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Revlon, Inc. (NYSE:REV)

Q2 2010 Earnings Conference Call

July 29, 2010 9:30 AM ET

Executives

Elise Garofalo – SVP, Treasurer, and IR

Alan Ennis – President and CEO

Chris Elshaw – EVP and COO

Steven Berns – EVP and CFO

Analysts

Reza Vahabzadeh – Barclays Capital

Jeff Kobylarz – Stone Harbor Investment Partners

Patrick Trucchio – BMO Capital Markets

David Sowu (ph) – Healthy Eyes Hilly (ph)

Operator

Good morning, ladies and gentlemen, and welcome to Revlon’s Second Quarter 2010 Earnings Conference Call. At the request of Revlon, today’s conference call is being recorded. (Operator Instructions) I would know like to turn the call over to Ms. Elise Garofalo, Revlon’s Senior Vice President, Treasurer, and Investor Relations. You may begin Ms. Garofalo.

Elise Garofalo

Thanks, Stephanie. Good morning, everyone, and thanks for joining today’s call. Earlier today we released our results for the second quarter ended June 30, 2010. If you have not already received a copy of the earnings release, you can obtain one on our website at revloninc.com.

On the call with me this morning are Alan Ennis, Revlon’s President and Chief Executive Officer; Chris Elshaw, Executive Vice President and Chief Operating Officer; and Steven Berns, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Alan, I’d like to remind everyone of a few things. First, our discussion this morning might include forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Information and factors that could affect the company’s results from time to time and cause them to differ materially from such forward-looking statements as set forth in the company’s filings with the SEC, including our 2009 Form 10-K filed in February of this year and our 2010 second quarter 10-Q, which we filed earlier this morning.

Next, our remarks today will include a discussion of adjusted EBITDA and free cash flow, both of which are non-GAAP measures that are defined in the footnotes to our release 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 which are the most directly comparable GAAP measures and they can be found in the financial table accompanying the release.

Regarding market share information, as a reminder, during our 2009 fourth quarter earnings call this February, we indicated that beginning with the first quarter of 2010, we are no longer reporting ACNielsen U.S. market share information. ACNielsen data represents only a portion of our channels in only the U.S. market. We believe that consumption through all of our retail partners in our markets globally is best reflected by observing our net sales performance and trends over time rather than this partial market share information.

In addition, as previously disclosed, effective for periods beginning January 1, 2010, we have made some changes to how we report net sales. Specifically, Canada is now reported as a separate region where in prior periods, before 2010, it was included in the Europe region; and South Africa is now included as part of Europe, Middle East, and Africa region where in prior periods it was included in the Asia-Pacific region.

As a result, prior year amounts have been reclassified to conform to this presentation. For your convenience, we’ve included a schedule of the reclassified numbers for each of the quarters in ‘09 and ‘08 at the back of our release.

I’d also like to remind you that some of financial reporting perspective, promotional allowances are recorded as a deduction to arrive at net sales while advertising costs are recorded within SG&A in the P&L.

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

Alan Ennis

Thank you, Elise, and good morning everyone. As we have discussed with you in the past, Revlon’s vision is glamour, excitement, and innovation through high quality products at affordable prices. And this underpins everything we do. We realize this vision by executing the five key elements of our business strategy; building our strong brands; developing our organizational capability; driving our company to act globally; increasing our operating profit and cash flow; and, improving our capital structure.

During the second quarter of 2010, we continued our intense focus on the key drivers of our business to support our business strategies. These drivers are innovative, high quality consumer preferred brand offering, effective brand communication including appropriate levels of advertising and promotion and superb execution with the retail partners to provide the optimal in-store offering.

In meeting the needs of consumers seeking new innovative products, we introduced several new breakthrough and first to market products for the first half of 2010 in Revlon and Almay color cosmetics. These product launches include unique offerings in mass cosmetics, innovations in products and extensions across all segments within the Revlon and Almay franchises.

Our new products include Revlon Grow Luscious Mascara, Revlon Just Bitten Lipstain + Balm and Almay One Coat Dial Up mascara. Chris will provide some more color on this launches later in the call. Additionally during the quarter, we signed one of Hollywood’s hottest stars, Kate Hudson, as the newest global brand ambassador for our Almay brands.

From the strategic and financial perspective, we maintain a sharp focus on driving profitable growth, while at the same time maintaining financial discipline. In the second quarter we delivered improved cash flow and competitive operating margins while significantly increasing our advertising investments to enhance our marketplace competitiveness. We will continue to support our brands in the third quarter as compared to prior year levels.

Also during the quarter, we realized an additional $6 million dollars of savings associated with our May 2009 restructuring program and have delivered $27 million of savings to date. We remain on track to deliver the planned $30 million of annualized savings.

We continue to strengthen our brands, deliver innovative new products, pursue targeted growth opportunities and invest in our organizational capability. And although the economic environment remains challenging, we continue to manage our resources carefully with the focus on the long-term profitable growth of our brands.

So now I would hand over to Chris who will talk about our global marketplace performance.

Chris Elshaw

Thank you, Alan, and good morning everyone. Today I will cover our net sales performance by brand and region. Total company net sales in the second quarter were $327.7 million, compared to $321.8 million in the second quarter of last year. Excluding unfavorable foreign currency fluctuations of $0.5 million, net sales increased 2% driven by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. This increase was partially offset by low net sales of Almay color cosmetics and Mitchum anti-perspirant deodorant.

Two important drivers of net sales during the quarter was; firstly, the launch of the number of key innovative new products in 2010, which I’ll expound it on later; and secondly, as Alan mentioned, we significantly increased our advertising investment in the quarter.

Moving on to the performance by brand, Revlon color cosmetics net sales increased during the quarter as compared to prior year. In the Face segment, we continue to be pleased with the performance of Revlon PhotoReady makeup, which contains innovative photochromatic pigments that bend and reflect light to give a flawless, airbrushed appearance. PhotoReady is now being sold in many major markets across all our regions and we continue to expect positive performance from this franchise.

In the Lips segment, for the second half of 2010, we introduced Revlon Just Bitten Lipstain, which is a unique two-in-one lip stain which also includes a balm. The new advertising campaign for Just Bitten features Jessica Biel, our newest Revlon brand ambassador. Also in the Lips segment is Revlon Color Burst Lipstick, which we launched earlier this year and is now being sold globally. Color Burst contains revolutionary elastic color technology, which feels virtually weightless on the lips.

In the Eye segment, we recently launched Revlon Grow Luscious Mascara and are very pleased by the early consumer response. 96% of women using this break through mascara saw instantly longer, fuller and (lusher) lashes. The Grow Luscious advertising campaign also features Jessica Biel.

Lastly, in Nail segments for the second half of 2010, we launched an innovative collection of scented nail enamel.

Moving on to the Almay brand. Net sales of Almay were down in the quarter compared to the prior year due to the cycling of the 2009 launch of Almay Pure Blends. As we focus on building the Almay brand’s co-franchisers, we launched two new products. First, we introduced One Coat Dial Up mascara, which includes Almay’s signature hypoallergenic formula and offers an adjustable dial to allow consumers to achieve their desired lush look.

We also introduced Smart Shade Anti-Aging Concealer, a breakthrough product that is an extension of the highly successful Smart Shade franchise. This new concealer uses proprietary shade sensing micro beads that adjust to the skin tone, while working to conceal and depuff the delicate skin under the eye and reduce the signs of aging. We continue to broaden the Smart Shade product assortment to meet additional consumer needs.

Last for Almay, we signed Kate Hudson as our newest global brand ambassador and she will be appearing in our second half 2010 advertising campaigns.

In women’s hair color, net sales of Revlon Colorsilk continue to grow in the second quarter. In support of this successful franchise, we continue to expand distribution of Revlon Colorsilk, including Revlon Colorsilk Luminista, which we’ve launched earlier this year.

Moving on to anti-perspirant deodorants. Net sales of Mitchum in the second quarter 2010 declined year-over-year. Capitalizing on social media trends and in supposed of the Mitchum brand which prides itself on working hard for consumers, we lost an innovative new campaign in the U.S. created by Hollywood movie director Brett Ratner. This campaign is designed to finally reward the hardest working person in America. We challenge people to create reality films telling their true stories of hard work, and the public responded in a strong way. We recently announced the ten finalists and the public can now vote for their choice online at mitchumhardestworking.com.

And finally, our beauty tools business continues to perform well in the face of softer demand in the category over all.

Now moving on to the regional sales performance during the quarter. In the United States, net sales were $179.3 million a decrease of $6.9 million or 3.7% compared to last year. The decline was driven by lower net sales of Almay color cosmetics, Revlon beauty tools and Mitchum’s anti-perspirant deodorants, all sales offset by higher net sales of Revlon color cosmetics.

In Asia Pacific, net sales of $48.7 million, an increase of $3.2 million or 7% compared to prior year. Excluding the favorable impacts of foreign currency fluctuations, net sales were essentially flat year-over-year. Lower net sales of Revlon color cosmetics in Australia were offset by higher net sales of Revlon color cosmetics throughout the rest of the region.

In Europe, Middle East and Africa, net sales were $50.2 million, an increase of $4.6 million or 10.1% compared to the same period last year. Excluding the favorable impacts of foreign currency fluctuations, net sales increased $3.3 million or 7.2%. This increase was driven by Revlon color cosmetics and fragrances in South Africa and higher net sales in certain distributor markets. Worthy of note in this region is that Revlon is the makeup partner for Britain’s next top model 2010. Revlon is the perfect partner to provide the on-trend make up looks and inspiration for the new series, given our long-standing tradition of having some of the most inspiring, successful and beautiful women in the world as our brand ambassadors. Elle McPherson, one of Revlon’s global brand ambassadors, is a presenter, judge and the executive producer of the new series.

In Latin America, net sales of $28.7 million, an increase of $1.5 million or 5.5% compared to the same period last year. Excluding the unfavorable impacts of foreign currency fluctuations, net sales increased $9.1 million or 33.5%. Approximately half of this increase was due to higher selling prices in Venezuela as a result in market conditions and inflations. From brand stand point, the increase was due to higher net sales of Revlon ColorSilk hair color, Revlon color cosmetics, and other beauty care products in Venezuela and certain distributor markets.

In Canada, net sales were $20.8 million, an increase of $3.5 million or 20.2% compared to the same period last year. Excluding favorable foreign currency fluctuations, net sales increased $1.3 million or 7.5%. This increase was primarily due to high net sales of Revlon color cosmetics.

Now I will turn it over to Steven to walk you through the rest of our financial results for the quarter.

Steven Berns

Thank you, Chris. As we have already discussed our net sales performance, I will start with gross margin performance in the quarter. In the second quarter of 2010, our gross profit margin increased to 67.3% versus 62.5% in the second quarter of 2009. Gross margin in the quarter was positively impacted by a few factors; first, lower cost related to sales returns in inventory obsolescence; second, savings related to our May 2009 restructuring actions; and third, lower material cost as a result of (per term) initiatives; lastly, gross margin was also impacted favorably by foreign currency fluctuations.

In the second quarter, SG&A increased $17.3 million, compared to $173.6 milling primarily due to higher advertising spending to support our brands, which was consistent with our expectations as discussed in connection with our first quarter results of this year.

We significantly increased media pressure in the second quarter of 2010, compared to the second quarter of 2009 while benefiting from lower advertising rates. In SG&A, we also benefited from the continued realization of savings from our May 2009 restructuring actions.

As we have previously disclosed, annualized savings in 2010 from our May 2009 restructuring actions are expected to be approximately $30 million. To date, we have achieved a run rate of $27 million. $15 million of which was realized in the second half of 2009 and $12 million of which was realized in the first half of 2010. We expect the remaining $2 million to $3 million of the annualized savings to materialize in the second half of this year.

As we have stated in the past, within the SG&A, advertising and promotional expense may vary from period-to-period based on marketplace conditions and timing of product launches. Consistent with our strategy to build our strong brands, compared to the third quarter of 2009, we will continue to support our brands with increased advertising spending in the third quarter of 2010.

Operating income in the second quarter of 2010 was $47.3 million, compared to $26.6 million in the same period last year. Adjusted EBITDA in the second quarter of 2010 was $61.7 million, compared to $43 million in the same period last year. As I mentioned earlier, our gross margin improved in the second quarter. In that regard, it is important to mention that our focus is on delivering competitive operating margins. Period-to-period, there are a number of moving parts contributing to our operating margins, including gross margin which are influenced by several factors, including sales mix, brand support and the timing and size of product launches, just to name a few factors.

All in all, we are pleased with our operating margins in the second quarter and year-to-date, which we believe are competitive.

Net income in the second quarter of 2010 was $16.4 million or $0.31 per diluted share, compared to net income of $200,000 or (inaudible) per diluted share in the same period last year. Operating income, adjusted EBITDA and net income in the second quarter of 2009, included $18.3 million of charges related primarily to the May 2009 restructuring action.

Tax expense in the second quarter of 2010 was $4.8 million, compared to a benefit of $200,000 in the second quarter last year. the higher tax expense was primarily due to two factors; first, the second quarter 2009 tax provision benefited from the favorable resolution of a tax contingency in the United States; and second, the second quarter of 2010 have higher taxable income in certain foreign jurisdictions as compared to the same period last year.

Net cash provided by operating activities in the second quarter of 2010 was $9.3 million, compared to $700,000 in the same period last year. And free cash flow in the second quarter of 2010 was a source of cash of $5.1 million, compared to a use of cash of $3 million in the same period a year ago.

Looking at the P&L for the first six months of 2010. Net sales in the first six months increased 1.3% to $633.2 million, compared to net sales of $625.1 million in the first six months of 2009. Excluding favorable foreign currency fluctuations of $8.5 million in the period, net sales were essentially flat year-over-year.

In the United States, net sales decreased 4.2% to $361.4 million compared to the last six months of 2009. In Asia pacific, net sales were $94.6 million, an increase of $7.5 million or 8.6% compared to the same period last year. And excluding the favorable foreign currency impact, that’s the favorable impact of foreign currency fluctuations in the Asia Pacific region, net sales decreased$1.6 million or 1.8%. In Europe, Middle East and Africa, net sales were $93.1 million, an increase of $9.2 million or 11%, compared to the same period last year. Excluding the favorable foreign currency impact, net sales increased $1.5 million or 1.8%.

And moving on to Latin America, net sales were $ 48.7 million, an increase of $2 million or 4.3% compared to the same period last year. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $14.9 million or 31.9%. In Canada, net sales were $35.4 million, an increase of $5.2 million or 17.2% compared to the same period last year. Excluding the impact of favorable foreign currency fluctuations, net sales increased $600,000 or 2%.

Operating income was $92.7 million compared to $58.2 million in the first half of 2009, and adjusted EBITDA was $122.8 million compared to $92.1 million in the same period last year. Both operating income and adjusted EBITDA in the first half of 2009 included $18.8 million or restructuring charges. Net income was $18.6 million or $0.36 per diluted share, compared to $12.9 million or $0.25 per diluted share.

Net income in the first half of 2010 included $9.7 million of expenses, associated with the march 2010 refinancing of the company’s credit agreement, in addition to foreign currency loss of $2.8 million related to the re-measurement of Revlon Venezuela’s balance sheet.

Net income in the first half of 2009 included the $18.8 million of restructuring charges and a $7.5 million gain, related to early extinguishment of debt. Additionally, the provision for income taxes in the first half of 2010 was $9.8 million as compared to a benefit of $2.2 million in the same period last year.

Turning now to cash flow. Year-to-date, operating cash flow was $40.5 million compared to $18 million in the same period last year and free cash flow year-to-date was $33.1 million compared to $14.5 million in the same period a year ago. On the liquidity front, our unutilized borrowing capacity and cash on hand as of June 30, 2010, was $134 million comprised of $106.6 million available under our revolving credit facility and $27.4 million of available cash. Our revolver was undrawn as of June 30, 2010.

Now let me update you on several factors which impact 2010 financial performance. With regard to our financial results related to Venezuela, the January 2010 devaluation, which we discussed last quarter, had the impact of reducing second quarter 2010 net sales by $7.8 million and operating income by $2 million. For the first half of 2010, it reduced reported net sales by $13.2 million and operating income by $3.9 million.

Next, consistent with our historical practice, while we are not providing specific guidance for adjusted EBITDA for 2010, I am going to update you on certain 2010 cash flow information we provided on our last earnings call in April.

Capital expenditures are expected to be $20 million for 2010. Permanent display expenditures are expected to be $40 million. Cash interest expense information is available by reference to our public filings which detail the composition of the company’s capital structure and applicable interest rates. Interest expense throughout the second half of 2010 will continue to be impacted by higher weighted average borrowing rates due to the LIBOR floor on our new term loan credit facility entered into in March 2010.

Taxes paid are expected to be approximately $15 million. And all other cash flows, including changes in working capital and pension expense and contributions are anticipated to result in a cash usage of approximately $20 million, which updates our prior guidance. However, our working capital flows may vary as a result of a number of factors on a quarterly basis.

This concludes our prepared remarks, and we would now like to open up the call for your questions. Operator, please prompt the participants for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh – Barclays Capital

On that last point regarding that guidance for the year, and I appreciate you providing that information, the all other that you just suggested would be $20 million. Would that include working capital, cash restructuring and tension?

Alan Ennis

That’s correct.

Chris Elshaw

And that includes all the components of working capital other than the items I mentioned which would impact cash, which would be CapEx, permanent displays, interest and taxes.

Reza Vahabzadeh – Barclays Capital

You talked about increasing the A&P spending in the second quarter, including media rates, but you benefited from lower rates that you presumably locked in the prior year. Are you still going to be benefitting from those lower rates in the second half?

Chris Elshaw

Yes. Just on the second quarter, so what we did is we increased the absolute dollar spend versus the second quarter of last year. And we did that at a lower rate so our (GRP) pressure was even higher than the dollar increase. Second points as I mentioned in my comments, we plan to have increased spending again in the third quarter of this year, compared to the third quarter of last year. The rates that we have typically are tied to the media year, which is the September to October time frame. And so we will go through that process with our agency media com, the MediaCom, sometime ago and we’ll benefit from their leverage in the marketplace as a considerable buyer of media. And so at this point, the mix of media and the choices that we make as we go into the next calendar year will have an impact on comps but it’s too early to indicate what those rates will be.

Reza Vahabzadeh – Barclays Capital

Is there going to be a shift this year in your A&P spending in favor of the A versus the P or not really?

Chris Elshaw

We have done that already this year. We saw, specifically in the second quarter, we saw a significant increase in our advertising spending as we looked at the mix of ground support.

Reza Vahabzadeh – Barclays Capital

If you can talk about the US sales trends in the second quarter, obviously down a little over 3.5%. But the year-over-year comparisons were quite manageable given destocking in the prior year. So, can you just talk about what drove that kind of a sales performance, which was in contrast with your non-US markets, which experienced growth?

Chris Elshaw

Sure. While specifically with regards to the U.S., a couple of things. In the second quarter we launched Grow Luscious Mascara and Just Bitten Lipstain and as you know, new products area a very important factor in this category. Grow Luscious is performing very well and Just Bitten has already shown some very positive results in the first month in the market. Earlier in the year we launched PhotoReady, which is again performing extremely well and such one of the best performing new products in the category this year. You’ve commented then and let’s talk then about them. We significantly increased our advertising investment as we rebalanced our mix of advertising (cost). So our focus is through our portfolio planning, driving profitable sales growth overtime. And incidentally, as we globalize that portfolio, you can seem to see the benefits of that around the world.

Reza Vahabzadeh – Barclays Capital

So, the fact that the year-over-year comparisons were quite manageable, that that’s not part of the equation here?

Chris Elshaw

No, I mean, as I said in my prepared remarks, Revlon color cosmetics have high in itselves in the quarter, which was offset by lower net sales of Almay color cosmetics, Revlon (inaudible) and Mithchum’s anti-perspirant deodorant. Revlon beauty tools is performing well in a softening category. Almay was focusing on our core franchises to drive growth, that’s Smart Shade, One Coat and Intense Eye. And Mitchum as we said is well under way with new advertising and new marketing activity and we have some innovation pipeline for next year.

Operator

Your next question comes from the line of Jeff Kobylarz with Stone Harbor Investment.

Jeff Kobylarz – Stone Harbor Investment Partners

I am curious about what you could say about the industry as far as new products that have been introduced across your competitive universe. Can you say just how many new products have been introduced as like, say, percentage of the total of the universe that you are in?

Chris Elshaw

That’s not really changed. Generally equates throughout the year to about 15% to 20% of retail sales in the category. And most manufacturers are in that kind of ballpark.

Jeff Kobylarz – Stone Harbor Investment Partners

I’m curious about this advertising, the increase that you spent in this second quarter. I can’t tell if the amount of advertising you are spending, if you shifted it to more of the international markets, because that is where you have had the sales growth. Sales growth is up low single digits excluding foreign currency, and the US sales are down. I’m just curious if you could elaborate a little bit about the $20 million increase in advertising and the change in the sales in the second quarter?

Alan Ennis

Sure. A couple of things, Jeff. First of all, the increase in advertising is a global number so we’ve looked at making sure that we have a competitive share of voice in our key brands and key markets around the world. And so as the landscape changes, we’re changing with that. That $20 million is an increase as a global number first of all. But there was a significant increase in the U.S. As you mentioned we rebalanced the mix of spending to focus a little more heavily on advertising spending as compared to promotional activity. Obviously, promotional activity has a more immediate impact than consumption in store versus the longer term brand building and equity building investment that advertising supports.

Jeff Kobylarz – Stone Harbor Investment Partners

Can you elaborate about that, about why the shift was made and why you think it is better for the Company long-term, to shift to advertising versus promotion?

Alan Ennis

Sure, I mean, listen. With any brands, the objective is to build brand equity with the consumer and overtime advertising to the consumer, whether it’s TV, print or online has a longer term benefit of building brand equity. Promotion is an effective vehicle for short-term consumption gains but really excessive promotional activity can really deteriorate the value of your brand and help your brand in the marketplace. So really building brand equity is best achieved through a combination of advertising and promotion but really a greater focus on advertising overtime.

Operator

Your next question comes from the line of Patrick Trucchio with BMO Capital Markets.

Patrick Trucchio – BMO Capital Markets

On sales growth, what do you think is the biggest factor in terms of U.S. sales and this being the fifth quarter that they have been down year-over-year, and international sales look pretty strong. What is the single biggest factor there?

Chris Elshaw

Well as we said in the prepared remarks, the decline was driven by lower net sales of Almay color cosmetics, Revlon beauty tools and Mitchum’s anti-perspirant deodorants. As I said on Almay, specifically net sales were down in the quarter compared to the prior year due to cycling of the low end shift Almay Pure Blends, which Alan also mentioned. And Revlon beauty tools as I said were performing well in a category that had some softness due to the recession. Mitchum was very focused on new campaign with The Hardest Working Person and the innovation that’s coming later in the year.

Patrick Trucchio – BMO Capital Markets

Okay. Do you guys know when we might see U.S. sales start to increase?

Alan Ennis

Let me just tell into partly. We’re focused on profitable growth. That’s what our objective is, and the key driver that is building the brands. We talked about a shift between promotional spending and advertising spending which is designed to drive long-term growth in the brand. What we’re doing is we’re executing the global application of our portfolio plans. so we’ve got three-year rolling portfolio plans for each of our key brands and we’re executing that in each of our regions around the world. The competitive dynamics, the marketplace conditions, economic uncertainty differ from country to country and from region to region. And so you see performance being impacted by that. Obviously our desire is to grow the business profitability in the U.S. And we believe we’ve got all of the right actions and ambitions in place to do that overtime.

Patrick Trucchio – BMO Capital Markets

On the gross margin. I know you guys gave a breakdown of the expansion, I guess the FX probably turns neutral to negative by the fourth quarter and maybe the first quarter next year. But what in the gross margin do you think was more one time and what do you think is more sustainable over time?

Alan Ennis

Well first of all as it relates to currency, I wouldn’t be so bold as to predict what currency is going to do in the back half of the year. And so currency is an outcome. I think there are a number of factors that impact gross margin positively versus where we have been in the past. Obviously we’re benefitting from the restructure savings. Some of those impacts (inaudible). We’re also benefitting from the procurement initiatives that we went through last year as we went out to all of our key inputs, key raw materials and key inputs to renegotiate and take advantage of marketplace rates. So you’re seeing the benefit of that in gross margin. There are always one time activities within their past that cause gross margin jump up and down, quarter-to-quarter. Obsolescence changes, inventory changes and currency, et cetera. And so really what our focus is on operating (commercial). We’ve shared that with you before and we believe that the level that we’re at today is very competitive and sustainable.

Operator

Your next question is a follow-up from Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh – Barclays Capital

As far as the timing of shipments of new products, are we mostly through that, is there some more to come in the second half?

Chris Elshaw

Well as you know, shipments vary from quarter-to-quarter. the first half shipments generally occur from November through early into the first quarter and the second half shipments are later April through into the third quarter. So it changes year-over-year but generally speaking between end of April and end of July your new shipments are in place.

Reza Vahabzadeh – Barclays Capital

So, you might still have some of that in the early part of third quarter of this year?

Chris Elshaw

Yes, that maybe some at it.

Alan Ennis

And that’s the normal cycle, as Chris says, that’s the normal cycle in the U.S. It’s not restricted to first half, second half as the retailers are more open to new product launches throughout the calendar year.

Reza Vahabzadeh – Barclays Capital

A couple of housekeeping items. The all other that you mentioned for cash uses, does that include dividends? Any preferred dividends?

Steven Berns

The preferred dividends are included in interest expense. My comments forgot to cash interest expense, I refer you to Book 10-Q as well as the 10-K and that’s the number that you can calculate, but we separately talked to interest taxes displays in CapEx.

Reza Vahabzadeh – Barclays Capital

Then accounts payables were higher year-over-year. Is that just timing?

Steven Berns

I would just look at that as timing. Clearly, there’s nothing noteworthy there.

Operator

Your next question is a follow-up question from Jeff Kobylarz with Stone Harbor Investments.

Jeff Kobylarz – Stone Harbor Investment Partners

I was curious about one of your goals to drive a common global process. Is there anything you could say in general about how far along you are with that and any metrics you could talk about, about putting that in place?

Chris Elshaw

Yes. I mean, we’ve been working on that for some time. We now have global portfolio plans for our largest brands and we organize the portfolio by consumer cluster around the world. So that while it’s a fairly global portfolio, many products apply. Of course the whole world, there is certain regions of the world where consumer preferences, cultural differences. Mean that you had to have a slightly adjusted portfolio. So we’re bouncing along that very strongly now. Well, probably about a year into it and we’re working on pursuing that. And the ultimate aim of it of course is to drive growth in every region in every country.

Alan Ennis

The thing we’re doing there, Jeff, is really we’re looking at our supply chain of manufacturing function and making sure that we are taking full advantage of the global application. Hence we have four manufacturing plants around the world, we have a number of third-party manufacturers and of course we source from various places. So again, looking at that globally is a focus of ours as we go through the next couple of years.

Jeff Kobylarz – Stone Harbor Investment Partners

Anything in general you could say about the ability to sell the Almay and the Mitchum brands internationally as well as they are penetrated here in the U.S.?

Chris Elshaw

Yes. I mean, if you let’s say, do a grade of the countries that we’re in business in the countries where we have Mitchum, you would say there are lots of places where we don’t have Mitchum.

Jeff Kobylarz – Stone Harbor Investment Partners

Is there the same consumer potential uptake in those international markets as there is in the U.S.?

Chris Elshaw

Yes. Again, depending on cultural preferences. So, in the case of deodorants, for example, you find distinct preferences around the world for different forms. So, providing you meet the form requirement, then obviously you can establish your brand. For example, Almay is in a few places around the world. Currently it is in Canada. We have good business in South Africa, Venezuela, so there are opportunities for brands like Almay and Mitchum in the rest of the world.

Operator

Your next question comes from the line of (David Sowu) with (Healthy Eyes Hilly).

David Sowu (ph) – Healthy Eyes Hilly (ph)

I have three questions. First, can you provide any color on your market share performance in the US with respect to color cosmetics, beauty tools and deodorant? And, secondly, can you talk about how the sell-in versus sell-out rate trended in the US in the second quarter? And just, lastly, maybe if you could talk about how the Project Impact initiatives at Wal-Mart are impacting sales, if at all? Thank you.

Chris Elshaw

Okay. First of all, as we’ve said in the ACNielsen Data, it represents only a portion of our channels in all of the U.S. markets. So that’s why we don’t focus on that and we are free to focusing on the next sales. In terms of the phasing, next sales and retail sales don’t necessarily move in tandem fro period to period. It depends when you shipping as to when the product seems to off for sale. Of course overtime, those things should be (per out). And then on project impact. Wal-Mart continue to focus on trying to increase and improved at in-store environment. We work very close with them. There’s continuing to roll out in a number of stores and whatever they are doing that way working very closely and obviously using the learnings that they’ve got.

Operator

At this time there are no further questions in queue.

Alan Ennis

Operator, thanks very much. We appreciate everybody’s participation today, and we’ll speak to you soon.

Operator

Thank you. This conclude today’s conference call. You may now disconnect.

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