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Revlon, Inc. (NYSE:REV)

Q3 2008 Earnings Call

November 5, 2008 9:30 am ET

Executives

Abbe Goldstein – Sr. VP IR

David Kennedy – President & CEO

Alan Ennis – Executive VP & CFO

Analysts

Todd Harkrider - Goldman Sachs

Karru Martinson - Deutsche Bank

Bill Chappell - SunTrust Robinson Humphrey

Carla Casella - JP Morgan Securities

Lance Vitanza - Knighthead Capital Management

Arun Seshadri – Credit Suisse

Mary Gilbert – Imperial Capital

Aaron Wolfson – Resolution Partners

Benjamin Vaderaten - Canyon Capital

Mark Kaufman – MLK Investment Management

Kevin Zeits - Tally Capital

Connie Maneaty - BMO Capital Market

Mary Gilbert - Imperial Capital

Operator

Good morning, ladies and gentlemen and welcome to Revlon's third quarter 2008 earnings conference call. At the request of Revlon, today's conference call is being recorded. (Operator instructions) I would now like to turn the call over to Ms. Abbe Goldstein, Revlon's Senior Vice President, Investor Relations and Corporate Communications. You may begin, Ms. Goldstein.

Abbe Goldstein

Thank you, Heather. Good morning everyone and thank you for joining our call. Earlier this morning we released our results for the second third 2008. If you have not already received a copy of the earnings release, you can obtain one at our website at www.revloninc.com. Here with me today are David Kennedy, President and Chief Executive Officer and Alan Ennis, Executive Vice President and Chief Financial Officer.

On today’s call, David will briefly highlight the second quarter results and provide a strategic update on the business. Alan will then review our financial results for the quarter in detail. I will then introduce our exciting new product lineup for the first half of 2009.

Before we get started, I would like to remind everyone that our discussion this morning might include forward-looking statements which are subject to the Safe Harbor Provisions of the Private Securities Litigation Act Reform 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 2007 Form 10-K and our third quarter 2008 10-Q which we will file later today.

Our remarks today will include a discussion of adjusted EBIDTA which is a non-GAAP measure that is defined in the footnotes to the release we issued this morning and is reconciled to net income, the most directly comparable GAAP measure in the accompanying financial tables.

In relation to U.S. share results unless otherwise noted our discussion this morning of mass retail share and consumption data is that of U.S. mass retail dollar volume according to AC Nielsen which excludes WalMart 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, Kmart and food and combo stores and represents approximately two thirds of the company's U.S. mass retail dollar volume. Finally as a reminder our discussion this morning should not be copied or recorded. With that I would now like to hand it over to David.

David Kennedy

Thank you Abbe and good morning everyone. Let me go over the highlights briefly with you for the third quarter of 2008 compared to last year. Net sales increased 1.1% to $334.4 million dollars, compared to $330.8 million dollars. Operating income was essentially unchanged at $19.8 million. Net income was $29.2 million or $0.57 per diluted share, compared to a net loss of $10.4 million, or $0.20 per diluted share.

Net income in the third quarter of 2008 include discontinued operations of $44.4 million or $0.86 per share of which $45.2 million relates to the gain on sales of discontinued operations. And adjusted EBITDA was essentially unchanged at $42.6 million.

Later in the call, Alan will review the financial results for the third quarter in detail. We've executed our strategy and probably grown our business during the first nine months of this year. Specifically, we have launched a comprehensive and successful new lineup of Revlon and Almay color cosmetics products, supported our brands with appropriate levels of advertising and promotional support, increased our margins and improved our capital structure.

As we continue to support our extensive second half 2008 new product introductions, we expect increased levels of advertising and promotional support in the fourth quarter of 2008 compared to the same period last year.

For the year 2008, we expect improved operating margins, profitability and free cash flow from continuing operations, compared to 2007, driven by the strength in the Revlon brand, efficiencies, and cost controls throughout the company.

We're extremely excited about the new product introduction for the first half of 2009, which Abbe will review with you later on this call. Our Revlon brand lineup includes comprehensive new offerings in every segment of the category – face, eyes, lip and nail. Almay Pure Blends is our first natural collection of color cosmetics and delivers a full range of shades, radiant finishes and eco-friendly products and packaging with no compromise in color and performance.

Looking ahead, we're managing our business with the objective of improving our financial performance in competitive position while maintaining flexibility in light of the uncertain economic conditions and retail sales environment in the U.S and around the world which will likely affect sales for the remainder of 2008.

In addition, the recent strengthening of the U.S dollar will likely impact our reported results in the fourth quarter of 2008. We believe that as economic conditions stabilize, our focus on the key drivers including innovative, high-quality consumer preferred new products, effective integrated brand communication, appropriate levels of advertising and promotion and superb execution with our retail partners, along with disciplined spending and rigorous cost control will continue to generate sustainable positive free cash flow and profitable sales growth over time.

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

Alan Ennis

Thank you Abbe and David and good morning, everyone. As we normally do, I would like to build upon David's introductory comments and take you through a more detailed review of our financial results. So starting with the P&L for the third quarter of 2008, net sales of $334.4 million increased 1.1% compared to $330.8 million in the third quarter of last year.

Foreign currency fluctuations did not have a significant impact on year over year consolidated net sales comparisons.

In the United States, net sales were $189.4 million, compared to $190.9 million in the third quarter of 2007. Third quarter net sales benefited from higher shipments of Revlon color cosmetics, largely due to 2008's new product launches, offset by higher returns and allowances for Almay and lower shipments of fragrances and beauty care.

In our international operations, net sales increased 3.6% to $145 million, compared to $139.9 million in the year ago quarter. Foreign currency fluctuations have no significant impacts on year over year comparisons.

The primary driver of third quarter net sales growth in our international operations was higher shipments of Revlon color cosmetics products, mainly due to products launched in 2008, partially offset by a decline in fragrances.

In our Asia/Pacific region, which is comprised of Asia/Pacific and Africa, net sales increased 10.9% to $70.4 million, compared to $63.5 million in the third quarter last year. This growth was primarily due to higher shipments of Revlon color cosmetics in Australia, South Africa, China, Japan and in certain of our distributor markets.

In our Europe region which is comprised of Europe, Canada and the Middle East, net sales decreased 2.5% to $49.8 million, compared to $51.1 million in the third quarter last year. Higher shipments of Revlon color cosmetics in Canada were offset by lower shipments of fragrances and Revlon color cosmetics in the UK, lower shipments of fragrances in Italy and other distributor markets, and lower shipments of skin care products in France.

In our Latin America region which is comprised of Mexico, Central America and South America, net sales decreased 2% to $24.8 million, compared to $25.3 million in the third quarter last year, primarily driven by lower shipments of beauty care products and color cosmetics in Mexico and in certain distributor markets partially offset by higher net sales in Venezuela.

Moving down the rest of the P&L for Revlon, Inc., in the third quarter of 2008, gross margin declined by 170 basis points to 62.1%, from 63.8% in the third quarter of last year, primarily driven by higher allowances on color cosmetics and higher charges for estimated excess inventory which were partially offset by favorable changes in sales mix and manufacturing efficiencies.

SG&A expenses of $187.5 million improved by $3.3 million or 1.7% from $190.8 million last year. The third quarter of 2007 included advertising and promotional support related to the launches of certain new products including Revlon Flare fragrance and Revlon Colorist hair color, which did not recur in the third quarter of this year. This year over year favorability was partially offset by higher accruals for incentive compensation.

Operating income for the third quarter of 2008 was essentially unchanged at $19.8 million, representing an operating income margin of 5.9%. Interest expense for the quarter was $29.1 million, an improvement fro $34.4 million last year due to lower average borrowing rates and lower average debt levels.

Net income was $29.2 million, or $0.57 per diluted share, compared to a net loss of $10.4 million, or $0.20 per diluted share in the third quarter of last year. Net income in the third quarter of 2008 includes $45.2 million or $0.88 per diluted share gain on the sale of discontinued operations and a loss from discontinued operations of $800,000, or $0.02 per share. Adjusted EBITDA was $42.6 million, compared to $42.8 million in the third quarter of last year.

Looking now at the P&L for the first nine months of 2008, net sales of just over $1 billion increased 1.9%, compared to $993.8 million in the first nine months of last year. Excluding the favorable impact of foreign currency fluctuations, net sales in the first nine months of 2008 increased 4/10th of a percentage point compared to the year ago period.

In the United States, net sales were $583 million, compared to $588.4 million in the first nine months of 2007. The slight decrease in net sales was primarily due to lower shipments of Revlon Colorist hair color and certain fragrances as well as higher returns and allowances of Almay color cosmetics and these were partially offset by higher shipments of Revlon color cosmetics.

In our international operations, net sales increased 6% to $429.6 million, compared to $405.4 million in the year ago period. Excluding the favorable impact of foreign currency fluctuations, net sales in the first nine months of 2008 increased 2.3% compared to the year ago period.

The primary driver of net sales growth in our international business was higher shipments of Revlon color cosmetics, partially offset by a decline in fragrances.

In the first nine months of 2008, gross margin increased by 80 basis points, to 64% from 63.2% in the year ago period, primarily due to favorable changes in sales mix.

SG&A expenses of $548.5 million improved by $33.4 million, or 5.7% from $581.9 million last year. The first nine months of 2007 including advertising and promotional supported related to the launches of certain new products including Revlon Colorist hair color, which did not recur this year. This year over year favorability in SG&A was partially offset by higher accruals for incentive compensation.

Operating income for the first nine months of 2008 was $111 million, compared to $39.1 million in the year ago period, representing an operating income margin of 11%.

Interest expense for the period was $91.9 million, an improvement from $101.4 million last year, due to lower average borrowing rates and lower average debt levels.

Net income was $46.6 million or $0.91 per diluted share compared to a net loss of $66.9 million or $1.13 per diluted share in the first nine months of last year. Net income includes $45.2 million or $0.88 per diluted share, a gain on the sale of discontinued operations and a loss from discontinued operations of $500,000. Adjusted EBITDA was $181.4 million compared to $116.3 million in the first nine months of last year.

At the end of July 2008, we completed the sale of our non-core Bozzano brand, leading men’s hair care and shaving line of products and certain other non-core brands that are sold only in the Brazilian market. The transaction was affected through the sale of our Brazilian subsidiary to hypermarkets and Brazilian diversified consumer product corporations.

The purchase price was approximately $107 million including approximately $3 million in cash on our subsidiary balance sheet. The net proceeds after payment of taxes and transaction costs are expected to be approximately $95 million.

Importantly, Revlon brand Color Cosmetics continued to be marketed in Brazil through our current third-party distributor. In the third quarter of 2008, the results of our Brazilian subsidiary were a loss of $800,000 compared to income of $1.7 million in the third quarter of last year. The results of our Brazilian subsidiary up to the date of disposition and the $45.2 million gain on sale are reported on discontinued operations in accordance of GAAP.

Moving now to mass retail share. In the US, according to ACNielsen, the color cosmetics category grew 3.4% in the third quarter of 2008, compared to the same period last year. The Revlon brand achieved a 13.4% dollar share on the third quarter of 2008, up four-tenths of a point from the same period last year and in line with the approximate 13% dollar share that the brand has maintained since the fourth quarter of 2006. Importantly, Revlon brand share grew each month in the third quarter over the comparable period in the third quarter of 2007.

In the third quarter of 2008, the Revlon brand share benefited from successful new product introductions. The Revlon brand continued its recent strength in the face segment with quarterly dollar volume up 23.5% from the year-ago period, driven largely by Revlon ColorStay Mineral Foundation and Revlon Custom Creations both of which were introduced in the first half of 2008 and continues to be ranked in ACNielsen’s Top 10 New Products through September 2008. In addition, the Revlon brand share in the face segment benefited from the second half of 2008 launch of Revlon Beyond Natural Makeup.

In the third quarter of 2008, Almay continued to maintain its approximate 6% dollar share in line with its quarterly performance since the fourth quarter of 2006. The Almay brand’s positive performance in the eye category was driven primarily by Almay Intense i-Color Collection and Almay Bright Eyes Collection which were launched in the first half of 2008 and the second half of 2008 respectively.

The women’s hair color category declined by 1.2 percentage points in the third quarter of 2008 compared to the same period last year. Revlon ColorSilk recorded an 8.2% share in the third quarter, consistent with the approximate 8% share we’ve maintained since the second quarter of 2007.

In antiperspirants and deodorants, the category increased by 2.3% in the third quarter of 2008 compared to the same period last year. In the quarter, Mitchum continued to maintain approximate 5% dollar share in line with its quarterly performance since the fourth quarter of 2006.

The Beauty Tool category expanded 26.6% in the third quarter of 2008 which was significantly higher than the historical growth rate for the category. This unusual category growth continued to be driven by a single pedicure product introduction from a non-traditional beauty tool category participant. Dollar volume of Revlon Beauty Tool grew 1.8% in the third quarter 2008. Excluding this non-traditional single pedicure products, Revlon dollar share in the third quarter would have increased by 1.1 points to 24.8%. In the third quarter, importantly, we've supported our brands with increased levels of advertising and promotion compared to the third quarter of 2007.

Moving now on to cash flows. Cash flow provided by operating activities in the first nine months of 2008 was $43.9 million compared to cash used by operating activities of $49.8 million in the same period last year resulting in an improvement of $93.7 million.

As I have indicated in previous calls, while we are not providing specific guidance for adjusted EBITDA for 2008, we have provided information to assist you in understanding the factors that will impact our expected full year 2008 cash flow. I would like therefore to update you on the information provided on our July call exceeding the impact of net proceeds from the sale of a non-core Bozzano brand.

Capital expenditures are expected to be approximately $20 million. Permanent display expenditures are expected to be approximately $50 million. Interest paid is expected to be approximately $125 million. Our total debt of September 30 was approximately $1.33 billion of which approximately 60% is currently at fixed interest rates and approximately 40% we have floating interest rates.

Taxes paid are expected to be approximately $15 million and finally all other cash flows including changes in working capital are anticipated to result in cash usage of approximately $20 million. Therefore, you can reach your own conclusions about expected full year 2008 cash flows based on these factors collectively in conjunction with your own expectations for adjusted EBITDA.

Our own utilized borrowing capacity and cash as of September 30, 2008 was $201.3 million comprising $139.6 million available under the revolving multi-currency facility and $61.7 million of cash and cash equivalent.

As we announced on September 3rd, we used $63 million of the net proceeds from the July 2008 sale of our non-core Brazilian brands to repay $63 million of the $170 million MacAndrews & Forbes Senior Subordinated Term Loan which matures August 1, 2009. This repayment will result in annualized interest savings of approximately $7 million. We are using the remaining proceeds from the sale of $32 million for general corporate purposes.

We intend to launch a $107 million equity rights offering that would allow stockholders to purchase additional shares of Revlon Class A common stock. Net proceeds of this equity offering would be used to fully repay the remaining principal balance of the M&F Term Loan. We are monitoring the financial markets closely to assess appropriate timing.

As we announced previously, we affected our 1-for-10 reverse stock split over Class A and Class B common stock during the third quarter of 2008.

So with that, I would now like to hand it over to Abbe to talk about our first half 2009 new products.

Abbe Goldstein

Thank you Alan. We continue to focus on building and leveraging our strong brands and believe that consistent development and marketing of innovated new products is the key driver for building brand equity and profitable growth over time. This strategy has contributed to the Revlon brand's improvements in the marketplace in 2008 as reflected in our US mass retail dollar share improvement.

For 2009, following a strong and successful lineup introduced in 2008, we will introduce an extensive new product lineup for Revlon and Almay color cosmetics and Revlon Beauty Tools. These product launches include unique offerings for the mass channel, innovations in products and packaging, and extensions within certain franchises.

The Revlon color cosmetics in the first half of 2009 are product introductions are as follows: The Revlon Matte Collection is a new versatile color collection that creates a glamorous, matte beauty look. The four-product collection for eye, face, and lip includes Revlon Matte Eye Shadow, Revlon Luxurious Color Eyeliner, Revlon Matte Powder Blush, and Revlon Matte Lipstick. Marketing support will feature Beau Garrett.

Revlon Age Defying Spa Foundation and Concealer are extensions to the highly successful Revlon Age Defying franchise and will offer new formulas and updated packaging incorporating anti-oxidants, tone therapy minerals, and vitamin C fusion, these new products help revitalize and brighten skin while protecting against fine lines. Marketing support will feature Elle Macpherson.

Revlon Beyond Natural Blush & Bronzer and Defining Waterproof Mascara are extensions to the Revlon Beyond Natural franchise which was introduced in the first half of 2008. Marketing support for Beyond Natural will continue to feature Jessica Alba.

Revlon ColorStay Brow Enhancer and Revlon ColorStay Liquid Eye Pen are extensions to the Revlon ColorStay franchise. The Revlon ColorStay Brow Enhancer is a self-advancing dual-ended brow styler that wears up to 16 hours.

The Revlon ColorStay liquid eye pen is a flow-through, felt-tip liquid eyeliner that allows for controlled application and also wears up to 16 hours. Marketing support for these products will feature Elle McPherson.

Revlon Crème Gloss is our next generation lipgloss in an innovative and unique to mass packaging with a flow-through brush applicator. Revlon Crème Gloss provide the full color impact of a lipstick with the extreme shine of a lip gloss. Marketing support will feature Halle Berry.

Enchantment is a collection of 13 new and on trend shades that will be introduced into Revlon's Super Lustrous lipstick and lip gloss, Revlon ColorStay 12-hour eye shadow Quad and Revlon Nail Enamel.

For Almay in the first half of 2009, we're introducing the Almay Pure Blends collection. Almay Pure Blends is our new natural collection of color cosmetic that deliver the pureness of nature in color, radiant finishes and eco-friendly products and packaging.

These hypoallergenic formulas are made from 95.8% to 98.2% natural ingredients with no compromise in color and performance. The packaging is made from 44% post-consumer recycled materials on average and traditional blister cards are being replaced with more environmentally-friendly hang tags.

This collection of five products for face, eye and lip include make-up, loose finishing powder, blush bronzer, eye shadow and lip gloss. Marketing support for Pure Blends will debut Leslie Bibb

In addition to our color cosmetic launch in the year, also be introducing a number of new Revlon beauty tool products. Revlon Pedi-EXPERT is a superior quality, ergonomically, engineered pedicure tool that offers the professional quality results at home. Included in the unique Revlon Pedi-EXPERT kit are bonus pedicure tools and a lifetime guarantee for the product.

With Revlon Pedi-EXPERT we expect to benefit from the recently increased consumer interest in foot smoothing pedicure tools, which has driven growth in nail category this year. Marketing support will feature Elle McPherson.

As a complement to the new Revlon ColorStay brow enhancer that I just mentioned, Revlon is also introducing a unique Revlon pre-enclosed tweezing cream and Revlon brow styling gel. Revlon cosmetic brushes are a complete line of premium quality brushes. The Revlon travel compact mirror is a sleek double sided mirror, which is coordinated to match Revlon's new matte collection that I just mentioned.

Revlon Easy Squeeze nail clip and Revlon Easy Squeeze cuticle nipper each offer an innovatively engineered nd unique extended fold-away handle. And lastly, Revlon ceramics stone nail file is a gentle long lasting file.

With that, we would now like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Todd Harkrider with Goldman Sachs.

Todd Harkrider - Goldman Sachs

Yes, thanks for taking my call.

David L. Kennedy

Good morning Todd.

Alan T. Ennis

Hello Todd.

Todd Harkrider - Goldman Sachs

Since the new product introductions since (inaudible) starts there, you know you've had a steady launch of new products that resonated with the consumers for some time now and it looks like you have another strong line for early 2009. But how do we get comfortable that next year's products will just be as successful as the last several years?

Are you reinvesting more on R&D? Is there a different process that the organization follows today than in the years' past? Or can you provide some color on why you think the Revlon will continue to maintain or grow its market share profitably?

David L. Kennedy

Well Todd, first of all, as you know in our strategy and the way we've articulate our strategy, our focus is ready on the key drivers. And the key driver, we believe and we've said this many times before is the introduction of a competitive level of new products every year for the color cosmetics brand Revlon and Almay.

And with that we began back at the end of '06, to accelerate the development of new products. We saw some of there in '07, we saw what we believe to be is a very good line up and its has been proven to be a very successful line up of new products for 2008, both in the first half and the second half.

So, what we've done to ensure that we can sustain that is first of all, ensure that we stay on strategy, two we've got processes, we've got the capability both within our product development group as well as our marketing group, as well as our R&D group to do that.

And so I believe that the proof really is what you've seen is a steady build and a successful new product line for our brands. So, '07 was a solid new product line, '08 was even better and we believe that we've got a very good and strong new product line up for 2009 ,including both first and second half launches.

And again let me just remind you that the strength of the Revlon brand really drives this company sales and drive this company's profitability around the world. I would also say that in terms of what we know about, our 2009 new products to date is that they've been sold in to retailers in the U.S. and around the world and we've received a very positive feedback from all of those retailers.

Todd Harkrider - Goldman Sachs

Yes, that sounds (inaudible). Then, the company has done a great job for taking costs out of the system, which is something you keep profitability up more than in year's past. As we look out into 2009 with a more difficult sales environment, is there are more to be done on the SG&A side to help offset some of the incremental assets?

Alan T. Ennis

Well, Todd first of all, I mean, we're always vigilant to any opportunities to restructure our business, change our work, change our processes, in order to achieve a much better cost profile and improve our margins. So we'll continue to look for those opportunities.

And I think if you look back particularly since '06 and '07, you've seen the results from continuing initiatives that we put in place, both the restructuring and in cost of sales in particular. When we call out to you that over this period of time when commodity costs have been going up, we have offset all of those and really improved our cost of goods as a percent, based on focusing on cost controls, restructuring the work and efficiencies in our plant, and our supply chain in total.

Todd Harkrider - Goldman Sachs

I'm pretty excited. Great job then, good luck for the fourth quarter.

David L. Kennedy

Thanks Todd.

Alan T. Ennis

Thank you, Todd.

Operator

Our next question comes from the line of Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank

Good morning guys.

David L. Kennedy

Good morning Karru.

Alan T. Ennis

Good morning Karru.

Abbe F. Goldstein

Good morning Karru.

Karru Martinson - Deutsche Bank

Just to follow up on that last comment on the commodities, as we look forward into 2009 across the board we're seeing some easing there, how does that fit in to your planning as we look forward to the year?

Alan T. Ennis

Well, a couple of things Karru. First of all, you're obviously referring primarily to oil. Oil, while it does impact our products and our packaging, it's not a significant cost to us. Having said that, as we go through to 2008, we have seen some cost pressures, but we've been able to off set those cost pressures, as David mentioned, by improving our efficiencies in our plant.

Also, an important point to consider if you think about this is that we turn inventory around three times a year, so there tends to be a lag effect on increases and decreases in oil prices plus we're pretty far down the supply chain and so it takes some time and it gets muted as it gets to us.

I think net-net, if oil stays where it is today as we move into 2009, obviously we should have some benefit albeit small given that it's a relatively insignificant part of our cost base.

Karru Martinson - Deutsche Bank

Okay. I'm sure you guys are going to not want to answer the question, but as we look it out to kind of October, a dismal month for retail in general, more pick up in mass, how do you guys feel about your presence in the mass channel and in traffic that your seeing there?

David L. Kennedy

Well Todd as far as looking out, I'm sorry, Karru, as far as looking out what we've said is that we would expect the slow down that we've seen in the category really and other economic factors that impact our sales in the fourth quarter. So, and we think that's likely.

Having said all that, if you look at the ACNielsen channels in the U.S. you will see a slowing, but what's good about it is we still are seeing growth. So, as we mentioned in the quarter, the category grew 3.4% year-to-date 3.8% even though we've seen some slowing recently in the channel.

So, there's still growth there, which we believe is very important and we also believe that being positioned in the mass channel is a very good place to be today. So, of all the places you can be in the very uncertain, very difficult to call economic environment, we believe that we are well-positioned. I would also say our brands, Revlon and Almay and our other brands, are well-positioned to cope with the uncertainties of this environment.

Alan T. Ennis

An important set important to add to that Karru, is as we built our plants over the last couple of years, we have insured that we have flexibility in our spending. And that's the change from what we used to do prior to 2006 where we used to commit to longer term expenditures, so, we've maintained flexibility in our spending. And so as the economic conditions unfold, we have the leverage to be able to pull back on spending as needed to ensure that we maintain and drive consistent improvement from the bottom line.

Karru Martinson - Deutsche Bank

Okay. And just in terms of the FX impact, I mean do we have a sense of the magnitude that we're expecting here in the fourth quarter as these swing?

David L. Kennedy

Well I would say that if you look at current rates, you would have to expect that the impact will be reasonably significant. But then again you don't know what's going to happen to rates between now and then. And again that's the translation impact, let's be clear, even though it's real in terms of the reported numbers. It is a measurement impact.

Alan T. Ennis

Now Karru, the major currencies that impact us in terms of where our bigger, more profitable operations are would be South Africa, Australia, Canada, and the UK. And if you look at where rates were around the end of October relative to the start of the year, and you will notice the South African rand is down almost 40%, the Australian dollar, at almost 30%, and the Canadian dollar and the pence turning down around 20%. So that clearly has an impact on translation as it relate to converting those non-dollar denominated financial results back into U.S. dollars.

The results for the transaction impact as you know, we produce about70% of our worldwide production in our manufacturing plants in North Carolina. And obviously as we export those products to our international markets there will be an impact to cost of goods in those specific economies.

David L. Kennedy

But let's be clear that the translation impact is the major impact and the translation impact is just that. So, it does affect the reported numbers, but it's cyclical and as you well know, currencies go up and down.

Karru Martinson - Deutsche Bank

Oh, absolutely. And just lastly, you know with the 32 million of cash that you're holding on to for general corporate purposes, and you have liquidity kind of improving results here, and what's your kind of view on paying down other parts of the capital structure beyond just the senior subordinated term loan here?

Alan T. Ennis

Well, a couple of things I would say there Karru, in the current markets, obviously we're leaning towards maintaining flexibility and liquidity. There are a number of requirements in the term loan where we have to make quarterly amortization payments of about $2.1 million that's started in April of this year and so we would continue to make those amortization payments in 2009.

Additionally, there is an excess cash flow calculation that requires us to pay approximately 50% of our excess cash flow in the calendar year. We have to pay that within 100 days from the end of the calendar year. So there are two things that we have to do to comply with the term loan, but again our focus certainly in short term would be maintaining flexibility and liquidity.

Karru Martinson - Deutsche Bank

Thank you very much guys.

Alan T. Ennis

Thank you.

Operator

Our next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

Bill Chappell - SunTrust Robinson Humphrey

Just want to wrap up on prior questions, so as we'd look '09 assuming rates and commodities are status-quo from today, the net impact would be negative to margins from currency versus commodities.

David L. Kennedy

Well Bill, it's really difficult to say. I would never try to project that out. I think what you're saying, if I understand your question, is that you're saying that the commodity potential positive impact would not offset the potential translation adverse impact. Is that right?

Bill Chappell - SunTrust Robinson Humphrey

Yes.

David L. Kennedy

Yes, and I'm just saying that there's no way that we can call that out today.

Bill Chappell - SunTrust Robinson Humphrey

No, I mean, again I'm just assuming spot rates (inaudible).

David L. Kennedy

You can't assume it in -- and you can work to the numbers on your own, if you make those assumptions. But the question is, what's the right assumption?

Bill Chappell - SunTrust Robinson Humphrey

Let me ask it a different way --

David L. Kennedy

I don't think that we can call those things today do you?

Bill Chappell - SunTrust Robinson Humphrey

Let me ask it's a different question. Year-to-date how much is translation effect boosted operating profits?

Alan T. Ennis

I can tell you that in one second.

David L. Kennedy

It's relatively small amount.

Alan T. Ennis

Relatively small amount.

David L. Kennedy

It's a relatively small amount, he'll lookup the number, but it's a relatively small amount.

Bill Chappell - SunTrust Robinson Humphrey

Okay.

Alan T. Ennis

In terms of year-to-date, currency, it's less than, in terms of EBITDA less than $1 million.

Bill Chappell - SunTrust Robinson Humphrey

Okay.

Alan T. Ennis

Favorable.

Bill Chappell - SunTrust Robinson Humphrey

Favorable, right. And second question, beyond fixed cost leverage, are there any other initiatives in terms of improving margins as we go to '09 or is it really going to be leveraging off that sales growth number?

David L. Kennedy

Well, I would say Bill, as I said earlier our history is such is that we've continue to improve our margins both through some top line growth as well as outcome of initiatives across the board, restructuring initiatives as well as efficiencies in our supply chain. And we will continue to look for those opportunities.

So, I believe since '06 we've had, three successful restructuring, I believe we closed a plant and you've seen evidence of our successful initiatives in our cost of goods percentage and overall improvement in our margins.

We're always going to be on the outlook for those kinds of opportunities. We've always got initiatives underway and when we complete those and we have an outcome we report those.

Bill Chappell - SunTrust Robinson Humphrey

Okay. I didn't understand for the quarter and maybe I just missed it, were Revlon Color sales in line with the category growth for the quarter?

Alan T. Ennis

Well we actually gained share in the quarter in the U.S. The category grew 3.4% and we actually gained four-tenths of a point, but we gained share relative to category growth in the quarter.

Bill Chappell - SunTrust Robinson Humphrey

So your consumer take away was better than 3.6% in the quarter?

Alan T. Ennis

It's better than 3.4%.

Bill Chappell - SunTrust Robinson Humphrey

Oh, 3.4% sorry. Is that, similarly, is that also, what you're seeing in non-track channels fairly similar on what you're seeing in track channels?

David L. Kennedy

Well Bill, we never talked about non-track, which is normal (inaudible).

Bill Chappell - SunTrust Robinson Humphrey

Okay, I just leave it at that.

Alan T. Ennis

Thanks.

David L. Kennedy

Thank you Bill.

Operator

Our next question comes from the line of Carla Casella with JP Morgan.

David L. Kennedy

Good morning Carla.

Alan T. Ennis

Good morning Carla.

Carla Casella - JP Morgan Securities

Good morning. Most of my questions have been answered, but one question if you could clarify, how much you've paid into your pension in '08 and then the estimates for how could look in '09?

Alan T. Ennis

In terms of 2008, which of course as you know is based on the valuation of the beginning of this year, in our plans worldwide, we will say approximately $14 million into our pension plan. We believe that given the decline in the U.S. and global financial markets, the return on pension plan assets for 2008 maybe less than the expected rate of return used to measure expense for the end of the year in 2008, which could result in a lower fair market value of plan assets at the end of the year.

While these conditions have not had a significant impact in our financial position or results or liquidity in the first nine months of this year, unless there's a significant improvement in the financial markets between now and the end of the year, we would expect that those conditions could result certainly an increase pension expense and cash contributions in 2009.

Suffice to say that we're working closely with our actuaries and our pension fund managers to accept the implications of the current market conditions on future pension (inaudible). Too early to tell, because of the ongoing volatility what that would be in '09.

Carla Casella - JP Morgan Securities

Okay, great. Thanks a lot.

Alan T. Ennis

Okay.

Operator

Our next question comes from the line of Lance Vitanza with Knighthead Capital Management.

Lance Vitanza - Knighthead Capital Management

Hey, guys.

Alan T. Ennis

Good morning Lance.

David L. Kennedy

Good morning Lance.

Lance Vitanza - Knighthead Capital Management

Thanks for taking the call. Congratulations on the pretty decent quarter given the overall environment. A couple of questions, first is, just to go back to one of the callers that asked about, I think, Alan you mentioned you have a 50% excess cash flow sweep in the bank debt. Did you say that the payments if any under that provision would be within 100 days of the end of the fiscal year?

Alan Ennis

Yes, the payment is within 100 days following the end of the fiscal year.

Lance Vitanza – Knighthead Capital Management

And typically there're a lot of carve-outs and exclusions from that calculation. So, is it likely that there might be amounts that would be required to be paid under that provision?

Alan Ennis

Well, the calculation is somewhat different but not all that different from our free cash flow calculation, but to the extent that as we close out the year we have positive cash flow than there would be implications to pay the in term loan 50% is what that number would be.

Lance Vitanza – Knighthead Capital Management

Okay, you'd also talked about liquidity, but I think I might have misheard you. Could you just repeat? I thought you said $201.3 million of total liquidity, which was compromised of $139.6 under the ABL? Did I get that right?

Alan Ennis

Yes, you did.

Lance Vitanza – Knighthead Capital Management

Okay.

Alan Ennis

And it's important just under the ABL, obviously that's defined by the borrowing base, as you know, and also we have about $14 million of letters of credit, which we have had for several years, that essentially get allocated against that liquidity.

Lance Vitanza – Knighthead Capital Management

And how much was outstanding on the line, actual drawings or borrowing, rather?

Alan Ennis

The revolver was undrawn at September 30th.

Lance Vitanza – Knighthead Capital Management

Undrawn. Okay. Okay. Is it possible to discuss advertising promotion spending levels? I know you report that annually in your 10-K, but do you have the levels year to date for this year, for last year?

Alan Ennis

It's not something that we report midcycle, as you know, Lance, suffice to say, to repeat some of the comps we said earlier, we did have increased levels of brands supporting the third quarter of this year compared to last year, and we expect to have increased levels of advertising and promotions reported in the fourth quarter also comparative to the fourth quarter last year, but it's not a number that we talk about year to year.

Lance Vitanza – Knighthead Capital Management

Okay.

David Kennedy

And for the nine months I think it's important to note that the brand support levels were actually comparable if you exclude the amounts that we spent in the launch of certain new products, including Revlon Hair Color Colorists.

Lance Vitanza – Knighthead Capital Management

Okay, great. I assume the numbers in your press release were all adjusted to give effect to the Bassano sale. Is that right, the historical numbers?

Alan Ennis

Yes, so, every number you see has been adjusted to collapse the Brazil operation and to discontinue operations.

Lance Vitanza – Knighthead Capital Management

Okay, in that case, can you give me the CapEx numbers for the quarter, both this year and last?

Alan Ennis

Certainly. Give me one second.

Lance Vitanza – Knighthead Capital Management

And actually, I am also looking for permanent display spending as well.

Alan Ennis

Yes, and capital expenditures for the quarter, again this is for the entire company, were $7.1 million, which is the same as it was third quarter of last year, and display spending this quarter was $10.4 million, compared to $6.6 million last year.

Lance Vitanza – Knighthead Capital Management

Okay, I don't suppose you have the same way for non-cash compensation?

Alan Ennis

Not with me. It's potentially something we can talk about offline after the call.

Lance Vitanza – Knighthead Capital Management

Okay, great. Thanks a lot guys.

Alan Ennis

Okay, Lance.

David Kennedy

Thank you, Lance.

Operator

Our next question comes from the line of Arun Seshadri with Credit Suisse.

David Kennedy

Hi Arun.

Arun Seshadri – Credit Suisse

Hi guys. Thank you for taking my call. Good morning. Just a couple of quick questions. Most of mine have been taken. First, just wanted to clarify, for the coming fourth quarter versus last fourth quarter, were there any major nonrecurring or higher expenses in last year's fourth quarter that we should be taking into account comping into this year?

David Kennedy

Well, the only thing we've said about the fourth quarter is that we would expect higher level of advertising and promotions, given our more extensive new product line and the support plan that we have for those products.

Arun Seshadri – Credit Suisse

Okay, but there wasn't anything like new product launches that you called out for 3Q of '07. Correct?

Alan Ennis

Well, we have new product launches every 6 months certainly in the U.S., so there were certainly new product launches that we called out this time last year. We called out our first half '08 launches. So, they would certainly be in last year's numbers.

Arun Seshadri – Credit Suisse

Be embedded in last year's numbers. Okay. And then the other questions were generally tying out cash flows. Just wanted to, on DSOs it looks like DSOs increased a little bit in this quarter sequentially. Could you just tell me, just kind of outline what drove that and kind of what your outlook on DSOs is for year end?

Alan Ennis

Our DSO, of course, there are so many different calculations. Our DSO looks like it actually improved slightly. So, I'll take a look at that and maybe we can talk about that offline after the call.

Arun Seshadri – Credit Suisse

Okay, and then working capital, just looking through the numbers here, looks like your fourth quarter working capital and others should be roughly 30ish million. Is pension sort of expected, most of that payment expected in the fourth quarter? Or when does that payment normally take place?

Alan Ennis

We've essentially made most of those payments through the end of September. So, there's really limited additional pension payments in the fourth quarter.

Arun Seshadri – Credit Suisse

Okay, and then on the tax line I noticed that your current what taxes are paid year to date compared to your full-year forecast implies a refund in the fourth quarter. Is that correct?

Alan Ennis

Well, bear in mind, what I talked about in our cash flow discussion was what we expect our taxes paid to be, which, as you know, based on timing is not always the same as what your tax expense is, and so, you need to look at kind of taxes paid through the nine months. I do not believe --

Arun Seshadri – Credit Suisse

Through the nine months they're around $22 million, if I'm looking at this cash flow statement correctly. And then you said $15 million taxes for full year.

Alan Ennis

Yes, well, bear in mind, when you look at the cash flow statement that the cash flow tax impact of the Brazil transaction, so the taxes we paid are including those tax numbers. So, you take that $22 million, you back end the $10 million taxes that we paid in the Brazil transaction, you get the $12 million, and you compare that to the $15 million for the full year.

Arun Seshadri – Credit Suisse

Perfect. Thank you. That's all I had. Appreciate it.

Alan Ennis

Thank you.

Operator

Our next question comes from the line of Mary Gilbert with Imperial Capital.

Mary Gilbert – Imperial Capital

Good morning.

Alan Ennis

Morning, Mary.

David Kennedy

Hi, Mary.

Mary Gilbert – Imperial Capital

I thought we could discuss just some of the flexibility that you have in some of your expenses. So, when you talked about some of the levers that you could pull, would that be related to some of your cash requirements? So, for example, on CapEx, you could reduce that, or permanent display costs, you could reduce that. Is that what you're referring to in terms of responding to the slower growth environment?

David Kennedy

Well, we have a number of levers that we could pull, and obviously the extent of which we pull those levers really depends on how we forecast, how we read the economic environment, including whatever the current situation would happen to be at the time.

We also, I would say, always have a number of initiatives ongoing to improve our costs, control our costs, improve our -- which would result in the improved margins. So, those would also continue to have an impact.

As far as the levers, you know, there are a number of them, certainly CapEx is one where you could defer or perhaps reduce. Permanent displays is really a function of your new product launches. So, you could think of it as analogous to brand support, to the extent that you have new products, new product launches. You've got to continue to provide for the merchandising and graphics and so forth on the walls.

So, I would say there's a number of levers that we can pull. It will depend on how we read the situation, how we see the situation going for the future, and it will also depend on, of course, how we read demand for our products overall and specifically.

Mary Gilbert – Imperial Capital

Okay, with regard to permanent display costs, the $50 million this year, and that's consistent with what it was last year, should we use that number also for 2009? And when we look at your overall cash requirements, do you think they'll be fairly consistent in 2009 versus 2008, except there might be an adjustment on the pension funding portion?

Alan Ennis

Yes, I mean, that's pretty a fair statement. If you look at what we have spent over the last two years, you know, I think if you go back prior to 2007, particularly in permanent display spending, it becomes difficult to compare, but if you look at the last two years, '07 and '08, we've spent around $20 million a year in CapEx.

We've spent around $50 million a year on permanent cabinetry. Our interest expense has come down and will come down further in 2009, as we've already repaid about $63 million at the M&F loan. Clearly as an international business, businesses continue to be come more profitable. There's probably an increase in taxes internationally. But broadly I think your assumptions around expectations for '09 are reasonable.

Mary Gilbert – Imperial Capital

And also, I forgot but with regard to pension funding, how much is the pension funding, the amount that you're funding, how does that compare to the amount that you're expensing?

Alan Ennis

In 2008?

Mary Gilbert – Imperial Capital

Yes.

Alan Ennis

The funding was about $14 million, and I'm just going to check on the expense piece, but I think the cash contributions were higher than the peno (ph) expense.

Mary Gilbert – Imperial Capital

Okay, by how much? The full amount or half as much? In other words, that must -- I'm sorry?

Alan Ennis

In the full year 2008 our pension expense was pretty small. So, the cash contributions of $14 million didn't get any higher than the expense.

Mary Gilbert – Imperial Capital

Oh, okay. Okay, great. So, that way we can use that full amount. Okay, so, when we're looking at the $20 million, $14 million is basically pension funding and then the other $6 million is just an increase in working capital year over year?

Alan Ennis

Oh, yes, that's a fair estimate.

Mary Gilbert – Imperial Capital

Okay. And than also I just wanted to clarify on revolver availability. We had $139.6 million available, but I think you said there was -- is this correct, there was it $14 million in LCs outstanding?

Alan Ennis

Yes.

Mary Gilbert – Imperial Capital

Was there something else that I'm missing? Because there's $160 million revolver.

Alan Ennis

Right, well, the revolver is based on a borrowing-based calculation. So, to the extent that your asset base that's used to calculate that availability falls below $160 million, then it reduces your borrowing capacity (inaudible) dollar for dollar on that basis.

David Kennedy

And that borrowing base is primarily accounts receivables and inventory.

Mary Gilbert – Imperial Capital

Got it. That makes sense. I just wanted to clarify that, so that was helpful. And then also, in talking about the trends that we're seeing in October and the outlook for the business, are there any trends that you've identified in terms of what the customer is focused on, like where you're seeing better velocity and where you're seeing weakness?

David Kennedy

Well, anything that we called out as of yet, I wouldn't even call it trend. We've seen and we've reported on the growth in the U.S. in the Nielsen category for the quarter and year to date, that growth rate slowed significantly in October, but that's one month. So, again, I wouldn't call that a trend.

We've also not really seen or been able to discern anything going on in the category that I would say that's different from what the normal consumer behavior has been in the past at this point. But remember that this is early November, so there's not yet a trend. So, you can't say where the category is going to, whether growth is going to improve or what. So, I wouldn't call anything a trend at this point.

Mary Gilbert – Imperial Capital

Got it. But I just didn't know if there was anything that you observed in October that would be sort of helpful in giving us an idea of what's going on with the consumer.

David Kennedy

No, no, I understand. I think again, I think the most important thing is to stay with what we know. We know the category has been growing and year to date has grown faster than it did last year. We did see some slowing in October of the rate of growth. We've seen no real at least discernible difference in consumer behavior in the category, and so that's where we are. So, we continue to monitor very carefully.

Mary Gilbert – Imperial Capital

Okay. And one last thing; with regard to the currency translation impact in the fourth quarter, given the decline in the currencies that you pointed out, I mean, there is going to be a cash impact to the extent that you pointed out with using the U.S. currency for over 70% of your cost, right? So, we should see there could be a negative impact from that standpoint. Correct?

David Kennedy

Yes, but it's relatively small. I mean, in fact, as currencies have gone up and down in past years, you've not even seen the impact. We've never called it out because it's not been that significant. So, I wouldn't overplay that point at all. I think the most significant point is the translation impact and again, underlying translation impact.

Mary Gilbert – Imperial Capital

Okay, so you --

David Kennedy

Around at some point.

Mary Gilbert – Imperial Capital

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

Alan Ennis

Thanks, Mary.

David Kennedy

Thank you, Mary.

Operator

Our next question comes from the line of Aaron Wolfson with Resolution Partners.

Alan Ennis

Hey, Aaron.

David Kennedy

Good morning.

Aaron Wolfson – Resolution Partners

Hello?

David Kennedy

Hello.

Aaron Wolfson – Resolution Partners

Hi. Sorry about that. I had a question about the Matt collection you're introducing. Is that a new line similar, or analogous to an age-defying, beyond natural, and color stay?

David Kennedy

No, no it's a complete and actually unique and new line of Matt collection. So, it's not like anything else we've offered.

Aaron Wolfson – Resolution Partners

I did not mean product wise, but analogous to that it's a new category that you're going to build off of similar to these others.

David Kennedy

No, we would call it a new franchise, not necessarily a new category or new segment collection that as it's outlined, as Andy called it out, but it is unique. We're obviously very excited about it. It's a beautiful collection, great shades, great packaging. On the wall it looks really upscale at nice price.

Aaron Wolfson – Resolution Partners

Got you. And you think this is something that you will add products to over time, similar to the other --

David Kennedy

If it's successful we sure will. We'll extend it. It's the perfect vehicle for extension.

Aaron Wolfson – Resolution Partners

Got you, and do you anticipate adding any other new lines similar to this going forward?

David Kennedy

Well, as we've indicated, I mean, we have a very strong lineup of new products. We'll continue to have a very strong lineup each year of new products. So, Matt is just one of those collections that we are launching now.

Aaron Wolfson – Resolution Partners

Got you. So, would this be your core stable of collections now, the age defying, beyond natural, color stay, and Matt, and then --

David Kennedy

Well it depends on what the opportunity that we see in the future. So, if the offering as it stands today, but as we've said in the past, we're planning three years out. So, we know what we're going to do in 2010; we know most of what we're going to do in 2011; and if opportunities provide between now and then, we're flexible enough to be able to include those in our lineups or modify (inaudible).

Aaron Wolfson – Resolution Partners

Got you. I mean, I guess the angle I was going for was to understand how the advertising spend going forward, would there be incremental advertising with this new line enough to support all these other lines, and as you introduce other new lines, would that be replacing existing advertising with some of these lines, or would advertising continue to grow?

David Kennedy

Well, as we've said, we're going to support these launches with what we believe is the appropriate level, but also remember that there's a certain amount of new products every year and we've targeted a certain level each year, and that amount, to be competitive, is going to be approximately the same over the next few years. And so, as we continue to change our offering every year, we continue to spend, but I don't believe that that would result in any major incremental spending or what I'm saying.

Aaron Wolfson – Resolution Partners

Got you. And for the SG&A levels, I mean, looking at the fourth quarter, historically it's been a lot lower, in the last two years at least, relative to the rest of the year. Given kind of the guidance for its increased ad spending, would the SG&A be closer to a run rate of the third quarter of this year or kind of more similar to the fourth quarters of the past two years and kind of tweaked up for some additional advertising?

David Kennedy

Well, if you're trying to get at what the level of advertising promotion spend is and brand support, I think you can think about it this way: It's more about where we allocate our spending, and we've, of course, allocated where we see the priorities and the best investments or the best opportunities. So, that's where we've allocated our spending.

So, we did have a slight increase, I think, in the advertising or brand support the end of third quarter, and we're going to continue to support our new product launches in the fourth quarter, which will have an impact compared to last year, simply because last year we did not have the same extensive lineup of new products that we had this year. You have to take all that into account.

Alan Ennis

Just to add one kind of clarifying point, Aaron. If you look at SG&A on a quarterly basis this year compared to last year, you'll note that at each quarter we have had lower SG&A expenses this year than we had last year. That's primarily because we have reduced costs as a result of restructuring actions that we have taken. We have cycled essentially brand support costs related to certain launches in 2007, including Revlon Colorist hair color.

What you would expect to see in the fourth quarter, consistent with what you were saying, is that we would have increased advertising and promotional spending and so it's kind of a leveling edge of the playing field over the fourth quarter period rather than what you have seen in the past which is higher spending in the first two quarters and then a significant decrease in the fourth quarter. It's really leveling that playing field over the course of the year.

Aaron Wolfson – Resolution Partners

So the take away would be kind of closer to the third quarterish levels and a dramatic drop as you've seen in the past two years? Is that fair to say?

David Kennedy

Well, I would say the dramatic drop piece you will not see.

Aaron Wolfson – Resolution Partners

Okay. Fair enough. And then you mentioned the face segment is up 25%. Is that? I'm sorry?

David Kennedy

The consumption terms in AC Nielsen in the US, just to be clear with that.

Aaron Wolfson – Resolution Partners

Oh, it is not your face segment?

David Kennedy

No, it is our face segment.

Aaron Wolfson – Resolution Partners

Okay.

Alan Ennis

Performance in the--

David Kennedy

But I'm saying in that slice of the market place.

Aaron Wolfson – Resolution Partners

Got you. What percentage of the color cosmetics sales is safe versus eye, lip, nail?

David Kennedy

That's a large percentage overall in the category. I believe eye now is number one. Face is number two. Lip is number three I believe and then nail is a small fourth, but important fourth in the category.

Aaron Wolfson – Resolution Partners

Got you. The last question is you mentioned there's been increased returns year-over-year. Can you give a little more color on that?

Alan Ennis

Well, a couple of things. As we look at the products that we planned to launch 2009 and the products that we have launched in the second half of 2008, we look at our wall in our retailers and we're substantially complete with our line reviews for 2009 and it looks like we're going to maintain space on aggregates in 2009, launches in 2008. And as we launch our new products product to make space on the wall for those new product and so we discontinue underperforming products in the normal course. The increase I think in the third quarter this year is primarily related to some of the limited edition collection products that we planned to scale back as we are moving to 2009.

Aaron Wolfson – Resolution Partners

Thank you very much.

Operator

Our next question comes from the line of Benjamin Vaderaten (ph) with Canyon Capital.

Benjamin Vaderaten - Canyon Capital

Hi. Thanks for taking my call.

David Kennedy

Good morning, Benjamin.

Alan Ennis

Good morning.

Abbe Goldstein

Hi. Good morning.

Benjamin Vaderaten - Canyon Capital

The first question relates to the sales growth trend in this quarter versus last quarter. It looks like your color cosmetics had done pretty well in the third quarter which would imply that everything else is not doing so well. Can you kind of comment on pricing and volume for color cosmetics and everything else, kind of what trends you're seeing in Q3 versus what you'd seen in Q2?

David Kennedy

Well, I'll just say a couple of things and I'll turn it over to Alan. First of all in Q2, remember that in terms of higher sales, our shipments that's when we shipped the majority of our second half new product lineup. So that's when we recognized those sales.

And then I would say that as we pointed out if you look at consumption in sell through, which occurs on those products as well as products that we launched in the first half and all other products as well, we had very good sell through in the third quarter of our color cosmetics products and other brands in terms of sell through we had growth in tools in the U.S. , we had reasonably good performance out of Mitchum and we had good performance out of ColorSilk albeit one product in lineup did not perform as well as we would like.

But overall, our sell through in the third quarter we believe was very good particularly given the market conditions even though the category was growing quite well. So that as far as anything else, I'll just turn over to Alan in terms of trends.

Alan Ennis

A couple other things Benjamin, in terms of pricing, you asked about pricing, typically there isn't kind of across the board in the U.S. certainly across the board pricing increases as there are in certain other categories.

You are able to achieve price as you introduce innovation either in terms of product or packaging into the category. And so you would like to be in a position to introduce a superior product that has a higher price point that the product that you replace on the wall, but there isn't a kind of across the board price increase on existing products, that's one point.

Second point is as we talked about in relation to the second quarter results, we had almost twice the number of SKUs in our second half 2008 launch that we did compared to our second half 2007 launch and so you saw significant increase in shipments of those new products in second quarter of this year relative to a year ago period.

That was the single biggest driver of revenue growth in the second quarter. As we look at our first half 2009 product launches, we probably had about a 50% increase in the number of SKUs compared to first half '08. So the rate of increase is certainly another significant albeit a very strong collection.

Benjamin Vaderaten - Canyon Capital

Got it. So I'm trying to understand what everything else other than the color cosmetics is doing. In the third quarter the category was up 3.4%. You guys gained 40 basis points of share year-over-year which should imply color cosmetics is growing faster, revenues are growing at 1%, so everything else must be growing less than 1% or even negative. Now I'm trying to understand, am I thinking about that the right way or--

David Kennedy

Well, I think if you're talking about our sales or you're talking about consumption or sell-through is majored by Nielsen so the reason why I pointed out that the sell throughs that I think that's probably the most important number if you are trying to look at sales trends because our shipments vary depending upon when we launch new products, when we do promotions, etc.

So shipments don't necessarily match up with whatever the consumption trends are that's the reason why I outlined briefly which is outlined in our release how we've done with our other products in the personal care category.

Alan Ennis

Another point Benjamin is as I mentioned in my earlier remarks, in the third quarter we have increased our level of allowances and so what you don't see in the part of net sales is the impact of the increase in allowances and that's kind of been all set by a reduction that we talked about in the brand support that falls in the SG&A. It's essentially a reallocation of our brand support in the P&L from SG&A to above the line. So that's also impacting what looks like the reported net sales number.

Benjamin Vaderaten - Canyon Capital

Got it. Second question relates to gross margin. So in the first and second quarter, your year-over-year comparison on gross margins were very good, 100 to 200 basis points, and as you mentioned gross margin went negative this quarter and that was a function of allowances. Can you kind of just give us more color on what changed between the first two quarters and this quarter and how the environment changed that led to this declining gross margin?

Alan Ennis

Well, I think an important point to look at is the nine month number. Quarter to quarter you can see shifts depending on decisions that we make. The nine-month number shows that our gross margin increased 80 basis points year-over-year, such an important first point to understand.

The second point is in relation to the third quarter as I just mentioned, we did have an increased level of allowances and so your manufacturing cost of goods relates to what you actually shipped as opposed to your net sales number and so the rate relative to net sales declined somewhat so really the trend to look at is in terms of the nine month number where we've shown an increase in margin.

David Kennedy

I would also point out again that because we had a more extensive lineup of new products in the second half of 2008, we had very good shipments in the second quarter and then our marketing programs focused on selling through in the third quarter as Alan points out the increase in allowances in the third quarter.

Benjamin Vaderaten - Canyon Capital

Got it. Thank you.

Operator

Our next question comes from the line of Mark Kaufman with MLK Investment Management.

Mark Kaufman – MLK Investment Management

Thank you. My question's already been answered.

Alan Ennis

Okay, well, thank you.

Abbe Goldstein

Thank you.

Operator

Our next question comes from the line of Kevin Zeits with Tally Capital.

Kevin Zeits - Tally Capital

Hi guys.

David Kennedy

Hey good morning Kevin.

Kevin Zeits - Tally Capital

Question on the launches. Thanks for mentioning the skew increase for the first half of 2009. Is the mix shift to beauty tools going to help margins year-over-year?

Alan Ennis

Well, actually total cosmetics tends to have a higher gross margin than what we call beauty care. And so what we talk about generally in our gross margin, we talk about favorable sales mix. If you look at our results, we talked about increase in shipments in color cosmetics and so that improved gross margin impact on mix is because of a shift from Easy Care to Color cosmetics. The beauty tools launches while they are significant in terms of what we expect in the market place will probably not have a significant impact on our gross margins.

David Kennedy

Even though the profitability in beauty tools is quite good. I mean the margins the bottom line are big, and so to the extent all other things being equal it should then have some impact there, it would be positive.

Kevin Zeits - Tally Capital

Yes, I guess that's what I meant was more to the operating margins because I know that typically don't spend the same level of advertising support behind those. Is that true in this case?

David Kennedy

Correct.

Alan Ennis

Yes.

David Kennedy

That's true generally speaking.

Kevin Zeits - Tally Capital

Okay. Do you have any sense at this point whether these shipments will be made sort of in this fiscal year versus next year as compared to last year's launches?

Alan Ennis

Well typically the way they work is we ship first half '09, we started shipments in second half of October, they will pick up in November and December and they will trickle in to kind of January and potentially in early February again as a function of retailer reset first of all and then based on certain on-counter displays that we will have in advance of the holiday season.

David Kennedy

In fact, you'll see some of the first of what we call first- half new products in market over the next two or three months.

Kevin Zeits - Tally Capital

Compared to last year, you're not expecting any major shifts in the timing of when those products get shipped?

David Kennedy

No. That is correct.

Kevin Zeits - Tally Capital

Okay.

David Kennedy

No major timing.

Kevin Zeits - Tally Capital

I think that's all I have. Thanks, guys.

David Kennedy

Thank you.

Alan Ennis

Thank you, Kevin.

Operator

Our next question comes from the line of Connie Maneaty with BMO Capital Market.

Connie Maneaty - BMO Capital Market

Good morning.

Alan Ennis

Good morning, Connie.

David Kennedy

Good morning, Connie.

Abbe Goldstein

Hi Connie.

Connie Maneaty - BMO Capital Market

Hi. For the new product for next year, I think you mentioned that your shelf space is going to be approximately the same as it was in 2008.

Alan Ennis

Right.

Connie Maneaty - BMO Capital Market

But I'm wondering about Almay, is Pure Blends going to add to Almay's Facings or are you swapping out older products and if it adds to Almay's--

David Kennedy

We're swapping out older products.

Connie Maneaty - BMO Capital Market

Oh, you're swapping out older products.

David Kennedy

Correct, that's correct.

Connie Maneaty - BMO Capital Market

So is this going to be the core Almay line going forward?

David Kennedy

What's this? The core Almay lineup is the offering as it is today, essentially Pure Blends will replace not 100 % of other lineups, but certain parts of the line as it exists today.

Connie Maneaty - BMO Capital Market

Okay and should we expect returns and allowances related to Almay to be higher in those fourth quarter as well?

Alan Ennis

Well, typically returns, the accounting calculations for returns is based on planned discontinuances so as we launch the Pure Blends collection, we will see increases in returns related to what we take off the wall. Allowances as I mentioned earlier is a function certainly in the fourth quarter as we increase our level of brand support, you will see that impact both above the line and below the line.

Connie Maneaty - BMO Capital Market

Okay. On the rights offering, I think in the past you've said that you expected to do it in the fourth quarter and on this call and in the press releases, you're alluding to waiting to see what the market's going to do?

David Kennedy

All we said is that in the past what we've said about what we said we could launch it as early as the fourth quarter, we're still in the fourth quarter by the way and so we're watching the markets. You know what the markets are today. They're very difficult and we don't want to do anything that would produce lower values for our shareholders.

Connie Maneaty - BMO Capital Market

Okay. And then one small question on FX, do you intend to offset the transaction impact with price increases in the local currencies?

David Kennedy

Well, there could be some of that it depends on the country really and for example in Australia potentially we could take some price there, but again let me point out that the transaction impact here is very small, it's not significant. Two, we would base our prices on the competitive situation in the marketplace first and that's what would be the primary reference point for our pricing in any country.

Connie Maneaty - BMO Capital Market

Okay. That's all I have. Thanks.

Operator

(Operator Instructions) We'll pause for just a moment for the next question. Our next question is a follow-up from the line of Mary Gilbert with Imperial Capital.

Mary Gilbert - Imperial Capital

I just wanted to sort of sum up the focus on the fourth quarter. In the headline where you talk about that you expect improved operating margins profitability and free cash flow for 2008. Can we use that same language to apply for the fourth quarter?

David Kennedy

Well, Mary, that applies to the year. We called that out we've also called out a couple of things that we believe might impact the fourth quarter. We've been very clear about that.

Mary Gilbert - Imperial Capital

Okay. Alright. Thank you.

David Kennedy

Thank you.

Abbe Goldstein

Thanks.

Operator

There are no further questions at this time. This ends the question-and-answer session of today’s call. We will now turn things back to Mr. Kennedy for some closing remarks.

David Kennedy

Thank you for participating in today's call and for your continued interest in Revlon. Let me say first and repeat, we're extremely excited about the new product introductions for the first half of 2009 and in fact for the full year 2009.

And as reviewed those earlier in the call, let me just remind you again that Revlon brand lineup includes the comprehensive new offerings in every segment of the category: face, eye, lip and nail and importantly, let me emphasize Almay Pure Blend is our first natural collection of color cosmetics that delivers a full range of shades, radiant finishes, eco-friendly products and packaging with no compromise in color or performance.

As I mentioned before we have demonstrated continued progress in the first nine months of the year and are realizing the benefits of executing our strategy. We expect improved operating margins, profitability and free cash flow for 2008 driven by the strength in the Revlon brand, efficiencies and cost controls through out the company.

We're managing our business with the objective of improving our financial performance and competitive position while maintaining flexibility in light of the uncertain economic conditions in retail sales environment in the U.S. and around the world.

We believe that as economic conditions stabilize, our focus on the key drivers including innovative high quality consumer preferred new products, effective innovative brand communication, appropriate levels of advertising and promotion and superb execution with our retail partners will continue to generate sustainable positive free cash flow and profitable sales growth over time.

Again, thank you for your participation on the call, in your interest in Revlon.

Operator

Thank you. This concludes today's Revlon third quarter 2008 earnings conference call. You may now disconnect.

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