Revlon Inc (REV) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's Second Quarter 2010 Earnings Conference Call. At the request of Revlon, today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Elise Garofalo, Revlon's Senior Vice President, Treasurer and Investor Relations. You may begin, Ms. Garofalo.

Thanks, Stephanie. Good morning, everyone, and thanks for joining today's call. Earlier today we released our results for the second quarter ended June 30, 2010. If you have not already received a copy of the earnings release, you can obtain one on our website at revloninc.com.

On the call with me this morning are Alan Ennis, Revlon's President and Chief Executive Officer; Chris Elshaw, Executive Vice President and Chief Operating Officer; and Steven Berns, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Alan, I would like to remind everyone of a few things. First, our discussion this morning might include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act, 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 2009 Form 10-K filed in February of this year, and our 2010 second quarter 10-Q, which we filed earlier this morning.

Next, our remarks today will include a discussion of adjusted EBITDA and free cash flow, both of which are non-GAAP measures that are defined in the footnotes to our release and are reconciled, in the case of adjusted EBITDA to net income, and in the case of free cash flow to net cash provided by operating activities, which are their most directly comparable GAAP measures, and they can be found in the financial tables accompanying the release.

Regarding market share information, as a reminder, during your 2009 fourth quarter earnings call in February, we indicated that beginning with the first quarter of 2010, we are no longer reporting ACNielsen US market share information. ACNielsen data represents only a portion of our channels in only the US market. We believe that consumption through all of our retail partners in our markets globally is best reflected by observing our net sales performance and trends over time rather than this partial market share information.

In addition, as previously disclosed, effective for periods beginning January 1, 2010, we have made some changes to how we report net sales. Specifically, Canada is now reported as a separate region, where in prior periods before 2010, it was included in the Europe region. And South Africa is now included as part of the Europe, Middle East and Africa region, where in prior periods it was included in the Asia Pacific region. As a result, prior year amounts have been reclassified to conform to this presentation. For your convenience, we have included a schedule of the reclassified numbers for each of the quarters in '09 and '08 at the back of our release.

I would also like to remind you that from a financial reporting perspective, promotional allowances are recorded as a deduction to arrive at net sales, while advertising costs are recorded within SG&A in the P&L. And, finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I'll turn it over to Alan.

Thank you, Elise, and good morning, everyone. As we have discussed with you in the past, Revlon's vision is glamour, excitement and innovation through high-quality products at affordable prices, and this underpins everything we do. We realize this vision by executing the five key elements of our business strategy -- building our strong brands, developing our organizational capability, driving our Company to act globally, increasing our operating profit and cash flow, and improving our capital structure.

During the second quarter of 2010, we continued our intense focus on the key drivers of our business to support our business strategies. These drivers are innovative, high-quality, consumer-preferred brand offering, effective brand communication, including appropriate levels of advertising and promotion, and superb execution with our retail partners to provide the optimal in-store offering.

In meeting the needs of consumers seeking new, innovative products, we introduced several new breakthrough and first-to-market products in the first half of 2010 in Revlon and Almay color cosmetics. These product launches include unique offerings in mass cosmetics, innovations in products, and extensions across all segments within the Revlon and Almay franchises.

Our new products include Revlon Grow Luscious mascara, Revlon Just Bitten lip stain plus balm, and Almay One Coat Dial Up mascara. Chris will provide some more color on these launches later in the call.

Additionally, during the quarter we signed one of Hollywood's hottest stars, Kate Hudson, as the newest Global Brand Ambassador for our Almay brand. Kate is confident and vivacious. Her energy and youthful spirit make her a perfect ambassador for our Almay brand.

From a strategic and financial perspective, we maintain a sharp focus on driving profitable growth, while at the same time maintaining financial discipline. In the second quarter we delivered improved cash flow and competitive operating margins while significantly increasing our advertising investments to enhance our marketplace competitiveness. We will continue to support our brands with increased advertising levels in the third quarter as compared to prior year levels.

Also during the quarter we realized an additional $6 million of savings associated with our May 2009 restructuring program and have delivered $27 million of savings to date. We remain on track to deliver the planned $30 million of annualized savings.

We continue to strengthen our brands, deliver innovative new products, pursue targeted growth opportunities, and invest in our organizational capability. And although the economic environment remains challenging, we continue to manage our resources carefully with a focus on the long-term profitable growth of our brands.

So, now I would hand over to Chris, who will talk about our global marketplace performance.

Thank you, Alan, and good morning, everyone. Today I will cover our net sales performance by brand and region. Total Company net sales in the second quarter were $327.7 million compared to $321.8 million in the second quarter of last year. Excluding unfavorable foreign currency fluctuations of $0.5 million, net sales increased 2%, driven by higher net sales of Revlon color cosmetics and Revlon Colorsilk hair color. This increase was partially offset by low net sales of Almay color cosmetics and Mitchum antiperspirant/deodorant.

Two important drivers of net sales during the quarter were, firstly, the launch of a number of key innovative new products in 2010, which I will expand upon later. Secondly, as Alan mentioned, we significantly increased our advertising investment in the quarter.

Moving on to the performance by brand, Revlon color cosmetics net sales increased during the quarter as compared to prior year. In the Face segment, we continue to be pleased with the performance of Revlon PhotoReady makeup, which contains innovative photochromatic pigments that bend and reflect light to give a flawless, airbrushed appearance. PhotoReady is now being sold in many major markets across all our regions, and we continue to expect positive performance from this franchise.

In the Lip segment for the second half of 2010, we introduced Revlon Just Bitten Lip Stain, which is a unique 2-in-1 lip stain which also includes a balm. The new advertising campaign for Just Bitten features Jessica Biel, our newest Revlon brand ambassador.

Also in the Lip segment is Revlon ColorBurst Lipstick, which we launched earlier this year and is now being sold globally. ColorBurst contains revolutionary Elasticolor technology, which feels virtually weightless on the lips.

In the Eye segment, we recently launched Revlon Grow Luscious mascara, and are very pleased by the early consumer response. 96% of women using this breakthrough mascara saw instantly longer, fuller, and lusher lashes. The Grow Luscious advertising campaign also features Jessica Biel.

Lastly, in the Nail segment for the second half of 2010, we launched an innovative collection of scented nail enamel.

Moving on to the Almay brand, net sales of Almay were down in the quarter compared to the prior year due to the cycling of the 2009 launch of Almay pure blends. As we focus on building the Almay brand's core franchises, we launched two new products. First, we introduced One Coat Dialup Mascara, which includes Almay's signature hypoallergenic formula and offers an adjustable dial to allow consumers to achieve their desired lash look.

We also introduced Smart Shade anti-aging concealer, a breakthrough product that is an extension of the highly successful Smart Shade franchise. This new concealer uses proprietary shade-sensing microbeads that adjust to the skin tone while working to conceal and de-puff the delicate skin under the eye and reduce the signs of aging. We continue to broaden the Smart Shade product assortment to meet additional consumer needs.

Last for Almay, we signed Kate Hudson as our newest Global Brand Ambassador, and she will be appearing in our second half 2010 advertising campaigns.

In Women's Hair Color, net sales of Revlon Colorsilk continued to grow in the second quarter. In support of this successful franchise, we have continued to expand distribution of Revlon Colorsilk, including Revlon Colorsilk Luminista, which we launched earlier this year.

Moving on to Antiperspirant/Deodorants, net sales of Mitchum in the second quarter 2010 declined year-over-year. Capitalizing on the social media trends and in support of the Mitchum brand, which prides itself on working hard for consumers, we launched an innovative new campaign in the US created by Hollywood movie director, Brett Ratner. This campaign is designed to find and reward the hardest working person in America. We challenged people to create reality films telling their true stories of hard work and the public responded in a strong way.

We recently announced the 10 finalists and the public can now vote for their choice online at mitchumhardestworking.com.

And, finally, our Beauty Tools business continues to perform well in the face of softer demand in the category overall.

Now, moving on to the regional sales performance during the quarter. In the United States, net sales were $179.3 million, a decrease of $6.9 million, or 3.7% compared to last year. The decline was driven by lower net sales of Almay color cosmetics, Revlon beauty tools, and Mitchum antiperspirant/deodorant, partially offset by higher net sales of Revlon color cosmetics.

In Asia Pacific, net sales of $48.7 million, an increase of $3.2 million, or 7% compared to prior year. Excluding the favorable impact of foreign currency fluctuations, net sales were essentially flat year-over-year. Lower net sales of Revlon color cosmetics in Australia were offset by higher net sales of Revlon color cosmetics throughout the rest of the region.

In Europe, Middle East and Africa, net sales were $50.2 million, an increase of $4.6 million, or 10.1% compared to the same period last year. Excluding the favorable impact of foreign currency fluctuations, net sales increased $3.3 million, or 7.2%. This increase was driven by higher net sales of Revlon color cosmetics and fragrances in South Africa, and higher net sales in certain distributor markets.

Worthy of note in this region is that Revlon is the official makeup partner for Britain's Next Top Model 2010. Revlon is a perfect partner to provide the on trend makeup looks and inspiration for the new series given our longstanding tradition of having some of the most inspiring, successful and beautiful women in the world as our Brand Ambassadors. Elle Macpherson, one of Revlon's Global Brand Ambassadors, is a presenter, judge, and the executive producer of the new series.

In Latin America, net sales were $28.7 million, an increase of $1.5 million, or 5.5% compared to the same period last year. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $9.1 million, or 33.5%. Approximately half of this increase was due to higher selling prices in Venezuela as a result of the market conditions and inflation.

From a brand standpoint, the increase was due to higher net sales of Revlon Colorsilk hair color, Revlon color cosmetics, and other beauty care products in Venezuela and certain distributor markets.

In Canada, net sales were $20.8 million, an increase of $3.5 million, or 20.2% compared to the same period last year. Excluding favorable foreign currency fluctuations, net sales increased $1.3 million, or 7.5%. This increase is primarily due to higher net sales of Revlon color cosmetics.

Now, I'll turn it over to Steven to walk you through the rest of our financial results for the quarter.

Thank you, Chris. As we have already discussed our net sales performance, I will start with gross margin performance in the quarter. In the second quarter of 2010, our gross profit margin increased to 67.3% versus 62.5% in the second quarter of 2009. Gross margin in the quarter was positively impacted by a few factors. First, lower cost related to sales returns and inventory obsolescence; second, savings related to our May 2009 restructuring actions; and, third, lower material costs as a result of procurement initiatives. Lastly, gross margin was also impacted favorably by foreign currency fluctuations.

In the second quarter, SG&A increased $17.3 million compared to $173.6 million primarily due to higher advertising spending to support our brands, which was consistent with our expectations as discussed in connection with our first quarter results of this year. We significantly increased media pressure in the second quarter of 2010 compared to the second quarter of 2009, while benefiting from lower advertising rates.

In SG&A, we also benefited from the continued realization of savings from our May 2009 restructuring actions. As we have previously disclosed, annualized savings in 2010 from our May 2009 restructuring actions are expected to be approximately $30 million. To date we have achieved a run rate of $27 million, $15 million of which was realized in the second half of 2009, and $12 million of which was realized in the first half of 2010. We expect the remaining $2 million to $3 million of the annualized savings to materialize in the second half of this year.

As we have stated in the past, within SG&A, advertising and promotional expense may vary from period-to-period based on marketplace conditions and timing of product launches. Consistent with our strategy to build our strong brands, compared to the third quarter of 2009, we will continue to support our brands with increased advertising spending in the third quarter of 2010.

Operating income in the second quarter of 2010 was $47.3 million compared to $26.6 million in the same period last year. Adjusted EBITDA in the second quarter of 2010 was $61.7 million compared to $43 million in the same period last year. As I mentioned earlier, our gross margin improved in the second quarter. In that regard, it is important to mention that our focus is on delivering competitive operating margins. Period-to-period, there are a number of moving parts contributing to our operating margins, including gross margin, which are influenced by several factors including sales mix, brand support, and the timing and size of product launches, just to name a few. All in all, we are pleased with our operating margins in the second quarter and year-to-date, which we believe are competitive.

Net income in the second quarter of 2010 was $16.4 million, or $0.31 per diluted share, compared to net income of $200,000, or nil per diluted share in the same period last year. Operating income, adjusted EBITDA and net income in the second quarter of 2009 included $18.3 million of charges related primarily to the May 2009 restructuring action.

Tax expense in the second quarter of 2010 was $4.8 million compared to a benefit of $200,000 in the second quarter last year. The higher tax expense was primarily due to two factors -- first, the second quarter 2009 tax provision benefited from the favorable resolution of a tax contingency in the United States; and, second, the second quarter of 2010 had higher taxable income in certain foreign jurisdictions as compared to the same period last year.

Net cash provided by operating activities in the second quarter of 2010 was $9.3 million compared to $700,000 in the same period last year. And free cash flow in the second quarter of 2010 was a source of cash of $5.1 million compared to a use of cash of $3 million in the same period a year ago.

Looking at the P&L for the first six months of 2010, net sales in the first six months increased 1.3% to $633.2 million compared to net sales of $625.1 million in the first six months of 2009.

Excluding favorable foreign currency fluctuations of $8.5 million in the period, net sales were essentially flat year-over-year.

In the United States, net sales decreased 4.2% to $361.4 million compared to the first six months of 2009. In Asia Pacific, net sales were $94.6 million, an increase of $7.5 million or 8.6% compared to the same period last year. And excluding the favorable foreign currency impact -- that is the favorable impact of foreign currency fluctuations in the Asia Pacific region, net sales decreased $1.6 million, or 1.8%.

In Europe, Middle East and Africa, net sales were $93.1 million, an increase of $9.2 million, or 11% compared to the same period last year. Excluding the favorable foreign currency impact, net sales increased $1.5 million, or 1.8%.

And moving on to Latin America, net sales were $48.7 million, an increase of $2 million, or 4.3% compared to the same period last year. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $14.9 million, or 31.9%.

In Canada, net sales were $35.4 million, an increase of $5.2 million, or 17.2% compared to the same period last year. Excluding the favorable impact of foreign currency fluctuations, net sales increased $600,000, or 2%.

Operating income was $92.7 million compared to $58.2 million in the first half of 2009, and adjusted EBITDA was $122.8 million compared to $92.1 million in the same period last year. Both operating income and adjusted EBITDA in the first half of 2009 included $18.8 million of restructuring charges.

Net income was $18.6 million, or $0.36 per diluted share, compared to $12.9 million, or $0.25 per diluted share.

Net income in the first half of 2010 included $9.7 million of expenses associated with the March 2010 refinancing of the Company's credit agreement, in addition to a foreign currency loss of $2.8 million related to the re-measurement of Revlon Venezuela's balance sheet. Net income in the first half of 2009 included the $18.8 million of restructuring charges and other, net, and a $7.5 million gain related to the early extinguishment of debt. Additionally, the provision for income taxes in the first half of 2010 was $9.8 million as compared to a benefit of $2.2 million in the same period last year.

Turning now to cash flow, year-to-date operating cash flow was $40.5 million compared to $18 million in the same period last year, and free cash flow year-to-date was $33.1 million compared to $14.5 million in the same period a year ago.

On the liquidity front, our unutilized borrowing capacity and cash on hand as of June 30, 2010 was $134 million comprised of $106.6 million available under our revolving credit facility, and $27.4 million of available cash. Our revolver was undrawn as of June 30, 2010.

Now, let me update you on several factors which impact 2010 financial performance. With regard to our financial results related to Venezuela, the January 2010 devaluation, which we discussed last quarter, had the impact of reducing second quarter 2010 net sales by $7.8 million and operating income by $2 million. For the first half of 2010, Revlon Venezuela reported net sales by $13.2 million and operating income by $3.9 million.

Once again, just let me repeat that statement. For the first half of 2010, it reduced reported net sales by $13.2 million and operating income by $3.9 million.

Next, consistent with our historical practice, while we are not providing specific guidance for adjusted EBITDA for 2010, I am going to update you on certain 2010 cash flow information we provided on our last earnings call in April. Capital expenditures are expected to be approximately $20 million for 2010. Permanent display expenditures are expected to be approximately $40 million. Cash interest expense information is available by reference to our public filings, which detail the composition of the Company's capital structure and applicable interest rates. Interest expense throughout the second half of 2010 will continue to be impacted by higher weighted average borrowing rates due to the LIBOR floor on our new term loan credit facility entered into in March 2010.

Taxes paid are expected to be approximately $15 million, and all other cash flows including changes in working capital and pension expense and contributions are anticipated to result in a cash usage of approximately $20 million, which updates our prior guidance. However, our working capital flows may vary as a result of a number of factors on a quarterly basis.

This concludes our prepared remarks, and we would now like to open up the call for your questions. Operator, please prompt the participants for questions.

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh with Barclays Capital.

Good morning.

Good morning, Reza.

Just on that last point regarding the guidance for the year, and I appreciate you providing that information. The "all other" that you just suggested would be $20 million, would that include working capital, cash restructuring and pension?

That's correct. And it includes all the components of working capital other than the items I mentioned, which would impact cash, which would be CapEx, permanent displays, interest and taxes.

Got it. I appreciate that. And then you talked about increasing the A&P spending in the second quarter including media weight, but you benefit from lower rates that you presumably locked in the prior year. Are you still going to be benefiting from those lower rates in the second half?

Yes. So, just on the second quarter. So, what we did is we increased the absolute dollar spend versus the second quarter of last year, and we did that at a lower rate. So, our GRP pressure was even higher than the dollar increase.

Second point is, as I mentioned in my comments, we plan to have increased spending again in the third quarter of this year compared to the third quarter of last year. The rates that we have typically are tied to the media year, which is the September to October time frame, and so we will go through that process with our agency, MediaCom. We signed with MediaCom some time ago and we will benefit from their leverage in the marketplace as a considerable buyer of media. And so at this point the mix of media and the choices that we make as we go into the next calendar year will have an impact on cost, but it's too early to indicate what those rates would be.

Right. Is there going to be a shift this year in your A&P spending in favor of the A versus the P, or not really?

Well, we have done that already this year. We saw, specifically in the second quarter, we saw a significant increase in our advertising spending as we looked at the mix of brand support.

Got it. And then if you can talk about the US sales trends in the second quarter, obviously down a little over 3.5%. But the year-over-year comparisons were quite manageable given destocking in the prior year. So, can you just talk about what drove that kind of a sales performance, which was in contrast with your non-US markets, which experienced growth?

Sure. Well, specifically with regard to the US, a couple of things. During the second quarter, we launched Grow Luscious mascara and Just Bitten lip stain, and, as you know, new products are a very important factor in this category. Grow Luscious is performing very well, and Just Bitten has already shown some very positive results in the first month in market. Earlier in the year we launched PhotoReady, which is again performing extremely well. It's actually one of the best performing new products in the category this year. And as you just commented and were talking about with Alan, we significantly increased our advertising investment as we rebalanced our mix of advertising support.

So, our focus is through our portfolio planning, driving profitable sales growth over time. And, incidentally, as we have globalized our portfolio, you can see we are seeing the benefits of that around the world.

Right. So, the fact that the year-over-year comparisons were quite manageable, that that is not part of the equation here?

No. I mean, as I said in my prepared remarks, Revlon color cosmetics had higher net sales in the quarter, which was offset by lower net sales of Almay color cosmetics, Revlon beauty tools and Mitchum antiperspirant/deodorant. I also commented, Revlon beauty tools is performing well in a softening category. Almay, we are focusing on our core franchises to drive growth of Smart Shade, One Coat, and Intense Eye, and Mitchum, as we said, we are underway with new advertising and marketing activity, and we have some innovation pipeline for next year.

Got it.

One point, Reza, as Chris mentioned earlier, that we are cycling the launch of Almay pure blends, which was a significant factor in our first half results last year.

Right. Can you just touch on the promotional environment out there in the US business and maybe the non-US business as well?

Well, the promotional environment is as intense as it ever was. It continues to be an intensely active category. We are constantly monitoring and adjusting our promotions with our retail partners. And, as Alan said, we also rebalanced our mix in the second quarter to focus more on advertising, which has two impacts, of course. On the one hand, advertising is a sell [through] support, but it also builds brand equity over time.

So, you haven't seen an intensification or any material change?

It is intense and it continues to be intense.

Okay, thank you.

Your next question comes from the line of Jeff Kobylarz with Stone Harbor Investments.

And I am curious about what you could say about the industry as far as new products that have been introduced across your competitive universe. Can you say just how many new products have been introduced as like, say, percentage of the total of the universe that you are in?

Yes, that has not really changed. It generally equates throughout the year to about 15% to 20% of retail sales in the category, and most manufacturers are in that kind of ballpark.

Okay. All right. And then I'm curious about this advertising, the increase that you spent in this second quarter. I can't tell if the amount of advertising you are spending, if you shifted it to more of the international markets, because that is where you have had the sales growth. Sales growth is up low single digits excluding foreign currency, and the US sales are down. I'm just curious if you could elaborate a little bit about the $20 million increase in advertising and the change in the sales in the second quarter?

Sure. A couple of things, Jeff. First of all, the increase in advertising is a global number. So, we have looked at making sure that we have a competitive share of voice in our key brands and our key markets around the world. And so as the landscape changes, we are changing with it. So, that $20 million increase is a global number, first of all. But there was a significant increase in the US. As we mentioned, we rebalanced the mix of spending to focus a little more heavily on promotional activity -- sorry, on advertising spending as compared to promotional activity. Obviously, promotional activity has a more immediate impact on consumption as it is in-store versus the longer term brand-building and equity-building investment that advertising supports.

Okay. And can you elaborate about that, about why the shift was made and why you think it is better for the Company long-term, to shift to advertising versus promotion?

Sure. I mean, listen, with any brands, the objective is to build brand equity with the consumer. And over time advertising to the consumer, whether it's TV, print or online, has a longer term benefit of building brand equity. Promotion is an effective vehicle for short-term consumption gains. But, really, excessive consumption, excessive promotional activity can really deteriorate the value of your brand and the health of your brand in the marketplace. So, really building brand equity is best achieved through a combination of advertising and promotion, but really a greater focus on advertising over time.

Okay, fine. All right. And then your gross margins, they are nicely impressive, and is there any comment you can make about gross margins, how durable they are, this high 60s kind of level?

Right. So, as we said earlier in our comments, with regard to gross margins, in the second quarter we talked about the drivers of the change versus the prior year. So, some of that was driven by, as you'll see in our 10-Q, lower costs related to sales returns and inventory obsolescence. We also had, as we had mentioned in prior periods, we did have favorable results as a result of purchasing initiatives that commenced in 2009, and therefore that benefited gross margins as well.

In terms of the FX impact on gross margins, that was 1.1 percentage points in the quarter and obviously that is just a variable as a function of the fluctuations in currency.

So, one of our key points is a focus on delivering competitive operating margins, and so because period-to-period there are going to be a number of moving parts including those factors which impact gross margins, we are focusing on delivering the competitive operating margins that we believe we have done in the second quarter and will hopefully continue to focus on those drivers.

Right. And, so, Jeff, if you look at our year-to-date results, our margin, OI margin is around 14.5%, which is consistent with the second quarter results. And so that is really what we are focused on when we talk about competitive margins. Fluctuations will happen at the gross margin line depending on normal activities within the business.

Okay, fine. Can you comment about your inventory levels, say, like the currency, the freshness of the inventory levels that you have and that are held at your retail partners?

Well, our own inventory levels are down year-over-year as we continue to drive inventory efficiency. We have talked about a goal of getting to four inventory turns, and we are on target to do that, which is a significant improvement from where we were just over two turns a couple of years ago. So, inventory management internally is a key focus for us, not just from an obsolescence standpoint, but we think about monetizing inventory and generating cash flow through working capital.

Inventory levels at retail, we haven't seen any significant movement in inventory levels at retail. We continue to work very closely with retail partners to make sure that what we are shipping in to retail is consistent with consumption.

Okay, fine. And then, lastly, if you do generate free cash flow this year, can you say what you would use that free cash flow for?

I mean, our strategy has been in the past to continue to invest appropriately in the business, so we are going to make sure that we are investing in our brands and our people, which are the key elements of our strategy. And then what we have done in the past is we have used excess free cash flow to reduce debt. We have reduced debt so far this year as part of the refinancing we did in March, and so that is really what our strategy has been.

All right. Thanks very much.

Thank you, Jeff.

Your next question comes from the line of Patrick Trucchio with BMO Capital Markets.

Hi. Good morning.

Good morning, Patrick.

So, my question is on sales growth. What do you think is the biggest factor in terms of US sales, and this being the fifth quarter that they have been down year-over-year, and international sales look pretty strong. What is the single biggest factor there?

Well, as we said in the prepared remarks, the decline was driven by lower net sales of Almay color cosmetics, Revlon beauty tools, and Mitchum antiperspirant/deodorant. As I said on Almay specifically, net sales were down in the quarter compared to the prior year due to cycling of the launch of Almay pure blends, which Alan also mentioned. On Revlon beauty tools, as I said, we are performing well in a category that has had some softness during the recession. And on Mitchum, we are very focused on our new campaign with the Hardest Working Person and the innovation pipeline that is coming later in the year.

Okay. I mean, do you guys know when we might see US sales start to increase?

Let me just comment about this. Here is what we are focused on, just so you are clear. We are focused on profitable growth. That is what our objective is. And the key driver of that is building the brands. We talked about a shift between promotional spending and advertising spending, which is designed to drive long-term growth of the brands. What we are doing is we are executing the global application of our portfolio plans, and so we have three-year rolling portfolio plans for each of our key brands, and we are executing that in each of our regions around the world. The competitive dynamics, the marketplace conditions, economic uncertainty differ from county to country and from region to region, and so you see performance being impacted by that. Obviously, our desire is to grow the business profitably in the US, and we believe we have all of the right actions and initiatives in place to do that over time.

Okay, great. And then just on the gross margin. I know you guys gave a breakdown of the expansion, but what would you say -- I guess the FX probably turns neutral to negative by the fourth quarter and maybe the first quarter next year -- but what in the gross margin do you think was more one time and what do you think is more sustainable over time?

Well, first of all, as it relates to currency, I wouldn't be so bold as to predict what currency is going to do in the back half of the year. So, currency is an outcome. I think there are a number of factors that impact gross margin positively versus where we have been in the past. Obviously, we are benefiting from the restructure savings. Some of those impact cost of goods, obviously, so that's a benefit. We are also benefiting from the procurement initiatives that we went through last year as we went out to all of our key inputs, key raw materials and key inputs to renegotiate and take advantage of marketplace rates. So, you are seeing the benefit of that in gross margin.

There are always one-time activities within there, Pat, that cause gross margins to jump up and down quarter-to-quarter, you know, obsolescence changes, inventory changes, currency, etc. And so really what our focus is is on operating margin, and we have shared that with you before. We believe that the level that we are at today is very competitive and sustainable.

Okay, great. Thank you so much.

Thank you, Pat.

Your next question is a follow-up from Reza Vahabzadeh with Barclays Capital.

Hi, Reza.

Hi. Just as far as the timing of shipments of new products, are we mostly through that, or is there some more to come in the second half?

Well, as you know, shipments vary from quarter-to-quarter. The first half shipments generally occur from November through early into the first quarter, and the second half shipments start late April through into the third quarter. So, it's around that period there are phasing changes year-over-year, but generally speaking between end of April and end of July our new shipments are in place.

So, you might still have some of that in the early part of third quarter of this year?

Yes, there may be some of that, too.

And that's a normal cycle, as Chris says, Reza. It's a normal cycle in the US. Of course, outside the US it's not restricted to first half, second half, as the retailers are more open to new product launches throughout the calendar year.

Yes, right. A couple of housekeeping items. The "all other" that you mentioned for cash uses, does that include dividends? Any preferred dividends?

The preferred dividends are included in interest expense, so my comments with regard to cash interest expense, I refer you to both 10-Q, as well as 10-K, and that is a number that you can calculate. But we separately talk to interest expense, taxes, displays and CapEx.

Got it. And then accounts payables were higher year-over-year. Is that just timing?

I would just look at that as timing. Clearly, there is nothing noteworthy there.

Thank you.

Your next question is a follow-up question from Jeff Kobylarz with Stone Harbor Investments.

Hi. Yes, again, gentlemen, I was curious about one of your goals to drive a common global process. Is there anything you could say in general about how far along you are with that and any metrics you could talk about, about putting that in place?

Yes, we have been working on that for some time. We now have got global portfolio plans for our largest brands, and we organize the portfolio by consumer cluster around the world. So that, while this is a fairly global portfolio, and many products are supplied across the whole world, there are certain regions of the world where consumer preferences, cultural differences mean that you have to have a slightly adjusted portfolio. So, we are advancing along that very strongly now. We are probably about a year into it and we are working on that, pursuing that. And the ultimate aim of it, of course, is to drive growth in every region and every country.

The other thing we're doing there, Jeff, is we are looking at our supply chain and manufacturing function, and making sure that we are taking full advantage of the global application of that. So, we have four manufacturing plants around the world. We have a number of third-party manufacturers and, of course, we source from various places. So, again, looking at that globally is a focus of ours as we go through the next couple of years.

Okay. Anything in general you could say about the ability to sell the Almay and the Mitchum brands internationally as well as they are penetrated here in the US?

Yes. I mean, if you were to do a grid of the countries where we are in business and the countries where we have Almay and Mitchum, you would see there are lots of places where we don't currently have Almay and Mitchum.

And is there the same consumer potential uptake in those international markets as there is in the US?

Chris Elshaw. Yes. Again, depending on cultural preferences. So, in the case of deodorants, for example, you find distinct preferences around the world for different forms. So, providing you meet the form requirement, then obviously you can establish your brand. For example, Almay is in a few places around the world. Currently it is in Canada. We have good business in South Africa, Venezuela, so there are opportunities for brands like Almay and Mitchum in the rest of the world.

All right. Thank you.

Thank you, Jeff.

Your next question comes from the line of David Wu with Telsey Advisory Group.

Hi. Good morning, everyone. I have three questions. First, can you provide any color on your market share performance in the US with respect to color cosmetics, beauty tools and deodorant? And, secondly, can you talk about how the sell-in versus sell-out rate trended in the US in the second quarter? And just, lastly, maybe if you could talk about how the Project Impact initiatives at Wal-Mart are impacting sales, if at all? Thank you.

Okay. So, first of all, as we said on the ACNielsen data, it represents only a portion of our channels in all of the US markets, so that is why we don't focus on that and we refer you to focusing on the net sales.

In terms of the phasing, net sales and retail sales don't necessarily move in tandem from period to period. It depends when you are shipping as to when the product is in store for sale. Of course, over time those things should equal out.

And then on Project Impact, Wal-Mart continues to focus on trying to improve their in-store environment. We work very closely with them. They continue to roll that out in a number of stores, and wherever they are doing that we are working very closely and obviously using the learnings that they've got.

Great Thank you.

At this time, there are no further questions in queue.

Operator, thanks very much. We appreciate everybody's participation today and we'll speak to you soon.

Thank you. This concludes today's conference call. You may now disconnect.