Revlon, Inc. Q4 2008 Earnings Call Transcript

| About: Revlon, Inc. (REV)

Revlon, Inc. (NYSE:REV)

Q4 2008 Earnings Call

February 12, 2009 9.30 am ET

Executives

Abbe F. Goldstein – Senior Vice President Investor Relations

David L. Kennedy – President and Chief Executive Officer.

Alan T. Ennis – Executive Vice President and Chief Financial Officer.

Analysts

Karru Martinson – Deutsche Bank

Reza Vahabzadeh – Barclays Capital

Carla Casella – JP Morgan

Kevin Ziets – Pauly Capital

Walter Branson – Regiment Capital

Mary Gilbert – Imperial Capital

Connie Maneaty – BMO Capital Markets

Benjamin Vaderaten – Canyon Capital

Mark Kaufman – Source Capital

Operator

Good morning, ladies and gentlemen and welcome to Revlon's Fourth Quarter 2008 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. Abbe Goldstein, Revlon's Senior Vice President, Investor Relations and Corporate Communications. You may begin, Ms. Goldstein.

Abbe Goldstein

Thank you and good morning everyone and thank you for joining our call. Earlier this morning we released our results for the fourth quarter and year ended December 31 2008. If you have not already received a copy of the earnings release, you can obtain one at our website www.revloninc.com.

Here with me today are David Kennedy, President and Chief Executive Officer and Alan T. Ennis, Executive Vice President and Chief Financial Officer.

On today’s call, David will briefly highlight the results for the year and provide a strategic update on the business. Alan will then review our financial results for the quarter and the year in detail. 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 which we will file in about two weeks.

Our remarks today will include a discussion of adjusted EBIDTA and free cash flow which are non-GAAP measures that are defined in the footnotes to the release we issued this morning and are reconciled in the case of adjusted EBITDA to the net income or net loss and in the case of free cash flow to net cash provided by our use in operating activity.

The most directly comparable GAAP measures in the accompanying financial tables. In relation to U.S. share results unless otherwise noted our discussion this morning of mass retail share is that of the U.S. mass retail dollar volume according to AC Nielsen which excludes Wal-Mart as well as regional mass volume retailers, prestige department stores, Internet, door-to-door, television shopping, perfumeries and specialty stores all of which are outlets for cosmetic sales. The AC Nielsen data is an aggregate of the drug channel, Target, Kmart and food and combo stores and represents approximately two thirds of the company's US mass retail dollar volume.

And 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. First, I would like to make a few brief comments on our financial results for the year follow by an update on the progress we made in 2008 in executing our strategy. Then I will turn it over to Alan, to review our 2008 financial results.

Overall during the year, we improved our operating margins generated positive free cash flow and net income from continuing operations and improved our capital structure by reducing debt by $110 million. While our net sales for the year were down 1.5%, we were very pleased with the strong growth of Revlon color cosmetics in the U.S. and in key countries around the world.

Gross profit margins expanded to 63.5% in 2008 from 63% in 2007. Operating profit improved to $155 million in 2008 compared to $118 million in 2007 and operating profit margin significantly increased to 11.5% in 2008 from 8.7% in 2007. We had net income from continuing operations of $13.1 million in 2008 compared to a net loss on continuing operations of $19 million in 2007. And we generated positive free cash flow with $26 million compared to negative free cash flow of $17.1 million in 2007.

During 2008, we continue to make progress executing our strategy. We continue to build and leverage our strong brands, focusing on the key drivers of profitable growth. Innovative high quality consumer preferred products, effective brand communications, appropriate levels of advertising and promotion, and superb execution with our retail partners.

We further strengthened our product offering in the color cosmetics category with the introduction of a comprehensive lineup of Revlon and Almay new products for 2008 and for the first half of 2009. The product launches included unique offerings for the mass channel innovations, and products, and packaging and line extensions within the Revlon and Almay franchises. It is important to note that we continue to concentrate on insuring, that we have a strong pipeline of new products each and every year in all segments of the mass color cosmetics category.

We supported our new product launches, as well as our existing product lines with effective creative advertising coupled with integrated promotional activities. Inline with our plan for a more focused allocation of advertising and promotional spending we supported our brands throughout the year including, increase spending in the fourth quarter of 2008 compared to 2007.

This resulted in consumption growth in the product lines and segments in which we focused. For example, in the U.S. the Revlon brand in the face segment grew 12.6% in the fourth quarter and 12.2% in the year significantly faster than the category segment growth of 5% in the fourth quarter and 3.3% in the year. The Revlon brand growth in the face segment was driven by three important 2008 new product launches namely, Revlon ColorStay Mineral foundation, Revlon Custom Creations foundation, and Revlon Beyond Natural Makeup, which was supported by TV and print advertising featuring Halle Barry and Jessica Alba as well as promotions in each quarter of 2008.

We signed Jennifer Connelly, and Elle Macpherson to represents the Revlon brand along with Halle Berry, Jessica Alba and Beau Garrett. We engage, Gucci Westman world-renowned makeup artist to service Revlon's Global Artistic Director and Leslie Bibb to represent the Almay, brand along with Elaine Mellencamp and Marina Theiss. In our Revlon beauty tools business, we launched several new products during the year and recently introduced the superior quality Revlon Pedi-EXPERT our entry into the fast expanding foot-smoothing pedicure tool segment.

We continue to realize positive results from our focused marketing activities in support of Revlon Colorsilk hair color and for the Mitchum brand we continued the successful Mitchum Man advertising campaign, and in the fourth quarter we launched a significant package upgrade. Our international business continued to grow driven by strong growth of Revlon color cosmetics primarily in the Asia-Pacific region and Canada while operating margins continued to expand.

We completed the $107 million sale of our non-core Bozzano brand, a leading man’s hair care and shaving line of products in Brazil. Revlon brand color cosmetics continue to be marketed in Brazil, through Revlon’s current third party distributor. We’ve reduce debt by $110 million in 2008, we use $63 million of the net proceeds from the Bozzano sale to reduce the $170 million MacAndrews & Forbes Senior Subordinated Term Loan, leaving $107 million of the loan outstanding we are saving $7 million in annualized interest expense as a result of this repayment.

In addition, the maturity date of the MacAndrews & Forbes loan was extended to August 2010. We use the balance of the Bozzano sale proceeds of $32 million in addition to our free cash flow from operations to reduce revolver borrowings. We continue to see the benefits of our day-to-day intense focus on rigorous cost control and initiatives to continuously improve efficiency. Favorable manufacturing efficiencies contributed to the improvement in gross profit margin. In the U.S., we completed a restructuring of our sales force, reducing staffing while better aligning our resources to serve our customers and efficiently implement our strategy.

During 2008, we continued to strengthen our organizational capability recruiting talented and experienced executives in all functions throughout the company. As we look forward to 2009, while we expect economic conditions and retail sales environment to remain uncertain around the world, we believe that we are better positioned, that in many years to maximize our business results in light of these conditions. Specifically, we have strong global brands, at highly capable organization, and sustainable reduced cost structure and an improved capital structure.

We are encouraged by the continued growth throughout 2008 in the mass channel color cosmetic retail sales in the US and in key markets around the world, despite the uncertain economic conditions. We are also encouraged that in January 2009, according to AC Nielsen, the U.S. mass retail color cosmetics category expanded 3.6% and the Revlon brand color cosmetics gained 0.7 percentage points, growing faster than the category resulting in a dollar share of 13.3%.

We are continuing to execute our strategy and manage our business while maintaining flexibility to adapt to changes in the business conditions. We are also continuing our intense focus on the key growth drivers of our business, which overtime we believe we will generate profitable net sales growth and sustainable positive free cash flow.

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

Alan T. Ennis

Thank you Abbe, thank you David and good morning everyone. As we normally do I would like to build upon David’s introductory financial comments and take you through a more detailed review of our financial results? So, starting with the P&L for 2008, net sales in 2008 were $1.347 million a decrease of $20.3 million or 1.5% compared to $1.367 million in 2007.

Foreign currency fluctuations negatively impacted net sales by $8.3 million, which accounted for six tenths of 1% of the net sales percentage decline. Excluding foreign currency fluctuations, net sales of Revlon brands color cosmetics increased 9%, driven by the strong new product introduction specifically higher shipments of favorable product return partially offset by higher promotional allowances. Increased net sales of Revlon brand color cosmetics were off set by declines in net sales of Almay specifically higher shipments offset by higher product return and higher promotional allowances.

In addition, to lower net sales of certain fragrance and beauty care brands. In the United States net sales in 2008, were $782.6 million a decrease of $21.6 million or 2.7% compared to $804.2 million in 2007.

Higher net sales of Revlon brand color cosmetics were offset by lower net sales of Almay fragrance and beauty care products. In 2008 higher net sales of Revlon ColorSilk and Revlon Beauty Tool were offset by the cycling of 2007 launches of Revlon colorist hair color, Revlon Flare fragrance and Mitchum Smart Solid antiperspirants and deodorants.

In our international operations, net sales in 2008 were $564.2 million an increase of $1.3 million or two tenths of 1% compared to $562.9 million in 2007. Excluding the unfavorable impact of foreign currency fluctuation of $8.3 million, net sales increased by 1.7% as a result of higher sales of Revlon and Almay color cosmetics, Revlon Beauty Tools and Mitchum antiperspirants and deodorant, partially offset by lower net sales of fragrance and hair care products.

Regionally, higher net sales in the Asia-Pacific and Latin America regions were partially offset by lower net sales in the Europe region. In our Asia-Pacific region, which is comprised of Asia-Pacific and Africa, net sales increased 3.7% or 6.7% excluding the impact of foreign currency fluctuations to $265 million compared to $255.6 million last year. This growth was primarily due to higher shipments of Revlon color cosmetics throughout the region and higher shipments of beauty care and fragrance in South Africa.

In our Europe region which is comprised of Europe, Canada, and the Middle East, net sales decreased 4.9% or 4.7% excluding the impact of foreign currency fluctuations to $200.8 million compared to $211.1 million last year. Lower shipments of fragrance and color cosmetics in the U.K., Italy, and certain distributor markets were practically offset by higher shipment of Revlon and Almay color cosmetics in Canada.

In our Latin America region, which is comprised of Mexico, Central America, and South America, net sales increased by 2.3% or 2.4% excluding the impact of foreign currency fluctuations to $98.4 million compared to $96.2 million last year. This increase was primarily driven by higher net sales in Venezuela and Argentina, practically offset by lower shipments of beauty care products in Mexico and lower shipments of fragrances and color cosmetics in several distributor markets.

Moving down the rest of the P&L for Revlon, Inc. for 2008, consistent with our business plan and the increased level of new products introductions we supported our brands with a more focused allocation of advertising and promotional spending throughout the year. Let me remind you that from a financial reporting perspective, promotional allowances are recorded as a deduction to arrive at net sales while advertising cost are recorded within SG&A in the P&L.

In 2008 advertising and promotional spending across all our brands remained largely unchanged. We increased spending on our color cosmetics brand while we had lower spending on certain beauty care brands as a result of the cycling of the prior year spending of a launches of Revlon ColorSilk Hair Color, Revlon’s Flare fragrance and Mitchum Smart Solid antiperspirants and deodorant.

These specific actions contributed to our performance in the marketplace in 2008, as reflects in the U.S. mass retail dollar share and dollar volume growth related to the Revlon and Almay brands and the segments in which our new product launches and advertising and promotional spending were focused.

In 2008 our gross profit margin improved by 50 basis points to 63.5% from 63% last year. We saw benefits from favorable changes in sales mix, and favorable manufacturing efficiencies. SG&A expenses of $709.3 million improved by $26.4 million to $735.7 million last year. The improvement in SG&A expenses for 2008 as compared to 2007 was driven primarily by three factors: Lower advertising costs of $27.6 million. As I mentioned, we increased spending on our color cosmetics brands, while spending on certain of our beauty care brands was lower as a result of cycling prior year spending of certain beauty care launches.

Permanent display amortization expenses were lower by $9.5 million, and these two factors were partially offset by a $4.4 million benefit in 2007, related to the reversal of the deferred rental liability upon exit a portion of our New York City headquarters lease place in that year.

Operating income in 2008 was $155 million representing an 11.5% operating income margin compared to $118.4 million representing an 8.7% operating income margin in 2007. Adjusted EBITDA in 2008 was $248.1 million compared to $221.4 million in 2007. Operating income and adjusted EBITDA benefited from an improvement in gross profit margins, lower SG&A expenses, and lower restructuring charges.

Additionally, operating income and adjusted EBITDA in 2008 benefited from a net gain of $4.7 million and $5.2 million respectively related to sale of our facility in Mexico in addition to a net gain of $5.9 million related to the sale of a non-core trademark.

Interest expanse for the year was $119.7 million, an improvement of $15.9 million from $135.6 million last year. This significant improvement was due to both lower average-borrowing rates and lower average debt level. Net income in 2008 was $57.9 million or $1.13 per diluted share compared to a net loss $16.1 million or $0.32 per diluted share in the prior year. Net income in 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 $400,000 of $0.01 per share.

Income from continuing operations in 2008 was $13.1 million and includes of net gain of $4.3 million related to sale of the facility in Mexico and a net gain of $5.9 million related to sales of $5.9 million related to the sale of a non-core trademark, and this compares to loss from continuing operations of $19 million in 2007.

Looking at the P&L specifically for the fourth quarter of 2008, net sales in the fourth quarter were $334.2 million a decrease of $39.1 million or 10.5% compared in to $373.3 million in fourth quarter of last year. Importantly, foreign currency fluctuations negatively impacted net sales by $23.3 million was accounted for 6.2% of the net sales percentage decline. Excluding foreign currency fluctuations increased net sales of Revlon brands color cosmetics were offset by a decreased net sales for Almay and certain beauty care brands.

Higher net sales of Revlon were driven by favorable product returns, partially offset by lower shipment and higher promotional allowances. While lower net sales of Almay were driven by higher shipments offset by higher product returns and higher promotional allowances. In the United States net sales in the fourth quarter of 2008 were $199.6 million a decrease to $16.2 million or 7.5% compares to $215.8 million in the fourth quarter of 2007.

Increased Revlon brand color cosmetics net sales were offset by declines in Almay and declines in certain beauty care brands. In our international operations, net sales in the fourth quarter of 2008 were $134.6 million a decrease of $22.9 million or 14.5%, this decline as I mentioned was entirely due to unfavorable foreign currency fluctuations.

Excluding that on favorable impact of foreign currency fluctuations, net sales increased by two-tenths of 1% as a result of higher net sales for Revlon and Almay color cosmetics mostly offset by a decline in hair care and fragrance products. Regionally, higher net sales in the Asia-Pacific and Latin America regions were offset by lower net sales in the Europe region. As I mentioned in relation to the year consistent with our business plan and the increase level of new products introductions, we supported our brands with increased levels of advertising and promotional supports in the fourth quarter of 2008 compared to the fourth quarter of last year.

In the fourth quarter of 2008 gross profit margin decreased by 40 basis points to 62.1% from 62.5% in the year ago period last year, primarily driven by the effect of higher promotional allowances partially offset by the benefit of favorable amount of fracturing efficiencies, and favorable product returns. SG&A expenses of $160.8 million increased by $7 million were 4.5% from $153.8 million last year, mostly due to increased advertising partially offset by reduced general and administrative expenses.

Operating income in the fourth quarter was $44 million compared to $79.3 million in the fourth quarter of last year and adjusted EBITDA was $66.7 million, compared to $105.1 million in the year ago period. The decline in operating income and adjusted EBITDA was driven primarily by the increased level of advertising and promotional spending consistent with our plan.

Interest expense for the period was $27.8 million, again a significant improvement from $34.2 million last year due to those lower average borrowing rates and lower average debt levels. Net income in the fourth quarter was $11.3 million or $0.22 per diluted share compared to net income of $40.8 million or $0.80 per diluted share in the same period of 2007.

Income from continuing operations in the fourth quarter of 2008 was $11.2 million compared to $40 million in the year ago period. Moving on to mass retail share for the four week period ended January 24, 2009 according to AC Nielsen the U.S. mass retail color cosmetics category grew by 3.6% compared to the year ago period. For this period, the Revlon brand color cosmetics dollar volume grew 9.7% resulting in a retail dollar share of 13.3% up seven-tenths of a percentage point compared to year ago period.

Following a 14.1% growth in the fourth quarter of 2008 dollar volume for the Almay brand decreased 3% in January 2009, resulting in a retail dollar share of 5.7% down four tenths of a percentage points compared to the year ago period. And I’d like to discuss the 2008 mass retail share information in some more detail. According to AC Nielsen, the U.S. mass retail color cosmetics category grew 3.4% in the fourth quarter of 2008 and grew 3.8% in the full year 2008 versus the comparable period last year.

Revlon color cosmetics, achieved a $12.2 share in the fourth quarter and a $12.7 share for 2008. Revlon brand dollar volume grew by 2.5% in the fourth quarter and by 2.1% in 2008, compared to the same periods in 2007. This growth in Revlon brand was driven by strength in the face segment throughout the year as David mentioned, with dollar volume up 12.6% in the fourth quarter and up 12.2% in 2008.

Our strength in the face segment was driven largely by Revlon ColorStay Mineral foundation, Revlon Custom Creations foundation, and Revlon Beyond Natural Makeup, all of which were introduced in 2008. Revlon Custom Creations foundation and Revlon ColorStay Mineral foundation were in the 2008 top 10 AC Nielsen new products by retail dollar sales.

In the lip segment, the Revlon brand benefited from growth in dollar volume by Revlon Super Lustrous lip color and the introduction of Revlon ColorStay Mineral lip gloss in the second half of 2008. In fact the Revlon brand has a number one dollar share position in the lip segment in both the fourth quarter and full the year 2008.

In the nail segment, the Revlon core nail franchise grew quarterly dollar volume by 18.8% and annual dollar volume by 15.2%. In the eye segment, Revlon brand dollar volume declined 1% for the fourth quarter of 2008 and increased three tenths of 1% in 2008.

The primary drivers for Revlon in the eye segment in 2008 were growth in eyeliner mainly from Revlon ColorStay pencil and liquid eyeliners offset by declines in Mascara. Moving on to Almay, Almay achieved a 6% dollar share in the fourth quarter and a 5.9% dollar share for 2008. Almay brand dollar volume grew 14.1% in the fourth quarter of 2008 and 2.2% in 2008 compared to the same period in 2007. This performance was driven by growth in the eye and face segments of 25.6% and 14% respectively in the fourth quarter of 2008, and 9.4% and 9.2% respectively for the full year 2008.

Almay positive performance in the eye segment was driven by the Almay Intense Eye Color collection and the Almay Bright Eyes Collection, which were introduced in the first half of 2008 and second half of 2008 respectively.

Almay Intense Eye Color eye shadow and Mascara were both ranked in the AC Nielsen in 2008 top 25 products by retail dollar sales. Almay’s positive performance in the face segment was driven by the continued success of Almay Smart Shade foundation. In the lip segments Almay dollar volume decline in the fourth quarter and in the full year largely due to decline in Almay hydracolor lipstick as it cycled its 2007 launch.

Moving on to women’s hair color, in the fourth quarter of 2008, the women’s hair color category declined by 1.8% while Revlon Colorsilk dollar volume declined by 1% compare to the same period in 2007.

In 2008 the women’s hair color category declined by seven-tenths per percent while Revlon Colorsilk dollar volume grew by 4% compared to the prior year. In antiperspirant and deodorant, the category grew by nine tenths of a percent in the fourth quarter and 2.6% in the full year 2008. Throughout 2008 Mitchum maintained an approximate 5% dollar share inline with its performance in 2007.

And, finally in beauty tools, the category grew 15.6% in the fourth quarter and 24.3% in 2008 significantly higher than the category’s historical growth rates, driven by a single pedicure product that was introduced by a non-traditional beauty tools category participants. Excluding that non-traditional single pedicure products, Revlon’s dollar share would have increased by half a percent to 23% in the fourth quarter and by two tenths of a percent to 24% in 2008, compared to the same periods in 2007.

As a remainder, we recently launched Revlon Pedi-EXPERT, which is a superior quality, ergonomically engineered pedicure tool and we expect to benefit from the recently increased consumer interest in foot-smoothing pedicure tools, which has driven growth in the category in 2008.

Moving on with the financial results for the year, operating cash flow in 2008 was $33.1 million compared to $300,000 in 2007, representing an improvement of $32.8 million year-over-year. Free cash flow, which we define as operating cash flow plus proceeds from the sales of certain assets less capital expenditures was $26 million in 2008 compared to negative cash flow of $17.1 million in 2007 resulting and an improvement of $43.1 million year-over-year. It is important to note that the net proceeds and gain on the sale of the Bozzano brand during 2008 are recorded as discontinued operations and therefore not included in our adjusted EBITDA or free cash flow numbers.

The improvement in free cash flow year-over-year was primarily due to improved operating cash, which benefited from lower interest payments and the proceeds from the sale of non-core trademarks, and the sale of the facility in Mexico.

So, therefore the components of our free cash flow in 2008 of $26 million are as follows. Adjusted EBITDA was $248.1 million, capital expenditures were $20.7 million, permanent display expenditures were $47.2 million, interest paid was $123 million, taxes paid were $14.4 million, and all other cash flows including changes in working capital resulted in a cash usage of $16.8 million.

In terms of our borrowing capacity, our unutilized borrowing capacity in cash as of December 31, 2008 was $168.6 million, comprising $126.8 million available under the revolving multi care facility and $41.8 million of cash and cash equivalents. It’s important to note that we do not have any debt maturing in 2009.

Moving on to 2009, I would like to take a few minutes to cover some specific factors that are likely to impact our 2009 financial performance, namely pension, foreign exchange, and certain other items that may impact cash flows.

Firstly relating to and post retirement expenses and cash contributions. As you know declines in the financial markets in U.S. and around the world in 2008, resulted in a decline in the value of our pension assets. While we are still in the process of finalizing the expected impact in 2009, we currently expect the pension and post retirement expenses will be approximately $30 million to $35 million in 2009, compared to $7.4 million $7.4 million in 2008.

Consequently, we currently expect our P&L expense related to pensions, to be $23 million to $28 million higher in 2009 compared to 2008.

Additionally, we currently expect that cash contributions to the pension and post retirement plans will be approximately $25 million to $30 million, compared to $12.8 million in cash contributions in 2008. Consequently, we currently expect pension cash contributions to be $12 million to $17 million higher in 2009 than in 2008.

Secondly, relating to currency, as you know, early in the fourth quarter of 2008, U.S. dollar strengthened significantly relative to other major currencies. As a result, our reported fourth quarter 2008 net sales were negatively impacted by $23 million. This equates to a 15% decline in net sales in the quarter in our international business, or a 6% decline in total company net sales in the quarter from unfavorable foreign currency translations.

As you know, foreign currency exchange rates have not changed significantly from the levels in the fourth quarter of 2008, and thus there maybe an impact on net sales comparability for the first nine months of 2009.

As a consequence, there may also be an impact from foreign currency translations on the comparability of reported operating income in 2009, compared to 2008 broadly inline with our operating margin percentage.

Additionally, in relation to currency, changes in foreign currency rates could have an impact on our 2009 results from the approximately 40% of our international products that are sourced from our manufacturing facility in North Carolina in the U.S. As we export U.S. manufactured products to our international business, the impact of the stronger U.S. dollar results in higher input costs for international business, and therefore unfavorably impacts gross margins to the extent that we are immediately able to pass those increased costs of the consumer.

And finally, in order to assist you in understanding certain other factors that will impact our expected full year 2009 cash flows, while we are not providing specific guidance for adjusted EBITDA, I will indicate the following.

Capital expenditures are expected to be approximately $20 million, permanent display expenditures are expected to be approximately $50 million. With respect to interest, as I indicated interest paid in 2008 was $123 million. You will note that at the end of 2008, our total debt was $1.329 billion, which was $110 million lower at the end of 2007.

Approximately 60% of our total debt is at fixed interest rates, and approximately 40% is at floating interest rates. We are benefiting and expect to continue the benefit from the low interest rate environment on our floating interest rate debt.

In addition we expect to also benefit from the expiration of our higher interest rates $150 million swap, which expires in September 2009. Taxes in 2009 are expected to be approximately $15 million and all other cash flows in 2009 including changes in working capital and including the impacts of higher pension expense and contributions as mentioned are anticipated to result in a cash usage of approximately $15 million.

In total we believe we are better positioned than in many years to maximize our business results in light of the uncertain economic conditions. Specifically, we have strong global brands with an extensive multi-year pipeline of new products. We have a highly capable organization. We have sustainable reduced cost structure and we have an improved capital structure. Overtime, we believe that continuing to execute our strategy will generate profitable net sales growth and sustainable positive free cash flow.

Thank you. Operator, you may begin the question-and-answers.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Karru Martinson of Deutsche Bank. Your line is open.

Karru Martinson – Deutsche Bank

Just kind of start with housekeeping. On the other cash flow that your correct the – it’s 15 cash usage of $15 million –15?

Unidentified Company Representative

Yeah, in 2009 correct.

Karru Martinson – Deutsche Bank

Correct. Okay. I just wanted to make sure on that. As we look out at 2009, and kind of the advertising spend, are we looking at kind of a similar level going forward here? Or are we are going to see some pullback and then how would that can be weighted through the course of the year?

Unidentified Company Representative

Well, as we’ve indicated, we will – we are going to support our brands. We are continuing to support them appropriately with advertising and promotional expenditures. We’ll support all of our new product launches and that’s the approach. In addition to that, of course as we look out, we are going to maintain flexibility in order to adapt to whatever the business conditions are. Let me remind you that throughout 2008, in the U.S. and then key countries around the world, the mass color cosmetics market continue to grow. We saw that even in January

Karru Martinson – Deutsche Bank

Okay. And in terms of the, but 2010 kind of debt maturities, obviously the Rights Offering seems like it’s on hold for now. I mean, kind of what’s the mindset here as here as we go through 2009 in terms of addressing that?

David L. Kennedy

Well, a couple of points clearly, first of all as I mentioned, we are in a good position and that we do not have any debt maturing in 2009. The MacAndrews& Forbes loan as you know was extended to August 2010. Having said that we’re still committed to doing the Equity Rights offering. Obviously, we are watching the markets closely to assess the timing at this point. So our strategy has not changed. We just have to wait and see what’s happened to the marketplace.

Karru Martinson – Deutsche Bank

Taking a step back and looking at the broader picture. I mean, are you seeing any shifts in your customer’s behavior in terms of trade downs, and kind of reaching, perhaps for out of the prestige market into kind of the mass market?

David L. Kennedy

Well let me answer that, in the cosmetics category, what we have deciding is continue to grow in mass as we’ve indicated. We have also noted that in the U.S., again in prestige, cosmetics are down. However, it’s very difficult to – it’s extremely difficult to know whether there is actually shifting going on between channels. In addition to that, in mass cosmetics again in the U.S. with the data that we’ve had, we’ve not seen any indication of trade down. In fact, dollar volume is actually somewhat ahead of unit volume increases. So it doesn’t appear that the people, at least in mass cosmetics are trading down.

Karru Martinson – Deutsche Bank

Thank you very much guys.

David L. Kennedy

Thanks Karru.

Operator

Thank you our next question comes from the line of Reza Vahabzadeh of Barclays Capital. Your line is open.

Reza Vahabzadeh – Barclays Capital

Good morning.

Unidentified Company Representative

Good morning Reza,

Unidentified Company Representative

How are you Reza?

Reza Vahabzadeh – Barclays Capital

Thanks. So when you look at the fourth quarter EBITDA comparisons year-over-year Alan, I mean, basically, is it just a reflection of somewhat lower shipments in the U.S. and higher returns offset by lower A&P spending?

David L. Kennedy

It was couple of things. The primary driver of the lower EBITDA year-over-year actually is increased level of advertising and promotional spending.

Reza Vahabzadeh – Barclays Capital

Okay

David L. Kennedy

That would be the single biggest driver. There obviously was some negative impacts of foreign currency driven by the - the impact of conference at the top line. But they are the two biggest drivers. It would be increased advertising and promotional spending, which we have planned to and indicated in the third quarter call.

Reza Vahabzadeh – Barclays Capital

Right.

David L. Kennedy

And the unfavorable impact of currency.

Reza Vahabzadeh – Barclays Capital

But did the shipments and number match you own internal plans?

David L. Kennedy

Yeah it did.

Reza Vahabzadeh – Barclays Capital

It did, okay. And then, as we look ahead to 2009, are there particular quarters where the timing of shipments are A&P and ad spending will change this year versus last year?

David L. Kennedy

Well, as you know in the U.S., and it’s different outside the U.S., but in the U.S., there are typically two major periods of product introductions. So the cycle does something like this. First half 2009, new products start to ship in the fourth quarter of 2008 and continue to ship into the beginning of the first quarter of 2009. Then, when we believe we’ve reached the appropriate distribution, we will commence the appropriate advertising and promotional campaign. So there is a lag between when a sale is recorded in our financial statements and when you would actually A. See the product at retail. B. See the commencement of the advertising and C, See those retail sales show up in Nielsen. The second cycle then in relation to - for example, second half of 2009, you would see shipments starting in the back half of the second quarter and trickle into the third quarter, and you would have that same lag effect on the timing of advertising and promotional spending and when you would see the sales of those products show up in the Nielsen. It’s different outside the U.S. The U.S. is - outside the U.S. they don’t have such a regimented cycle, it’s more of a continual flow of new product introductions to the world.

Karru Martinson – Deutsche Bank

But there is no difference in the timing of those patterns this year versus last year to your knowledge? Nothing significantly different.

David L. Kennedy

Talking about ’09.

Karru Martinson – Deutsche Bank

Yeah, ’09 versus ’08, there is no significant change in patterns.

David L. Kennedy

Well it’s possible because it really depends on the timing of the new product launches.

Karru Martinson – Deutsche Bank

Right.

David L. Kennedy

And even though Alan outlined the general launch cycle in the U.S. that can actually change somewhat.

Karru Martinson – Deutsche Bank

Right, so are your new plan launches from a timing standpoint, do you know if they are going to be about the same time as prior year or are they going to be different?

David L. Kennedy

I mean, it’s broadly consistent.

Alan T. Ennis

Broadly consistent but let me caution you there could be some differences.

Karru Martinson – Deutsche Bank

Okay. Got it.

David L. Kennedy

Just one other point on that as you think about our international operations, as I did mentioned if exchange rates stay where they are today, there would be an impact on reported net sales comparability in the first three quarters of next year, driven by currencies.

Karru Martinson – Deutsche Bank

I see, okay. And then, on the cash flow lines, you mentioned that the other line item will be a use of cash of $15 million, which is less than your pension contribution number. Is there an offsetting, working capital or some other item?

David L. Kennedy

Well, let me explain it to you. The - what you see, the way I outlined it is that the cash flows that I talked about start at EBITDA and bridge the way down to cash flow. So clearly the pension expense but the accrual for pension expense will be recorded in EBITDA.

Karru Martinson – Deutsche Bank

I see.

David L. Kennedy

Well you would see in your movement in working capital really it’s a delta between your expense and your contribution.

Karru Martinson – Deutsche Bank

Okay, so you don’t need to add any – the contribution has not moved any actual expense this year. Okay and then, last question. Are you seeing any signs of inventory destocking in the U.S. or abroad and where are we in that cycle if you will?

David L. Kennedy

Well first of all, let me remind you as we’ve done on prior calls that, retailers today manage and we work with them to manage the level of inventories and try very closely. Targets have been set, and we work with all the retailers in order to make sure that we got the appropriate level of inventories in tray. We’ve not seen anything to change that pattern. We’ve not seen any major changes to what the retailers are doing today in the tray than we’ve seen over the past year or two or three.

Karru Martinson – Deutsche Bank

Thank you very much.

David L. Kennedy

Thanks enough.

Operator

Thank you. Your next question comes from a line of Carla Casella of JP Morgan. Your line is open.

Carla Casella – JP Morgan

Hi

Unidentified Company Representative

Good morning Carla.

Carla Casella – JP Morgan

Good morning. My questions related to permanent display spending. It looks like it’s ticking up a bit in ’09. Is that just because of the number of products introductions or do you do need do some more spending on your displays or is that strategy to potentially gain some more shelf space.

David L. Kennedy

Well Carla its actually reported 2008 spending was around $47 million, what I said is we expect to be approximately $50 million in ’09. So it’s broadly inline in ’09 where it was in ’08.

Carla Casella – JP Morgan

Okay and..

David L. Kennedy

And that by the way that’s consistent with where it was in 2007 as well.

Carla Casella – JP Morgan

Right exactly. And then it looks I just want to clarify the EBITDA, adjusted EBITDA that you gave does not adjust out the two gains, and then also it doesn’t adjust for the restructuring charge you took in the fourth quarter?

David L. Kennedy

That’s Correct. The only thing that’s excluded from it, in that context is the BAZANO transaction?

Carla Casella – JP Morgan

Okay

Unidentified Company Representative

But the two one-time gains are in there and the restructuring is in there too.

Carla Casella – JP Morgan

Okay and I know prior questions asked about the destocking, but I’m wondering, how would you – would you say your trade inventories - the inventories at the trade level, are they pretty clean across channels or are there any channels that you are worried about that maybe carrying too much inventory of either old products or even some of the new ones?

David L. Kennedy

As we monitor our inventory levels in trade at the key customers, we don’t see any change, any significant change year-over-year even over the past few years.

Carla Casella – JP Morgan

Okay. Okay that’s great. Thanks, that’s all I had.

Unidentified Company Representative

Thanks Carla.

Operator

Thank you our next question comes from the line of Kevin Ziets of Pauly Capital. Your line is open.

Kevin Ziets – Pauly Capital

Hi, good morning.

Unidentified Company Representative

Good morning Kevin.

Unidentified Company Representative

Good morning Kevin.

Kevin Ziets – Pauly Capital

I just wanted to know if you could quantify that currency impact in the fourth quarter because it looks like your gross margins held up reasonably well.

Alan T. Ennis

Yeah, we didn’t quantify it specifically. The way to think about is Kevin, in the fourth quarter, the way to think about it would be the sales decline resulting from currency was $23 million. And way to think about it would be to look at our margin structure. So our operating income margin and if you would assume that margins applies to our international business, then you could work out what the currency impact on OI is.

Kevin Ziets – Pauly Capital

So there was no additional impact from the 40% sourcing of those international sales from North Carolina?

Alan T. Ennis

It was very material and I’ll tell you why. Inventory turns around times a year. And so, while our international businesses were purchasing inventory from our U.S. manufacturing facility in the fourth quarter, most of that inventory, on average in general would be on the balance sheet at the end of the year and that would start to bleed through into the first quarter. So, there is a lag because of inventory turns with - when that transaction impact would hit the P&L

Kevin Ziets – Pauly Capital

And so, what you’re saying is I guess some of that, more expensive inventory if you will is going to flush through in maybe the first quarter, first few - for or most of 2009?

Alan T. Ennis

Yeah, well certainly in the first quarter and then if rates stay where they are today then that would continue to correct.

Kevin Ziets – Pauly Capital

Okay, and then I guess with regards to the ad spend, I know you are always saying that you are going to spend at competitive levels. I’m just looking at the Mitchum share year-over-year and some of the areas where maybe brought down spending, it does look to have impacted market share. Just, I guess - just want to get a sense of whether you are going to be more just as kind of focus on the new launches or if you are going to be more broad based in terms of the ad spends going forward? And then well, maybe just answer that to start.

David L. Kennedy

As far as the Mitchum brand is concerned, remember that we launched a major new product in 2007. So we spent significantly behind that launch. As it’s customary when you launch the new product. In that category, and in the hair color category, and even in fragrance category, the number of new product introductions is much, much less than in the color cosmetics category. So you won’t see us spending at levels because we’re not launching new products every year in those categories. So, as we go forward, of course if we do launching products we’ll spend at appropriate levels to be competitive depending upon the product line, whether it’s an extension, whether it’s a major new product and so forth.

Kevin Ziets – Pauly Capital

Right. I guess I guess, thinking on those lines you have the Pedi-Expert coming up. That’s kind of seems like a more major new product line.

Unidentified Company Representative

Right.

Kevin Ziets – Pauly Capital

And just want to balance that against maybe what you are seeing in terms of just advertising rates out there. Is there any opportunity to bring your costs down?

David L. Kennedy

You mean in terms of advertising rates?

Kevin Ziets – Pauly Capital

Yes.

David L. Kennedy

Well I see this that we have processes in place and we’ll manage to get and to take advantage whatever favorable rates that we can give in advertising and really across the board in all of our raw materials for example. So whatever is favorable out there, we believe that we can be very aggressive and to take advantage of it.

Kevin Ziets – Pauly Capital

And maybe you mentioned this but what were the restructuring costs that were taken during the fourth quarter?

David L. Kennedy

It’s relating to the restructuring of our sales force in the U.S.

Kevin Ziets – Pauly Capital

Okay, could you - a little more color on that?

David L. Kennedy

Well, what we did is, realign our sales force to our customer base in a more effective and efficient way, and accordingly we reduced staffing levels, but we believe that we’ve got a more efficient and in fact a better aligned sales force against our customer base.

Alan T. Ennis

The charge we took Kevin in the fourth quarter was about $3 million.

Kevin Ziets – Pauly Capital

And the anticipated annualized savings?

Alan T. Ennis

We expect the savings to be more than that on an annualized basis.

Kevin Ziets – Pauly Capital

Okay and will hit pretty immediately.

Alan T. Ennis

Yeah the restructuring was done in November, December. So savings will be started.

Kevin Ziets – Pauly Capital

Okay great. Last question is on the new product launches and whether in general, you’ve been able to - just maybe whether you’ve been able to open up any new channels of distribution or expand existing channels with the launches that you’ve come out with?

Alan T. Ennis

We are broadly distributed in the U.S. We are into every mass channel to a significant degree outside the U.S. we’re in all the channels that strategically we think that we can compete, and so we believe that we’ve got very good strong access to the consumer in the U.S. and in all the countries around the world. So, we really think our focus should be on increasing the turnover per store door per door and that's our focus.

Kevin Ziets – Pauly Capital

Okay, I guess just one more on the L'Oreal, I think they’ve said that they are increasing their ad spend and there are promotional stance. So just wondering whether you are seeing an increased level of competition in general out there?

David L. Kennedy

Well, remember that L'Oreal, operates in a number of categories in which we don’t compete.

Kevin Ziets – Pauly Capital

Right. I think that they were speaking particularly about the U.S. mass, but I’m maybe…

David L. Kennedy

Yeah, well. They still have – they still operate in a number of categories in which we don’t compete. So, I would say broadly speaking at this point, although we haven’t seen all the data yet for the fourth quarter. But we’ve seen no significant change. I would say broadly speaking, in the patterns of advertising and promotional spending in 2008, that we’ve seen in prior years.

Kevin Ziets – Pauly Capital

Okay, that's great. Good luck guys.

Alan T. Ennis

Thanks Kevin

Operator

Thank you, our next question comes from the line of Walter Branson of Regimen Capital. Your line is open.

Walter Branson – Regimen Capital

Thank you, just a couple things. Going back to the kind of timing of the numbers. So, in 2008 you did have, broadly different timing, I think with strong year-over-year growth in adjusted EBITDA in the first two quarter then decline in the fourth quarter. Was there a significant change in the calendar in 2008 in terms of new product shipments and A&P spending, versus 2007 that explains a lot of that.

Alan T. Ennis

Well, in fact that does explain it. We had – we did have a - I would say a – I don’t know if you call it, significant, but a moderate change in the calendar. We introduced more products for 2009 earlier, which means later in the year in the 2008. And in addition we supported our products throughout the year. And we had a more even support based on the products that we launched for ’08 throughout the year versus ’07. That makes sense?

Walter Branson – Regimen Capital

Yes, and just, and maybe looking at the immediate future. In the first quarter of ’09, is it broadly comparable in terms of shipments of new products and A&P to the first quarter of ’08 or significantly different?

Alan T. Ennis

Well, as we said, we will have and our intent is to have strong new product pipeline in cosmetics, each and every year and that’s what we will continue to do.

Walter Branson – Regimen Capital

Okay and then in terms of the large increase in A&P spending in the fourth quarter, can you give us a sense, whether in dollars or percentages, what the magnitude of that was on a year-over-year basis?

Alan T. Ennis

What I can tell you Walter is that the preponderance of the difference between our EBITDA in the fourth quarter of last year versus the fourth quarter of this year, was advertising and promotional spending.

Walter Branson – Regimen Capital

Okay.

Alan T. Ennis

As I mentioned earlier there was a negative impact of currency so if you strip that difference really would be increased level of spending in advertising and promotion.

David L. Kennedy

And that was in accordance with our marketing plan.

Walter Branson – Regimen Capital

Okay, so that’s obviously a pretty significant change and given that significant change, were you disappointed that the Revlon brand did not increase its share for the quarter?

David L. Kennedy

No in fact we were very pleased because the advertising in the U.S is very focused on certain segments and we call that out I think in the script, we got very good performance in all those segments in which we focus the advertising and the promotion. We also saw that in January as well.

Walter Branson – Regimen Capital

Okay, thank you.

David L. Kennedy

Thank you Walter.

Operator

Thank you, our next question comes from the line of Mary Gilbert of Imperial Capital, your line is open.

Mary Gilbert – Imperial Capital

Thank you.

Unidentified Company Representative

Hello Mary.

Unidentified Company Representative

Hi Mary, how are you?

Mary Gilbert – Imperial Capital

Good, how are you doing?

Alan T. Ennis

Good. Very well.

Mary Gilbert – Imperial Capital

I wanted to just get a clarification on the reversal in the gains, in the quarter you had is it $4.3 million gain and then a $5.9 million non-core trademark?

Alan T. Ennis

Let me try to clarify. That was in relation to the full year, so..

Mary Gilbert – Imperial Capital

Okay the 5.9 was full year, okay?

Alan T. Ennis

That was the sale of the non-core trademark happened in the first quarter, and..

Mary Gilbert – Imperial Capital

Okay.

Alan T. Ennis

And the Mexico plant sale happened in the second quarter. So there was no one-time gains in the fourth quarter, but in relation to the yea, obviously, there were.

Mary Gilbert – Imperial Capital

Okay, so there were no reversals or anything in the fourth quarter correct?

Alan T. Ennis

Except the restructuring charge, and increased advertising and promotion expense in accordance with our clients.

Mary Gilbert – Imperial Capital

Yeah, which we got that. So basically, yes so we have backed out we are going to get closer to $69 million for the quarter. Yeah for the quarter so then therefore for the full year what I need to do is, there was the $4.4 million reversal, the $4.3 million gain, and the $5.9 million gain. Correct? Those all are the adjustments?

Alan T. Ennis

You are trying to put these into your models?

Mary Gilbert – Imperial Capital

Yeah

Alan T. Ennis

Yeah that’s correct.

Mary Gilbert – Imperial Capital

Okay super. Okay got it. So that’s kind of inline with what I’m looking for and then I wondered in looking at the cash requirements for 2009 it looks like it’s going to be somewhere around $220 million in total. I know you haven’t said that but you did give us some color on what’s going on with the currency and we’ve gone over that in the past and I guess I wanted and then we have an idea of the pension expense impact. So, on that basis do you except to have potentially if we sort of look at the current demand that we’re seeing in the market in the way the categories acting that you would be slightly cash flow and negative to the tune of may be $20 million to $30 million?

Alan T. Ennis

That was something we are going to answer on the call, obviously, Mary. But I think we have given you enough information to be able to model that fairly appropriately.

Mary Gilbert – Imperial Capital

Okay, and then one other thing on the revolver, how much did you have drawn on the revolver and how much outstanding in LC’s?

Alan T. Ennis

The revolver was undrawn at the end of the year and we continue to have around $30 million of LC’s.

Mary Gilbert – Imperial Capital

Okay perfect.

Alan T. Ennis

One important point, I just want to reemphasize you are thinking of the cash flow. As you think about interest as I mentioned, interest in 2008 was $123 million,

Mary Gilbert – Imperial Capital

Right

Alan T. Ennis

Obviously we’ve reduced debts during 2008 and rates have come down. So, as you think about modelling interest in 2009 you have to bear in mind those factors.

Mary Gilbert – Imperial Capital

Great.

Alan T. Ennis

It should be a positive impact to us.

Mary Gilbert – Imperial Capital

Exactly, yeah okay. Yes okay…

Alan T. Ennis

Also I would keep in mind that as I indicated earlier that we’ve got processes in place to take advantage of any cost savings that may arise from indirectly from improved prices in commodities, advertising rates, et cetera. And as well, we will continue to day-to-day control our costs, very well. Plus, we will get the benefit of the restructuring of the sales force.

Mary Gilbert - Imperial Capital

Got it. Yeah, so basically with these initiatives, you’re targeting and you’ve done this in the past. I have seen you do it. You’re targeting to be at least cash flow neutral, it sounds like.

Unidentified Company Representative

Well, again, we’ll leave you to work it out. But, I would take your comments, very carefully particularly as it concerns our ability to take advantage of whatever costs savings are there in terms of our input costs, rates on advertising, as well as controlling the day to day costs around here.

Mary Gilbert - Imperial Capital

Okay, and then also with regard to…

David Kennedy

As well as an interest rates as well as Alan pointed out.

Mary Gilbert - Imperial Capital

Yeah. And then with regard to the rights offering that's definitely going to be 2009 and then or could it be pushed out?

Alan T. Ennis

So, what we said Mary, that the expiration of that loan, was extended to August 2010, to give us some flexibility in terms of timing. We haven’t identified or committed to specific timing to do the right suffering. Although, we are committed to doing it.

Mary Gilbert - Imperial Capital

Okay, got it. So, it could be pushed off into early 2010, if necessary?

David Kennedy

Correct.

Mary Gilbert - Imperial Capital

Okay, great. That’s super. Most helpful. Thank you, very much.

David Kennedy

Thanks, Mary.

Unidentified Company Representative

Thanks.

Operator

Thank you, our next question comes from the line of Connie Maneaty of BMO Capital Markets. Your line is open.

Connie Maneaty – BMO Capital Markets

Good morning.

Unidentified Company Representative

Good morning, Connie.

Unidentified Company Representative

Hi, Connie

Connie Maneaty – BMO Capital Markets

Thanks. What is the split in pension expenses between costs of goods and SG&A?

Alan T. Ennis

I will, the total pension expenses in 2009, we expect to be as I mention $20 million to $25 million. I don’t know the specific answer for you. I do know that a significant portion is in SG&A. There is a component in cost of goods, but it is certainly less than half the number.

Connie Maneaty – BMO Capital Markets

Okay.

Alan T. Ennis

I mean that’s I mean you could model that, less than $10 million is in costs of goods and the balance of the 20 to 25 would be in the SG&A.

Connie Maneaty – BMO Capital Markets

Okay, and did you, I don’t know if you I didn’t see it in the release. Did you give the sales growth rates for the international segment?

Alan T. Ennis

Yes.

Unidentified Company Representative

Yes, we did.

Alan T. Ennis

Yes I told about specifically.

Connie Maneaty – BMO Capital Markets

Okay.

Unidentified Company Representative

Yeah.

Connie Maneaty – BMO Capital Markets

I mean for the fourth quarter and not the full year.

Unidentified Company Representative

Yes I think we did.

Unidentified Company Representative

Yes.

Connie Maneaty – BMO Capital Markets

Okay. I’m sorry about, that the U.S. business, sales declined in 2008 in three of the fourth quarter. And so the U.S. sales growth rate declined 2.7% this year and it rose 5.1% last year. If we take out, I mean what’s the big swing factors here the colorist launch last year?

David Kennedy

That was a part of it, for sure. There was also allowances. And then you have to take into account returns and I don’t know remember where we were for the whole years, was favorable for the whole year.

Alan T. Ennis

Right, yeah. That the real big drivers, as you point out would be cycling the launch of those beauty care products we talked a bit.

David Kennedy

Colorist and Flare and Mitchum.

Alan T. Ennis

And Mitchum.

David Kennedy

And Mitchum Smart Solid. You know the pipeline sales primarily.

Unidentified Company Representative

The increase in promotional which as you know is a deduction you arriving in that sales.

Connie Maneaty – BMO Capital Markets

So, as we look forward, I mean are there one time events that are going to swing the growth rate in the U.S. business in 2009?

David Kennedy

Are they one time events? There are onetime event, you may like a new product launch or something like that.

Connie Maneaty – BMO Capital Markets

It’s very hard to model, whether normalized growth rates for the U.S. business, should be or could be. I mean as 2009 a normalized year, what you say?

David Kennedy

This 2009 a normalized year.

Connie Maneaty – BMO Capital Markets

Yes.

David Kennedy

It’s really going depended on what success we have with new products. With new products and that we may launch in the other categories. Many experts for example, which we’re launching, I mean obviously we don’t know what the performance is going to be. We have very high expectation. We are very optimistic about it. And if it works then, it’s going to create some growth.

Connie Maneaty – BMO Capital Markets

Okay, and would you describe the impact on the gross margin from foreign exchange? What’s coming up in the next couple of quarters, would you describe it is material or immaterial?

Alan T. Ennis

Well, material is subjective.

David Kennedy

Well, it also depends on what the exchange rates do as well.

Connie Maneaty – BMO Capital Markets

Well, assuming they stay where they are.

Alan T. Ennis

I would say that in the first three quarters of 2009. If rates stay where they are, you would see fairly significant impacts in the top line. Within constituencies, you also have the transaction impact. So I would say that the impact in gross margin could be significant.

Connie Maneaty – BMO Capital Markets

Okay.

David Kennedy

One other point just to help you think about it, I mean the four major currencies that you need to think of it. Or from our standpoint, in other words, bigger markets. Would be the Australian dollar, the Canadian dollar, the South African rand and the U.K. pound, there the four major currencies that you should track relative to our international business

Connie Maneaty – BMO Capital Markets

Okay

David Kennedy

I would also call out again. There will be other factors involve, which can could be positive to that is effect of whatever we see in terms of efficiencies. Our manufacturing and supply chain as well as, if we are able to gain better input costs. And to the extents of we can get pricing and pass on whatever the transactions effect might be.

Connie Maneaty – BMO Capital Markets

Most of the companies have already, talked about having price increases announced. So, you have announced price increases, yet?

David Kennedy

We have not announced any price increases in the U.S. However, let me point out that in the color cosmetics category in the U.S. that dollar volume is ahead of unit volume. So, I believe that everyone is taking process, as they introduce new product launch at relatively higher prices.

Connie Maneaty – BMO Capital Markets

Right, but what about price increases in international market to offset the FX effect?

David Kennedy

We are considering and we’ll evaluate whether it can and it should take price increases. We will take those, but we will also – we will take those where we can but we'll balance that out with being comparative.

Connie Maneaty – BMO Capital Markets

Okay, I understand that you are pleased with the impact of higher advertising has ahead on the specific product, that you are targeted. But when do you suspect all this effort will translate into sustainably growing market share for both Almay and Revlon?

David Kennedy

Well, it will depend obviously on the continued effectiveness of our new products and as well as the effectiveness of our overall marketing. We believe that we are in a very good position today. We believe that we are making tremendous progress and we’re very optimistic about our ability to continue to maintain our share and if our new products work well, then we believe that will be able to grow share overtime. We believe strongly in our strategy it’s very focused, we’ve got a tremendous capability with all of our people in house now, we strengthen that over the past two years and I think you’ve seen the progress that we made over the past 2.5 years approximately. Also I would go on to say that we want profitable share growth, we will be able to sustain that share growth and so, we will balance share growth that was profitability as we go forward.

Connie Maneaty – BMO Capital Markets

And just one final question, I think you said that the sales in the fourth quarter, 7.5% decline in the U.S. and 10% decline overall, as well as adjusted EBITDA, they all make your expectations?

Unidentified Company Representative

Yes they were in line with our clients.

Connie Maneaty – BMO Capital Markets

Okay, great thank you.

Unidentified Company Representative

And we by the way, we attempted to call out in the third quarter. What we expected to do in the fourth quarter in terms of our advertising and promotional expenditures.

Connie Maneaty – BMO Capital Markets

Right, I remember that. Okay thanks very much.

Unidentified Company Representative

Thanks Connie.

Operator

Thank you our next question comes from the line of Mark Kaufman of Source Capital. Your line is open.

Mark Kaufman – Source Capital

(Inaudible)

Unidentified Company Representative

Hello. Operator, can we go to the next caller please.

Operator

Thank you, our next question comes from the line of (Brandon Austin of VINATOR). Your line is open.

Unidentified Analyst

Hi, guys.

Unidentified Company Representative

Hi, good morning.

Unidentified Company Representative

Good morning.

Unidentified Analyst

Can you guys, so, could you guys guide to negative cash flow from operations, because I can’t run our guide but hopefully, negative cash flow from operations but positive, not positive but neural free cash flow is that the plan?

Unidentified Company Representative

I don’t understand your question.

Unidentified Analyst

So, I thought you guys said earlier in the call that you expect 2009 to have negative cash flow from operations but neutral free cash flow.

Unidentified Company Representative

No, we haven’t ever seen anything like that. We outline the factors so, that you could calculate and your own estimate of cash flow.

Unidentified Analyst

Okay, can you that debt relief that you guys got obviously that's quite helpful. The debt release that you guys go until 2010. Was that – what’s debt more seen you, the stuff that you got relief on or the rest of debt?

Unidentified Company Representative

Rest of the debt. But they…

Unidentified Analyst

Rest of the debt.

Unidentified Company Representative

You will just see - when you say relief, we extended MacAndrews & Forbes term loan, which is subordinate of debt to August 2010. And the other two pieces of debt that we have are seen your term loan which matures in January 2012 and our 9.5% senior notes which mature April 2011.

Unidentified Analyst

Okay and are you guys going to have to I miss the part on the pension, the pension liability are you guys going to have to take some more cash to fund the pension liability or how do you plan on dealing with that situation?

Unidentified Company Representative

You know what I said, specifically, was in relation to cash contribution for pension that we expect the cash contributions would be approximately $12 million to $17 million higher in 2009, then they were in 2008.

Unidentified Analyst

Okay. And could we talk a bid about the competitive environment. I guess everyone out there seems to be having a tough time. Is this – is there an opportunity or is there a necessary retrenchment in the industry, in general and your opinion?

Unidentified Company Representative

I haven’t seen nearly retrenchment. As we have indicated the category in the U.S. and in key markets around the world for cosmetics continues to grow. We are very pleased with it. We saw that growth in the U.S. in January. We see no change in terms of the competitive environment. So it seems or now, anyway that we are very well positioned.

Unidentified Analyst

Okay and on the right offering I guess last thing, on the rights offering is that – is that necessarily going to be equity or could that done in a form of debt convert are you guys.

Unidentified Company Representative

It will be equity rights offering.

Unidentified Analyst

Equity rights offering. Okay, thanks a lot guys.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

Thanks, Brandon.

Operator

Thank you our next question comes from the line of Ben Vaderaten of Canyon Capital. Your line is open.

Benjamin Vaderaten – Canyon Capital

Hi, my question was answered thank you.

Unidentified Company Representative

Thank you, Ben

Unidentified Company Representative

Good morning. And he has gone.

Operator

Thank you, our next question comes from the line of Mark Kaufman of Source Capital. Your line is open.

Mark Kaufman – Source Capital

Hi, good morning gentlemen.

Unidentified Company Representative

Good morning, Mark.

Unidentified Company Representative

Hi, Mark.

Mark Kaufman – Source Capital

Here is my question, when I look at your numbers for the fourth quarter you talk about Revlon being a positive and Almay being a negative. And of course down a couple of paragraphs or maybe it’s next paragraph talk about the takeaway. AC Nielsen saying that, Almay did quite well. So, the difference between those two events because you had a lot returns, which obviously don’t show up AC Nielsen and returns of all product that reduced your overall revenue on Almay or is there something else going on in the channels that AC Nielsen doesn’t follow?

Unidentified Company Representative

But in terms of our shipments returns was the major factor, in fact I think we called out we actually had hired shipments. I should say in terms of our sales.

Mark Kaufman – Source Capital

Right.

Unidentified Company Representative

So we had higher accrued returns. Primarily based on our marketing plans for ’09 and the products we expect to discontinue.

Mark Kaufman – Source Capital

Right

Unidentified Company Representative

Okay.

Mark Kaufman – Source Capital

So it would seem to me that, well, maybe going forward, that if we gets some follow up through that there is actually some pretty good interest in the Almay brand? Right.

Unidentified Company Representative

The Almay brand is very strong. We had a very good quarter. We had a very good year with the Almay brand. And we did very well in eye and face. That’s what we focused, we launched hydracolor lip in ’07, and we were really cycling the launch of that product as you know in the pipelines of that, so, we feel very good about the Almay brand.

Mark Kaufman – Source Capital

So there is a possibility here, that we might see shipments higher than returns going forward or it may – maybe, I’m over stating case as far as how?

Unidentified Company Representative

Well, I think if you look back at our average return experience of the past two years. It’s continued to improve. As we get much better and managing our offering and our in-store inventory.

Mark Kaufman – Source Capital

And okay, thanks very much.

Unidentified Company Representative

Thanks, Mark.

Operator

Thank you. Our next question comes from the line Walter Branson of Regiment Capital. Your line is open.

Walter Branson – Regiment Capital

Thanks, just a follow up on – your sales. So, looking back on my notes and correct me, if I’m wrong, I saw that first quarter ’09 new launches were projected to be up 50% in SKU’s year-over-year. So, I would expect that a sales gain in Revlon brand for the fourth quarter, because you ship those launches. But actually your shipments were lower in the fourth quarter, of ’08 than ’07, but you said they met your expectation. So, what am I looking at wrong here?

Unidentified Company Representative

I’m not sure what you’re looking at. First I have to get some indication of where you’re getting your…

Unidentified Company Representative

One point, I guess the number of SKUs year-over-year is necessarily indicative, of higher dollar shipments depends on the type of SKU, the make up of where that would go on the wall, so, it is not necessarily a direct correlation between the number of SKUs and how that would effect shipments.

Unidentified Company Representative

But also if I understand, what you are saying, the shipments in the fourth quarter will come towards the end and their shipments into the retailers, there can be a difference. So, when the shipments occur, and when they actually show up on counter as well.

Walter Branson – Regiment Capital

Okay, but I guess, I'm just looking at…

Unidentified Company Representative

Try to match those through statistics that you pointed out, that is sometimes very difficult because the differences in shipment patterns and retail sales patterns.

Walter Branson – Regiment Capital

Okay, well. Let me ask in other way. Do you look at your first quarter ’09 launches, has been stronger than your first quarter ’08 launches? And you know whether answer yes or no. How the shipments of those first quarter ’09 launches, mostly in fourth quarter or significantly in first quarter as well?

Unidentified Company Representative

Well as far as whether they are strong or not. I guess the marketplace will be the judge. I believe, we would launch in terms of number products and product lines. Similar number probably speaking and I would say that the shipment pattern there, is broadly speaking then about the same as what you’re seen in prior years.

Unidentified Company Representative

And we think about it is in terms of retail space. So, our space on the wall, and some space of the wall, I mean in 2009 as we expect largely unchanged what it was in 2008 and in 2007. So there is a fixed amount of LINEAR feet in the wall some put products.

Walter Branson – Regiment Capital

So I guess what you’re attributing the, and as you said give me your expectations. So, lower shipment of Revlon product in the USM in the fourth quarter year-over-year?

Unidentified Company Representative

I think it was just timing.

Walter Branson – Regiment Capital

Okay, okay good thank you

Operator

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 everyone. For being on the call today, we really appreciate it. Let me just reiterate a couple things, in closing, I believe we are better positioned than in many years to maximize our results, in light of the uncertain economic conditions. We have strong global brands with an extensive multiyear pipeline of new products. We have a highly capable organization. We have a sustainable reduced cost structure and we have an improved capital structure. And we will continue to intensely focus on executing our strategy and believe that overtime, that will generate profitable net sales growth and sustainable positive free cash flow, thank you.

Operator

Thank you and this concludes today’s conference call. You may now disconnect.

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