Revlon, Inc.Q2 2009 Earnings Call Transcript

Jul.30.09 | About: Revlon, Inc. (REV)

Revlon, Inc. (NYSE:REV)

Q2 2009 Earnings Call

July 30, 2009 9:30 am ET

Executives

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

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

Chris Elshaw - Executive Vice President and Chief Operating Officer

Steven Berns - Executive Vice President, Chief Financial Officer, and Treasurer

Analysts

Todd Harkrider - Goldman Sachs

Reza Vahabzadeh - Barclays Capital

Walter Branson - Regiment Capital

Carla Casella - J.P. Morgan Securities

Karru Martinson - Deutsche Bank

Mary Gilbert - Imperial Capital

Patrick [Trickeo] - BMO Capital Markets

Operator

Good morning ladies and gentlemen. At this time I would like to welcome everyone to Revlon’s Second Quarter 2009 Earnings Conference Call. At the request of Revlon today’s conference call is being recorded. (Operator Instructions)

I would now like to turn the call over to Ms. Abbe Goldstein, Revlon’s Senior Vice President, Investor Relations and Corporate Communications. You may begin Ms. Goldstein.

Abbe Goldstein

Thank you very much. Good morning everyone and thanks for joining our call. Earlier this morning we released our results for the second quarter ended June 30, 2009. If you have not already received a copy of the earnings release you can obtain one from our website at www.revloninc.com.

Here with me today are Alan Ennis, President and Chief Executive Officer; Chris Elshaw, Executive Vice President and Chief Operating Officer; and Steven Berns, Executive Vice President, Chief Financial Officer.

On today’s call Alan will provide a strategic update on the business, Chris will review our marketplace performance and Steven will review our financial results.

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 second quarter 2009 10-Q which we plan to 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 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 20 announcing that the independent members of our board of directors received a proposal from MacAndrews & Forbes pursuant to which Revlon will 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 that 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, dollar volume data and product ranking, is based on U.S. mass retail dollar volume according to ACNielsen 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 ACNielsen data is an aggregate of the drug channel Target, K-Mart, and food and combo stores and represents approximately 2/3 of the company’s U.S. mass retail dollar volume.

Finally, as a reminder, our discussion this morning should not be copied or recorded.

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

Alan Ennis

Thank you Abbe and good morning everyone. As we have discussed with you in the past our business strategy, which we formulated in late 2006, focuses firstly on building and leveraging our strong brands; secondly on improving the execution of our strategies and plans and providing for continued improvements in our organizational capability through enabling and developing our employees; third continuing to strengthen our international business; fourth improving our operating profit margins and cash flow; and fifth improving our capital structure.

The successful execution of this strategy has led to significantly improved profitability, reduced debt, stabilized market share around the world and in 2008, as you know, the generation of net income and positive free cash flow.

Revlon has incredible talent and capabilities, broad geographic reach, strong global brands, and a heritage that recognizes the importance of philanthropy. We continue to take actions to enable Revlon to become a stronger, more financially sound organization, and continue to have measured success around the world while staying true to our vision of providing glamour, excitement, and innovation to consumers through high quality products at affordable prices.

We are of course keenly aware of the current challenging economic environment. We are managing our resources carefully while maintaining a balanced perspective on the long-term growth of our brands. We are continuing to focus on successfully executing our established business strategy while we monitor economic and competitive conditions and adjust our plans as appropriate to deliver the best possible results.

Let me now take a few minutes to discuss the progress we have made in the second quarter of this year in furtherance of our established business strategy.

In relation to building and leveraging our strong brands we continue to develop and improve our three-year brand portfolio strategy for all of our brands and to focus on the drivers of profitable brand growth, namely innovative, high quality, consumer preferred brand offering; effective consumer brand communication; appropriate levels of advertising and promotion and superb execution with our retail partners.

To that end, in the first half of 2009 we introduced an appropriately supported, comprehensive line-up of key innovative new products and are pleased with our marketplace performance. A few such products are Revlon ColorStay Ultimate liquid lipstick, Revlon DoubleTwist mascara, and Almay Smart Shade Smart Balance, all of which are doing well albeit early in their launch cycles.

On May 1, 2009 we announced that Jessica Biel joined our star-studded line up of accomplished, modern, and glamorous group of grand ambassadors for our Revlon brands. Jessica joins academy award winning actresses Halle Berry and Jennifer Connelly, actresses Jessica Alba and Bo Garrett and super model and entrepreneur Al McPherson.

Also, we are very proud of our company’s long-standing and continued philanthropic efforts. In continuation of that heritage we again sponsored the annual EIF Revlon Run-Walk for Women in New York City and Los Angeles in May of this year. Each year these events raise more than $10 million in support of women’s health initiatives and the fight against cancer.

Moving on with our strategy, in terms of improving our operating profit margins and cash flow on May 28, 2009 we announced an organization restructuring to reflect the more efficient workflows and processes that we have implemented over the past two years. That organization restructuring, which has now been fully implemented, is reducing our annualized costs by approximately $30 million of which $15 million will benefit the second half of this year. This action represented an important, necessary and logical next step forward for Revlon and is enabling us to become a stronger, more financially sound organization while continuing to vest in our people and our brands.

Additionally, we have an ongoing approach focused on taking advantage of all opportunities to reduce both our direct and indirect input costs. For example, during the second quarter of 2009 we delivered greater media presence, or gross rating points, by benefiting from lower negotiated advertising rates.

In terms of our capital structure, as Steven will cover with you in more detail later in this call, in the second quarter of 2009 we reduced total debt by approximately $9 million. So far in 2009 we have reduced debt by nearly $50 million and since the start of 2008 by almost $160 million. In addition to lower debt levels we have also benefited from lower interest rates on our floating rate debt. We believe that continued execution of our established business strategy will over time generate profitable, net sales growth and sustainable positive free cash flow.

With that let me hand it over to Chris who will take you through our marketplace performance in detail.

Chris Elshaw

Thank you Alan and good morning everyone. According to ACNielson, which as you know does not include Wal-Mart, our largest customer, while the mass color cosmetics category in the U.S. continued to grow in the second quarter of 2009 the rates of growth slowed sequentially to 1.1% compared to 3.3% in the first quarter of this year and 4.6% in the same period last year. In addition certain retailers reduced inventory levels versus a year ago period which had a significant impact on our net sales in the second quarter. We believe that rather than these retailer inventory reduction actions being a timing shift from quarter-to-quarter it is more likely to be a permanent reduction in retail inventory levels. There remains uncertainty about what further actions, if any, retailers may take going forward. We maintain strong working relationships with our retail partners and we continue to work closely with them.

Now moving on to our brand performance in the second quarter, Revlon color cosmetics dollar volume declined 2.6% in the second quarter of 2009 resulting in a share decline of 0.5% points. This follows a share gain in the first quarter and resulted in Revlon’s first half 2009 share increasing 0.1% points compared to the same period last year. Our period-to-period share reflects new product launch timing and promotional phasing, as well as the impact of market factors such as category performance and complexity of activity.

In the face segments Revlon dollar volume declined 9% versus a year ago period when we had the successful first half 2008 launches of Custom Creations foundation and ColorStay Mineral powder foundation: both of which were top ten ranked new products in the year ago products; however the decline was partially offset by the positive performance of Age Defying Spa foundation and Age Defying Spa Concealer, both of which are first half 2009 launches; as well as ColorStay Mineral Mousse makeup introduced for the second half of 2009. Revlon continues to hold the No. 1 position in the lip segments with a 22.3% dollar share.

We grew dollar volume 1.9% driven by the strong performance of ColorStay Ultimate liquid lipstick which, while still early in its launch cycle, has gained a 1.9% dollar share of the segment and is already in the top ten new products in the quarter.

The continued positive performance of Crème Gloss and Matte lipstick, both first half 2009 launches, also added to our positive lip segments results.

In the nail segments our core nail franchise grew by 28.9% driven by new shade introductions and effective brand advertising.

In the eye segment our dollar volume declined 2.8%, positive performance by DoubleTwist mascara, still early in its launch cycle, continued strength in ColorStay ancillary products, as well as Matte eyeliner was offset by declines in eye shadow and other mascara products.

Moving on to Almay, in the second quarter of 2009 Almay dollar volume decreased 6.5%. Declines from products launched in prior years and from discontinued lines were not fully offset by gains from new product introductions. We have seen positive performance by Smart Shade Smart Balance makeup, still early in its launch cycle, as well as Pure Blends.

The Bright Eyes Collection also continued to perform well in the eye segments and Almay maintains its leadership in the eye and makeup remover segments.

Moving to women’s hair color, in the second quarter of 2009 dollar volume in the women’s hair color category declined by 5.2% while Revlon ColorSilk hair color grew by 14.4%. As we have said before, more units of Revlon ColorSilk hair color continue to be purchased in the U.S. markets than any other brand.

Moving to antiperspirant/deodorants in the second quarter of 2009 dollar volume in the antiperspirant/deodorant category grew by 0.9% while Mitchum declined by 10.7%. Mitchum holds a leading position in gels, a subcategory that has been negatively impacted by the expansion of clinical type products. Mitchum is a key strategic brand for us. We intend to continue to focus and support the brand with appropriate levels of advertising and promotion, as well as new product introductions.

Finally beauty tools, in the second quarter of 2009 dollar volume in the beauty tools category declined 20.2% as the category cycled the launch of a non-traditional pedicure tool in 2008. Revlon beauty tools declined by 9.5% and gained 2.4 share points, taking dollar share to 20.2%. Revlon continues to hold the No. 1 position in the beauty tools category.

Our Pedi-EXPERT products launch from the first half of 2009 is ranked No.1 in the top 60 new beauty tools through June 2009.

I will now turn the call over to Steven.

Steven Berns

Thank you Chris and good morning everyone. Starting with our P&L for the second quarter of 2009 net sales in the second quarter were $321.8 million, a decrease of $44.7 million compared to the prior years $366.5 million. The primary drivers of the net sales decline were retailer inventory reduction actions and the unfavorable impact of foreign currency fluctuations. Excluding the impact of foreign currency of $60.7 million net sales decreased 7.6% in the quarter.

From a brand standpoint we have lower net sales of Revlon and Almay color cosmetics and Revlon beauty tools, partially offset by higher net sales of Revlon ColorSilk hair color. In the United States second quarter 2009 net sales were $186.2 million, a decrease of $30.2 million or 14% compared to $216.4 million in the same period last year. This decline was primarily driven by retailer inventory reduction actions which resulted in lower net sales of Revlon and Almay color cosmetics.

In our international operations net sales in the second quarter of 2009 were $135.6 million, a decrease of $14.5 million, or 9.7% compared to $150.1 million in the same period last year. The entire decline was due to unfavorable foreign currency fluctuations which negatively impacted net sales by $16.7 million in the quarter. Excluding the unfavorable foreign currency fluctuations net sales increased by 1.5% driven by higher net sales in the Latin America and Asia Pacific regions, partially offset by lower net sales in the Europe region.

The growth in net sales, excluding the FX impact, was primarily due to higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color partially offset by declines in Revlon beauty tools.

In our Asia Pacific region, which is comprised of the markets in the Asia Pacific region and Africa, net sales were down 5.9% to $62.7 million; however, excluding unfavorable foreign currency fluctuations net sales increased 3.3% over the year ago quarter. This growth was primarily due to higher shipments of Revlon color cosmetics in Australia and China partially offset by lower shipments of Revlon color cosmetics in Japan.

In our Europe region, which is comprised of Europe, Canada, and the Middle East, net sales were $45.7 million compared to $57.2 million in the year ago quarter. Excluding unfavorable foreign currency fluctuations net sales were down 4.9%. Lower shipments of Revlon color cosmetics in Italy and Canada were partially offset by higher shipments of Revlon skin care in certain distributor markets.

In our Latin American region, which is comprises of Mexico, Central America, and South America, net sales increased 3.4% to $27.2 million compared to $26.3 million in the year ago quarter; however, excluding unfavorable foreign currency fluctuations net sales were up 10.6%. This increase was primarily driven by higher net sales in Venezuela and Argentina and higher shipments of beauty care products in certain distributor markets partially offset by lower shipments of fragrances and beauty care products in Mexico.

Now moving down the rest of the P&L for Revlon Inc., during the second quarter of 2009 we maintained appropriate levels of advertising and promotional spending across our portfolio of brands compared to the same period a year ago. As a reminder, from a financial reporting perspective promotional allowances are recorded as a deduction to arrive at net sales, while advertising costs are recorded within SG&A on the P&L.

In the quarter our gross profit margin was 62.5% compared to 66% in the year ago quarter. In the second quarter of ’09 gross margin was impacted by increased inventory obsolescence charges, unfavorable foreign currency fluctuations, and unfavorable changes in sales mix, as well as higher pension expense within the cost of goods sold line.

SG&A expense of $156.3 million improved by $31.9 million from $188.2 million in the same quarter last year. This improvement was driven by the favorable impact from lower advertising expenses due in part to shifts in timing of certain advertising spending, as well as lower advertising rates. In addition, SG&A was favorably impacted by lower general and administrative expenses primarily due to lower compensation expenses, favorable foreign currency fluctuations and lower permanent display amortization expenses. These positive factors were partially offset by the higher pension expenses.

It is important to note that the lower advertising expenditures I just mentioned were achieved while increasing the efficiency of our advertising as measured in gross rating points, also known as GRPs.

Operating income in the second quarter of 2009 was $26.6 million including $18.3 million of restructuring charges related primarily to the May 28, 2009 restructuring compared to $59.2 million in the same period last year.

As Alan mentioned, annualized cost reductions from the May 2009 organizational restructuring are expected to be approximately $30 million of which approximately $15 million will benefit our second half 2009 results. Restructuring and related charges for the year are expected to be approximately $21 million comprised of $18.3 million of employee related costs, including severance and other termination benefits, which was recognized in the second quarter of 2009 and approximately $3 million related to the consolidation of our facilities in New Jersey which will be recognized in the second half of 2009.

Adjusted EBITDA in the second quarter of 2009 was $43 million including $18.3 million of restructuring charges compared to $81.3 million in the same period last year. Second quarter 2009 operating income and adjusted EBITDA include a pension expense of $5.7 million compared to $1.8 million in the second quarter 2008.

As a result of the sale of a facility in Mexico the second quarter 2008 operating income included a net gain of $5.9 million and adjusted EBITDA was benefited by that same sale by $6 million.

Net income in the second quarter of 2009 was $200,000.00 or nil per diluted share including $18.3 million of restructuring charges compared to $19.9 million or $0.39 per diluted share in the same period last year. In addition to the restructuring charge net income in the second quarter of 2009 was also impacted by higher foreign currency losses of $3.3 million and higher pension expense of $3.9 million offset by lower taxes of $8.8 million and lower interest expense of $6.7 million.

Second quarter 2008 net income included a net gain of $4.9 million related to the sale of the facility in Mexico.

Interest expense for the first quarter was $24 million an improvement of $6.7 million from $30.7 million in the year ago quarter due both to lower average borrowing rates as well as lower average debt levels.

The second quarter of 2009 also had reduced amortization expense primarily resulting from the lower spending on permanent displays which has been achieved by a significantly improved product portfolio planning process. We expect to spend approximately $40 million on permanent displays for all of 2009.

In the second quarter the Company had a tax benefit of $200,000.00 as compared to a provision of $8.6 million in the second quarter of 2008. This was due to lower taxable income outside the United States and the favorable resolution of a U.S. tax matter during the second quarter.

Looking at the P&L for the first six months of 2009 net sales during the first six months decreased 7.8% to $625.1 million compared to the net sales of $678.2 million in the same quarter a year ago. Excluding unfavorable foreign currency fluctuations of $37 million net sales decreased by 2.4%.

In the U.S. net sales decreased 4.2% to $377.2 million compared to net sales of $393.6 million in the first six months of 2008.

In our international operations net sales in the first six months of 2009 decreased 12.9% to $247.9 million compared to $284.6 million in the first six months of 2008. Excluding the unfavorable impact of foreign currency fluctuations of $37 million net sales in international operations in the first six months of ’09 were essentially unchanged compared to the same period last year.

Operating income was $58.2 million in the first six months of 2009 which included a net charge of $18.8 million primarily for restructuring. The $58.2 million is compared to $91.2 million in the first half of 2008.

Adjusted EBITDA was $92.1 million in the first six months of 2009 compared to $138.8 million in the same period last year and net income for the first half of 2009 was $12.9 million or $0.25 per fully diluted share compared to $17.4 million or $0.34 per diluted share in the first six months of 2008.

As compared to the first six months of 2008 net income in the first half of 2009 was negatively impacted by higher foreign currency losses of $10 million and higher pension expense of $7.8 million while being positively impacted by lower taxes of $16.6 million, lower interest expense of $14.7 million, and a $7.5 million gain on the repurchase of $30.9 million principle amount of our 9.5% senior notes.

The first six months of 2008 included a net gain related to the sale of our facility in Mexico and the amount of the gain reflected in operating income was $5.7 million. Net income reflected $4.9 million and adjusted EBITDA reflected $5.9 million. Operating income, net income, and adjusted EBITDA in the first six months of 2008 also include a net gain of $5.9 million related to the sale of a non-core trademark.

Turning now to cash flow, operating cash flow in the first six months of 2009 was $18 million compared to $20.8 million in the year ago period. Free cash flow, which we define as operating cash flow plus proceeds from the sales of certain assets less capital expenditures, was negative $3 million in the second quarter 2009 compared to a positive free cash flow of $7.4 million in the year ago quarter.

Free cash flow in the first six months of 2009 was $14.5 million compared to $22 million in the same period last year. Second quarter and first six months 2008 free cash flow did include the receipt of $2.7 million related to the sale of our facility in Mexico. Free cash flow in the first six months of 2008 also included the proceeds of $5.9 million related to the sale of the non-core trademark I just mentioned.

Regarding borrowing capacity, our unutilized borrowing capacity, as well as cash at June 30, 2009 totaled $127.8 million and that was comprised of $111.1 million available under the revolving multi-currency facility and $16.7 million of cash and cash equivalents.

In the second quarter of 2009 we reduced total debt by approximately $9 million by repurchasing $7 million in aggregate principle amount of our 9.5% senior notes. After these repurchases there remained outstanding $359.1 million aggregate principle amount under our 9.5% senior notes. Additionally, we reduced outstanding borrowings under the revolving credit facility by approximately $2.5 million in the second quarter. In total in the first half of 2009 we have reduced debt by $48 million.

Moving on to the balance of 2009, I would like to update you on several 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 flows.

First with regard to pension and post retirement expenses and cash contributions, as mentioned during our first quarter call the declines in the global financial markets in 2008 resulted in a decline in the value of our pension plan assets. On May 28, 2009 we announced an amendment to our U.S. pension plan. At that time we advised you that we expected pension and post retirement expenses would be approximately $25 to $30 million in 2009 compared to $7.4 million in 2008. We are confirming that estimate today.

As a result of the decline in 2008 in the value of the pension assets, and after giving affect to the amendments that we stated on May 28 in our press release, we expect our P&L expense related to pensions to be approximately $19 to $24 million higher in 2009 compared to 2008. We also advised on May 28 that we were required to re-measure our pension plan assets and liabilities and we estimated at that time that we expected our liabilities would decrease by approximately $50 million from the balance at 12/31/2008.

At June 30, 2009 the actual reduction of the pension liability related to these amendments is approximately $9 million. The decline in our estimate of $50 to the actual of $9 million was caused by a significant decrease late in the second quarter in the benchmark interest rates used to discount pension liabilities. Additionally we expect that cash contributions to the pension and post retirement plans will be approximately $25 to $30 million this year compared to $12.8 million in 2008. Consequently we expect pension cash contributions to be $12 to $17 million higher in 2009 as compared to 2008.

Next relating to currency, as you probably know in late 2008 the U.S. dollar strengthened significantly relative to other major currencies. As a result our reported second quarter 2009 net sales were negatively impacted by $16.7 million which equates to an 11.2% decline in net sales in the quarter for our international business, or a 4.6% decline in total company net sales. Through 06/30/09 foreign exchange rates versus the U.S. dollar have not changed significantly from the levels in the fourth quarter of 2008 and therefore should they remain at those levels there may be a negative impact on net sales and operating income for the third quarter of 2009 versus the third quarter of 2008.

Additionally, changes in foreign currency rates could have an impact on our 2009 results as approximately 40% of our international products are sourced from our manufacturing facility in North Carolina. The impact of a stronger U.S. dollar versus foreign currencies 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, there is a time lag until such transaction impact flows through the P&L.

As we have indicated on previous calls, while we are not providing specific guidance for adjusted EBITDA for 2009, we have previously provided information to assist you in understanding the factors that will impact our expected full year 2009 free cash flow. So updating the information provided on our April 2009 call, we expect capital expenditures to be approximately $15 million in 2009; permanent display expenditures are expected to be approximately $40 million, and with respect to interest paid, interest paid in 2008 was $123 million.

At the end of June 2009 our total debt was approximately $1.28 billion which was $48 million lower than at the end of 2008. Approximately 60% of our total debt is at fixed interest rates and approximately 40% is at floating interest rates. We are benefiting from the current interest rate environment on our floating interest rate debt. In addition, based on current interest rates we expect to also benefit from the September 2009 expiration of our $1150 million interest rate swap.

Taxes paid in 2009 are expected to be approximately $15 million and lastly all other cash flows in 2009, including changes in working capital, and the impact of the higher pension expense in contributions, that I previously mentioned, are anticipated to result in cash usage of approximately $15 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Harkrider of Goldman Sachs.

Todd Harkrider - Goldman Sachs

I know you don’t give out detailed guidance, but I was hoping to get some color on the third quarter in general. Is it tracking better than expected, lower, or in line with your internal plans?

Alan Ennis

As you correctly pointed out we don’t give forward-looking guidance in that context. What I can tell you is what we have seen in the second quarter, and to reiterate some of the points that we’ve made which is different from what we saw in the first quarter and indeed different from what we saw in the fourth quarter of last year. It was specifically in the U.S. that we saw the color cosmetics category according to Nielson the growth rate started to slow. It was at around 3% to 4% growth rate for the last few quarters and then second quarter that growth rate slowed to 1.1%. So that is a change from what we had been seeing in the past.

Additionally as we mentioned, certain retailers in the U.S. and in certain countries outside the U.S. have taken inventory reduction actions which did impact our second quarter net sales. So there is continued uncertainty as we go forward. What we are focused on is continuing to do what we have done well in the past which is to execute our strategy, focus on the drivers of profitable brand growth. We have some good successes in the marketplace in terms of our new product launches so far this year and we believe that will continue.

Todd Harkrider - Goldman Sachs

Okay and maybe to focus on the new ColorStay Ultimate liquid lipstick. It seems like such a strong product given it is the first one step long lasting product out there, but comparing your dollar volume growth to the face segment last year where you had some other excellent launches it seems like this one might not be as successful as planned. Is that because it is taking longer to roll out and we should see the benefits in the third quarter, or is that product just performing below plan?

Alan Ennis

Well as you rightly pointed out the face segment is down, but our lip segment has increased this year; so we are the number one brand in the lip segments and ColorStay Ultimate liquid lipstick has a relatively recent launch. It already has just under 2% market share and it is already in the top ten new products. So, I think that bodes well for the future.

Todd Harkrider - Goldman Sachs

Okay and you are around 20 months away from the maturity of your unsecured bonds. With the credit markets opening up have you started talking to banks on refinancing that debt or would you rather wait until the McKendrick’s and Forbes offered to the minority shareholders clear up?

Alan Ennis

As you correctly point out the notes do mature on April of 2011. We continue to monitor the financial markets to assess the appropriate course of action and we consider the timing of an refinancing activities as we do that.

Todd Harkrider - Goldman Sachs

Okay, I appreciate it and good luck with the rest of the year.

Operator

Your next question comes from Reza Vahabzadeh of Barclays Capital.

Reza Vahabzadeh - Barclays Capital

Just as far as the health of the category is concerned, let me just start off with that. I have a question about retailer inventory destocking. Do you think, whether it is the category or Revlon products, are you done with retailer inventory destocking as much as you know today?

Alan Ennis

Well all we know today is what occurred in the second quarter and as we said the reduction retailer inventories have a significant impact on our net sales in the second quarter. There is still some uncertainty about what retailers might do, if anything, further in the second half of the year, but we continue to work very closely with them on managing those inventories.

Reza Vahabzadeh - Barclays Capital

How significant was the retailer destocking in the second quarter?

Alan Ennis

It was a primary driver of our net sales reduction in the U.S.

Reza Vahabzadeh - Barclays Capital

Okay so ex resale destocking you would have been nearly flat?

Alan Ennis

Well here is what I will tell you. If you look at net sales for the Company the two single biggest drivers of the decline in net sales were foreign currency fluctuations and the retailer inventory actions, so take from that what you will.

Another point worthy to note in relation to the retail inventory points, to build on what Chris said, is that we don’t believe that the actions taken by the retailers are specific to our brands or to our categories. So it wasn’t a Revlon specific action we don’t believe.

Reza Vahabzadeh - Barclays Capital

Right and then as far as the category is concerned, regarding mass cosmetics, the category obviously slowed in the second quarter from the first quarter trends, not to mention prior year trends. As far as run rate trends, did that deceleration continue late into the second quarter and into the third quarter, as best as you can tell, from a POS standpoint?

Alan Ennis

Well we don’t have third quarter Nielson information as yet. In the second quarter it did actually include the first months of decline since November 2004, so that certainly is a difference. I mean that is a long period of years which has been in decline, however if you look at the growth range for longer terms, take since 2000, the category has been between a -2 and a +6. I am not sure what it seems to inhabit. So, we will know more, obviously, as we go through the third quarter.

Reza Vahabzadeh - Barclays Capital

Got it, but I mean just from our perspective and from a modeling perspective is it reasonable to expect some deceleration in the category as we go into the third quarter based on all of the comments you have made and ACNielson data and the like?

Alan Ennis

Well it is difficult to foresee that because the months vary and some months are up, some months are down. So it is hard to get a trend from that. What we know to date is it has decelerated in its rate of growth.

Reza Vahabzadeh - Barclays Capital

Got it okay and then just one financial housekeeping question and I appreciate all the disclosure you provided previously. The cash restructuring spend for 2009 and also the second half of ’09, did you mention that number?

Steven Berns

Yes. In the release that we published on May 28 we did disclose in that release the expectations for the cash disbursements both in 2009 all the way out through 2012. That is in the May 28th release.

Reza Vahabzadeh - Barclays Capital

Got it and then as it relates to the P&L do you have additional cost savings in the second half of 2009 over and beyond the SG&A cost savings you talked about in order to be able to cushion maybe FX headwinds or maybe even category headwinds? I know you have had some manufacturing cost savings the last 18 months.

Alan Ennis

Reza, as you know and I know you have followed Revlon for some time, we are always looking at ways to improve our costs. Specifically, in the first part of this year we took some specific actions, as I mentioned. We had some restructuring, as I mentioned to you, which will generate about $15 million of incremental savings in the second half of this year. We also are benefiting from and will continue to benefit from lower advertising rates. So go from the second quarter we actually increased our media presence, but did so at lower rates.

We are also looking at all of our input costs, direct and indirect, to make sure that we are benefiting from the best rates that are out there and that includes chemicals, packaging, etcetera… all of our manufacturing and non-manufacturing inputs. So, we continue to find ways to improve our cost structure going forward.

Reza Vahabzadeh - Barclays Capital

Right, but I mean you are not talking about a specific new manufacturing cost savings plan in the second half that would be necessarily significantly above the prior year.

Alan Ennis

No and our approach has been and will continue to be that as and when we have information about a cost saving action, whether it is in manufacturing or elsewhere, we would report that to you at that time.

Reza Vahabzadeh - Barclays Capital

I got it, thank you.

Operator

Your next question comes from Carla Casella of J.P. Morgan Securities.

Carla Casella - J.P. Morgan Securities

Could you talk about returns and allowances and how that trended during the quarter?

Alan Ennis

There is nothing specific to call out there really in terms of returns and allowances. We have made significant improvements over the last couple of years, since the beginning of 2007, in our level of returns, and that is really driven by the effective implementation of our three-year rolling portfolio plan. So, what we have for all of our brands is we have a view as three years at any point in time to what we plan to launch and also what we plan to discontinue. So, with that backdrop we are able to make better decisions around timing of shipments, inventory management, etcetera, all of which have resulted generally in a decline in the level of the ongoing level of returns expense period-to-period.

Carla Casella - J.P. Morgan Securities

You don’t think that could kick up with the retailers destocking?

Alan Ennis

We haven’t seen that. I think the impact of the retailer destocking actually is lower shipments, so we are shipping lower inventory into the channel in the second quarter. In actual fact there would be fewer inventories to return should there be a discontinuance of a product.

Carla Casella - J.P. Morgan Securities

Okay and on the destocking I have one more related question. Are you seeing still an increase in the number of store brands in the retailers and do you think they are destocking to move away from the national brands and more into the store brands?

Alan Ennis

Well if you mean by store brands private label, private label is not a big influence in this category. Most of the share in the category is owned by branded products, so certain retailers bring in very niche brands, but in general we are not seeing any private label introductions.

Carla Casella - J.P. Morgan Securities

Okay, it just seems like the drug category we are starting to see more of the higher end skin care lines, many of which are private label, and then some are just new lines and I am wondering if they are shifting more towards that look. There are more consultants in the store and they are focused more away from the national brands.

Alan Ennis

No we haven’t seen that in the drug category.

Carla Casella - J.P. Morgan Securities

Okay and then lastly on the new products side going forward into the third quarter/fourth quarter can you give us a sense where your new product shipments for third quarter, are they to the same magnitude as third quarter last year?

Alan Ennis

Well as you probably know, many of the new product shipments take place in the second quarter. The way that the cycle works is that in the U.S. there are two periods a year where most of the new product shipments take place: towards the end of the second quarter leading into the third and towards the end of the fourth quarter leading into the first.

In the international market, that is not the case, they tend to take place throughout the year.

Carla Casella - J.P. Morgan Securities

Right I was thinking about you talked about the shipments for the first quarter last quarter. I guess as we look into the back half I am just trying to get a sense of whether we are looking at an apples-to-apples type size of launches, or are the launches greater or less than in the past?

Alan Ennis

As an indication, second quarter shipments on new products were commensurate with the shipments in the second quarter of last year and as Alan said we have a rolling three year portfolio class the aim of which is to make sure that we continually build our product portfolio through out the years.

Carla Casella - J.P. Morgan Securities

Okay, great that is helpful. Thank you.

Operator

Your next question comes from Walter Branson of Regiment Capital.

Walter Branson - Regiment Capital

I am not sure if you said this, but of the $18 million in charges you took for employee severance how much of that was already paid through the first half?

Steven Berns

We did not say that. What we said was during 2009, as it was disclosed in the 28th of May’s release, as well as what will be disclosed in our 10-Q, we expect to pay approximately $12 million this year. And that is in the second half of 2009.

Walter Branson - Regiment Capital

I take from that then that not much has been paid through the first half.

Steven Berns

Correct.

Walter Branson - Regiment Capital

Okay and my second question is you bought some more bonds during the quarter. How much additional ability do you have at this point, whether you intend to do it or not, but how much ability do you have under your credit agreements to buy additional bonds?

Steven Berns

We have limited availability and those documents in terms of the credit agreements as well as the indentures with regard to the capacity are all in the public domain. We haven’t disclosed that.

Walter Branson - Regiment Capital

Okay, thanks very much.

Operator

Your next question comes from Karru Martinson of Deutsche Bank.

Karru Martinson - Deutsche Bank

In terms of the inventory reduction are we seeing any change in the aggregate shelf space for Revlon or is this just basically getting rid of the stock in the back room?

Chris Elshaw

It is exactly that, there is no change in our shelf space.

Karru Martinson - Deutsche Bank

Okay and no change kind of for the 2010 new product launches and the plans that you have that all remains the same?

Chris Elshaw

As far as we are aware at this moment there is no change there either.

Karru Martinson - Deutsche Bank

In terms of the slow down for the cosmetic category growth, I think when you guys announced the restructuring you said it had been really kind of the past four weeks of that time. Have you seen that trend accelerate, or what have you been seeing on that front?

Alan Ennis

As we said, what we have seen is the deceleration over time and that happened through out the first half. Months go up and months go down, but certainly the aggregate late in the second quarter was lower than the first quarter. We are all interested to see, of course, how that will play out in the third and fourth quarters, but at this moment there isn’t a clear trend as to what is going to happen.

Karru Martinson - Deutsche Bank

Okay and then just in terms of the competitive response to the inventory destocking, are you seeing any change from your competitors, whether it is to be more promotional or more aggressive in terms of displays?

Alan Ennis

As you well know this is a highly competitive category and it continues to be highly competitive.

Karru Martinson - Deutsche Bank

All right, thank you very much.

Operator

Your next question comes from Mary Gilbert of Imperial Capital.

Mary Gilbert - Imperial Capital

Just going back to the inventory reductions did that take place across all types of retailers? Then is it kind of a 1-x effect? In other words they have already reduced their inventories, or is it because of the slow down in the category we are going to continue to see inventory shipments down year-over-year as we move through the balance of the year?

Alan Ennis

A couple of things Mary, first of all, as I mentioned, we don’t believe that the retailer inventory reduction actions were specific to Revlon’s brand. We believe that it is across brands and in fact across categories. So we don’t think that is specific to our company.

The second point is what we do know is what happened in the second quarter, as we talked about. We work and have worked and continue to work very closely with our retailers. We have extremely good relationships with all of our key retailers both in the U.S. and around the world and we will continue to work with them. In terms of what is going to happen in the future, it is too early to tell.

Mary Gilbert - Imperial Capital

Okay. The other thing is I just wanted to get these numbers very quickly, because you went pretty fast, but how much was outstanding under the revolver and how much was available?

Steven Berns

The revolver availability in total, we had total capacity of $127.8 million including $111 million available under the revolving credit facility and as we said, we have $16.7 million in cash at quarter end.

Mary Gilbert - Imperial Capital

Okay so the $127.8 is total liquidity, is that how you were describing it?

Steven Berns

Correct.

Mary Gilbert - Imperial Capital

So $111 available under the revolver and how much was outstanding in borrowings?

Steven Berns

At the end of the quarter we had approximately $1 billion borrowed.

Alan Ennis

As you know, Mary, the revolver has $160 million capacity, but it is an after factor revolver, which means that it is tied to your asset levels, so as you know, over the last certainly 12 to 18 months we have continued to improve our inventory levels. A direct consequence of that is that your borrowing base comes down, so essentially our revolver was, for all intents and purposes, undrawn at the end of the second quarter. We do have around 13 million of letters of credit which we have had for some time. So the difference between $127 + $13 which is $140 and the $160 is a decline in the asset base that supports that facility.

Mary Gilbert - Imperial Capital

Yes, Okay that makes sense. One other thing, just to clear up on pension, how much is pension funding expected to be this year? Not the year-over-year increase but the actual dollar amount of funding and then how much is the expense number expected to be?

Steven Berns

As I discussed the pension funding is expected to be $25 to $30 million and the pension expense is also expected to be $25 5o $30 million.

Mary Gilbert - Imperial Capital

Okay so in other words it is basically going to match so there is going to be no excess funding over and above what is expensed. So the $15 million of other cash items that you talked about, including working capital, is that reflecting the $11.9 million of cash restructuring costs then, that $15 million?

Steven Berns

Yes.

Mary Gilbert - Imperial Capital

Okay perfect. Thank you very much.

Operator

Your next question comes from Reza Vahabzadeh of Barclays Capital.

Reza Vahabzadeh - Barclays Capital

I was wondering if you have a feel and can discuss what you think will be the pace of new product introductions category wide and especially your competitors? Is the pace of new product introductions increasing sequentially in year-over-year, or is it decreasing?

Alan Ennis

No, we haven’t seen any change in the pace of new products introductions. As you know it is a significant proportion of the category and that continues.

Reza Vahabzadeh - Barclays Capital

Okay so versus last year and the run rate we are about the same as we have been?

Alan Ennis

Yes.

Reza Vahabzadeh - Barclays Capital

Okay and then as far as just competitive activity, and I know it has always been highly competitive and it may stay like that as well, but as far as promotional prices and duration have you seen any change in that?

Alan Ennis

No it is actually that the promotional activity continues to be intent.

Reza Vahabzadeh - Barclays Capital

Right, so to what factor do you attribute your changes in market share versus last year?

Alan Ennis

As you know the share from period to period depends upon a number of different things. It depends upon our new product timing; it depends upon our competitive activity and also what goes on in the marketplace. So, while the aggregate continues to be around the same if you are not directly anniversary in the same period the prior year, that can shift around. So, it is really a matter of timing year-over-year on some of these things.

Reza Vahabzadeh - Barclays Capital

Right so you don’t think you are losing share because of increased promo activities it is just timing of new products, because the market in mass cosmetics in the second quarter was clearly one of the lowest at least in the last few quarters.

Alan Ennis

Yes. As we have talked about frequently it is a question of the market share over time. I mean share does go up and down in this category period to period.

Reza Vahabzadeh - Barclays Capital

I get it, thank you.

Operator

Your next question comes from Patrick [Trickeo] of BMO Capital Markets.

Patrick [Trickeo] - BMO Capital Markets

In terms of FX in gross margin, assuming rates remain about where they are now would we have seen the worst effect from currency on gross margin in the second quarter?

Steven Berns

What we said earlier in our prepared remarks was that there would be an impact in the third quarter of ’09 versus the third quarter of ’08 if rates were to stay at the same levels that they were at in the second quarter. What we can tell you is that unfavorable foreign currency fluctuations, as I mentioned earlier, did reduce gross profit as a percentage of net sales by 0.9% points. So there was the impact, as I mentioned, primarily there are a couple of factors. One is obviously that our international operations are buying product from our North Carolina facility.

Patrick [Trickeo] - BMO Capital Markets

Okay and do you purchase advertising on a spot basis or do you have longer-term contracts?

Alan Ennis

Like most of the marketplace it is a combination of upturn purchases and what is called scatter purchases and that is how we operate.

Patrick [Trickeo] - BMO Capital Markets

Okay, great thanks very much.

Chris Elshaw

One other point, just to clarify one other point that Steven made, if I can Pat, on the FX piece you talked about transaction and as you know and we have talked about it many times unfortunately there is a translation piece and there is a transaction piece. On the cost of goods margin piece while the translation impact, should rates stay where they are, that will wash out through the third quarter and into the fourth quarter. On that basis we would be apples and apples. But, from a transaction standpoint, because of inventory turns, that transaction impact would bleed into the fourth quarter.

Patrick [Trickeo] - BMO Capital Markets

Would the transaction fees also bleed into 2010?

Chris Elshaw

For the most part, no. We typically turn inventory three to four times a year, so from a general standpoint you would expect most of that transaction impact to come through the fourth quarter. There would be potentially a small tale in the first quarter of ‘10, but by and large the fourth quarter of 2009 should take care of that. Again, assuming rates stay where they are.

Patrick [Trickeo] - BMO Capital Markets

Okay great, thanks so much.

Operator

Your next question comes from Mary Gilbert of Imperial Capital.

Mary Gilbert - Imperial Capital

Just to follow up on ad spend and your strategy, and I know you gave these numbers and it was a bit quick, but could you go over how much you reduced ad spend year-over-year in the quarter?

Chris Elshaw

Steven will get you some specific numbers. I think the important point here is that we have maintained an appropriate level of spending in the quarter. Ad spending quarter-to-quarter can vary depending on the timing of new product launches for example. But, we did also say is that we did benefit from reduced rates, so we actually achieved a higher level of what they call gross rating points or immediate pressure for actually lower dollar spend.

Mary Gilbert - Imperial Capital

Okay so there was no dollar reduction in ad spend?

Chris Elshaw

Not meaningful.

Mary Gilbert - Imperial Capital

Okay and what about on a go forward basis? Is there any kind of a strategy there because of lower rates where you are still able to get the benefit that you intended to get, but you are just lowering the dollar spend because of better rates, or just in that you are able to measure or spend more efficiently in terms of the media?

Chris Elshaw

We certainly intend to maintain our media pressure; there is no doubt about that. At the same time we are, like many other people, in negotiation for the upfront right now. So, at this moment it is all in a state of flux, but clearly there are significant savings occurring in the media market.

Mary Gilbert - Imperial Capital

Okay and then do you expect to redeploy those savings and to further brand support, or to realize those benefits in cash?

Chris Elshaw

I would say that the first thing is to maintain competitive and appropriate market pressure, so we will continue to make sure that we are appropriate in the level of growth rating points we are achieving.

Mary Gilbert - Imperial Capital

Okay, one last thing, just looking at all the puts and takes, I realize you are not providing guidance, but do you expect to generate cash this year, be neutral, or have a slight burn?

Chris Elshaw

Well that would be forward-looking guidance, obviously Mary, which we are not going to disclose. You know me better than that.

Mary Gilbert - Imperial Capital

Okay, all right thank you.

Operator

This ends the question-and-answer session of today’s call. We will now turn things back over to Mr. Ennis for closing remarks.

Alan Ennis

Thank you Leslie, and thank you everyone for joining our call. We continue to do what we have done well over the last several years and we will do so going forward. Thank you for your continued interest in Revlon.

Operator

Thank you. This concludes today’s conference call. (Operator Instructions)

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!