45.9 million. Net loss was $11.3 million or $0.02 per diluted share, compared to a net loss of $87.1 million or $0.20 per diluted share. Adjusted EBITDA increased to $42 million, compared to an adjusted EBITDA loss of $20.1 million.

Our performance in the second quarter was driven by a combination of sales growth, the benefits from the restructuring actions we took last year, and ongoing control of our costs. Vital Radiance affected comparability of the 2007 over 2006 period. In the second quarter, 2006, Vital Radiance reduced net sales by approximately $14 million and reduced operating profitability, and adjusted EBITDA by approximately $40 million. Our U.S. business net sales growth, excluding the impact of Vital Radiance, was driven by higher shipments of Almay and beauty care products, partially offset by lower shipments of Revlon color cosmetics. Our International operations results reflected net sales growth in the Asia Pacific, and Latin America regions, partially offset by lower sales in the Europe region. In terms of the U.S. market place performance, according to ACNielsen, the color cosmetics category declined 0.5% in the second quarter of 2007, compared to the same period last year. In the second quarter 2007, Revlon color cosmetics market share declined by 90 basis points in the year over year, which reflected a decrease in share, by products launched in prior years, offset in part by performance from new products, launched in the second half of 2006, and the first half of 2007. Importantly, on a sequential basis, since the fourth quarter 2006, the Revlon brand has maintained an approximate 13% dollar share. In the second quarter 2007, Revlon's positive performance in the lip and eye categories, were more than offset by declines in the face and nail categories. Revlon's performance in the lip category was primarily driven by Color Stay Soft and Smooth, which was launched in the second half of 2006. The performance in the eye category was driven by the Limited Edition Eye Collection, and Luxurious Color eyeliner which were launched in the first quarter of 2007.

In the second quarter and first half of that 2007, we continued to support our existing brands worldwide, with comparable dollar spending versus last year. The new product launches that we had planned for the second half of this year, have all been executed on schedule, namely the launches of Revlon 3D Extreme Mascara, Revlon Renew Lip Color, Revlon Age Defying Makeup Primer, Almay Pure Blend Mineral Makeup and Almay Smart Shade Line Extensions. As we look forward to 2008, we believe that we have a strong offering of new product introductions for our Revlon and Almay color cosmetics. These introductions include significant, innovative, and unique new product lines in the face category as well as collections, across all categories. In addition, we have important upgrades to certain products launched in prior years. We intend to support these new products with advertising and promotions, at competitive levels using our exciting line-up of spokes models.

We continue to execute our business strategy. First, building and leveraging our strong brands. We recently launched several exciting new products in our core brands, and are supporting these launches at competitive levels of brand support. As noted, we believe we have a strong pipeline of new product launches for next year as well. Secondly, improving the execution of our strategies and plans, and providing for continued improvement in our organizational capability. We have a strong team in place at Revlon, and are focusing on developing our employees through new and expanded roles, and enhancing our capabilities. We continue to strengthen our International business. We continue to strengthen that business further by leveraging our U.S. based Revlon brand marketing, as well as our strong regional brands. We're focused on enhancing our operating profit margins in cash flow. We're certainly focused on sales growth, and expect continuing sustainable benefits from our restructuring actions, and ongoing cost controls. Finally, we're focused on improving our capital structure. We plan to refinance the remaining balance of our 8 5/8 senior subordinated notes, prior to maturity.

As we look forward to the balance of the year, we remain on track with our expectations to generate approximately $210 million, in adjusted EBITDA in 2007. We're excited about our new product pipeline for 2008, and expect to invest appropriately, to successfully launch these new products into the market place. So, with that, let me hand it over to Alan Ennis, our CFO who will take you through the financial results for the quarter in some more detail.

Thank you, David. Good morning, everyone. As we normally do, I would like to build upon David's introductory financial comments, and take you through a more detailed review of the financial results for the second quarter of 2007, compared to the same period last year.

Starting with the P&L, net sales in the second quarter of 2007 advanced 8.8% to $349.2 million, compared to net sales of $321.1 million in the second quarter last year. Excluding the favorable impact of foreign currency fluctuations, net sales increased by 7.5%, versus a year ago. As David mentioned, Vital Radiance which was discontinued in September of 2006, affected our year-over-year comparability. Net sales in the second quarter of 2006 were reduced by approximately $14 million related to Vital Radiance. Specifically as was reported in the second quarter last year, net sales from vital radiance were impacted by returns and allowances charges, which more than offset the dollar value of shipments in that quarter. Just as a reminder, a summary of the impact of Vital Radiance by quarter for both net sales and operating incomes is posted on our web site.

In the United States, net sales in the second quarter of 2007 increased by 13.4% to $204.2 million, compared to net sales of $180 million in the comparable period last year. As I mentioned earlier, second quarter 2006 net sales in the U.S., were reduced by approximately $14 million from Vital Radiance. Excluding that impact of Vital Radiance in the prior year, net sales in the U.S. advanced 5% driven by higher shipments of Almay and beauty care products, partially offset by lower shipments of Revlon color cosmetics. The increase in Almay shipments was largely in support of our new second half product launches of Almay Smart Shade extensions namely blush and bronzer, and Almay Pure Blends mineral makeup.

In our International operations, net sales increased 2.7% to $145 million, compared to net sales of $141.1 million in the comparable period last year. Excluding the favorable impact of foreign currency fluctuations, International net sales, were largely unchanged compared to the same period last year. Notably within our International business, we saw sales growth in Asia Pacific and Latin America regions, partially offset by lower sales in the Europe region. As David mentioned earlier, continuing to strengthen our International business is one of our key strategic objectives. Over the last five years, through the end of 2006, net sales, our International business have grown at a 9% compounded annual growth rate, and we have significantly improved our operating margins. Over that same period, net sales of Revlon color cosmetics Internationally, have grown at an 11% compounded annual growth rate. These results clearly demonstrate the strength of the Revlon brand.

Across all categories, the Revlon brand, is a billion dollar brand for our company globally. Our growth profit margin for the quarter was 63.4%, compared to 57% in the second quarter last year. The gross profit margin in 2006 was negatively impacted by both Vital Radiance and charges related to estimated excess inventory levels of Almay. Excluding the impact of those charges last year, our gross profit margins improved by about one percentage point in the quarter, as a result of favorable factory efficiencies. Partially offset by unfavorable product mix. Moving down the rest of the P&L, SG&A expenses of $202.4 million improved, from $228.5 million last year. Driven primarily by the realization of restructuring savings in the current year, and the non-recurrence of brand support incurred last year, in connection with Vital Radiance.

In the second quarter and first half of 2007, we continue to support our existing brands worldwide, with comparable dollar spending versus last year. Results for the second quarter 2007 included restructuring expenses of $2.1 million, compared to restructuring expenses of half a million dollars last year. The restructuring expense in the current quarter related primarily to the closure of our plant in Irvington, New Jersey. We closed that plant on schedule at the end of June 2007, and consolidated the packaging of beauty tools, into our main Oxford, North Carolina, facility. The plant closure will result in cost saving synergies going forward. Importantly, we have executed our restructuring programs on schedule and are clearly achieving the planned savings. We're seeing the benefits of the restructuring actions in our financial results, and we still expect to deliver total annualized savings of approximately $55 million.

Operating income was $16.9 million, compared to an operating loss of $45.9 million last year. Interest expense for the quarter was $33.6 million, down from $35.9 million last year. The reduction in interest expense is due primarily, to lower average borrowing rates on comparable debt levels. Net loss in the second quarter of 2007 was $11.3 million, or $0.02 per diluted share, compared with a net loss of $87.1 million or $0.20 per diluted share in the second quarter of last year. Adjusted EBITDA in the second quarter of 2007 was $42 million compared to an adjusted EBITDA loss of $20.1 million, in the same period last year. Impacting comparability in the second quarter of 2006, Vital Radiance reduced our operating profitability and adjusted EBITDA by approximately $40 million. Excluding the impact in the prior year, the improvements in operating income, net loss, and adjusted EBITDA were driven by sales growth, continued benefits from our restructuring actions, and ongoing cost controls. At the end of the second quarter, we had $478.2 million shares outstanding, of class A common stock. $31.25 million shares, of outstanding class B, common stock.

Staying with the P&L, I would now like to briefly discuss the key financial results for the first six months of 2007. Net sales increased 4.8% to $677.8 million, compared to net sales of $646.6 million, in the first six months of last year. Excluding the impact of foreign currency fluctuations, net sales increased 4% versus a year ago. Vital Radiance had a minimal impact on net sales in the first six months of last year. Adjusted EBITDA in the first six months of 2007 was $74.3 million, compared to an adjusted EBITDA loss of $4.8 million, in the same period last year.

Results for the first six months of this year included restructuring expenses of $6.4 million, related primarily to our previously announced September 2006, organizational streamlining, and costs related to the closure of our plants in Irvington, New Jersey. The first six months of 2006 included restructuring expenses of $9.5 million, related primarily, to our February 2006 restructuring program. Key drivers of our results in the first six months of 2007 were higher net sales of Almay and beauty care products, benefits from our restructuring actions and ongoing cost controls. All of which resulted in solid adjusted EBITDA growth.

Moving on to cash flows, cash flow used for operating activities in the first six months of 2007 was $33 million. Compared to cash flow used for operating activities of $95.5 million, in the first six months of 2006. This improvement was due to a lower net loss, decreased permanent display spending, and was partially offset by a smaller improvement in working capital in 2007, compared to last year.

Capital expenditures for the first half of this year were $5.3 million, versus $11.3 million, in the first half of last year. We still expect capital expenditures for the full year to be in the $20 million to $25 million range, consistent with prior year spending levels. Permanent display expenditures in the first half of the year from $34.2 million versus $68.9 million, in the first half of 2006. The significant reduction in spending year over year, relates to the expenditures incurred last year associated with the new walls for Vital Radiance and the re-stage of Almay. We still expect permanent display spending, for the full year to be in the $60 million to $70 million range, compared to $98.7 million in 2006. With respect to our capital structure, the $167.4 million balance of our 8 5/8 senior subordinated notes, are due to mature on February 1, 2008. We have had discussions with our bankers and based on those discussions, we remain highly confident that we can, and will refinance these notes, prior to their maturity. Our unutilized borrowing capacity and cash as of July 31, 2007, totaled approximately $181 million, comprising $100 million available under the revolving multi-currency facility, $50 million available under the McAndrews and Forbes line of credit, and $31 million of cash, and cash equivalence.

As David mentioned earlier, we remain on track, to deliver approximately $210 million of adjusted EBITDA, for the full year of 2007. We look forward to updating you on our progress over the balance of this year. With that, we would like to open it up to your questions.

Thank you, sir. At this time, we're ready to begin our Q&A session. (OPERATOR INSTRUCTIONS). One moment for the first question, please. Our first question comes from Bill Chappell, from SunTrust.

Good morning.

Good morning, Bill.

I guess, just trying to understand the product roll-out for the remainder of the year, and then I know you don't give quarterly guidance. Really trying to understand the September quarter. What are you seeing in terms of schedule? Where should we see the biggest benefit, in September, or is it more December in terms of shooting new products out, and also what's kind of your expectation for traditional returns that you take in September? Will it be excluding Vital Radiance, in line with historical periods, or will it be greater or less? How do you look at that, too?

Well, Bill, I think, we don't give out guidance. And a lot of those questions would lead us to forecasting, as we said, we've launched two strong products in the U.S. under the Revlon brand. And we will launch additional products under the Almay brand as well. And, as we've also indicated, we believe we have a very strong new product line up, for 2008. And so I think that we'll probably stay right there. Our second quarter, you saw the results for the second quarter, we continue to experience good sales growth. Not withstanding that our Revlon shares in the U.S. is declining. Or has declined, year over year. We're maintaining the share at presence, or have maintained it through the second quarter of sequential basis. So, that's kind of the way we see it.

I guess I understand -- I'm just trying to understand, 4% kind of organic growth, including Vital Radiance, despite the market share declines in the quarter. How much of it is pipeline fill and how much of it is sustainable?

Bill, it is Alan here. A couple of things. Importantly, we launched a number of new products in the Almay franchise, for the second half of this year. Obviously the pipeline associated with that, was recorded in the second quarter when we shipped it. Last year, for comparable reasons, we didn't have any second half launches for Almay, because we had completely restaged the brand at the beginning of the year. So, there is some comparability issues there, looking at the Almay brand but importantly, our financial results for the quarter were in line with our expectations, and we're pleased with where they came at.

No, I mean they're obviously better than expected. From my standpoint. I guess the next question, can you talk a little bit about the overall category, what you're seeing. We've heard a lot about the pressure on the consumer, and possibly in the second half, and go forward. I mean are you seeing, that it doesn't look like-- we're hearing it from positions (inaudible) what are you seeing on the consumer, and what do you expect for the rest of the year?

Bill, as far as the category in the U.S. is measured by Neilson, you've seen, what we've seen. The category was flat in those channels. And, we read the media. We read the press. We talk to our customers. And we read it. It is a belief of our interpretation that it is cyclical. If you look at the category growth on average, as measured by Neilson in the U.S. over the past few years, it has ranged anywhere from a slight decline, to as much as a 4% growth on an annual basis, as I recall. So, again, the category moves up and down. It remains a very healthy category. Highly competitive, as you know. Driven by new product introductions, so we're seeing -- we're interpreting the first task category slowdown as cyclical and we certainly wouldn't be in a position to forecast how the category would react to whatever the economic pressures are going forward.

There is a lot going on in the Capital Markets. There's a lot going on in the economy. And so we're certainly not in a position to attempt to project out what's going to happen. In addition, let me just reinforce that there's nothing that we're seeing today in the category, that's gonna impact us continuing to execute against the strategy that we've outlined.

Great.

And in addition, we -- let me remind you, we remain very excited about our new product line-up, for the remainder of this year as well as 2008.

That's helpful. I guess one final question, Alan, as I look at the tax line, it was a tax benefit, instead of taxes. Should I imply that, that meant majority of a bigger chunk of the operating profit came from the U.S. versus International, or was there anything else going on there?

Well, you shouldn't -- couple of things. There was a one-time reserve or adjustment, in the second quarter related to a position we had at one of our International markets, specifically disclosed in our Q, which you'll see later. It relates to a tax program, in our Mexican operation, where we're able to address and resolve the situation that we had down there, to our favorable advantage. So, what you're seeing there, is the reversal of about a $5.9 million reserve, against the typical quarterly tax expense.

Great. Thanks a lot.

Thank you. Our next question comes from Lance Vitanza, from Concordia.

Thanks, guys for taking my call. Congratulations on the great quarter, and then just a couple of things that I wanted you to repeat or clarify. I tried to keep up with you in my note taking here, but the shares outstanding on the A shares?

$478.2 million.

$478.2 million. Okay. And then, the comments you made regarding the liquidity, you know, the cash and the amounts under the revolver and so forth, what date was that as of?

As of July 31.

July 31. Okay. And then could you kind of just take through the debt balances at the end of the quarter?

In the different branches of debt, sure. One second. We had, at the end of June, under our term loan facility, we had $840 million. Under the revolving multi-currency credit facility, there was $48.4 million. The balance of the 8 5/8 senior subordinated notes was $167.4 million, and the nine and a half senior notes due in 2011 were $387.2 million.

Ok. And then what about the short term bank lines? Any unsecured debt and so forth?

Well, I'm just taking you through our total debt picture. That's everything.

Okay. Can you tell me -- Okay. Fine. The $48.4 million on the revolver, how does that compare with where you were at the end of Q2 last year?

I don't have that right in front of me. Let me get back to you on that one, Lance. I have the December balance, but not June of last year.

Remember also, Lance that, we refinanced in the fourth quarter, so we changed the structure of that significantly, so I'm not sure what you're looking for is comparable.

Ok. What I'm trying to get at is where you are from a working capital standpoint, relative to last year, at this time.

It is probably better if we get back to you on that. We can take you through all of those numbers and of course, the Q will be filed when, today.

Filed later today.

Ok, great.

You can track it through the Qs and the Ks as well. We'll be happy to entertain those off-line.

Ok, thanks, guys.

our next question is from Filippe Goossens, of Credit Suisse.

Yes, good morning, everyone.

Good morning, Filippe.

David, first question for you perhaps, can you just give us a little bit additional color on Europe, as sales were down 1.5% last year. We were up 0.3% and we did have the benefit of foreign currency, I would presume. And anything that's, behind the kind of weakness, in the European market?

Well, first of all, Europe includes Canada, as you know. And the Revlon brand in Canada, reflected the kind of performance we're having here in the U.S., so that's part of the problem. And also in the U.K. in the second quarter, really, while the growth in all of the brands over there is quite good, we did under our continuing program of rationalizing some brands, we took some charges for some brands, that we're in the process of exiting.

Ok. And then the other question I had for you, David, and we've spoken about this in the past, as it relates to your overall portfolio. And my question specifically today, is with regard to the audience. We had a slight slippage in terms of market shares. Yesterday on the Church and Dwight conference call, the company made reference to the fact that it is a very competitive market, that they're electing scale, in that business to compete, and that they're actually moving toward quote-unquote gorilla marketing. Can you just kind of, for our benefit, tell us how you're able to do a better job in the deodorant category?

Well, first of all, I don't have any knowledge of the Church and Dwight call, and I wouldn't compare our results to anybody else. It is a highly competitive category. That's not new. That's been the case in the U.S., and really around the world in key countries for years. So, we don't see any change in the intensity. And as you move through time, different players, react in different ways and respond. But at the same time, it has always been a very intensely competitive category, and remains so. Our brand strength there, with the Mitchum brand is strong, it is good. So, we've got a great asset there.

We launched, as you know, a new product line in the first quarter of the year. We think that's doing reasonably well, I would say, although it is still early. So, we like our position. We think our brand is strong. I think we've got some good people who manage that brand, and all in all, we've got a very good position there. Not only in the U.S., but around the world in certain countries where we market the Mitchum brand.

Then my next question is for both of you, David and Alan. You make reference, both I think in the press release as well as in your prepared comments. That you have spent, or continued to spend, on a comparable dollar basis, as it relates to advertising spent, to support your brands. Now, when I kind of look across the board of companies, either in the personal care space, or companies in the household space that have reported over the last number of weeks, everybody talks about the need to increase their advertising, and marketing spent. Yet, over the last number of quarters, it seems that you're able to manage to keep these levels stable.

Aren't you under-investing perhaps a little bit in these brands, David, based on the performance that we've seen over the Revlon brand in the U.S. and that going forward, perhaps you need to step up that spending, and maybe that's why, despite having outperformed guidance, maybe not guidance but our estimates for the second quarter that you're not raising your 210 EBITDA target for the year?

Filippe, first of all, we are attempting to manage to grow our key brands, profitably. And we spent a lot of time managing our expenditure, in order to get the best return that we believe or can expect, from a particular expenditure. And we want to remain competitive, but we do want to have profitable growth, over time. So, that's our overall objective. Other companies potentially have other objectives, different strategies. And so forth. But ours I think, is very clear. We've got really good brands. We're focused on those brands. We're focused importantly on all of the key drivers of the brand. That includes strong new products, continuing to have a sustainable, very strong pipeline of new products. We're going to manage our portfolio strategically over time. To optimize and maximize, profitable growth over time. We're also very focused on the effectiveness of our communication, around our brands. The effectiveness of our execution in store, with our retail partners. So, we're focused on all of the elements, which we believe drive profitable growth over time.

As it relates to the outperformance, David, in the second quarter and still maintaining the 210 target, is that perhaps a more -- should we interpret it as a more conservative stance on your side, or is there perhaps --

First of all, Philippe, let me just comment on your term outperformance. We're right on track with our expectations. So we--

Okay.

We are solidly in line with our expectations. That's what we have indicated, and we indicated that in the first quarter, and we're indicating that now.

Ok. Then, Alan, as it relates to the restructuring program, obviously you continue to do very well there. Can you give us a program to date, in terms of how much savings have you realized so far, as well as what the charges program to date are?

Yeah, I think a couple of things. In the second quarter as I mentioned, we recorded $2.1 billion of expenses. In the first six months, we recorded $6.4 million of expenses. In terms of spending, we've largely, incurred certainly through the P&L, the preponderance of the costs associated with all of the programs, they've all been recorded largely been recorded now that we've officially closed the plant in Irvington, New Jersey. In terms of savings, as I mentioned, we're on track. We achieved in 2006, we achieved approximately $20 million of these savings, were as of the first of July, we're actually on our run rates of $55 million. From an annualized basis we should have the full $55 million, in 2008.

Ok. My final question, Alan, you and I have spoken about this many times already, but what comfort can you give us today, that if the high yield markets remain closed, as they are according to our bankers, that. McAndrews and Forbes, will indeed again backstop the refinancing of the notes. I think any comfort that you can give to investors today on the call here, I think would be very much appreciated.

A couple of comments, Filippe. As I mentioned earlier, we have had discussions with our bankers, and you know, importantly, based on the discussions, we remain highly confident that we can and we will, refinance those notes prior to maturity. You know, we believe that continuing to demonstrate improved performance, will put us in a better position to refinance our debt. We will get that done before February 1, of next year.

Right. But I do understand your performance, Alan. But my point goes more towards, what if the market remains closed, the high yield market is closed. Nobody can get deals done. So, what comfort can you give us that McAndrews will backstop you, if the high yield market remains closed, regardless of you hitting your 210 number?

Filippe, you're talking about a hypothetical situation. Let me remind you, what we said again. That we have discussed this thoroughly, with our bankers. We remain highly confident that we can refinance these notes.

Ok. Fair enough. I'm just looking at what I see in the market place today. That nobody can get deals done.

We also talk to people who understand the market place very well, Filippe. We've indicated that to you.

Ok. Thank you very much.

Before the next question, I wanted to go back and answer a question that Lance Vitanza had, from Concordia. You asked what the balance in the multi-currency revolving facility was, as of June last year. And that balance was $104.6 million. So $104.6 million, last year at the end of June, compared to $48.4 million at the end of June this year. Okay, operator.

Thank you, sir. Our next question comes from Mary Gilbert from Imperial Capital.

Yes, good morning. I wondered if you could talk about your cash needs this year. In addition to the permanent display costs. Do you have any cash needs, on the working capital side, or have you found some opportunities to reduce working capital? What kind of change can we expect there?

Let me go through a couple of things, Mary, if I may. You know, we continue to drive improvements in our working capital. In fact, if you look at working capital change, in the first six months of this year, it actually improved by about $30 million over where it was at year end. In terms of cash, you know, cash usage, if you look at our EBITDA target of $210 million, we've talked about a Cap Ex of $20 million to $25 million. We've talked about permanent display spending of , in the $60 million to $70 million range. In terms of interest expense, we've been trending it around $34 million a quarter. You know for the first two quarters of this year. And if you assume, you know, taxes are in the $10 million to $15 million range as they have been, on average for the last number of years, you would probably see a net usage of working capital, driven primarily by pension contributions which are in excess of our pension

How much is that?

Pension contributions we expect this year to be about $38 million.

How much of it is an excess of expense?

The expense will be about $8 million.

Thank you.

And then, you know, importantly, our sales returns reserve, was quite high at the end of the year as we had accrued for returns registered to Vital Radiance. As that product has come back in, and continues to come back in, we expect that return reserve to go down, which will obviously equate to cash going up.

How much will that affect do you think?

It is hard to tell what the sales returns will be at the end of the year. I would imagine it will be in the $30 million to $40 million range.

That will be the cash impact?

I believe so.

Ok. All right. So this sort of gives us a framework for all of your cash needs. So, I have the working capital effect with the cash reserve going down, and the pension funding in excess of the amount expensed.

Yes. If you take those two in isolation, what you'll see is that the balance of the working capital inventory in receivables and payables, will continue to improve this year, compared to where they were last year.

Ok. So, will that be enough to offset a portion of that cost on the working capital side?

Yes.

Ok. And then you know, sort of looking at '08, we're still going to have the pension funding in '08. We shouldn't have the reserve issue in '08, right?

The reserve, obviously depends on what we do from a new product standpoint, and product performance. So, you know, I can't comment about the reserve position would be. Certainly, the pension contributions will continue to be a drain on cash, but as for reserves, it depends on what we do in the market place.

Based on the guidance of 210, it looks like you would have a net cash usage of about $93.5 million. Does that sound about right?

Well, yeah. I think you're double counting the pension and sales returns, so it is not that high.

Oh, it's not that high. I was counting --

included in working capital, Mary. You've gotta consider those as a part of working capital.

Right.

You're counting the (inaudible).

Oh, okay. Yeah. So, I was thinking I have $30 million as the amount funded in excess of the amount expensed, and then I was also counting on the reserve going down by about 30. That's how I got $60 million.

I understand. Those are all components of working capital. So, you've gotta think about those separately, or as a part of working capital, I should say.

That's what I was doing but oh, are you saying because we also have permanent display expenditures in working capital, too.

Just go over it again, Alan and make sure she's clear.

If you assume EBITDA of 210. Assume Cap Ex of between $20 million and $25 million.

Yep.

You assume permanent display spending of between $60 and $70 million. Interest expense of around $34 million a quarter, which it has been for the first two quarters of this year. They're fairly known quantities. The balance of all of the other items that we talked about; including sales returns, working capital, taxes, pension contributions, should roughly equate to, you know, $25 million to $40 million use of cash.

Oh, I see. I see. So, in other words, do you have a working capital benefit from inventories, receivables, and that sort of thing that offsets some of the --

Yes.

Got it. Got it. Got it. That's most helpful. Thank you for the clarification on that.

Sure.

Ok. That's most helpful. Thank you.

Ok, Mary.

Our next question comes from Reza Vahabzadeh, of Lehman Brothers.

Good morning.

Good morning.

I guess in some categories, and for some companies, there seems to be some discussion of cautious inventory levels at retail, and some inventory D stock. Can you comment on that with respect to your categories, and what you're seeing?

Sure. I'll be happy to. You have to put this in the context, I guess, of what you're talking about as a U.S. business primarily. Is that correct?

Yes. Thank you.

Although it is probably the same in most large retailers around the world. Over the past few years, there has been a continuing trend to manage retailer inventories, as closely as possible. And that trend continues. We don't see any real change in that trend. Obviously quarter to quarter, half to half, there is always some changes, as it concerns individual retailers, but overall, that trend continues, and we think it is a healthy trend, and we worked with our retailers to ensure that we've got the optimized level of inventory in stores, so we don't lose sales on the one hand, but on the other hand don't overinvest in inventory as well.

So, again, continuing trends, don't see any particular -- at least up through the second half, of June, we don't see any particular changes, in those trends. Again, they're pluses or minuses, with every retailer, but no particular complexion points in those trends, I guess you would say.

I'm sorry. Did you quantify the magnitude of the Almay new product pipeline field, for the quarter?

We did not quantify that.

Okay. And as far as comparisons for the third quarter, did you have -- your comments in the past, you may have mentioned this and answering another question, you don't have a tough comparison in the third quarter, as far as a pipeline shipments, in the prior year for Almay Revlon?

Well, what's the question?

We would have to look back at those quarters, you know. I think we disclosed those quarters in the past.

I'm just saying this pipeline fill in the second quarter is not borrowing from the third quarter?

Third quarter this year. No.

Ok.

With our normal business practices.

Got it. Then as far as your -- you mentioned dollar share trends in your press release, are the volume share trends similar to the dollar share trends, or are they better or worse?

Are you saying the Neilson dollar share trends?

Yes. You disclosed dollar share trends in your press release, according to A.C. Nielson. Are the volume share trends comparable?

I think the category is about flat in the first half, so if you maintained sequential share as compared to last year, obviously the dollar share trends, are gonna be different. And there is a matter of record, I guess.

No, I mean your volume share trends, for your products.

Are you talking about Neilson consumption? Let me make sure I understand which numbers you're talking about, or are you talking about our sales, that we record?

Well, you have dollar share trends that are -- you know, sequentially basically stable, as you mentioned for, you know, Revlon and for Almay.

Our share. Our U.S. Neilson share, color cosmetics for the Revlon brand, sequentially for the last three quarters, has been approximately 13%.

Right. But that's dollar share. It is not volume share.

Right. You're talking about unit share.

Volume or units, yes.

In terms of unit share, you know, they're directionally in line with where the dollar share is, if as you look at both. They're pretty much in line.

Ok.

Across those categories.

Got it. Thank you.

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

Hi, good morning. I'm wondering if you could talk about returns and allowance trends, exclusive of Vital Radiance. Are you seeing an improvement in that?

Returns and allowances, are actually improved, certainly in the quarter, in the first six months of this year. As you know, last year we had significant returns and allowances, expenses related to Vital Radiance and in fact, in the fourth quarter of 2005, we had significant returns, third and fourth quarter of '05, returns related to the restage of Almay. So I think what we're seeing, as we go into this year, is a more normalized level of returns and allowances. Clearly, we're focused on making sure we don't have you know, from an obsolescence standpoint-- excess inventory on our side, and that we try to ship to consumption. So I think what we're seeing is an improvement, generally in returns and allowances even excluding those one-time activities. Associated with Vital Radiance and Almay in the last couple of years.

Ok, great. That's helpful. A couple of things. Could you touch on maybe some of your price points, and your product mix. You mentioned that your growth margin yes, it was improved, however it was slightly -- the improvement was slightly offset, by the sales mix. And that would then lead me to believe that perhaps the Almay and the new product introductions, are a less profitable. Can you address that? And then also in your new product line-up, would you say that the price points are higher? I mean it looks like you're kind of adding value to the product. So, I would think that you would be able to charge a higher price. Can you just talk about pricing in general?

Well, first of all, you asked a number of questions I think. Let me try to answer as best I can. First of all, as far as the pricing on new products, that obviously depends on the new product itself. And our determination, of what sort of price, that we would suggest to the retailers, that they can achieve, with that product. So, we obviously spend a lot of time evaluating what that is, competitive context. As well as in the consumer context. For example, our limited edition collection, of which you'll -- of which you would know it, if you saw the price points in the stores would be at a higher price level overall, than perhaps some other products that we might have in a comparable line.

Our Revlon hair color product that was launched this year, that was certainly at a higher price point. We felt like we had a product proposition, that would support the level. So really it depends overall, on the individual product, the competitive situation, what our retailers who in fact set the price, we don't, think about the particular product. And what was your other question?

The other question was regarding your sales mix you talked about in general, on an earned balance there was improvement in your gross margin, however some of the efficiency gains were offset by the sales mix.

I'll let Alan answer that.

A couple of things. We had, you know, importantly a percentage point improvement in our gross margin in this quarter, which is an achievement. The preponderance of that really is, efficiencies associated with activities in our factory. We continue to not only in our main factory, but also our plants around the world. We continue to improve the processes we have. We continue to improve the way that we manufacture products, and so we're clearly seeing the benefits of those efforts falling through to our gross margin. That's the main driver of the point difference. The mix is for all intents and purposes, is minimal.

Ok. Thank you. That's helpful. That's it for me.

Thank you, Karen.

Our next question comes from Frank Bianco from Argent.

Good morning. Can you repeat your availability under the revolver, please?

$100 million. As of the end of July.

You had another 50 available under a separate line?

Yes. In the McAndrews and Forbes line of credit.

Can you borrow under either, to refund the [OIET] maturity?

Say that again?

Can you borrow under either line to fund the. (inaudible) Maturity?

I guess a couple of things. We're not going to get into specific questions around how we plan to refinance the 8 5/8. There are a number of factors that impact how we can refinance. I think for reference, we have very limited senior debt capacity, based on our current debt structure. And so we would be happy to take any additional questions you may have off-line at the end of this call, if you want to call Abbe Goldstein, to clarify any of the information in our public information.

If I understand it, it sounds like you can't borrow under your line.

I didn't say that but I think if you have a specific question about what's in the public domain, I would be happy to address the specific question after the call, with Abbe.

No problem. Thanks.

Thank you.

Thank you. Our next question comes from Kevin [Zeits], from Goldman Sachs.

Hey guys.

Good morning, Kevin.

I think what your answer to this is going to be, but just -- am I reading you correctly by your saying, you want to deliver more performance in the back half of the year, and you think that that will help the refinancing process go more smoothly, that this is something that you're going to wait until maybe later this year, or early next year?

We're not going to talk about that timing specifically, Kevin. What I did say, and what I've said for a number of quarters, is that we believe it is continuing to demonstrate improved financial performance, would put us in a better position to refinance the debt. So, you know, clearly, the second quarter results are a demonstration of our ability to achieve 210, and I think that's an important step.

Thanks. I thought that's what your answer would be.

I'm glad I'm consistent.

Just a -- I want to make sure I'm thinking about this correctly. If I look at your schedules, regarding Vital Radiance, it looks like there were about $60 million in the back half of the year, in operating income losses. And I guess if I put that together with the EBITDA, of what I have anyway, around $100 million, from the second half of '06, that's roughly $160 million plus the $75 million you did in the first half of this year. Puts you at about 230. Is that doesn't include any growth or benefit from restructuring savings in the back half the year. Am I thinking of that correctly? Is there the possibility of either, really significant beat, or maybe conversely, is there a lot of caution or some source of caution that you may have, about the second half of the year?

I recognize about half of the numbers you called out. Some I don't -- some don't ring with what I have. I think what you should take, is that our financial results for this quarter were in line with our expectations. As was the first quarter so we remain on track to deliver 210.

Ok. Housekeeping item on the restructuring charges. What's left from a cash standpoint, to flow through? In the back half of the year?

From a cash -- let me just -- I think it is in the Q.

Give us a moment. We'll come back.

Or if it will be in the Q later, I'll pull it from later.

That will be in the Q later today.

Probably better if you called us, then we can clarify.

Ok. Just the last question on, sort of, new product introductions. When you're looking out, and you mentioned that the '08 slate of products looks robust. I was wondering if you could compare sort of in number, or in magnitude of opportunity, that you see for 2008. And then I guess a related question, I think you said you might be upgrading some of your existing lines, and just wondering whether the -- sort of the speed with which you need to revamp your existing lines, is maybe accelerating on a longer term basis.

Sure. Well, first of all, as we've indicated on prior calls, we are focused on all of the drivers (inaudible). Importantly, with the Revlon brand reinvigorating our pipeline of new products, and while I don't want to give details, as you might expect, because it's for competitive reasons, at this time of the year, we do expect strong launches across all categories, and as we indicated, we'd also be upgrading certain products that we lost in prior years.

So, that's about all that we really want to say at the present time. Later on in the year, we'll be giving out more details so you'll have to be patient with us. I hope you can understand we wouldn't want to disclose the details at this point, given the competitive situation.

I was just wondering if -- just sort of directionally whether there were more products, fewer products than --

As we indicated, we'll be launching products under the Revlon brand across all of the categories. If you compare that to, let's say 2006, where we essentially restaged the Color Stay brand in the first half and launched one major, very successful lip product in the back half.

Ok. Thanks.

Kevin, just to get back to you on your restructuring question. I dug up a copy of our Q, that we're going to file later today, they're restructuring-- the balance on the restructuring accrue, if you like, is about $12.5 million. The preponderance of that, would be paid out in cash over the back half of this year, and early into next year.

Ok. Thank you. And I'm not sure if you addressed sort of, the back end of my last question in terms of the how quickly you're sort of upgrading your lines. Is it once every couple of years, or is it every year or --

It is an ongoing effort, and it is driven by our portfolio strategy, the opportunities that we see, but obviously in this category, overall, new products are a strong driver of probable growth and so we would plan, as we've indicated to continue to focus on having a strong, new product pipeline every year.

Ok. Thanks very much.

Thanks, Kevin.

Thank you. (OPERATOR INSTRUCTIONS).Our next question comes from Connie Maneaty, from BMO Capital Markets.

Good morning.

Good morning, Connie. How are you?

I'm fine but I came into the call very late, because of everything going on with the subways today. So, I hope this -- I'm not asking something you've already answered.

That's all right. We'll be happy to answer it again, Connie.

Ok. Can you just comment on the relative sluggishness of the Revlon brand, in the first half of the year? Does it have more to do with the new sales of the new products you'll be introducing later? Or just give us a little bit of color on this very important part of your business.

Sure. In the U.S. again, it is a clear picture of a greater decline in products -- from products we've launched in prior years. Key franchises like Age Defying for example. Against successful, I would say, in the well-performing new product launches in the back half of '06. What we've launched in the first half of this year. You can trace that performance, I think, back to the strategy that was undertaken on the Revlon brand, which was the focus of the restages of the key franchises in '05 and '06 and the company's strategy to launch Vital Radiance and Almay, as opposed to focus on the Revlon brand and building and having continuing to develop, the strong pipeline of new products.

So, from your comments then this morning, once you start to roll out these new products across the whole Revlon platform, would that be the start of a continuous process, to get that brand a little bit more relevant, I guess?

Connie, if you go all the way back to third quarter of last year, where we articulated the strategy to refocus on the Revlon brand, and all of the drivers of that brand, and build that brand over time, we've been very consistent in saying that one of the key elements of that is, having a strategically well-managed portfolio of new products, including strong pipelines of new products every year. What we believe to be strong products every year. Continuing to manage that portfolio for possible growth. That is the central focus, in where we're concentrating our efforts, and we've been doing that now for three quarters.

So, how far out are you looking --

We also said we're very excited about our 2008, pipeline of new products and we'll be able to talk more about that later in the year.

And is the pattern going to be the same where most of the new products for 2008 are shipped in December, or will there be some --

in the U.S., that will be the continuing pattern, although as we've indicated, we've launched two new products in the back half of this year. And I would expect, that there will be, the continuing trend of launching products, I don't know how many. Depends on the retailer's reset patterns, and where they want to go. In the back half of each year. For 2006 as you know, we launched a lip product in the back half of the year under the Revlon brand. This year, we're launching 3D Extreme Mascara, Revlon Renewist, and additional products under the Almay brand. So, I think going forward, you'll see a continuing pattern again in the U.S., most of the launch is occurring in the first half. Most retailers reset, and then launches in the back half, also again depending upon what retailer plans are.

Finally, could you comment on your experience with Flair? It seems like a bit of a -- it is a unique product. How is it doing?

Flair. We just launched Flair in the U.S. It is too early to say how it is doing. We launched it in mass directly. So, we'll see how it goes. It is really too early to say, Connie.

Ok.

Just now reaching store shelves.

Ok.

And broadening its distribution.

Great. Thanks.

Thanks, Connie.

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

Thanks. I just wanted to follow up on a previous questioner's question regarding, the ability to use the revolver to refinance the 8 5/8 which you didn't really answer. I thought you had said on a previous call, that pursuant to the indenture for the 9.5% senior notes, that you needed to refinance the subordinated debt, or equity. Is that not correct?

I couldn't quite hear what you said.

Sorry. I said I was following up on previous questioner's question, about the ability to use the revolver to refinance the 8 5/8, and I thought you had said on a previous call, that pursuant to the indenture for the 9.5% senior notes, that you needed to refinance with the subordinated debt, or equity. Is that not correct?

Well, I guess a couple of things. Under the current debt structure, and the agreements we have in place, we have very limited additional senior debt capacity. So, we would likely refinance the 8 5/8 with a generally similar class of debt, although we're still evaluating our options.

My question was regarding the indenture for the 9.5% senior notes. I thought had you made reference to the restrictions on that, on a previous call. Are there not any such restrictions?

Sure, there are a number of restrictions under the various credit agreements and indentures that we have in place. If you have a specific question, we would be happy to take that after the call, if you want to call Abbe Goldstein directly.

Thank you.

Sure.

This ends the Q&A segment of today's conference. We will now turn the call back over to Mr. David Kennedy, for closing remarks.

First of all, thank to all of you for participating in the call, and just let me repeat a couple things, that I would like for you to take away. We generated mid single digit sales growth. We generated solid adjusted EBITDA growth. We are executing our restructuring actions on schedule, and are benefiting, from those actions. We remain on track, to generate the $210 million in adjusted EBITDA for 2007, and importantly, we are excited about our new product pipeline for 2008, and expect to tell you more about our line-up later this year. Thank you, everyone.