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Revlon, Inc. (NYSE:REV)

Q1 2009 Earnings Call

April 30, 2009 9:30 am ET

Executives

Abbe Goldstein – Senior Vice President, Investor Relations and Corporate Communications

David L. Kennedy – President and Chief Executive Officer

Alan T. Ennis – Chief Financial Officer and President Revlon International

Analysts

Reza Vahabzadeh - Barclays Capital

Todd Harkrider - Goldman Sachs

Karru Martinson - Deutsche Bank

[Unidentified Analyst] – J.P. Morgan

[George Calhoob] - BTIG

Lance Vitanza – Knighthead Capital Management

[Pat Turkey] – BMO Capital Markets

Kevin Zeits - Pali Capital

Mary Gilbert - Imperial Capital

Walter Branson - Regiment Capital

Dax Vlassis - Gates Capital Management

Operator

Good morning ladies and gentlemen and welcome to Revlon’s first quarter 2009 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 thanks for joining our call. Earlier this morning we released our results for the first quarter ended March 31, 2009. If you have not already received a copy of the earnings release you can obtain one at our website at revloninc.com.

Here with me today are David Kennedy, President and Chief Executive Officer and Alan T. Ennis, CFO and President Revlon International. On today’s call David will highlight the results for the quarter and provide a strategic update on the business. Alan will review our financial and market share results for the quarter and I will introduce our breakthrough new product lineup for the second 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 Reform Act of 1995. Information on factors that could affect the company’s results from time to time and cause them to differ materially from such forward-looking statements are set forth in the company’s filings with the SEC, including our 2008 Form 10-K and our first quarter 2009 10-Q which we will file later today.

Our remarks today will include a discussion of adjusted EBITDA 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 net income or net loss, and in the case of free cash flow to net cash provided by operating activities, the most directly comparable GAAP measures in the accompanying financial tables.

As you know we issued a press release on April 29 announcing that the independent members of our board of directors received a proposal from MacAndrews and Forbes pursuant to which Revlon would issue new preferred stock in exchange for publicly held Class A common stock. We have no further comment at this time beyond what was in the press release and will not be taking any questions on this subject. If and when there are developments that require disclosure, we will of course do so.

Unless otherwise noted our discussion this morning of share and dollar volume data is based on U.S. mass retail dollar volume according to AC Nielsen which excludes Wal-Mart as well as regional mass volume retailers, prestige stores, department stores, Internet, door-to-door, television shopping, specialty stores, perfumeries and other distribution outlets, all of which are channels for cosmetic sales. The AC Nielsen data is an aggregate of the drug channel, Target,

K-Mart, and food and combo stores and represents approximately two-thirds of the company’s U.S. mass retail dollar volume.

And finally as a reminder our discussion this morning should not be copied or recorded.

With that I would like to hand the call over to David.

David L. Kennedy

Thank you, Abbe, and good morning everyone. Before we review our first quarter results I would like to take this opportunity to comment on the organizational changes we announced. Our board elected Alan Ennis President and Chief Executive Officer, Chris Elshaw Chief Operating Officer, Steven Berns Chief Financial Officer, and I was elected Vice Chairman of the Board and will also serve as a Senior Executive Vice President at MacAndrews and Forbes Holdings Inc. Let me congratulate Alan, Chris and Steven on their appointments. Alan has extraordinary energy, the leadership skills and strategic ability to lead the worldwide Revlon organization at this time and continue to implement our strategy most effectively.

As you know, Alan has been a key member of our leadership team as Chief Financial Officer, President Revlon International and is a member of the operating committee. In those roles he has been closely involved in all the key decisions we have made over the past few years.

Chris has been highly successful in leading our U.S. region and prior to that our Europe region. Chris will continue to lead and manage the U.S. region as well as the international business.

Later in May we will welcome our new Chief Financial Officer, Steven Berns. We believe we are most fortunate to have someone in the key CFO position with Steven’s broad financial experience and knowledge of our business.

We have over time formulated well thought out and orderly succession plans for senior roles within our company to insure we have highly capable executives in position to continue to implement our strategy. As part of these organizational changes we have formed the office of the Vice Chairmen which will include Alan, Chris and me to oversee the company’s strategic development. Going forward I believe that Alan and Chris along with the other senior management team that make up the operating committee will provide the company with outstanding leadership.

Now I’d like to talk to you about our first quarter. I will make as I usually do a few comments on our financial results for the quarter, followed by an update on the progress we made in executing our strategy and business plan and then I will turn it over to Alan to review our financial and market share results in detail.

In the first quarter of 2009 we continued to execute our strategy including our focus on the key drivers of profitable brand growth. In the quarter we increased net income and free cash flow, reduced debt by $38.3 million, grew Revlon color cosmetics U.S. retail sales over 9% and increased market share in the U.S.

Net sales for the quarter were $303.3 million compared to $311.7 million in the year ago quarter. Excluding unfavorable foreign currency fluctuations, net sales were up 3.8% driven primarily by the continued strong growth of Revlon color cosmetics in the U.S. and in key countries around the world.

Operating income for the quarter was largely unchanged at $31.6 million compared to the same quarter last year, and operating income margin improved to 10.4% in the first quarter of 2009 compared to 10.3% in the same period last year. Please note that operating income in the 2008 period included a $6 million gain on the sale of a non-core trademark.

We had net income of $12.7 million in the first quarter of 2009 compared to a net loss of $2.5 million in the prior year quarter. And we generated free cash flow of $17.5 million compared to $14.6 million in the same period last year. We continue to be encouraged by the growth in the mass retail color cosmetics category in the U.S. and in key countries around the world. However, we continue to manage our business, maintaining the flexibility to adapt to changes in the business conditions including the ongoing economic uncertainties. We believe that continued execution of our strategy will over time generate profitable net sales growth and sustainable positive free cash flow.

We are enthusiastic and optimistic about our new product introductions for the second half of 2009 which continue the strong pipeline of new product launches in recent periods. Abbe will review these with you later on this call. Our Revlon and Almay color cosmetics lineup includes a number of first-to-market, breakthrough technology products and comprehensive new offerings in every segment of the category, namely face, eye, lip and nail.

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

Alan T. Ennis

Thank you, Abbe, and 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 P&L for the first quarter of 2009, net sales for the first quarter were $303.3 million a decrease of $8.4 million compared to $311.7 million in the first quarter of last year. Excluding the unfavorable impact of foreign currency fluctuations of $20.3 million, net sales increased by 3.8%. Higher net sales of Revlon and Almay color cosmetics and Revlon ColorSilk Haircolor were partially offset by a decline in net sales of Mitchum Anti-Perspirant Deodorant. Net sales of Revlon color cosmetics excluding foreign currency fluctuations increased 8.9% driven by strong new product introductions.

In the first quarter of 2009 we increased advertising and promotional spending across our portfolio of brands compared to the same period last year. In the United States first quarter 2009 net sales were $191 million, an increase of $13.8 million or 7.8% compared to $177.2 million in the first quarter of 2008. The increase was driven primarily by higher net sales of Revlon and Almay Color cosmetics and Revlon ColorSilk Haircolor.

First quarter of 2009 net sales benefited from higher pipeline shipments of first half and some second half 2009 new color cosmetics products. As a result of timing of shipments and a more extensive new product lineup including Revlon Colorstay Liquid Lipstick.

In our international operations, net sales in the first quarter of 2009 were $112.3 million, a decrease of $22.2 million or 16.5% compared to $134.5 million in the same period last year. Almost all of the decline was due to unfavorable foreign currency fluctuations which negatively impacted international net sales by $20.3 million in the first quarter of 2009. Excluding that unfavorable foreign currency fluctuations, net sales were down 1.4% as declines in fragrances and certain beauty care products were partially offset by higher net sales of Revlon color cosmetics.

From a geographic standpoint lower net sales in the Europe and Latin America regions were partially offset by higher net sales in the Asia-Pacific region. In our Asia-Pacific region which is comprised of Asia-Pacific and Africa, net sales were down 10.9% to $57.1 million. Excluding unfavorable foreign currency fluctuations, net sales increased 5.1% over the year ago quarter. This growth was primarily due to higher shipments of Revlon color cosmetics in China, Australia, and South Africa and higher shipments of certain beauty care products in South Africa. These were partially offset by lower net sales in certain of our distributor markets and in Japan.

In our Europe region which is comprised of Europe, Canada and the Middle East net sales were $35.7 million compared to $49.1 million in the year ago quarter. Excluding unfavorable foreign currency fluctuations, net sales were down 9.4%. Lower shipments of beauty care products throughout the region, lower shipments of fragrances in the UK and increased returns in Canada were partially offset by higher shipments of Revlon color cosmetics throughout the region.

In our Latin America region which is comprised of Mexico, Central America and South America, net sales were $19.5 million compared to $21.3 million in the year ago quarter. Excluding unfavorable foreign currency fluctuations, net sales were down 2.8%. This decrease was primarily driven by lower shipments of beauty care products in Mexico and certain distributor markets, partially offset by higher net sales in Venezuela and Argentina.

Moving down the rest of the P&L for Revlon, Inc., in the first quarter of 2009 we increased advertising and promotional spending across our portfolio of brands compared to the same period last year. Let me remind you from a financial reporting perspective that promotional allowances are recorded as a deduction to arrive at net sales, while advertising costs are recorded within SG&A in the P&L.

In the quarter our gross profit margin was essentially unchanged at 63.4% compared to 63.7% in the year ago quarter. Gross margin was impacted by higher allowances on color cosmetics, unfavorable foreign currency fluctuations and higher pension expense within cost of goods while we benefited from favorable manufacturing efficiencies, lower material costs and favorable changes in sales mix.

SG&A expenses of $160.2 million improved by $12.6 million from $172.8 million in the same quarter last year. This improvement was driven by the favorable impact of foreign currency fluctuations and lower permanent display amortization expenses, partially offset by an increase in advertising costs primarily associated with the launches of certain new products and higher pension expenses.

Operating income in the first quarter of 2009 was $31.6 million representing a 10.4% operating income margin compared to $32 million representing a 10.3% operating income margin in the same period last year. Adjusted EBITDA in the first quarter of 2009 was $49.1 million compared to $57.5 million in the same period last year. First quarter 2009 operating income and adjusted EBITDA included pension expense of $6 million compared to $2.1 million in the first quarter of last year. And David mentioned first quarter 2008 operating income and adjusted EBITDA included the gain of $6 million related to the sale of a non-core trademark.

Net income in the first quarter of 2009 was $12.7 million or $0.25 per diluted share compared to a net loss of $2.5 million or $0.05 per diluted share in the same period last year. Net income in the first quarter of 2009 benefited from lower interest expense of $8 million, a gain on the repurchase of 9.5% senior notes of $7 million, and lower income tax expense of $7.8 million partially offset by higher foreign currency losses of $6.7 million and higher pension expense of $3.9 million. First quarter 2008 net loss included a gain of $6 million related to the sale of a non-core trademark.

Interest expense for the first quarter was $24.1 million an improvement of $8 million compared to $32.1 million in the year ago quarter. This improvement was due to both lower average borrowing rates and lower average debt levels.

Operating cash flow in the first quarter of 2009 was $17.3 million compared to $10.7 million in the year ago period, resulting in an improvement of $6.6 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 $17.5 million in the first quarter of 2009 compared to free cash flow of $14.6 million in the first quarter of last year, an improvement of $2.9 million year-over-year. First quarter of 2008 free cash flow included the gain of $6 million raised from the sale of a non-core trademark.

In terms of our borrowing capacity, our unutilized borrowing capacity in cash as of March 31, 2009 was $147.5 million comprising $120.5 million available under our revolving multi-currency facility and $27 million of cash and cash equivalents. In the first quarter of 2009 we reduced our total debt by $38.3 million. Regarding our senior secured term loan, during the first quarter of 2009 we repaid $18.7 million of our senior secured term loan. After this repayment there remained outstanding at the end of the first quarter of 2009 approximately $815 million principal amount under the term loan which matures in January, 2012.

Regarding our 9.5% senior notes, during the first quarter we repurchased $23.9 million in aggregate principal amount of our 9.5% senior notes. As a result of these repurchases we wrote off the ratable portion of the unamortized debt discount of $300 thousand. After these repurchases there remained outstanding $366.1 million aggregate principal amount under these notes which mature in April, 2011. Finally, we had outstanding borrowings under our revolving credit facility of $4 million at the end of the quarter.

Moving on to mass retail share, according to AC Nielsen the U.S. mass retail color cosmetics category declined and dollar volume grew 3.2% in the first quarter 2009 compared to the same period last year. In the first quarter 2009 Revlon color cosmetics achieved a 13.2% dollar share, an increase of 0.7 of a point and grew dollar volume by 9.3% compared to the year ago period.

In the face segments Revlon color cosmetics grew 16.4%. Our strength in the face segment was driven by Revlon Age Defying Spa and Revlon Age Defying Concealer, both of which were launched for the first half 2009 and Revlon ColorStay Mineral Foundation which was introduced in 2008 as well as core ColorStay Foundation. Revlon color cosmetics holds the number one position in the lip segment with a 22.2% dollar share. We grew 8.9% in the lip segment in the first quarter of 2009 compared to the year ago quarter. This growth was driven by Revlon Crème Gloss and Revlon Matte Lipstick, both first half 2009 launches, as well as Revlon ColorStay Mineral Lip Glaze introduced in 2008 and Super Lustrous Lipcolor.

In the nail segments Revlon color cosmetics nail franchise grew by 33.8%. In the eye segment Revlon color cosmetics grew 3.8% for the first quarter of 2009. The primary drivers for us in the eye segment were Revlon ColorStay Pencil and Liquid Eyeliners and brand products, and Revlon Matte Luxurious Color Kohl Eyeliner which were offset by declines in mascara.

Moving on to Almay, in the first quarter of 2009 Almay had a 5.7% dollar share while dollar volume was down 4% compared to the year ago periods. This performance was driven by declines in face and lip, partially offset by growth in the eye segments. Almay continues to be the number one makeup remover brand.

In the first quarter of 2009 much of Almay’s advertising and promotional support focused on the introduction of the first half 2009 new Almay Pure Blends collection. This is a multi-segment offering including products for the face, eye and lip that is still early in its launch cycle. In the first quarter of 2008 Almay’s advertising and promotional support focused on Almay’s Smart Shade, a highly successful and established collection of products in the face segment.

Almay’s positive performance in the eye segment was driven by the Almay Intense eye color collection and the Almay Bright Eyes collection which were launched in the first half of 2008 and second half of 2008 respectively. Almay dollar volume in the lip segment declined largely due to continued declines in Almay Hydracolor Lipstick as we have mentioned in previous quarters.

Moving on to women’s haircolor, in the first quarter of 2009 dollar volume in the women’s haircolor category declined by 2.3% while Revlon ColorSilk Haircolor grew by 1% compared to the same period in 2008. More units of Revlon ColorSilk Haircolor continued to be purchased in the market than any other brand.

Moving on to antiperspirants and deodorants, dollar volume in the antiperspirants deodorants category declined by 0.1% in the first quarter of 2009. Mitchum continues to maintain an approximate 5% dollar share in line with its quarterly performance since the fourth quarter of 2006. Mitchum also continues to hold the number one position in gels.

And finally the beauty tools category dollar volume declined 1.8% in the first quarter of 2009 while the Revlon beauty tools grew by 0.5% compared to the same period last year. Revlon holds the number one position in the beauty tools category with a 21.2% dollar share. Revlon Pedi-Experts launched in the first half of 2009 is ranked number one in the AC Nielsen top 60 new beauty tools by retail dollar sales through March, 2009.

So moving now onto the balance of 2009 I would like to take a few minutes to update you on certain specific factors that are likely to impact the balance of our 2009 financial performance namely pension, foreign exchange, and certain other items that may impact cash flow. Firstly relating to pension and post retirement expenses and cash contributions, as mentioned during our last call the declines in the financial market in the U.S. and around the world in 2008 resulted in a decline in the value of our pension plan assets. We expect that pension and post retirement expenses will be approximately $30 to $35 million in 2009 compared to $7.4 million in 2008. Consequently we expect our P&L expense related to pensions to be $23 to $28 million higher in 2009 compared to 2008. Additionally we expect that cash contributions to the pension and post retirement plans will be approximately $25 to $30 million compared to $12.8 million in 2008. Consequently we expect pension cash contributions to be $12 to $17 million higher in 2009 than in 2008.

Secondly relating to currency, as you know early in the fourth quarter of 2008 the U.S. dollar strengthened significantly relative to other major currencies. As a result, our reported first quarter 2009 net sales were negatively impacted by $20.3 million which roughly 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 driven by unfavorable foreign currency translation. Foreign exchange rates have not changed significantly from the levels in the fourth quarter of 2008 and thus there may be an impact on net sales comparability for the second and third quarters of 2009.

As a consequence, there may also be an impact from foreign currency translation on the comparability of reported operating income in 2009 compared to 2008, broadly in line with our operating income 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. 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 our international business and therefore unfavorably impacts gross margins to the extent that we are not immediately able to pass those increased costs on to the consumer. However, with our inventory turning around three to four times a year, there is a time lag until that transaction impact flows through our P&L.

As I’ve indicated on previous calls, while we are not providing specific guidance for adjusted EBITDA for 2009 we have provided information to assist you in understanding the factors that will impact our expected full year 2009 cash flow. I would like now to update you on the information we provided during our February call. Capital expenditures are expected to be approximately $15 million, permanent display expenditures are expected to be approximately $40 million. With respect to interest as I indicated interest paid in 2008 was $123 million. At the end of the first quarter 2009 our total debt was $1.29 billion which was $38.3 million lower than at the end of 2008.

Approximately 60% of our total debt is at fixed interest rates while approximately 40% is at floating interest rates. We are benefiting and expect to continue to benefit from the current low interest rate environment on our floating rate debt. In addition, we also expect to benefit from the expiration of our higher interest rate $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 the impact of higher pension expense and contributions as mentioned are anticipated to result in cash usage of approximately $15 million.

And so with that I’d now like to turn it over to Abbe to talk about our second half 2009 new products.

Abbe Goldstein

Thank you, David and Alan. As part of our strategy in continuing to build our strong brands, we believe launching high quality consumer preferred new products is a key driver of profitable brand growth. Following a strong and successful lineup introduced for 2008 and in the first half of 2009, today we announced the launch of our new lineup for the second half of 2009. The lineup features first-to-market breakthrough technology product introductions of Revlon and Almay color cosmetics together with new shades that continue Revlon’s track record of setting and influencing trends.

Second half 2009 Revlon color cosmetics introductions are as follows. First, Revlon ColorStay Ultimate Liquid Lipstick is a breakthrough product that is the first and only one step lipstick color that has it all. Exclusive ColorStay long-wear technology combined with an exclusive ultra conditioning complex to provide comfortable, food-proof wear for up to 12 hours in one simple step. The advertising campaign features Jennifer Connelly.

Second, Revlon DoubleTwist Mascara is a first-to-mass revolutionary 2-in-1 brush that has traditional bristles to thicken lashes and innovative combs to define, providing massive volume and remarkable definition with a rich color impact. The advertising campaign features Jessica Alba.

Third, Revlon ColorStay Mineral Mousse Makeup and ColorStay Mineral Finishing Powder are extensions to the Revlon ColorStay Mineral franchise which was introduced in 2008. ColorStay Mineral Mousse Makeup is a first-to-market formula with ColorStay technology that offers the benefit of mineral makeup in long-wearing mousse form with a luxurious matte finish. Mineral Finishing Powder features coordinated three shade marbleized pigments swirled together to provide a soft, all over lift of color that diffuses flaws and minimizes shine. The advertising campaign features Halle Berry.

Fourth, Pure Confections is a collection of 14 new and on-trend shades featuring a palette of candy-inspired colors that will be introduced into core Revlon lip, eye and nail products.

Fifth, Passion Fusion is a collection of 13 new and on-trend shades featuring a rich and realistic palette that will be introduced into core Revlon lip, eye and nail products.

Sixth, Revlon Fruitful Temptations Nail Enamel is a collection of eight exotic summer fruit shades, each of which has a matching fruit scent when the enamel is dry.

And last, Revlon Makeup Remover Towelettes are oil-free, quilted and pre-moistened. The towelettes contain an antioxidant blend of pomegranate, rosemary and chamomile that leave the skin feeling clean and refreshed.

Second half 2009 Almay color cosmetics introductions are as follows. First, Almay Smart Shade Smart Balance Makeup is a breakthrough product that is an extension of the highly successful Almay Smart Shade franchise which was launched in 2007. Almay Smart Shade Balance Makeup uses Almay’s Smart Shade proprietary technology with shade sensing microbeads to adjust to skin tone, and uses new and breakthrough Smart Balance technology with skin balancing microspheres that work to keep oily areas shine-free and dry skin softly hydrated. The advertising campaign features Elaine Mellencamp and Marina Theiss.

Also for Almay is Almay Pure Blends Volumizing Mascara, which is an extension of the Almay Pure Blends natural collection of color cosmetics that was launched in the first half of 2009. Volumizing Mascara features a hypoallergenic formula and is made of 97.5% natural ingredients, housed in eco-friendly packaging. The advertising campaign features Leslie Bibb.

And finally, before we open for your questions, we’d like to inform you that the annual Revlon Run-Walk for Women will be held in New York City on May 2 and in Los Angeles on May 9. We are very proud of our longstanding and continued philanthropic support for women’s health initiatives and the fight against women’s cancers. If you’d like to donate to this cause or register, please go to the website at revlonrunwalk.com.

With that we’d like to open up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Reza Vahabzadeh - Barclays Capital.

Reza Vahabzadeh - Barclays Capital

The sales commentary, just trying to get a better understanding of that. You mentioned that the sales shipments in North America were affected by the timing of shipments of some shipments of first half as well as second half products, so I’m just trying to better understand that. Does this mean that some of the sales that you ordinarily would have shipped in the second quarter or maybe even third quarter were just shipped into first quarter?

Alan T. Ennis

Well, let me address that. So what I said was that in the first quarter our net sales did benefit from what we call pipeline shipments the first half and some second half 2009 new color cosmetics products. The way the cycle works is there are shipments which go into the retail channel, and there’s a lag between that obviously and consumption first points. Second point is the timing of those shipments can vary period to period and so there are occasions where at quarter end would reflect shipments related to what was sold into the channel, which will be consumed at a later point. So I would say that there are shipments in the first quarter of 2009 that could otherwise have shipped in the second quarter, but because of the timing of those shipments they occurred in March.

David L. Kennedy

So they were shipped after that, Reza. They were shipped according to the marketing plan, so we this year because of some strong new products that we’re launching, primarily for second half, we launched those products earlier or we wanted to and did in fact and have launched those products into the marketplace earlier than let’s say we did last year. And so we’ve got two very, very strong – we have a very strong pipeline over all new products but in particular we’ve got some extraordinary products such as the ColorStay Liquid Lipstick product which is a breakthrough product. So we launched those earlier into the market in accordance with our market plan.

Reza Vahabzadeh - Barclays Capital

But do you think that the earlier shipment, was that just a coincidence? Or does that mean that retailer reception to it is also maybe better than you expected?

David L. Kennedy

Well certainly in order to be able to launch these products earlier let’s say into the marketplace we would have had to have retailer enthusiasm about them.

Reza Vahabzadeh - Barclays Capital

And then on the international front obviously FX is a significant impact but the organic sales were down just modestly. Is that a dynamic that may persist into the second quarter with FX trends you know about the same, maybe a little bit more difficult comparisons but organic sales kind of in the neighborhood of flattish?

David L. Kennedy

Well, we wouldn’t call that or forecast our sales in the second quarter. You already know that. We would say –

Reza Vahabzadeh - Barclays Capital

You wouldn’t?

David L. Kennedy

No, I’m not. I say I’m not forecasting that but you know obviously the currency trends continue today so if they did continue obviously they’re going to have an adverse impact to the extent that we can’t offset them in other ways. And secondly, you’ll note that we did have good organic results in the Asia-Pacific area and that’s continuing the trend that we’ve had for some time. We also had very good Revlon cosmetic sales really around the world. So we had some softness in Europe and Latin America primarily in our beauty care products.

Reza Vahabzadeh - Barclays Capital

And then turning to margins, it seems like you have some manufacturing savings, some sales mix momentum that is offsetting the higher A&P spending and the pension expense. I mean give or take, is that a dynamic that you think is going to be sustaining to the second or third quarter directionally?

Alan T. Ennis

Well again that’s something that we’re going to call out at this point. But you’re correct in your assessment that for the first quarter we did see and were able to offset the negative impact of currency and pension with efficiencies.

Reza Vahabzadeh - Barclays Capital

Let me ask you the question in a different way. Do you think that the manufacturing savings that you were able to generate in the first quarter is likely to persist at the same rate in the second quarter?

David L. Kennedy

Well, I’ll give you the same answer. We’re not going to talk about what we would expect past the first quarter.

Reza Vahabzadeh - Barclays Capital

And then lastly so interest expense for the year, I don’t know if you went over that Alan, but is it going to likely be what, in the $95 to $100 million range?

Alan T. Ennis

We didn’t give a specific number, Reza. We called out some factors that you could use to approximate what you would expect yourself. We called out that we’ve got about $1.3 billion in debt at the end of the first quarter, 60% of our debt is at fixed rates and about 40% is at floating rates. And so we have benefited from both the lower interest rate environment on our floating debt and we have benefited from lower overall debt levels. As you know we reduced our debt by approximately $110 million during 2008 and by another almost $40 million during the first quarter. So I think you’ve got all the components you need to be able to calculate this.

Reza Vahabzadeh - Barclays Capital

And then lastly, you talked about cash contribution for pension expense of $25 to $30 million and then when you were going through your cash flow guidance I thought you said working capital including pension expense will be a use of just $15 million?

Alan T. Ennis

That’s correct.

Reza Vahabzadeh - Barclays Capital

So obviously that means that working capital itself, before pension expense, would likely be a source.

Alan T. Ennis

Well bear in mind that the calculation of working capital as it relates to pension will include the movement in the pension liability, so you’ve got a pension expense component that goes through your balance sheet in the form of –

Reza Vahabzadeh - Barclays Capital

Right.

Alan T. Ennis

[Inaudible] the offset by the cash contributions. So the combination of that change plus working capital changes we’re saying would result in the use of $15 million.

Operator

Your next question comes from Todd Harkrider - Goldman Sachs.

Todd Harkrider - Goldman Sachs

Regarding the new product pipeline, you know it seems like you’ve picked up the level and innovation over the past couple of years a lot. How much flexibility and capacity do you have to keep adding more complex SKUs to your manufacturing lines?

David L. Kennedy

Well if I understand your question I would answer it this way that, you know, it’s really not a question of number of SKUs or flexibility. I mean we look at our offering at a point in time strategically we are planning out three years in terms of our portfolio strategy, and we’re taking advantage of the opportunities we see from trends and in the marketplace and our end objective is to have from that offering with all of our brands profitable sales growth. And that’s the broad sense. So it’s not a question of capacity, it’s a question of opportunity, how rapidly we want to take advantage of that opportunity and what the impact of those opportunities that we see are in our offering as a whole.

So I would also say I mean this organization’s capacity to innovate and produce new products is extremely sound.

Todd Harkrider - Goldman Sachs

I assume you’re getting credit for all the hard work with the new products, but can you talk about if you’re seeing any resistance as you move prices up? You know, it appears there’s a lot of white space between you guys and prestige products but wanted to see if you could give any color on how aggressive and how willing retailers and customers are and to moving into that white space. Thanks.

David L. Kennedy

Well let me be clear, we stay focused on our core customer in the mass retail channels, and in terms of pricing overall in the category in the U.S. I’m speaking about now, overall in the category pricing on average has gone up somewhat, but it’s primarily because of the introduction of new products. There’s been no overall price increase or across the board increase.

Todd Harkrider - Goldman Sachs

But you’re on the higher end there and I know that the Altas of the world and the CVS’s and Beauty 360’s are going to combine mass and prestige under one roof. I didn’t know if you think there’s any opportunity to even further the price increases at a little bit quicker rate as that happens.

David L. Kennedy

Well we’ll certainly have to evaluate that as we see how that particular situation works out, but if you want to take a comparable of what may be and underline may, because we don’t know exactly what’s going to take place with the customer that you’ve called out or precisely what’s going to happen there, but if you take what is potentially a comparable situation with the Shoppers Drug in Canada, prestige brands live side by side with our brand and with the other mass brands. And it’s been a very healthy mix. So we look forward to those kinds of opportunities. We’re not a bit concerned about being right alongside however that is merchandised or presented in the store with prestige brands.

Alan T. Ennis

Yes, I would add to that. I would say Todd that we’re actually well positioned given our price point within the mass channel which is at the higher end of color cosmetics that we’re well positioned to participate at that level.

David L. Kennedy

And I would also say that the quality of our products in all respects and the quality and innovation on all of our products are extremely sound and we can compete with anybody.

Operator

Your next question comes from Karru Martinson - Deutsche Bank.

Karru Martinson - Deutsche Bank

With the strong pipeline that you guys have, you know, some shipped here in the first quarter are we seeing kind of a pull forward from the second half of the year into the 2Q as well or are we going to be more on a normalized sell in rate going forward?

David L. Kennedy

I would say that there’s a little pull forward there but we’ve also got strong second half launches, even though we’re putting some of those in the marketplace a little earlier. But at the same time I would say overall it’s reasonably normal.

Alan T. Ennis

Obviously we’ll have first half 2010 products that we will start to ship later on in the year.

Karru Martinson - Deutsche Bank

How are you guys feeling about the inventory levels at retail with the sell in?

David L. Kennedy

Well we’re very comfortable with the inventory levels. We work closely with the retailers. We have done for years and will continue to. Consumption is still strong in the marketplace in the U.S. and so we believe from our standpoint there’s no issue with inventory in the channel.

Karru Martinson - Deutsche Bank

It’s probably a bit early but just in terms of your Latin American sales, are you seeing an impact from the swine flu?

David L. Kennedy

Well it is too early to tell. What we do know at this point is we’re continuing to ship to our retail partners on schedule in Mexico. What we don’t know is what impact if any there would be on consumption. However, our Mexico business as you may know is not a significant part of our overall business globally.

Karru Martinson - Deutsche Bank

And then in terms of the debt repayment, a robust pay down here in the first quarter, what’s your view for the year and going forward on the uses of cash?

David L. Kennedy

Well I’m not going to call out what we would expect to do with cash flow going forward. I would comment and agree with you that debt pay down was a positive step and builds upon the steps we took in 2008 to reduce debt. Obviously our focus in our strategy is to continue to improve our capital structure, and that would be the focus that we would look to going forward.

Operator

Your next question comes from [Unidentified Analyst] - J.P. Morgan.

Unidentified Analyst - J.P. Morgan

You mentioned earlier that you pulled back some pull forward some of your product launches. Just a little more on that, could you give us a percent in what was from first half and what was from the second half?

David L. Kennedy

We wouldn’t want to quote you a percent. We’re just saying that because of the timing of our marketing plan and the launch of those products, some positive impact on sales. But we can’t give you a percent.

Unidentified Analyst – J.P. Morgan

And how much sales were driven by the new product launches this year versus last year?

Alan T. Ennis

That’s not something we talk about publicly.

Unidentified Analyst – J.P. Morgan

Can you put – what just on the Mexico, just follow up on the Mexico question, how much of your sales were to Mexico?

David L. Kennedy

We don’t call out sales by country, but our sales in all of Latin America in the first quarter were about $20 million.

Operator

Your next question comes from [George Calhoob] – BTIG.

George Calhoob – BTIG

Regarding the second half, the pipeline of launches that you’re talking about, is there a way you can tell us if it’s going to be more heavily weighted towards Q3 versus Q4? Especially that it seems to have in some of the Q4 late months you’re probably going to have some of the 2010 launches put in there as well.

David L. Kennedy

The way the cycle works, George, is that second half 2009 shipments usually take place during the second quarter. What we called out today was those second half 2009 shipments started at the end of the first quarter. They will continue through the second quarter and in fact trickle into the beginning of the third quarter. We will then have in normal course as we always do our first half 2010 new product launches that will start late in the third quarter and continue through the fourth quarter. And again that shipment schedule is primarily focused on what happens in the U.S. and it’s driven primarily by retailer reset schedule. And it’s been that way for the last several years. Outside the U.S. it tends to be less seasonal.

George Calhoob – BTIG

But when you add it all up, is it going to be almost for this year at least more weighted towards Q4 then Q3 or do you think they’re going to be almost split equally when it comes to the second half?

David L. Kennedy

We’re not going to call out an answer to that right now.

George Calhoob – BTIG

On the manufacturing costs given that you’re shipping into the international business out of the U.S. based production in North Carolina, and you mentioned that your inventory turns three to four times a year and obviously some of that is going to probably reflect itself a little bit more in the balance of 2009, is that in any way going to effect how your gross margin performance is going to be in the second half? Or do you think you’re going to be able to still offset the impact of the currency on the gross margin with some of the pricings that you may be inputting in the new product launches?

David L. Kennedy

Your analysis is correct in that as we export U.S. manufactured products to our international businesses, the stronger U.S. dollar will result in higher input costs of those businesses. So that would unfavorably impact gross margins to the extent that we could not immediately pass it on to the consumers. Passing price on to consumers is a function of the marketplace as opposed to a function of our margins. And so the ability to do that will be driven by our position in the markets on a country by country basis. So there are certain markets where we can do that relatively easily, there are other markets where we don’t have the leverage to do that. So there will be certainly if rates stay where they are today, there will certainly be an impact on gross margins for the balance of this year.

George Calhoob – BTIG

And my last question is in terms of it seems to me that given the cash uses that you outlined in your prepared remarks you’re still going to be meaningfully cash flow positive. I know you didn’t give any of that guidance but I have mine. In terms of the use of cash, you mentioned you want to strengthen the balance sheet. Now specifically do you have any limitations on buying back the senior notes versus having to pay down bank debt? Or can you do both as you elected in Q1?

Alan T. Ennis

Well as I mentioned during the prepared remarks, we did reduce debt by almost $40 million in the first quarter. We have limited ability to repurchase additional 9.5 senior notes. We could always prepay term loan at any time, but we’d have to buy that back at par and I believe plus a one point [call] premium.

George Calhoob – BTIG

When you say limited I mean is this – can you give us the number? Is it meaningful? Or do you think it’s small at this stage given the limitation?

Alan T. Ennis

It’s a limited availability.

Operator

Your next question comes from Lance Vitanza – Knighthead Capital Management.

Lance Vitanza – Knighthead Capital Management

Could you be a little bit more specific in terms of what exactly your capacity is for incremental repurchases of the bonds?

David L. Kennedy

You know, Lance, we’re not going to get any more specific on this call. All of the information that’s needed to work that out is in the public domain and the various agreements and indentures.

Lance Vitanza – Knighthead Capital Management

A question about the trademark sale from last year. Is that basically the $6.2 million that you have there in the restructuring costs in other line of your P&L?

Alan T. Ennis

Yes that’s correct.

Lance Vitanza – Knighthead Capital Management

And then on the impact of currency on gross margin, we’ve spent a fair amount of time talking about this on prior calls and so forth and if I remember correctly in Q4 because of the lag in terms of the working capital, you really couldn’t see that impact but am I correct in presuming that for the Q1 quarter we really did get a full quarter’s worth of that impact in there?

Alan T. Ennis

That’s correct.

Lance Vitanza – Knighthead Capital Management

So then as we think about Q2 [a la] sequel we should expect a similar impact on your gross margin?

Alan T. Ennis

Yes, assuming rates stay where they are you should expect that. Yes.

Operator

Your next question comes from [Pat Turkey] - BMO Capital Markets.

Pat Turkey - BMO Capital Markets

I guess I just want to follow up on the FX. I just want to make sure that in the first quarter was the – so the FX pressure in the first quarter was it about where you expected or is it going to – I guess yes, that’s it. Was it about where you had expected it to be?

Alan T. Ennis

Well rates as I mentioned rates against the U.S. dollar kind of moved to where they are today right at the beginning of the fourth quarter. And they’ve roughly stayed there. I mean certain rates have bounced around a little bit but they’ve roughly been in line with where they were fairly early on in the fourth quarter. So from that standpoint, yes.

Pat Turkey – BMO Capital Markets

And then second question, how much I guess could you quantify in percentage terms the sales in the U.S. that benefited from the pipeline sale?

David L. Kennedy

That’s not a number we’re going to call out publicly.

Operator

Your next question comes from [Ken Dan] – Jefferies and Company.

Ken Dan – Jefferies and Company

I was just wondering if you could tell us what the increase in advertising spending was in the quarter? And with the launch of new products do you plan to increase it further in the next few quarters versus the prior year?

David L. Kennedy

Well there were some increases we called out in the release. We won’t give you the dimensions of that. And we’re not going to forecast what our advertising expense is going to be going forward. I’ll just say generally as we’ve said in the past that we support our new products based on what we think is competitive and given the nature of those products, what type of products there are and so forth, and what the expected performance is out of those products. But beyond that, you know, we’re not going to call it out.

Ken Dan – Jefferies and Company

Can you say whether you think you’ll –

David L. Kennedy

You look back over the past two years you’ll see some indication of how we have spent our advertising and our strategy continues to be the same. We continue to have maybe slightly greater number and I’d say strength in new products, so you can put all that together and get some indication of what our spend is going to be.

Operator

Your next question comes from Kevin Zeits - Pali Capital.

Kevin Zeits - Pali Capital

I was wondering – I was just kind of looking through my notes, but did the CapEx and display number come down from prior forecasts?

Alan T. Ennis

Yes it did. CapEx came down from I believe $20 million to $15, and permanent display expenditures came down from approximately $50 to approximately $40.

Kevin Zeits - Pali Capital

So could you talk about what’s driving that? Are you seeing better rates on your purchases or is there something related to the product lineup?

Alan T. Ennis

Well it’s not related to the product lineups specifically. We are seeing some improvement in our ability to purchase our displays in our CapEx at slightly better rates. It’s also a function of us looking at our spending and making sure that we’re making only prudent investments at this time.

Kevin Zeits - Pali Capital

Is that your decision or is that somewhat the retailers’ decision on the display side specifically?

Alan T. Ennis

Well, the display spending as you’re alluding to is a function primarily of a couple of factors. One of which is new product launches. The other which is store openings, etc. So the new product launches would be a key driver but the decision in terms of spending is ours.

David L. Kennedy

We’re actually getting more efficient in our operation and as Alan indicated we’re also seeing some better costs. There’s some improved costs there as well. On CapEx our capital spending is a matter of just adapting and changing our plans, making better decisions we believe based on the returns that we’ll get from that capital.

Kevin Zeits - Pali Capital

On the international prices, or on the international business did you specifically take pricing to hold margins where they are? Or did you experience a mixed shift that helped tilt the margin rates to stay so strong?

Alan T. Ennis

It’s actually a combination of both of those things. In certain countries around the world where we have the ability to pass on price to the consumer, we have done that. In certain countries where there is inflation or higher levels of inflation, where it’s normal to increase prices we have done that. And we’ve also benefited somewhat from a shift in mix towards color cosmetics away from beauty care.

Kevin Zeits - Pali Capital

Is it the strategy to basically sort of test newer products in the U.S. first and then bring them into international markets? I know it’s probably a mixed boat, but is that generally the strategy ?

David L. Kennedy

No, that’s never been the strategy.

Kevin Zeits - Pali Capital

Then the international Revlon success is attributable to specific launches that are designed for those markets?

David L. Kennedy

No. What we do and what the strategy is, it’s well laid out in everything we’ve written and printed, is that all of our brands, all of our key brands are run for the most part on a global basis. We leverage off the brand strategies, the brand plans, the advertising and so forth in every market around the world to the extent that we possibly can. We only adapt in certain countries where consumer taste or preference causes us to do that.

Alan T. Ennis

Kevin, in many of the key countries around the world we actually launch our new products simultaneous with the launch timing in the U.S.

Kevin Zeits - Pali Capital

I wanted to ask if you think there are any sort of strategic changes that come about by the change in responsibilities or is the company more focused on acquisitions than maybe you have been in the past or divestitures for that matter?

David L. Kennedy

Our strategy as it’s been established and communicated will continue. And I would just keep in mind that these changes in management have been planned and thought through and they’re all part of a succession plan.

Operator

Your next question comes from Mary Gilbert - Imperial Capital.

Mary Gilbert - Imperial Capital

I wanted to find out with Almay, you do have a new lineup with the Smart Shade Balance Makeup. Could you also talk about any other new introductions because it seemed like a lot of it was focused on Revlon, and what your strategy is with Almay overall?

David L. Kennedy

Sure. I mean we outlined the new product introductions in our release. I think we’ve got a very good and strong lineup.

Alan T. Ennis

The Pure Blends collection that we launched, it’s still early in its launch cycle so we’re watching that. The Smart Shade Smart Balance that you mentioned is building upon the successful Smart Shade franchise that was launched in 2007. We also have as Abbe mentioned within the Pure Blends franchise, the Volumizing Mascara which we’re launching for the first half of 2009. So we feel good about the Almay new product launches.

David L. Kennedy

And just remember with the Almay brand we’re primarily focused on the face and the eye segment.

Mary Gilbert - Imperial Capital

So we should see – I was just kind of looking at the market share data there, and so I was just wondering if maybe we could see some positive trends there as we move forward like we did with Revlon in the quarter.

David L. Kennedy

It’s certainly our intention to have that happen.

Mary Gilbert - Imperial Capital

Well actually just getting back to permanent display cost, is $40 million sort of the new level that we should look at as being kind of the recurring level? Like the amount that you’ll always need to spend? Previously it was sort of $50, now it’s $40 and then of course that number will adjust depending on what you have going on with new product launches and that sort of thing. But is it kind of like the maintenance level of permanent display costs? Is that the new?

Alan T. Ennis

To your point, in the last few years to 2007 and 2008 we have spent as you pointed out approximately $50 million. We now expect that to be approximately $40 million which is an improvement obviously and it’s a combination of as David mentioned us getting more efficient in our spending. It’s a combination of us getting better prices on our inputs. And just doing the whole process better.

Mary Gilbert - Imperial Capital

You’ve effectively reduced that sort of maintenance expenditure requirement significantly.

Alan T. Ennis

Right, and there’s factors that could impact that as I mentioned going forward. So new product launches would impact the level of spending. Retailer in store changes in design or layout could impact that spending going forward. So we’ve got to focus on what we believe to be our spending level for 2009 right now.

Mary Gilbert - Imperial Capital

So we could see a change in 2010?

Alan T. Ennis

We could.

Mary Gilbert - Imperial Capital

And then also can you talk about the status of the I’m calling it the go private transaction?

David L. Kennedy

No, as we indicated at the beginning of the call we won’t have any comments on that.

Operator

Your next question comes from Walter Branson - Regiment Capital.

Walter Branson - Regiment Capital

I apologize if this one was already answered already, but regarding the foreign exchange impact of manufacturing in North Carolina and shipping to international markets, given the slow turn in inventory did you see a full impact of that in the first quarter or is the full impact still to come?

Alan T. Ennis

By and large we saw full impact of that in the first quarter. Our inventory turns ran three to four times a year. The rates essentially dropped to their current levels at the beginning of the fourth quarter last year, so at the end of 2008 we had essentially all of that negative impact on the balance sheet with the inventory and that started to bleed through P&L at the beginning of the first quarter.

Walter Branson - Regiment Capital

And in terms of the ability to price more aggressively or at higher prices to offset that in international markets, it may not be one answer but do your key competitors in the international markets have the same issue? Or do they typically manufacture in those markets rather than shipping to the U.S.?

David L. Kennedy

I’m not sure what their manufacturing footprint is, so I couldn’t readily address that for you.

Operator

Your next question comes from Dax Vlassis - Gates Capital Management.

Dax Vlassis - Gates Capital Management

My first question is do you consider Almay and Mitchum core brands?

David L. Kennedy

Yes.

Dax Vlassis - Gates Capital Management

And what is the strategy for those two brands? I mean it seems like more of the new products have been towards Revlon and I don’t know what the status of Mitchum is or the size of that brand.

David L. Kennedy

Well Almay has a full range of new products in the segments that we focus on for that brand and continues to be a very strong brand in the U.S. and in the countries that it’s in around the world. The Mitchum brand is also a strong brand in its category. It’s the leader in gels. We continue to advertise the brand and we’re upgrading the packaging as well. So you’ll see that in stores. So it’s a very good and profitable brand for us and it is a core brand.

Dax Vlassis - Gates Capital Management

On a similar subject, is there anything that you would consider non-core similar to the – I don’t know how you pronounce it, the Bozzano brand or?

David L. Kennedy

Bozzano brand. Well the Bozzano brand was in fact a core brand at the time, a very healthy brand, strong brand in Brazil. We took advantage of an opportunity to realize the value of that brand. So it was a core brand. It was a very healthy brand. We had invested in the brand, we had grown the brand and we happened to have an opportunity come our way and we were able like I said to realize the value of the brand.

Operator

This ends our Q&A question-and-answer session of today’s call. I now turn the call back over to Mr. Kennedy for closing remarks.

David L. Kennedy

Thank you very much everyone for participating in today’s call and for your continued interest in Revlon.

Operator

This concludes our conference call for today. You may now disconnect your lines.

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Source: Revlon, Inc. Q1 2009 Earnings Call Transcript
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