Revlon Inc (REV) 2007 Q3 法說會逐字稿

Thank you. Good morning, ladies and gentlemen, and welcome to the Revlon's third 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 of Investor Relations and Corporate Communications.

Thank you and good morning, everyone. Thanks for joining our call. Earlier this morning we released our results for the third quarter 2007. If have you not already received a copy of the earnings release you can obtain one at our website Revloninc.Com. Here with me today are David Kennedy, President and Chief Executive Officer; and Alan Ennis, Executive Vice President and Chief Financial Officer. David will briefly highlight the third quarter results and provide a strategic update on the business. Alan will review our financial results for the third quarter in more detail and I will introduce our exciting new product line up for the first half of 2008.

Before we get started, I'd 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 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 third 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 in 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 is market share and retail consumption is that of the U.S. mass market according to AC Nielsen which excludes Wal-Mart as well as regional mass volume retailers, Prestige, department stores, Internet, door to door, television shopping, perfumeries, and specialty stores all of which are outlets for cosmetic sales. The AC Nielsen data is an aggregate of the drug channel, Target, K-Mart, and food and combo stores and represents approximately two-thirds 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'd now like to hand it over to David.

Thank you, Abbe, and good morning to everyone. First, I'd like to briefly review our financial highlights for the third quarter of 2007 as compared to the same period last year. Net sales increased to $339.7 million from $305.9 million. Operating income increased to $20.7 million compared to an operating loss of $57.2 million. Net loss was 410.4 million or $0.02 per diluted share compared to a net loss of $100.5 million or $0.24 per diluted share. Adjusted EBITDA increased to $43.9 million compared to an adjusted EBITDA loss of $25.1 million. Our performance in the third quarter was driven by a combination of increased net sales, continued benefits from the restructuring actions we took last year, and in early 2007 and our ongoing control of cost. Later in the call, Alan will review the financial results of the third quarter and for the first nine months of the year in more detail.

In terms of U.S. marketplace performance according to AC Nielsen, the color cosmetics category increased 0.7% in the third quarter of 2007 compared to the same period last year. In the third quarter of 2007, Revlon color cosmetics market share declined 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 point dollar share.

In the third quarter 2007, Revlon's positive performance in the eye category was more than offset by declines in the facelift and nail categories. Revlon's positive performance in the eye category was driven by new products including the Limited Edition Eye Collection, Luxurious Color eye liner and 3D Extreme Mascara, which were all launched in 2007.

In the third quarter 2007, Almay maintained its approximate 6% share. During the quarter, Almay's positive performance in the face category was offset by declines in the lift and eye categories. Almay's positive performance in the face category was principally driven by Smart Shade makeup and its new line extensions, Smart Shade Blush and Bronzer.

In the third quarter we continued to competitively support our existing brands worldwide with increased dollar spending versus last year. We continue to execute our business strategy, first building and leveraging our strong brands. Throughout 2007, we launched several exciting new products in our core brands and are supporting these launches at competitive levels. As Abbe will discuss in more detail later in this call, we believe that we have a strong 2008 line up of new products for our Revlon and Almay color cosmetics brands. 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.

Secondly, improving the execution of our strategies and plans, and providing for continued improvement in our organizational capability. Effective October 1, 2007, we established a U.S. region and appointed Chris Elshaw as General Manager to run this significant part of our business. This organizational change will provide the focus and continue the clear accountability to grow the U.S. business profitably. Prior to his new role, Chris successfully grew our business profitably in Europe and Canada for the past five years as Managing Director of our Europe region.

Third, continuing to strengthen our international business. We continue to strengthen our international business by leveraging our U.S. based Revlon brand marketing as well as our strong regional brands. In the third quarter, and first nine months of 2007, international operating profits and margins continued to improve compared to the same periods last year.

Fourth, enhancing operating profit margins and cash flow. Our results for the quarter and for the first nine months of the year demonstrate improved margins and significantly less cash usage. We are focused on sales growth and expect continuing sustainable benefits from our restructuring actions and ongoing cost controls.

And five, improving our capital structure. We recently entered into a $150 million floating to fixed interest rate swap transaction in order to reduce our exposure to interest rate volatility. Based on our performance in the third quarter, and our outlook for the remainder of the year, we expect full year adjusted EBITDA to exceed our previous forecast of $210 million. So with that let me hand it over to Alan who will take you through the financial results for the quarter and nine months in some more detail.

Thank you, David and good morning, everyone. As we normally do, I would like to build upon David's introductory financial comments and take you through a detailed review of the financial results for the third quarter of 2007 compared to the same period last year. Starting with the P&L, net sales in the third quarter of 2007 advanced 11% to $339.7 million compared to $305.9 million in the third quarter of last year. Excluding the favorable impact of foreign currency fluctuations, net sales advanced 8.6% versus a year ago. Vital Radiance which was discontinued in September 2006 affected our year-over-year comparability. Net sales in the third quarter of 2006 were reduced by approximately $15 million related to Vital Radiance.

Specifically, as we reported in the third quarter of 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 income is posted on our website.

In the United States, net sales in the third quarter of 2007 increased by 19.7% to $190.9 million, compared to $159.5 million in the comparable period last year. As I mentioned earlier, third quarter 2006 net sales in the U.S. were reduced by approximately $15 million from Vital Radiance.

Excluding the impact of Vital Radiance in the prior year, net sales in the U.S. advanced 9.4% driven by a favorable reduction in sales returns and higher shipments of beauty care products primarily women's hair color, partially offset by lower shipments of Revlon and Almay color cosmetics.

In our international operations, net sales increased 1.6% to $148.8 million compared to $146.4 million in the comparable period last year. Excluding the favorable impact of foreign currency fluctuations, international net sales declined 3.4% compared to the same period last year. As David mentioned in the third quarter of 2007, international operating profits and margins continued to improve compared to the same period last year.

In Asia Pacific, net sales for the third quarter of 2007 increased $5 million or 8.6% to $63.5 million compared to $58.5 million for the third quarter of last year. Excluding the impact of foreign currency fluctuations, net sales in Asia Pacific increased $2.3 million or 3.9%. This increase in net sales was due primarily to higher shipments in South Africa, Australia, and in certain of our distributor markets.

In Europe, net sales for the third quarter of 2007 decreased by $3.7 million or 6.8% to $51.1 million compared to $54.8 million for the third quarter of last year. Excluding the impact of foreign currency fluctuations, net sales in Europe decreased by $7.3 million or 13.3%. This decrease in net sales was due primarily to lower shipments in Canada driven principally by our planned reduction in promotional activity in 2007 and importantly by the fact that the third quarter of 2006 benefited from shipments associated with the restage of Almay Color Cosmetics.

In Latin America, net sales in the third quarter of 2007 increased by $1.1 million or 3.3% to $34.2 million compared to $33.1 million for the third quarter of last year. Excluding the impact of foreign currency fluctuations, net sales in Latin America remained essentially unchanged year-over-year as higher shipments in Venezuela were offset by lower shipments in both Brazil and Mexico.

Moving down the rest of the P&L for Revlon Inc, our gross profit margin for the quarter was 63.4% compared to a margin of 51.3% in the third quarter of last year. This 12.1 percentage point margin improvement breaks down as follows. 7.3 points of the change related to the impact that Vital Radiance had on prior years third quarter, 2.8 points of the change related to lower year-over-year charges for estimated excess inventory with the balance of the improvement coming from favorable returns and allowances. SG&A expenses of $194.2 million improved from $200.4 million last year driven primarily by the realization of savings in the current year from our previously announced and implemented restructuring actions and the non-recurrence of brand support incurred last year in connection with Vital Radiance. In the third quarter we continued to competitively support our existing brands worldwide with increased dollar spending versus last year.

Results for the third quarter of 2007 included restructuring expenses of approximately $0.5 million related to our previously announced restructuring programs compared to restructuring expenses of $13.8 million last year. We have executed our restructuring programs on schedule and are clearly seeing the benefits of the restructuring actions in our financial results. We are delivering total annualized savings of approximately $55 million as expected.

Operating income for the third quarter of 2007 was $20.7 million compared to an operating loss of $57.2 million last year. Interest expense for the quarter was $34.5 million down from $38.3 million last year. This favorable reduction in interest expense is due primarily to lower average borrowing rates on comparable average debt levels. Net loss in the third quarter of 2007 was $10.4 million or $0.02 per diluted share compared to a net loss of $100.5 million or $0.24 per diluted share in the third quarter of last year. As David mentioned adjusted EBITDA in the third quarter of 2007 was $43.9 million compared to an adjusted EBITDA loss of $25.1 million in the same period last year.

Vital Radiance executive severance and restructuring expenses affected compatibility of the 2007 over 2006 period. In the third quarter of last year, these items collectively reduced operating profitability by approximately $72 million and reduced adjusted EBITDA by approximately $64 million. Excluding the impact of these items, the improvements in operating income, net loss, and adjusted EBITDA Were driven by net sales growth, continued benefits from restructuring actions, and our ongoing efforts to control costs. At the end of the third quarter, we had 479.3 million shares outstanding of Class A common stock and 31.25 million shares outstanding of Class B common stock.

Staying with the P&L, I would now like to briefly discuss the key financial results for the nine months ended September 30, 2007. Net sales in the first nine months of 2007 advanced 6.8% to slightly over $1 billion compared to net sales of $952.5 million in the first nine months of last year. Excluding the impact of foreign currency fluctuations, net sales in the first nine months of this year increased by 5.5% versus year ago. Net sales in the prior nine months in 2006 were reduced by approximately $15 million from Vital Radiance.

For the first nine months of this year, operating income was $40.6 million compared to an operating loss of $120.3 million in the first nine months of last year. Net loss was $56.9 million or $0.11 per diluted share compared to a net loss of $245.8 million or $0.59 per diluted share for the first nine months of last year. Adjusted EBITDA was $118.2 million compared to an adjusted EBITDA loss of $30 million in the same period last year. In the first nine months of 2006, Vital Radiance executive severance and restructuring expenses reduced operating profitability by approximately $124 million and adjusted EBITDA by approximately $113 million. Results for the first nine months of this year included restructuring expenses of $6.9 million.

Key drivers of our results for the first nine months of 2007 were higher net sales, including the impact of lower returns expense and higher shipments of Almay and Beauty Care products, lower SG&A expenses, lower restructuring costs, and lower interest expenses. The lower SG&A was primarily due to the Company's organizational streamlining activities which resulted in lower personnel rated expenses and lower occupancy expenses primarily related to the exit of a portion of our New York City headquarters leased space.

Moving on to cash flows, cash flow used for operating activities in the first nine months of 2007 was $47.6 million compared to $124.8 million in the first nine months of last year. This significant improvement was due primarily to a lower net loss and decreased permanent display spending partially offset by changes in net working capital. Capital expenditures in the first nine months of this year were $12.5 million versus $15.5 million in the first nine months of last year. We expect capital expenditures for the full year to be approximately $20 million, consistent with spending levels in recent years. Permanent display expenditures in the first nine months of this year were $40.9 million versus $81.4 million in the first nine months of last year. This significant reduction in spending year-over-year relates to the expenditures incurred last year associated with the new oils for Vital Radiance and the restage of Almay. We expect permanent display expenditures for the full year to be approximately $60 million compared to almost $100 million last year.

In order to assist you in understanding the factors that impact our expected full year 2007 cash usage, I would indicate the following. As we have mentioned we expect adjusted EBITDA to exceed $210 million. Capital expenditures are expected to be approximately $20 million and permanent display expenditures are expected to be approximately $60 million. Interest expense has been around $35 million per quarter, taxes are expected to be approximately $15 million for the year, and additionally, pension contributions and other changes in working capital collectively are anticipated to result in net cash usage of between 25 million and $30 million.

In September 2007, in order to reduce our exposure to interest rate volatility, we entered a $150 million, two year floating to fixed interest rate swap transaction related to indebtedness under our term loan. After giving effect to this swap, approximately 48% of our debt is fixed and 52% is floating. 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. Based on our ongoing discussions with our bankers and our demonstrated improved financial performance so far this year, we remain highly confident that we can and will refinance these notes prior to their maturity. Our current plan is to complete the refinancing of these notes in the fourth quarter of this year with a generally similar class of debt.

Our unutilized borrowing capacity and cash as of October 31, 2007, totaled approximately $152.6 million comprising $73.5 million available under the revolving currency facility, $50 million available under the McAnders & Forbes line of credit , and $29.1 million of cash and cash equivalents. As David mentioned earlier, based on the performance in the third quarter and our expected outlook for the remainder of this year, we now expect full year adjusted EBITDA to exceed our previous forecast of $210 million. And with that I'd like to turn the call over to Abbe to introduce our first half 2008 exciting new product line

Thank you, Alan. As we have stated in our strategy, we are focused on building and leveraging our strong brands. We believe that consistent development and marketing of innovative new products is a key driver for building brand equity and profitable growth. In 2007, we focused on developing a broad array of new product ideas across all categories so that going forward, new products can be introduced regularly, consistently, and quickly as part of our portfolio management strategy. This focus has resulted in a comprehensive line up of new products for 2008. Just as important, we are developing a full pipeline for 2009 and 2010.

For 2008 we will introduce an extensive new product line up for Revlon and Almay Color Cosmetics. These product launches include differentiated and unique offerings for the mass market, innovations in products and packaging, new technologies, and extensions within the Revlon and Almay power franchises. These new products will be supported with competitive levels of advertising and promotions using our talented spokesmodels. In the U.S., you will start to see some of our new products in stores towards the end of this year and all of the new first half product launches will be in full distribution in the beginning of next year.

For the Revlon brand in the first half of 2008, we will introduce ColorStay minerals, the first ever minerals collection with ColorStay long wear technology. We will introduce a full collection of products which includes foundation as well as baked blush, bronzer, and eye shadow. The collection wears for up to 16 hours is uniquely mess free and the foundation has SPF10 sun protection. The baked technology used for the blush, bronzer and eye shadow provides a sheer application and allows the lightness of a loose powder with the convenience and ease of application of a pressed powder. The foundation has eight shades, the blush and bronzer has five and the eye shadow has four skews with each skew containing three shades.

Next, our custom creation foundation, another first to market for us. Custom creation foundation is a lightweight formula packaged in an innovative bottle that features an adjustable dial with five settings, so you can easily fine tune your shade to the perfect match for your skin tone. The bottle contains two chambers of product with a single pump. Custom creations foundation has SPF15 sun protection and is for all day wear. The foundation has six skews with each skew containing five shade options.

Next, our 2008 Limited Edition collection is an exciting new line up of six cross-category introductions in face, eye, and lip. Our 2008 Limited Edition collection focuses on self-expression and freedom of experimentation. First, make a sheen lustrous shadow which is an ultra smooth eye shadow that features three complementary shades embossed together which can be worn by blending the shades or applying them individually for a personalized beauty look. The shadow has four skews with each skew containing a three color pallette.

Second, is a floral affair sheer powder blush which is a soft powder blush that is also embossed with three complementary shades that can be applied together or individually as desired. The blush has four skews with each skew containing three shades.

Third is mix and mingle lip pallette, which is a creamy lip gloss in a compact that contains a blend of three colorful shades again to be used individually, layered or blended together. There are six skews with each skew containing three shades.

Fourth is creme de la creme liquid lip color which is a chromatic liquid lip color that comes in six dramatic shades yet is wearable for everyday use.

Fifth is soft on the eyes sheer loose shadow which is an ultra fine loose powder eye shadow that comes in a unique mess free package and contains four shades that can be worn individually or uniquely combined in the mixing well. There are three skews with four shades in each.

The fifth and final product in our new 2008 Limited Edition collection offering is marvelous match liner shadow duo which is two in upon pencil where one side is marbleized eye liner and the other side is a eye shadow. They color and metallic uniquely mix with each application. This product has five skews each with a liner and a shadow.

For Almay, in the first half of 2008 we will introduce TLC foundation, which stands for Truly Lasting Color. TLC foundation is our first healthy beauty long wear liquid makeup. This foundation incorporates skin care benefits, lasts for up to 16 hours and has SPF sun protection of 15. The product contains an exclusive blend of vitamins and antioxidants, namely green tea to protect the skin, lemon extract to brighten and vitamin E to help smooth. The foundation will be offered in nine shades. Like all of our Almay products, TLC foundation is hypoallergenic and dermatologist tested.

Also from Almay is the relaunch of our already highly successful intense eye color collection, with new play-up shadows, eye liners and mascara with a molded brush. These products are expertly coordinated to intensify natural eye color. There are four skews for each shadow liner and mascara to coordinate with brown, blue, green, and hazel eyes.

Now, turning to our popular makeup remover, we will introduce an enhanced formula and an improved package while keeping all of the features that have made our makeup remover so successful. The product contains a botanical blend of ingredients to condition the skin. We will offer eye makeup remover pads and liquid in both oil-free and moisturizing formulas and we will introduce new and improved towelettes for our oil free formula.

In the second half of 2008, we will offer additional and significant new products and innovations within the Revlon and Almay portfolios. We are extremely excited about our new product line up for 2008 and expect our products to be well received by consumers. With that we would like to open up for your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Filippe Goossens of Credit Suisse. You may ask your question.

Yes, good morning, everybody.

Good morning, Filippe. How are you?

Not too bad. Thanks. A few questions here. The first one in terms of the international operations, David, can you just provide us with a little bit more granularity as it relates to particularly Latin America and Europe? We were expecting to see a little bit more of a pick up in results there, given the success of some of your competitors in these markets or maybe put differently, has your focus been more on improving profitability of that part of the business as you have done successfully versus just trying to drive the top line?

Filippe, there are a number of factors involved but let me just make sure you understand that we did have improved margins and profit for our international operations for both the quarter and the year-to-date. Our focus continues on not only growing the top line but improving those margins, and as we've said before, our strategy is to leverage our strong brands including Revlon, Almay where it is marketed outside the U.S. and our other strong local and regional brands. So we continue to maintain our focus on profitable growth, both on the top line as well as continuing to grow the business profitably.

There are a number of factors involved in the third quarter, and talking specifically, but somewhat generally I guess in Europe, which includes Canada by the way, recall that we're cycling some significant pipeline shipments when we restate Almay in Canada last year, in the third quarter. We also changed our promotional strategy in Canada which had an impact on the top line that had a positive impact on the bottom line. And then in Latin America, again a number of factors involved but I would say the primary factor is that -- that was a negative impact on sales was our not supporting non-core brands, particularly in hair care and some other brands that are non-core to us, and while that had a negative impact on net sales, again it has over time particularly a positive impact on the bottom line. So it falls within our continued rationalization -- continued brand rationalization outside the U.S.

And then in Asia Pacific, actually we had a pretty solid quarter there and the key factor there was really the slow growth or slower growth, not unlike that in the U.S. with the Revlon brand. So again, a number of factors involved. That business continues to have momentum and I believe as we begin to strengthen our Revlon brand, particularly with the new product lineup for 2008, with the infrastructure and the margin structure and the business models that we have outside the U.S. that we're very optimistic about that business.

Okay, and then it looks like you have some exciting new products in the pipeline for the first half of 2008. With that as a back drop, David, can you perhaps give some initial comments in terms of the shelf space allocations you're getting for 2008 and perhaps a first glimpse on what your expectations are for EBITDA next year?

Well, with respect to the latter, Filippe, we're not in a position to comment on any outlook for 2008 at this time. As far as the shelf space in the U.S. we would expect broadly speaking to have approximately the same amount of shelf space in the aggregate that we've had this year. There's the pluses and minuses within certain retailers, not all decisions at this point are final, but we would expect, again to have in the aggregate approximately the same amount of shelf space.

Okay, and then perhaps moving on to a question for Alan. Obviously, we are pleased with the hedging activity because that reduces obviously your exposure there in terms of changes in interest rates going up, but more specifically, we were still a little bit puzzled with regard to the timing obviously for the refinancing of the senior sub debt. Why did you not opt given the uncertainty in the environment, again, why did you not opt to make a statement that for example, McAnders & Forbes would back stop in case the markets were to take another turn for the worst as we've sign in August and September? Why not give investors more comfort that even if we kind of all know that McAnders & Forbes will be there for you guys, why not make that statement?

Well, I guess a couple of things, Filippe, as I mentioned. We're in ongoing discussions with our bankers directly and based on those discussions, we're confident that we can refinance those notes and we plan to do so. In fact, later in the fourth quarter this year. One thing that I mentioned to you and others previously is that we expected improved financial performance this year and I believe now we're in a position where we have emphatically demonstrated that improved financial performance which we believe puts us in a better position to refinance those notes than it would have earlier in the year, and so as I mentioned we expect to complete that refinancing later in the fourth quarter, again using a generally similar class of debt.

I do understand that strategy, Alan, but again, we are starting to run out of time here, and I mean, you have like for all practical purposes, four weeks left before we close for the holiday season and if there's something that goes wrong in the market then we've all seen how horrible the credit markets have been this year. I'm just puzzled why you're willing to play it so close to the finish line? I'm just, I mean I understand where you're coming from, but I think it would have been more comforting not playing it so close to the vest. Anyhow, final question if I may and then I'll pass it on. In terms of the cost cutting, very good performance there, Alan. Are we pretty much at the 55 million as you had indicated previously?

Yes. We essentially started the 55 million annualized run rate as of July 1, this year. You would see the full benefit of that in 2008 but we're at that run rate now.

Okay, wonderful. Thank you so much.

You're welcome.

Your next question comes from Mr. Bill Chappell of SunTrust Robinson and Humphrey. You may ask your question.

Good morning.

Good morning, Bill.

I guess first question following up the new product launches for next year, I guess can you talk a little bit about marking spend behind that? I mean, do you feel like you, at the level that you're currently running at, do you need to accelerate that to support these new launches or are you still in a healthy state where you can support them at the current cost level?

Bill, as we've said and we continue to say, we'll support these products at competitive levels, but specifically to your question, we think that we're providing very adequate support given all the factors that one weighs when you support a new product launch, including ultimately what you expect the performance of the product to be, the type of the product it is, and so fourth. We're very comfortable that we will support these products tentatively as we have done in the second half of this year, as we have done with all of our product launches in '07.

And just looking to next year, it sounds like versus 2007, the new product launches will be a little more front end loaded?

Well, Bill, I wouldn't necessarily say that, as Abbe indicated, we planned some fairly significant launches in the second half of '08 that we do not want to talk about at this point for obvious competitive reasons.

And last just trying to understand on the same thing. It seems like this quarter certainly benefited from lower returns, and it is tougher to figure out over the past few years with and without Vital Radiance kind of what the right return level looks like, but you're seeing, you're not getting new shelf space with these new products but I assume they're replacing your existing products. So kind of help me mesh the lower returns with big launches at the same time.

Well, I think a couple of things, Bill. We've done something differently in 2007 as we mentioned, we have intentionally reduced the number of one-time only promotional activity in '07 compared to what we have done in prior years and so that favorably improves our returns expense year-over-year, and so what you're seeing as we move into the third quarter of this year, fourth quarter of this year into next year, returning to kind of what I would call a more normalized level of return activity, and what's required there is really managing our, what we call our stop ship date to minimize the returns on the shelf when we do discontinue, formally discontinue products. So really what you're seeing is the cycling of, as you mentioned Vital Radiance and the planned reduction of one-time only promotional programs.

Okay, great. Thanks.

You're welcome.

Our next question comes from Ms. Lori Scherwin of Goldman Sachs. You may ask your question.

Hi, good morning.

Good morning.

Can you talk a little bit about working capital? I think inventory days were up year-over-year this quarter and they had been showing improvement so far year-to-date? And then just, Alan, you walked through a break down of your cash expectations for this year but I didn't hear any expectation for how working capital would impact that.

Well, what I indicated was that I expected on a full year basis that working capital in conjunction with pension contributions on a cash basis would result in the cash usage this year of around 25 million to $30 million.

Okay, so that was in addition to the pension. What was the issue--?

No--.

--this quarter, why did it reverse the positive trend?

Well, let me clarify one thing. The 25 million to 30 million is inclusive of pension contributions.

Got it.

In relation reversing prior trends, our working capital continues to improve. One thing that you're seeing when you look at working capital really revolves around the sales return accrual that we put up on the books last year for Vital Radiance. We put up a significant reserve as you know for sales returns for Vital Radiance and then in 2007 we've essentially monetized that accrual so you're seeing that accrual significantly decreasing this year which obviously looks like a use of working capital but essentially it's monetizing what we booked in the prior year.

Okay and then David I was hoping to just get some updated thoughts from you on how you're viewing the color cosmetics category in the U.S.? Clearly it's been lackluster for the past couple of quarters and historically all the retailers said when Revlon has new news the category benefits and I'm just wondering in your discussions with the retailers about these new products, is that the same expectation? Are you looking for the category to improve with your new products or at this point are you managing your business and not worrying what the outside category does?

Well, obviously we continue to watch the category and see what overall demand is but as you know, Lori, if you look back over time, this category at least since I've been involved in the business over the past five years, has been in the small decline for a particular year and then it will go back up, I think in '06 was a strong year at over 4% of the Nielsen channels and this year it looks like it's going to be slightly positive. So while we watch that, I think the most important thing that we are focused on and you alluded to it in what you said is continuing to grow our business profitably with strong focus on new product development.

Okay, but none of your plans are built up based on expectations for the category?

No, not given what we've seen in category trends. Again, they've been around that, anywhere from flat to upwards of 4%. We don't see that changing.

Okay, perfect. Thanks very much.

Thank you.

Next question comes from the Carla Casella of JPMorgan. You may ask your question.

Hi. I'm wondering if you can clarify how much additional senior debt you could put on that you could issue to -- for the refinancing of the notes that come due in February? Can you use the bank facility or any other senior debt ahead of the other notes?

Well, Carla, I guess a couple of things. First of all we have very limited senior debt capacity today, and as I mentioned earlier, it's likely that we would refinance the subnotes using a generally similar class of debt. Having said that, our indentures are in the public domain if you care to go look at them and we would be happy to have a conversation with you after this call if there is specific questions in relation to those indentures that you want us to address.

Okay, and then on the permanent display spending for this year, it's down significantly over last year. Sounds like next year with a bunch of new products you'll probably have to increase the spending again. Do you have any idea or general direction of what you would expect for '08?

Well, we're not putting out a specific number for '08, Carla. A couple of things. We have as we focus on all costs in the Company, we have looked at permanent display spending and try to identify ways that we can optimize that spending so we can essentially reuse where possible, some of the expenditures we've incurred in the past. So I wouldn't necessarily assume an increase in display spending.

Okay. Great. Thank you.

You're welcome.

[Laura Connor] (inaudible) you may ask your question.

Yes, hi. In order for the Company to meet the 210 or exceed the 210 EBITDA guidance, it looks like the Company would need to make 92 million of EBITDA in the fourth quarter of this year. Do you have a comparable number for 2006 just to get a sense of what the year-over-year increase that's required would be ?

Yes, I think in the fourth quarter last year, we reported EBITDA of 108 million.

So it actually isn't even an increase that's required?

Well, what we said is we expect to exceed 210.

Okay. Thank you very much. That's very helpful.

You're welcome.

The next question comes from Mr. Lance Vitanza of Concordia Advisors. You may ask your question.

Hi, guys. Congratulations on another pretty decent quarter here. I just had a couple of housekeeping questions. Could you repeat the number of Class A shares outstanding?

Yes. It was 479.3 million Class A shares.

479.3 and then I know you gave, I think I heard you give a permanent display number for the nine month period. Did you also give one for Q3 or could you help me out and give me the Q3 number?

Yes, I can. One second. Yes, the nine month number was around 40 million. I'll give you Q3 right now, just give me one second. Permanent display spending for the third quarter was 6.7 million.

6.7 million?

Yes.

And then could you just go through the debt balances, I guess really primarily focused on what you have outstanding on the revolver fee and McAnders & Forbes line and any other sort of short-term bank lines or other pieces of debt other than the bonds?

Yes, what I mentioned is that we have around 156 million of available liquidity as of the end of October, so that is about 73 million that's available under the revolver, 50 million available under the McAnders & Forbes line, and about 29 million in available cash. In terms of outstanding debt, at the end of September, obviously we have the 840 million under the 2006 term loan, 67 million outstanding under the revolver, obviously the 167.4 million in the subnotes, 387.5 million under the 9.5 senior notes.

And no other items there that I'm missing

No.

Okay. And then maybe just to follow-up on the last question, the last caller's question, with respect to Q4 here, could you give us any sort of feel for how that's going to look relative to last year? Revenue, EBITDA, up, down, flat?

Yes, I mean, I guess a couple of things. Through September, we've recorded EBITDA of about 118 million and as we've indicated, we expect to exceed 210 for the full year. There's a number of factors that impact the fourth quarter specifically, the timing of 2008 new product shipments which is largely dependent on the time frame for retailer resets. As David mentioned, we expect to continue to competitively support our 2007 new products and again, there is some final decisions to be made in relation to retail space. David mentioned we expect to have roughly the same amount of space in '08 as in '07 although all of those decisions haven't yet been finalized.

And so when you kind of boil all of that down then, are you looking for revenues and EBITDA to be kind of where they were last year or up or down from there or what, just directionally how should I be thinking about it?

We're not giving specific guidance for fourth quarter revenue.

Right, no, I'm not asking for specific guidance. I guess but you say you're also not willing to kind of talk about the direction then either?

No.

Okay. All right, thanks, guys.

Thanks, Lance.

Our next question comes from Mr. [Patrick Trujillo] of BMO Capital Markets. You may ask your question.

Hi, good morning. Just a few questions in reference to your sales. First, what were gross sales in the third quarter?

We don't report gross sales.

Or then what were your returns and allowances?

We don't report returns and allowances externally either.

Okay.

We start at net sales that's where we start talking.

Okay. And then were there any sales that normally ship in the fourth quarter that shipped in the third quarter instead?

No.

Okay. Thank you very much.

You're welcome.

Next question comes from Reza Vahabzadeh of Lehman Brothers. You may ask your question.

Good morning.

Good morning, Reza.

Just on the display spending and CapEx, it looks like your guidance is slightly lowered from the preceding guidance by $5 million in each bucket. Is that accurate and is there a timing in there?

Yes, it is accurate and no, there's no timing in there. As I mentioned earlier, we're constantly looking at ways to optimize our spending, and so in permanent display spending, we're spending what we need to to ensure the displays look professional on the wall. In terms of capital, again we're looking at every capital expenditure and ensuring that we spend only appropriately, so there's no timing in there if that's one of the questions.

Yes, no, I guess timing may have been a factor but it sounds like it's more efficiency.

That's right.

I guess that raises the question of you're spending 80 this year in CapEx and display, about 105 last year, and 95 the year before, so what would be the more normal, normalized spend on these two items?

Well just to clarify, in 2006, we spent about 100 million only on permanent displays and we had about 20 million in capital.

Right.

Combined in '06 it was around 120 million and as you correctly pointed out this year we expect it to be closer to 80. In my view, $80 million is closer to what a run rate and expectable run rate and again we're going to continue to try and manage those expenses down where possible.

And you also have to recall that both in 2005 and in 2006, there was additional spending for the restage, relaunch of Almay as well as the launch of Vital Radiance. I hear you, and then on pension contribution, you mentioned the spend for pension or cash used for pension contribution and working capital was in the range of 25 to 30. I'm assuming that the pension portion of that is in the $20 million range?

Well, full year, our full year expected cash contributions to all of our pension plans is approximately $38 million for the year.

Okay.

And post-retirement.

I see, and so the working capital you're expecting that to be a source this year?

Well, no. If you look at it, the cash contributions is $38 million, clearly we have a pension expense that's embedded in the EBITDA number.

I see.

So you have to net those two.

Okay, and so what is the normalized cash contribution to all of your different plans? I mean, is 38 a good run rate number on a regular basis?

Well, again, there's a number of factors. There isn't really such a thing as a normalized run rate when it comes to cash contributions. Obviously it depends on asset performance, it depends on the requirements under the pension acts that came out, so there isn't really a normalized rate that you can look at.

I see. And then on your guidance, when you say you expect to exceed 210, are we saying we're going to exceed just slightly or by an unlimited amount?

Well, we didn't give a specific answer in terms of what we expect that to be.

Okay. Your comments in answering a prior question seemed to suggest that timing of shipments for new products for 2008 as well as the marketing spend can affect a fourth quarter. I guess would that be a potential reason for fourth quarter of this year, overall performance to be below prior year?

I wouldn't say that necessarily. What I'm saying in relation to the timing of new product shipments is that the reset schedule is out of our control. The retailers manage the reset schedule and to the extent that they accelerate that or push it out some would have an impact on when we would actually ship new products and as you know, the fourth quarter is significantly, has historically been a significant component of our full year EBITDA, and so there's a number of factors that can influence the outcome.

So essentially you're saying there is some uncertainty on the timing of shipments because of the uncertainty around the reset schedule and retailers and it could push back or forward some sales in EBITDA?

What we're saying is, is that based on what we know today, we would expect to exceed the 210 and then we've tried to outline some factors which will remain uncertain in the AT one will be retailers making decisions about when they're actually going to reset. We have an expectation about that today but not all of those decisions have been made, so that is a factor that could be a plus or a minus against the quarter.

Got it. Thank you.

Our next question comes from Mr. [Kevin Zeits] of Goldman Sachs. You may ask your question.

Hi, good morning. Wanted to ask about the refi, if I could. In your discussions with your bankers have you talked about a range of expected borrowing costs on the refi?

We have, but that's not something we're going to talk about on this call.

Can you directionally say higher than where you are now on the 8 5/8?

Yes, it's going to be higher than the current rates for sure.

Okay, and is there any, just thinking about the fixed rate swap that you had entered into, is there any reason why that's 150 million and not larger, given the size of your exposure to floating rates?

Well, the reason we picked 150 million was to kind of balance our fixed and floating debt at around 50/50.

Okay. Great. Then moving on to the market share performance, you talk about weakness I guess outside of -- outside of eye, and I was just wondering whether the new Renewist Lip and sort of if you could comment on how that's doing? And then maybe separately your confidence in launching a mineral brand, maybe based on the performance of how the Almay mineral brand is doing.

Firstly, on the products that we've launched in the back half, we launched 3D Mascara which has done quite well. Revlon Renewist lip color has done what I'd say had good performance, solid performance, and so we're very pleased with both products at this point. The declines have come from products launched in prior years, in particular in the face category and that's a continuing trend. With the 2008 new product launches, particularly with the focus on face, we're very enthusiastic about that category as we go into 2008 into next year. And the second question was?

The relations of the ColorStay Minerals.

We believe that we've got a distinct advantage in the minerals category because of the ColorStay, what we call Power Franchise. This is the first with the ColorStay long wearing technology, so we're very excited about it, very pleased with the innovation that we can bring to the market in this area.

Okay, and then are you pleased with the way that Almay, the Almay Mineral brand is performing?

Almay Mineral brand is doing okay. I would say it's performing about to expectations. We like the product a lot and we think it provides us a very good platform and some options to go forward with potentially a Mineral line with Almay, although we've made no decisions at this point.

Okay. On the gross margins, you kind of highlighted where you were picking up year-over-year and it seemed like most of them were sort of favorable comparison areas as opposed to underlying benefits from some of the cost saving measures that you might be implementing, meaning returns, inventory write-offs and Vital Radiance. Can you talk about where you see your margin trends going?

Well, a couple of things on that point. Clearly, when you look at Vital Radiance, the year-over-year impact is fairly straightforward. The other improvements really are as a result of the decisions that we've made in how we go to market, so for example, the lower returns is in fact a direct consequence of our decision to reduce the number of one-time only promotional activities, so it's a direct outcome from the actions that we've taken. The lower obsolescence charges as I mentioned again is attributable to the way we go to market with products throughout this year, so with the exception of Vital Radiance, frankly the rest of it is benefits from improved decision-making.

That's fair and I should have been clear with my question. I thought that closing Irvington for example, would have been a benefit to gross margins as well as to maybe some of the--?.

Yes, there is some benefit in there from closing that plant.

And is there any mix shift, positive mix shift going on as well?

In terms of mix, there's a slightly unfavorable mix impact in the quarter but it's not meaningful.

Okay. Great. Last question, back to the refi. Would you at this point expect the maturity of whatever new security you come with to be outside of that of the senior notes?

We haven't settled on a maturity schedule yet.

Okay. Thank you.

Thanks, Kevin.

(OPERATOR INSTRUCTIONS) Ms. Mary Gilbert of Imperial Capital, you may ask your question.

Yes, I just wanted to clarify a couple of things. When we're looking at, let's say 2008 and then of course Q4, because of some of these new product launches for the first half of 2008 or for the first quarter, is that going to sort of show up in the fourth quarter and how could that impact the outlook for 08? In other words we're just wondering what kind of momentum we're looking at in terms of financial performance for 2008 with regard to the product portfolio.

I think, Mary, if I understand your question, you have to remember how the business works in the U.S. That we ship in a large portion of what we call the pipeline shipments for the new product launches, and the year preceding the year when they're actually launched in market, and that occurs every year. So December will contain sales for a large portion of the pipeline for products actually launched in marketplace in '08. That occurs each year, so when you cycle that every year. And then the first quarter again, the pattern is that there will be some pipeline shipments again depending upon when retailers actually reset. So that's the pattern of sales, and so as far as its impact, I don't see it having any different impact in terms of the pattern of sale for '07 or '08.

Right. I guess the key is that the same thing sort of has to happen next year where you've got some really exciting new products, you have to keep that momentum going in order to--?

Right, and we can--.

Where we can see the growth.

As we have indicated our focus has been on '08 but it's certainly on 2009, 2010, and even beyond, so we have increased our ideation, we've increased a number of new product concepts that we've got under evaluation for potential launch and commercialization. That has been our focus, so we would expect to have a consistent, reliable pipeline of strategic new product as we go forward.

Okay. How should we think about, like for example, this year with the guidance that you gave us on your sources and uses of cash, let's just say you come in at 210 and I realize that you expect to exceed that number, but that gives us a cash burn of about 53.5 million at the 210 mark, otherwise it will be slightly less than that. Or somewhat less than that. So if we look out to 2008, I was trying to figure out on the expense line how some of those items might change. For example, on the permanent display, were you saying that 80 million is sort of a more normalized level or?

Well, a couple of things. In terms of capital expenditures, if you look at permanent displays and capital expenditures, in 2007 we expect to end the year with 60 million for permanent displays and about 20 million for other capital, so 80 million in aggregate between those two.

Oh, okay.

That's how I would think about that for '07 and I wouldn't expect significant change as we move forward.

Okay so that should stay about the same so the key is really to kind of reduce this cash burn because I guess on the pension funding, I'm sorry, how much is the pension expense?

The pension expense is around $9 million I believe. I need to clarify that.

Oh, okay. Great. So, what I'm trying to figure out is how we reduce this cash burn on get it to a point where we're, if that was possible where we're turning positive. So that's why I was wondering instead of looking out to '08 are there any other initiatives or full year benefits where we could see EBITDA, let's just say for example, if you came in at 210 this year, where we could see EBITDA increasing in '08?

Well, a couple of things. First of all, turning the corner in terms of free cash flow is clearly a focus of ours internally and that's our objective. I'm not going to get into specifics around what we would expect in 2008. Having said that, we've consistently talked about expecting mid single digit sales growth over time. We believe as Abbe and David have talked about that we've got a strong line up of new products as we go into next year. We expect to have in the aggregate, consistent levels of shelf space going into next year and as I said, we hit the 55 million annualized restructuring savings as of July this year so there will be a little bit of a follow on benefit into 2008.

So really, Mary, the key is going to be top line growth, continuing to improve our margins through our cost controls, efficiencies, and controlling all of our SG&A costs, that will be the key.

Okay. Great. That's very helpful. Thank you.

Our next question comes from Mr. Filippe Goossens of Credit Suisse. You may ask your question.

Yes, good morning. Thanks for a few more questions here. David, we had the recent announcement of Clorox moving into the Natural personal care space with the acquisition of Birds and Bees. Do you see any opportunities for Revlon in the Natural category?

Well, Filippe, in terms of the Natural category, of course we continue to look for opportunities with respect to any ideas that might produce profitable growth for us as we go forward. Remember that Almay is positioned in part of the Natural area anyway, I would say, so we'll continue to focus on Almay. We think it's got great opportunity as we go forward. And as we develop new products, launching products for Almay, we certainly have opportunities there to move in a, call it a more natural direction. So, we all know that Natural is a trend and again, we take that into account as we generate ideas, as we evaluate those ideas, and as we decide what we're going to commercialize ultimately.

Okay. And then the second question, David, the category as a whole core cosmetics in the mass merchant channel, obviously a decline versus a strong last year. To what extent is the category slowdown a result of Wal-Mart slowing down its supercenter rollouts versus perhaps less product innovation as we had last year? And then secondly, kind of an add-on, given that slower rollout of Wal-Mart, are you perhaps looking at reallocating or maybe increasing resources a little bit towards other channels, i.e. groceries or direct stores? Thank you.

Let me answer the last question. Our channel strategy remains the same. We're broadly distributing in all of the mass channels and we'll continue to focus on all those channels. As far as the category growth, as measured by Nielsen, and remember that doesn't take into account Wal-Mart, as I said earlier in the call, if you look back over the history of the mass category growth in U.S. as measured by Nielsen, you'll see it about even to 4% would be the range of growth that we've seen. This year, year-to-date I think we're at about 0.4 and the third quarter was 0.7, so we're not too concerned about that because we think the category will remain healthy, has been healthy, will remain healthy, and that level of growth really doesn't affect our plans.

Okay, and then the final question I have, just kind of trying to come back, I think to an earlier question of somebody else in terms of trying to--?

I would also say, Filippe, that the cosmetics category is really driven to a large extent by new products, and to the extent that companies launch new products that are innovative, exciting to the consumer, that that can also affect category growth, all other things being equal.

Okay, and then the final question just trying to understand better what the actual base number is for the U.S. business that we should be using. Alan, can you give us a bit more granularity? In other words if you were to carve out the accrued returns from the third quarter last year, what would have been sales this year in North America?

Say that again? Well, sales this year, you mean year-over-year?

That's correct. Because in your press release you indicated that the the sales improvement you were to--?

Filippe you really can't go at the analysis that way because there's a number of factors that are involved and I don't think that track of questioning is going to get you to where that you need to be.

Okay, maybe you can follow-up on that, Alan, after the call if you don't mind?

No problem.

The next question comes from Mr. Walter Branson of Regiment Capital. You may ask your question.

Thank you. Let me try one more question on the refinancing of the 8 5/8. Are you anticipating doing a public or 144 A offering to the investing community at large or some sort of a private offering to one or a few investors?

Yes, we haven't nailed down exactly what we're going to do. Obviously we have a number of options along those lines.

Okay. I guess the suspense will be over soon enough. Thanks.

The next question comes from Mr. Jeff Kobylarz of Stone Harbor Investments. You may ask your question.

Good morning. I was curious if you could comment about the levels of retail, levels of inventory of Revlon and Almay at your retail customers. How is it at quarter end and how does it compare versus prior year?

Our levels of inventory at the retail are broadly consistent with what they have been over the last number of years.

Okay. I may have missed this, you may have commented about this already but the 55 million of cost savings that you mentioned, how much of that will fall into '07?

In terms of '07, probably in the high 40s.

Okay. And can you comment about your in stocks with your retail customers? How are those trending in the third quarter?

Comment on our -- I didn't--?

I didn't get the last word. Stocks?

In stocks. How are your in stocks.

Oh, in stocks, percentages?

Yes.

From everything we know, we're in stock at a high level.

Okay. And lastly, can you comment what percentage of your sales, say in '06 were of one-time only type products? I mean, general guidance there?

We don't specifically talk about the level of one-time only promotions.

Or the mix.

Or the mix.

Of sales in any event.

It depends. I think in '07 it's probably broadly half of what it was in '06.

Okay. All right, thank you.

Okay.

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

Thank you for your interest in Revlon and for your questions. For the year so far we are executing our strategy with a focus on building our strong brand, particularly the Revlon brand, with an emphasis on developing and marketing strong new products consistently and profitably over time. As a result of this focus and the hard work of all of our employees, we have generated solid EBITDA results. We've executed our restructuring actions on schedule and are benefiting from these actions and other cost controls that we have put in place. As mentioned, based on our performance in the third quarter, and our outlook for the remainder of the year, we expect full year adjusted EBITDA to exceed our previous forecast of $210 million. Looking ahead, we are very excited about our new strong product launches for 2008 and the pipeline we are working on for 2009 and 2010. Thank you.