Revlon Inc (REV) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Revlon's second quarter 2011 earnings conference call. At the request of Revlon, today's conference 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. Ms. Garofalo, you may begin.

Thank you, Tanyika. Good morning, everyone, and thanks for joining today's call. Earlier today we released our results for the second quarter ended June 30th, 2011. If you have not already accessed a copy of our second quarter 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'd 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 2010 Form 10-K and our 2011 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. These non-GAAP measures are defined in the footnotes to our release and are also reconciled to their most directly comparable GAAP measures in the financial tables at the end of our release.

And finally, as a reminder, our discussion this morning should not be copied or recorded. With that, I'll turn the call over to Alan.

Well, thank you, Elise, and good morning, everyone. As we discussed with you in the past, Revlon's vision is glamour, excitement, and innovation through high-quality products at affordable prices. This underpins everything we do. We realize this vision by executing the five key elements of our business strategy, which are designed to drive profitable growth. These elements are, 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.

With regard to building our strong brands, during the second quarter of 2011 we made progress in a number of areas. From a top line perspective, we delivered net sales growth of 4% excluding the benefit of currency fluctuations, driven by the US and Asia-Pacific regions. Our brands performed well in the marketplace and we are very pleased with both new and core product performance during the period. Our recent acquisition of Sinful Colors is transitioning well, and we are pleased with its marketplace performance.

As we have discussed for some time, we believe that the drivers of profitable growth are, first, innovative, high-quality, consumer-preferred brand offering; second, effective brand communication including appropriate levels of advertising and promotion; and third, superb execution with our retail partners to provide optimal in-store offering.

Our results in the quarter benefited from our focus on these drivers. Specifically, we are focused on our three-year global portfolio plans for our key brands in order to meet the needs of our consumers globally. This enables us to have a compelling product offering across both our core and new products.

Next, our brand communication is benefit-driven, compelling to the consumer, and consistently delivered across all touchpoints, including traditional media, in-store, and a variety of digital platforms.

Lastly, working alongside our retail partners globally, we are creating an engaging shopper environment with eye-catching in-store displays and effective promotional activity.

With regard to our strategic objective of increasing our operating profit and cash flow, for the quarter we maintained competitive operating margins while growing the top line. We continued to support our brands at appropriate levels in the marketplace and invest in growth opportunities globally. Our negative cash flow in the quarter was impacted primarily by the timing of debt interest payments, which Steven will discuss later. It is important to note that it was not driven by any change in the underlying business.

With regard to our strategic objective of improving our capital structure, we refinanced our bank credit facilities in the quarter, resulting in lower interest rates and extended maturities. Annualized savings associated with the refinancings are an estimated $10 million.

So, in summary, driving profitable growth comes down to brands and people. We have incredible talent and capabilities, broad geographic reach, and strong global brands. Overall we had a strong quarter, and I am pleased with our performance so far in 2011. So, with that, I will hand it over to Chris to talk about our marketplace performance.

Thank you, Alan, and good morning, everyone. Today I will review our net sales performance excluding the impact of changes in foreign currencies by region and by brand.

Net sales in the second quarter were $351.2 million, an increase of 4% versus the second quarter last year. This increase in net sales was driven by Sinful Colors and Revlon color cosmetics. From a regional standpoint, in the United States net sales increased $15.6 million, or 8.7%, primarily due to the inclusion of net sales of Sinful Colors, and higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. It is important to note that net sales in the US grew in the quarter, excluding the results of Sinful Colors.

In Asia-Pacific, net sales increased $4.2 million or 8.6%, due to the higher net sales of Revlon color cosmetics in China, Australia, and certain distributor markets.

Moving on to Europe, Middle East, and Africa, net sales decreased $3.4 million or 6.8%, primarily due to lower net sales of Revlon color cosmetics in the UK and Italy, and lower net sales in certain distributor markets.

Worthy of note in this region, for the second year in a row, Revlon will be the official makeup partner for Britain and Ireland's Next Top Model 2011. Revlon is a perfect partner to provide the on-trend makeup looks and inspiration for the 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 executive producer of the series.

In Latin America, net sales decreased $1 million or 3.5%, primarily due to lower net sales in Mexico, Venezuela, and certain distributor markets, which were partially offset by higher net sales in Argentina.

With respect to Venezuela, lower net sales in the second quarter resulting from the previously-announced June 5th fire, were largely offset by higher selling prices, given market conditions and inflation. We have not recorded any sales in Venezuela since the fire. Steven will provide more details later in the call.

In Canada, net sales decreased $2.4 million, or 11.5%, primarily due to lower net sales of Revlon color cosmetics.

Now, moving on to the performance by brand, starting with Revlon color cosmetics, net sales increased during the quarter as compared to prior year.

In the face segment, we recently launched Revlon Age Defying With DNA Advantage, a revolutionary full-coverage makeup with moisturizing benefits that help protect the skin's DNA to fight the signs of ageing. 96% of women using this makeup saw flawless, younger-looking skin in just two weeks.

In the lip segment, Revlon ColorBurst lipgloss, which continues its global rollout, is a new luxurious lipgloss that contains our innovative Elasticolor technology and micro-pearl crystal formula, which distributes rich color pigment evenly for weightless color and vivid, mirror-like shine. This lipgloss is performing well in the marketplace.

In the eye segment, building upon our highly successful Revlon Grow Luscious franchise, we introduced Grow Luscious Plumping Mascara. We recently launched a 60-second commercial directed by Oscar Award-winner Darren Aronofsky, starring brand ambassador Jessica Biel, with music producer Pharrell Williams, in support of this product launch.

And lastly, in the nail segment, Revlon Top Speed, our advanced line of nail color that dries in 60 seconds, has been introduced in several countries, and we are pleased with its performance in the marketplace. Top Speed was recently recognized by the Oprah Magazine's April O-wards.

Moving on to the Almay brand, net sales were down modestly in the quarter as compared to the prior year. As we continue to build out Almay's core franchises, our Intense-I smoky eye shadow, launched earlier this year, continues to be successful in the marketplace. In addition, we also introduced some new franchise extensions under the Wake-Up Makeup franchise and the Get Up and Grow mascara.

In women's hair color, net sales of Revlon ColorSilk grew in the second quarter. We continue to expand distribution of Revlon ColorSilk, including Revlon ColorSilk Luminista.

In antiperspirant deodorants, net sales of Mitchum in the second quarter of 2011 were essentially flat year over year. As we stated in our last call, we continue to support the Mitchum brand and have built on Mitchum's established efficacy positioning with the introduction of Mitchum Advanced Control, containing FreshDefense technology. We have also engaged Mother Advertising, and recently launched a new advertising campaign in support of this new product.

And finally, our Revlon Beauty Tools business continues to perform well in the marketplace.

I will turn this 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 begin with our gross margin performance in the quarter. In the second quarter of 2011, our gross profit margin was 65.3% versus 67.3% in the second quarter of 2010.

Gross margin in the 2011 period was unfavorably impacted by product mix, higher allowances, and higher costs related to inventory obsolescence and sales returns. These unfavorable impacts were partially offset by favorable foreign currency fluctuations and lower pension expense.

SG&A increased $8.1 million to $181.5 million versus the second quarter of 2010, primarily due to the impact of unfavorable changes in foreign currency and higher permanent display expenses. Operating income in the second quarter of 2011 was $47.8 million compared to $47.3 million in the same period last year. Adjusted EBITDA in the second quarter of 2011 was $66.3 million compared to $61.7 million in the same period a year ago. Operating income and adjusted EBITDA benefited from higher net sales, partially offset by higher cost of sales and higher SG&A.

As I have mentioned in previous earnings calls, we continue to focus on delivering competitive operating margins. Period to period, there are a number of moving parts contributing to our operating margins, which are influenced by several factors including the mix of products sold, brand support, and the timing and size of product launches, just to name a few. Overall, we are pleased with our operating margins in the second quarter and the year to date periods.

Net income in the second quarter of 2011 was $6.5 million or $0.12 per diluted share compared to net income of $16.4 million or $0.31 per diluted share in the same period last year. Net income in the second quarter of 2011 included pretax charges of $11.3 million related to the early extinguishment of debt as a result of the refinancing of our bank credit facilities.

Net income also included a foreign currency loss of $1.7 million, related to the remeasurement of Revlon Venezuela's balance sheet due to a change in the exchange rate used to translate Revlon Venezuela's financial statements. Specifically, we began using a rate of 5.5 Bolivars per US dollar in the second quarter, which was the average rate at which the Company has accessed US dollars, in place of Venezuela's official exchange rate of 4.3 Bolivars per US dollar.

Net cash used in operating activities in the second quarter of 2011 was $20.8 million compared to net cash provided by operating activities of $9.3 million in the same period last year. And free cash flow in the second quarter of 2011 was a negative $24.2 million compared to positive free cash flow of $5.3 million in the same period a year ago.

Cash flow in the second quarter of 2011 was impacted primarily by the timing of cash interest payments on our term loan. Total interest payments in the quarter were $41 million compared to $24.4 million in the second quarter of 2010. In addition, we had higher permanent display spending of $14.7 million in the quarter compared to $7 million in the same period last year.

Now, looking at the P&L for the first six months of 2011, my commentary on net sales will exclude the impact of changes in foreign currency. Net sales in the first six months of 2011 were $684.4 million, an increase of 5.4% compared to the first six months of 2010. In the United States, net sales increased $19.7 million or 5.5%. In Asia-Pacific, net sales increased $8.3 million or 8.8%. In Europe, Middle East, and Africa, net sales increased $1.4 million or 1.5%. In Latin America, net sales increased $5.9 million or 12.1%. In Canada, net sales decreased $800,000 or 2.3%.

Operating income was $92.5 million compared to $92.7 million in the first half of 2010, and adjusted EBITDA was $124 million compared to $122.8 million in the same period last year. Net income was $16.9 million or $0.32 per diluted share, compared to $18.6 million or $0.36 per diluted share. As a reminder, net income in the first six months of 2011 included pretax charges of $11.3 million related to the 2011 refinancings, and net income in the first six months of 2010 included $9.7 million of expenses associated with the March 2010 refinancing.

Turning now to cash flow, year to date, cash flow provided by operating activities was $3.3 million compared to $40.5 million in the same period last year. Free cash flow year to date was negative $2.5 million compared to positive $33.5 million in the same period last year.

Cash flow in the 2011 period was primarily impacted by the timing of interest payments on our term loan debt. The first six months of 2011 included $57.1 million of interest payments compared to $38.5 million in 2010. In addition, there was a higher use of cash for permanent display spending and other working capital during the 2011 period, as compared to the same period in 2010.

On the liquidity front, our un-utilized borrowing capacity and cash on hand as of June 30, 2011, was $144.2 million, comprised of $43.1 million of available cash and $101.1 million available under our revolving credit facility. At June 30, 2011 we had approximately $10 million borrowed under our revolver.

As previously announced during the quarter, consistent with our strategy to improve our capital structure, we refinanced both our bank term loan and revolving credit facilities, which lowered our interest rates and extended debt maturities. The cash cost of both transactions totaled approximately $4.6 million.

With respect to the P&L charges associated with these refinancings, we recorded a charge of $11.3 million during the second quarter of 2011, comprised of a write-off of $9.4 million of previously capitalized debt costs and a $1.9 million charge of -- for fees and expenses which were expensed as incurred in connection with these refinancings. Based on current debt levels and LIBOR rates, annualized interest savings would be approximately $10 million.

Now, let me take a couple of minutes to discuss the fire in our Venezuelan facility in a little more detail, specifically the accounting for the quarter and the status of insurance recovery with respect to the fire.

In early June, our manufacturing facility in Venezuela was destroyed by fire. As a reminder, during 2010 Venezuela represented approximately 3% of the Company's consolidated net sales and 2% of the Company's consolidated operating income. As a result of the fire, we recorded a $4.9 million impairment loss in the second quarter related to the net book value of Venezuela's inventory, property, plant, and equipment, which was destroyed by the fire.

In the quarter we also recorded $4.9 million of income in a related insurance receivable, as it was probable that our insurance recovery related to the fire would be at least equal to the net book value of the inventory, property, plant, and equipment destroyed. This income entirely offset the $4.9 million impairment loss which I just mentioned.

Subsequent to June 30th, we received confirmation that our insurers agreed to an interim advance payment of $15 million to be paid to the Company with respect to the fire. We expect to receive these proceeds in the third quarter of 2011. At this time, an assessment of the extent of damage and the fire's impact on our business in Venezuela is ongoing, and therefore the final amount and timing of the ultimate insurance recovery is unknown. With respect to our ongoing business in Venezuela, we are currently evaluating options to minimize the disruption, and at this time are unable to estimate the full year impact of the fire on our financial results in Venezuela.

Now, moving on to the balance of 2011, consistent with our historical practice, I'm going to provide certain 2011 cash flow information, none of which has changed from the guidance we provided during our last earnings call.

Capital expenditures are expected to be approximately $20 million. Permanent display expenditures are expected to be approximately $40 million. Pension plan contributions are expected to be approximately $30 million. Cash interest expense can be estimated by reference to our public filings, which detail the composition of our capital structure and applicable interest rates. And lastly, cash paid for income taxes is expected to be approximately $20 million.

As a reminder, with respect to operating cash flow in general, the timing of these cash flow items just noted, as well as other working capital items, can vary from quarter to quarter based on a number of factors. We continue to closely manage our key working capital accounts, including receivables, payables, and inventory.

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.

Good morning, Reza.

Good morning. Just on the current sales trends in some of the non-US markets, Canada sales were down XFX, as was Europe XFX, which was different than the last quarter. Any comments or color on that, why, XFX sales are down this quarter but they were up last quarter?

Yes. So, Reza, let me start with Canada and then I'll talk about EMEA. So, as we stated, net sales XFX declined $2.4 million in the quarter, and that was primarily due to lower net sales of Revlon color cosmetics. On a year to date basis, net sales XFX declined just $800,000, and that was primarily driven by Almay. But if you look at our marketplace performance year to date, Revlon continues to maintain its position, and we've also been very pleased with our Almay performance.

In terms of EMEA, again, as we stated, XFX declined $3.4 million in the quarter, and that was primarily due to lower net sales of Revlon color cosmetics in the UK and Italy, and certain distributor markets. On the year to date basis, however, net sales increased $1.4 million.

And in relation to the UK, I would say, despite the net sales declines, we're very pleased with the marketplace performance and progress there, in particular with respect to Revlon color cosmetics and certain of our beauty care products. Suffice to say that in all regions we're very focused on driving profitable growth, and as we've talked about before, timing of net sales and marketplace performance on a quarterly basis don't always match perfectly. So, as we've said, over time we think our net sales trends are indicative of our performance; but I think it's hard to take any one quarter in isolation.

Right. So, I mean, in other words, the timing of shipments of old or new products probably impacted the second quarter performance versus first quarter, or at least was partly reflecting of that?

Well, as I say, we don't break out shipments versus marketplace performance in that way. But if you look over time you will see our performance in net sales is an indication of our business. And the underlying business, we're very pleased with. As I said, we're very pleased with our performance in the UK.

Got it. And in Latin America, were sales flattish, excluding the Venezuela issue?

Well, actually, I've said, not quite. Net sales were down $1 million or 3.5%. That was due to lower net sales in Mexico and Venezuela, of course, and certain distributor markets, partially offset as I mentioned by higher net sales in Argentina. But on a year to date basis, net sales increased $5.9 million in that region, and that was driven by Revlon cosmetics and some beauty care products. And with --

Got it.

-- slight exception, there was a slight decline in Mexico, but other than that, all other markets grew.

Got it. And then, turning to gross margin, obviously this quarter gross margin is lower year over year. First quarter it was up. And obviously display spending had an impact on that -- display spending was up almost 200 basis points year over year. What else contributed to gross margin decline year over year?

So, first, our focus is on operating margins, and certainly from quarter to quarter there will be some variability in gross margins. Specifically in the second quarter, our gross margin was 65.3% versus 67.3%, as I mentioned earlier.

And gross margin in the quarter, as you just indicated, was impacted by a few factors, and let me just reiterate those. One was currency -- I should say, product mix, was an impact. It was an unfavorable impact on gross margin in the quarter. So, we had certain products that had a higher cost of goods in the mix that were sold, relative to products that were sold in the prior period.

Second, we had higher allowances in the quarter, which also impacted gross margin. And we also had higher costs related to obsolescence and sales returns, which I discussed. And some of these were off -- all of these unfavorable changes were offset by favorable foreign currency fluctuations and lower pension expense. And so, there were a number of factors -- and so, when we look at that, we see about the 65.3%, it's worthy of note to say that on a year to date basis our gross margin is 65.6% compared to 65.9% in the same period last year, and 65.5% for the full year 2010.

Got it. And in Sinful, the sales of Sinful -- what were they in the quarter, for the -- as a percentage of prior year sales?

Well, as we -- as you know, we don't break out sales by brand in the region. Suffice to say, excluding Sinful, sales in the US region increased.

Got it. Thank you.

Thanks, Reza.

Your next question comes from the line of Carla Casella.

Hi. I had another question on Sinful Colors. The -- it sounds like this was a very successful launch. Can you talk about the sell-through of the brand versus the sell-in, and when -- if you already are in the replacement cycle for that, or if this is still the sell-in period?

I'm not quite sure what you're saying. I mean, we took over an existing business, so there's a program of promotion and display that was in place, and that we've been working with since that time. Suffice to say, we're very pleased with the marketplace performance of Sinful. It's got a great business model. It's based on quality products at an attractive price with lots of attractive promotions. So, we're very happy with how it's going.

That's great. I guess I was trying to get a sense for the -- does it hold about the same amount of inventory in the channel, or is that a brand where it holds more or less inventory than the other Revlon products?

Yes. I wouldn't say there were any distinguishing factors about inventory on Sinful versus other nail products.

And then when you look at your new product launch, have you -- what percentage of your sales do you plan to come from new products this year, and do you think that should be greater or less than last year?

Well, as we said before, we don't actually break out the absolute proportions, but what we do say is that in the category, between 15% and 20% of retail sales every year come from new products, and we aim to be competitive each and every year in that way.

Okay, great. Thank you.

Thanks, Carla.

Your next question comes from the line of Connie Maneaty.

Hi. This is actually Zeke Kramer for Connie. I was wondering if you could talk a little bit about what drove the increase in net sales in the US ex Sinful Colors. And I know you said you don't break out Sinful or brands, but I was wondering if you could sort of give us some help on, I guess, the order of magnitude of the increase in the US ex Sinful.

As we said in our remarks, the increase was primarily driven by Sinful Colors, Revlon color cosmetics, and Revlon ColorSilk hair color, and excluding Sinful, the US business was up.

In terms of what we think about the US performance, well, we've been very focused on driving growth there. And, as you know, we talked about this several quarters ago. We've put in place some very specific actions to positively affect our US performance. First of all, we've spent a lot of time optimizing our brand support mix between advertising, promotional activity, and other drivers, so that it's more effective.

Secondly we've been working on enhancing our in-store execution. By the end of last year we'd increased our in-store promotional display pressure, and more recently we've been implementing some exciting new graphic and layout changes to our permanent walls.

And thirdly, as we said, we've appointed a dedicated general manager for the US business who's providing a very effective day-to-day focus on the US region. So, we believe those are the basis of our improvements in the US business.

Great. Thank you.

Your next question comes from the line of David Wu.

Hi. Good morning, everyone. Your first (inaudible) looks like the SG&A expense ratio came down meaningfully. Can you talk about what drove the decline?

Well, I mean, if you look at our 10-Q which was filed this morning, if you look into the comments, most of the decline -- most of the increase year over year was actually driven by currency. So, ex currency, not a huge increase in SG&A. What we are doing is making sure that we're spending both the right level in terms of dollar spend, and the right mix between what gets captured in SG&A and what gets above net sales. So, it's exactly what we expected it to be excluding the currency changes.

And just to confirm, in the quarter, was the ad-to-sales ratio up versus last year?

I don't recall if it was up or down versus last year. I don't think it moved meaningfully, David.

And are there any changes within the mix -- the ad mix?

It's an ongoing process. We're constantly looking at all of the media outlets including traditional media, online, et cetera, and so it changes quarter to quarter, but nothing fundamental, I don't believe. And generally, it's driven by our own view on what's the most effective media, and working with our retail partners through our joint business plans in terms of -- on how we execute. But nothing significant to call out.

And it seems like, too, we've heard that ad rates have been going up, especially the back half. Are you seeing rate increases?

Well, of course, as you saw, there was -- with the upfront, there was a lot of talk in the press about what the rates were. We work with MediaCom, who is one of the largest media buyers in the industry. So, we rely upon them to make sure that we have the best combination of quality, quantity, and rates in our media buying.

Great. And on Venezuela, how are you mitigating the impact from the fire? Are you planning to ship any product out of the US plant in the meantime?

So, right now, we're currently evaluating all options, and our focus is to minimize disruption to our Venezuela business. So, obviously, it's a moving feast, and as we take actions we'll update you.

Great. And then just lastly on Europe, can you talk about sort of where you are in terms of expanding distribution and whether you're gaining traction with that?

In Europe in general or a specific country?

Both.

I mean, our distribution base hasn't significantly changed. I mean, what you find with Revlon is, we're generally distributed in the places where people are buying cosmetics already. Our real focus is about increasing turn and productivity in those outlets. But as I say, yes, the UK is a significant market in Europe, and we're certainly very pleased with our progress there on Revlon cosmetics.

Excellent. Thank you very much.

Thanks, David.

Your next question comes from the line of Jeff Kobylarz.

Good morning. Just curious about the 140 basis-point hit to your gross margin, you said from mix. And can you say, with the acquisition of Sinful Colors, was their inventory write up, that caused kind of a one-time impact on gross margin in this quarter?

As you know, the Sinful acquisition closed on March 17th and the accounting is that we do write up those assets, but that was not a material movement in the gross margin, and it was a first quarter event.

So, the product mix -- what we're talking about is when we have sales in -- of certain products within color cosmetics and our beauty care portfolio, there are various margins, and depending on the sales of those products in a particular quarter, the gross margin can vary from period to period. But as I mentioned earlier in the call in our prepared response to another question, our gross margin both in 2010 as well as in the latest 12 months, as well as for any measured periods of time recently, has been in and around the 65.5% rate.

Okay. Thanks. And about Sinful Colors, can you comment about how the trade has responded to your acquisition of the company, and is there any change in the growth rate for Sinful, just given that you guys are the owners now?

Well, we run Sinful as a standalone business. We have a dedicated general manager for that business and it's run entirely separate from Revlon. The relations with the trade are excellent, and we continue to take full advantage of that.

All right. And also, can you comment about the sales of new products in the first half of this year compared to the first half of last year? Just, how are they performing?

Well, as we said earlier and in our Quarter One call, too, we're pleased with our new product performance. As I commented earlier, we target to be competitive in the category, which is 15% to 20% of retail sales in new products. And that really comes from our three-year rolling global portfolio plan. So, as we set out some time ago as part of our strategy, we need to have a strong new product pipeline in this category. So we implemented this three-year rolling portfolio plan. The benefit is that you get earlier sight of your new products, you're able to make sure that the technology's excellent, and you're able to prepare for a good in-store launch. So, we're consistently focused on that, and making sure that we're meeting the needs of all our consumers globally.

All right. Thanks for your help. That's it.

Your next question comes from the line of Marianne Manzolillo.

Could you comment, please, on your inventory levels of $141.8 million at the end of the second quarter? That's higher than it's been for a while.

I think at any period end -- and I'll hand it over to Steven in a second -- any period end, inventory's going to move around. There's nothing fundamentally different about our business that would indicate that inventory is anything of a concern.

Okay. So, we should expect it to decline as the year goes on?

I didn't say that. I think you need to anticipate whatever you choose to anticipate. What I would say is that there's nothing fundamentally different about our business as it relates to inventory. Obviously we did add the Sinful Colors brand to our portfolio, which does have some inventory in it, but net-net, nothing fundamentally different from an underlying business standpoint.

Okay. All right. So, it should -- by year end it should be comparable to last year's year end, except for perhaps any timing or temporary differences?

I wouldn't conclude that. That's up to you to conclude.

How much of an increase would be attributable to the Sinful Colors business?

It won't be disclosed.

I'm sorry?

That's not something that we disclose.

I see. Okay. And then, regarding the permanent display spending, is that then capitalized as part of property and equipment?

Well, the accounting for it differs around the world. In the US, typically it is capitalized and amortized over a three-year period, and in certain markets outside the US it is capitalized. But also, in certain markets outside the US -- in China for example -- it's expensed as incurred.

Okay, great. Thank you.

Thank you.

We do have a follow-up question from the line of Reza.

Yes. Just as a follow-up, you mentioned in your remarks that in the second quarter allowances as well as returns were higher year over year. I was wondering if you can comment on that, because it seems like returns and allowances have been moderating year over year in the last few quarters, for the most part.

With regard to allowances, that's going to be a function of, as activity both around new products as well as our core business in any particular quarter, can vary from period to period as a function of our selling activity. However, we don't see a change in the overall level of allowances that are driving our business. As Chris and Alan both mentioned earlier, we look for a mix of advertising and promotion that will drive profitable brand growth.

And is it roughly flat year over year, to date -- year to date?

I just don't have that in front of me at the moment, Reza.

Got it. And then you talked about FX being helpful to your gross margins. Is that a function of selling products produced out of US to appreciating currency countries away from us?

No. We're manufacturing the majority of our products, more than 50%, in the US in our Oxford, North Carolina facility. We're then selling those products to overseas markets, and then in addition we are translating the financial statements of our foreign currency -- our foreign subsidiaries, non-US subsidiaries. Those financial statements are then translated back to US dollars so there's both transaction and translation impacts that are reflected in the financial statements.

Got it. That's what I meant to say. But you said it in a more eloquent way. And then lastly, the tone of business in the US for the category -- I mean, have you seen any improvement in the category, broadly speaking, or any softness versus first quarter over the prior year?

The category continues to be positive. You know, this is a highly competitive category. It's got a lot of strong players like ourselves who are competing constantly every day, plus it's full of a group of retailers who are competing very hard against each other; so, all that has produced a fairly good category, certainly this year.

So, you said category sales were up in the second quarter. Were they up in the first quarter?

Yes.

They were. Okay. And retailer posture on color cosmetics and beauty care -- is that also constructive?

Yes. I mean, they continue to see it as a good category. We have very strong relationships with each of the major customers. As Alan mentioned earlier, we work very closely on joint business plans with them to maximize performance, so it's a good place to be.

Thank you.

Thank you, ladies and gentlemen. I would now like to turn the call back to Mr. Alan Ennis for closing remarks.

Thank you, and thank you very much for joining our conference call. We look forward to speaking with you when we report our third quarter results later this year. Thank you.

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