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Revlon, Inc. (NYSE:REV)

Q3 2010 Earnings Call

October 28, 2010 9:30 AM ET

Executives

Elise Garofalo – Senior Vice President, Treasurer and IR

Alan Ennis – President and CEO

Chris Elshaw – Executive Vice President and COO

Steven Berns – Executive Vice President and CFO

Analysts

Mili Seoni – J.P. Morgan

Reza Vahabzadeh – Barclays Capital

Grant Jordan – Wells Fargo

Connie Maneaty – BMO Capital Markets

David Wu – Telsey Advisory Group

Marianne Manzolillo – Angelo, Gordon

Ania West – Ciax Advisors

Operator

Good morning, ladies and gentlemen and welcome to Revlon’s Third Quarter 2010 Earnings Conference Call. At the request of Revlon, today’s conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Ms. Elise Garofalo, Revlon’s Senior Vice President, Treasurer and Investor Relations. You may begin, Ms. Garofalo.

Elise Garofalo

Thank you, Christy. Good morning, everyone and thanks for joining today’s call. Earlier today, we released our results for the third quarter ended September 30, 2010. If you’ve 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 on factors that could affect the company’s results from time to time and cause them to differ materially from such forward-looking statements is set forth in the company’s filings with the SEC, including our 2009 Form 10-K filed in February and our 2010 third 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 their most directly comparable GAAP measures. Reconciliations can be found in the financial tables accompanying our release.

Regarding market share information, as a reminder, during our 2009 fourth quarter earnings call, 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’ve 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 the 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.

Also, I want to remind you that 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 in the P&L. And, finally, as a reminder, our discussion this morning should not be copied or recorded.

With that, I’ll turn the call over to Alan.

Alan Ennis

Thank you, Elise and good morning, everyone. As we have discussed with you in the past, our 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 third quarter of 2010, we continued to execute our business strategy and made progress in a number of important areas. As we look at our sales performance for the quarter, we were pleased with our growth in the Europe, Middle East and Africa region, which excluding FX, increased 15% year-over-year and in the Latin America region, which excluding FX, was up over 30% year-over-year.

In the U.S., however, net sales declined. Clearly, we are not satisfied with this performance. And we are taking a number of actions to address this, which Chris will expand upon later in the call. With regard to building our strong brands, our 2010 new products are performing well. Our product portfolio plans are delivering a pipeline of innovative, high-quality, consumer-preferred products which, as you know, remains a critical driver for growth.

Also, during the quarter, in order to continually improve our performance and consistent with our strategy of developing our organizational capability, we enhanced our global management team with a number of key organizational changes. Julia Goldin recently joined us as Chief Marketing Officer, overseeing all marketing activities for our brands globally.

We see tremendous opportunity to build our brands with world class marketing, which requires such a talented senior executive leader to set brand strategy and coordinate and integrate marketing direction and execution across all brands and regions.

In the Asia Pacific region, we hired David Teasdale to succeed the retiring general manager of that region, Graeme Howard. David has a track record of broad international general management responsibilities, most recently with the Mars Corporation in Asia. I would like to take this opportunity also to thank Graeme for his many years of exemplary service to our company.

Also, during the quarter, we made a number of internal appointments. Firstly, we appointed John Collier as general manager of the U.S. John has held several senior roles at Revlon including major customer marketing roles in the U.S. and most recently served as general manager of our Canadian business.

Secondly, we appointed Simon Worraker as general manager of Canada. Simon was previously general manager of EMEA. And, finally, we appointed Mark Wood as general manager of EMEA, where Mark was previously general manager of the U.K. and our European distributor businesses. These individuals, together with our strong capability and innovation complement a highly capable organization, which positions us well to realize our strategic objective of profitably growing our business.

Lastly, as it relates to business strategy, with regard to increasing our operating profit and cash flow and improving our capital structure, we have delivered a highly competitive operating income margin of 14% this year, while continuing to invest in our brands and our people. In addition, we continue to generate positive cash flow from operations and reduce debt.

In summary, we are strengthening our brands, investing in our organizational capability and improving our financial profile. And we remain focused on delivering profitable net sales growth.

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

Chris Elshaw

Thank you, Alan, and good morning, everyone. Today, I will review our net sales performance, excluding the impact of changes in foreign currencies by region and by brand. Total company net sales in the third quarter were essentially unchanged year-over-year as low net sales in the United States were largely offset by higher net sales outside the U.S.

Within the U.S., lower net sales were driven by Revlon and Almay color cosmetics. On a brand basis outside the U.S., we saw higher net sales of Revlon color cosmetics, Revlon Colorsilk hair color and Revlon fragrances.

So, starting with the regional sales performance during the quarter, in the United States, net sales were $166.7 million, a decrease of $17 million or 9.3% compared to last year. As I noted, the decline was primarily driven by Revlon and Almay color cosmetics.

While we were pleased with the performance of many of our new products, this performance was insufficient to offset the decline in our base business during the quarter. Our intent is to improve our performance in the U.S. market, in particular, in the Revlon and Almay brands through the following actions which are under way.

Firstly, we are optimizing our brand support mix to be more effective. We have increased our media pressure using creative that has tested well with consumers. And we have reduced our promotional debt. We believe, however, that the increase in media pressure did not fully offset the impact of the reduction in promotional debt.

In addition to having consumer preferred new products, there is a fine and ever changing balance required between advertising and promotion to drive sales. Therefore, we are focused on continuing to refine this brand support mix to generate sales growth.

Secondly, we believe that we have room for improvement in our in-store execution, specifically, our in-store displays. We will be implementing some exciting new graphic and layout changes to our permanent display walls over the next few months.

In terms of promotional displays, we will be introducing more impactful and eye-catching displays as well as improving the in-store messaging to consumers. We believe that these changes will improve our competitiveness at the point of purchase to benefit both our strong new product introductions and our existing base business.

And, finally, in order to improve execution and drive growth in the U.S., we have appointed a dedicated general manager to provide increased day-to-day focus on the U.S. region. John Collier has a successful track record with Revlon and his previous experience in the U.S. market in major customer marketing roles and he was most recently general manager of our Canadian business.

So, in summary, we believe the actions we are taking will enhance our marketplace effectiveness. And we remain very focused on delivering profitable net sales growth in the U.S.

Moving on to Asia Pacific, net sales were essentially unchanged year-over-year. Lower net sales of Revlon color cosmetics in Australia and Japan, primarily driven by economic conditions were offset by higher net sales of Revlon color cosmetics and other beauty care products throughout the rest of the region.

In Europe, Middle East and Africa, net sales increased $6.6 million or 14.8%. This increase was primarily due to higher net sales of color cosmetics and fragrances in the U.K., where our Revlon brand is growing strongly and in South Africa, where we are building on a strong end-market position.

As I mentioned last quarter, Revlon is the official makeup partner for Britain’s Next Top Model 2010, which was hosted by our brand ambassador, Elle Macpherson. Tiffany Pisani was recently crowned this season’s winner and is the face of Revlon’s new Autumn/Winter 2010 trend collection. This collection designed by Revlon Global Artistic Director, Gucci Westman, will be in the U.K. markets in November.

In Latin America, net sales increased $9.2 million or 31.7%. Approximately, half of this increase was due to higher selling prices in Venezuela as a result of market conditions and inflation.

From a brand standpoint, the increase was primarily due to higher net sales of Revlon color cosmetics and Revlon Colorsilk hair color, both in Venezuela and several distributor markets. In Canada, net sales were essentially unchanged year-over-year.

Now, moving on to performance by brand, Revlon color cosmetics total company net sales decreased during the quarter as compared to prior year. Net sales were lower in the U.S.; however, outside the U.S. net sales increased during the quarter.

With regard to our new products. In the Face segment, Revlon PhotoReady makeup continues to perform very well globally. We believe PhotoReady success is driven by our innovative formula, which contains photochromatic pigments that bend and reflect light to give a flawless, airbrushed appearance in any light. We have exciting plans to further extend the Revlon PhotoReady franchise in the future.

In the Eye segment, we are very pleased with the global performance of Revlon Grow Luscious Mascara. Our tests show that 96% of women using this breakthrough mascara saw instantly longer, fuller and lusher lashes.

Grow Luscious is now being sold across all of our regions. This has been our best mascara launch in recent years, which reflects the tangible benefits of our portfolio planning and innovation process.

In the Lip segment, Revlon’s Just Bitten Lip Stain + Balm is the only lip stain including a balm, a benefit clearly appreciated by the consumer and is performing very well.

And, lastly, in the Nail segment, we are excited about Top Speed, an innovative nail enamel that dries in 60 seconds and this is offered in a range of on-trend colors. Top Speed is in market in Canada, where it has been incremental to our existing nail business and we will be introducing Top Speed on a global basis.

Moving on to the Almay brand, net sales of Almay were down in the quarter as compared to the prior year. Net sales were lower in the U.S.; however, outside the U.S., net sales were unchanged.

During the quarter, we launched our TV advertising campaign behind the Almay intense [i-franchise] with Kate Hudson, our newest Global Brand Ambassador. We are pleased with the performance of this franchise, which we believe has shown responsiveness to this new campaign that went on air in August.

The franchise is also benefiting from our light interplay technology, which intensifies a woman’s natural eye color. We remain focused on building Almay’s brand’s core franchises.

In Women’s Hair Color, net sales of Revlon Colorsilk continued to grow in the third quarter in both our core Colorsilk offering as well as our new Colorsilk Luminista range. We continue to expand distribution of this highly successful product line around the world.

In Antiperspirant/Deodorants, net sales of Mitchum in the third quarter of 2010 declined year-over-year. We continue to support the Mitchum brand and have both new product innovation and exciting creative plans for 2011.

And, finally, our Beauty Tools business continues to perform well in the face of softer demand in the category overall. The strength of our Beauty Tools business is centered on the strong heritage of the Revlon brand coupled with our high quality products offering. And in 2010, we brought some innovative new products to the marketplace.

Now, I’ll 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 third quarter, our gross margin improved to 65.4% versus 63.9% last year. Gross margin in the quarter was positively impacted by a few factors.

First, lower costs related to inventory obsolescence and sales returns; second, savings related to our May 2009 restructuring actions; third, lower costs as a result of procurement initiatives; fourth, lower pension expense and last, lower allowances on color cosmetics. These improvements were partially offset by an unfavorable impact of product mix during the quarter as compared to the third quarter of 2009.

In the third quarter, SG&A increased $13.9 million to $169.3 million primarily due to higher advertising spending with our brands. This is consistent with our prior expectations as discussed on our second quarter earnings call.

In the third quarter, we significantly increased media pressure as compared to the third quarter of 2009, while benefiting from lower advertising rates. Operating income in the third quarter was $39.3 million compared to $50.3 million in the same period last year. Adjusted EBITDA in the third quarter was $54.3 million compared to $66.5 million in the same period last year.

Operating income and adjusted EBITDA continued to benefit from the realization of savings from our May 2009 restructuring. As we have previously disclosed, annualized savings from these actions are expected to be approximately $30 million.

Through September, we have achieved a run rate of approximately $29 million, $15 million of which was realized in the second half of 2009 and $14 million of which was realized through September 2010. We expect the remaining annualized savings to materialize in the fourth quarter of this year.

Tax expense in the third quarter was a benefit of $600,000 as compared to an expense of $2.5 million in the third quarter of last year. The lower tax expense was primarily due to two factors.

First, the third quarter 2010 tax provision benefited from the favorable resolution of tax matters in the United States. And, second, the third quarter 2010 had lower taxable income in certain jurisdictions as compared to the same period last year.

Net income in the third quarter of 2010 was $12.5 million or $0.24 per diluted share, compared to net income of $23.1 million or $0.45 per diluted share in the same period last year. Operating income, adjusted EBITDA and net income in the third quarter of 2009 included $2.6 million of charges related to the 2009 restructuring actions.

Moving on to cash flows, net cash provided by operating activities in the third quarter was $9.5 million compared to $59.2 million in the same period last year. Free cash flow in the third quarter of 2010 was $5.1 million compared to $54.1 million in the same period a year ago.

The third quarter of 2010 was impacted by unfavorable changes in working capital, lower operating income and higher interest paid as compared to the same period last year. The working capital variance in cash flow from the third quarter of 2009 was primarily driven by a source of cash from working capital in the 2009 period versus a use of cash in the 2010 period.

The source of cash in 2009 was primarily attributable to accounts receivable and inventory as we realized benefits associated with our corporate inventory turns initiatives. In contrast, during the third quarter of 2010, inventory was a use of cash.

As we continue to execute our inventory turns initiatives, for the full year 2010, we expect to further improve our inventory turns as compared to 2009. As we stated during our 2009 year-end conference call, the 2010 benefit is expected to be less than the amount of the benefit received full year 2009.

Looking at the P&L for the first nine months of 2010, net sales in the first nine months of 2010 were $952.2 million, essentially flat year-over-year on an XFX basis as compared to the first nine months of 2009. In the United States, net sales decreased 5.8% to $528.1 million compared to the first nine months of ‘09.

In Asia Pacific, XFX net sales decreased $1.5 million or 1.1%. In Europe, Middle East and Africa, XFX net sales increased $8.1 million or 6.3%. And in Latin America, XFX net sales increased $24.1 million or 31.8%. Lastly, in Canada, XFX net sales were essentially flat year-over-year.

Operating income in the nine-month period was $132 million, representing an operating income margin of 13.9% compared to $108.5 million in the same period last year, which represented an operating margin of 11.4%. Adjusted EBITDA was $177.1 million compared to $158.6 million in the same period last year.

Both operating income and adjusted EBITDA in the first nine months of 2009 included $21.4 million of restructuring charges. Net income was $31.1 million or $0.60 per fully diluted share, compared to $36 million or $0.70 per fully diluted share in the same period last year.

Net income for the first nine months of 2010 included $9.7 million of expenses associated with the March 2010 refinancing of the company’s revolving credit and term loan facilities. It also included a foreign currency loss of $2.8 million related to the remeasurement of Revlon Venezuela’s balance sheet as a result of Venezuela’s currency devaluation in January of this year. And, last, the provision for income taxes in the first nine months of 2010 was $9.2 million as compared to $300,000 in the same period last year.

Net income for the first nine months of 2009 included $21.4 million of restructuring charges and a $7.8 million gain related to the early extinguishment of debt.

Turning now to cash flow, year-to-date operating cash flow was $50 million compared to $77.2 million in the same period last year. Free cash flow year-to-date was $38.2 million compared to $68.6 million in the same period last year.

On the liquidity front, our unutilized borrowing capacity and cash on hand as of September 30, 2010 was $140.2 million comprised of $108.1 million available under our revolving credit facility and $32.1 million of available cash. Our revolver was undrawn as of September 30, 2010.

Now, let me update you on several factors that 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 third quarter 2010 net sales by $8.8 million and operating income by $1.3 million.

In the first nine months of 2010, it reduced reported net sales by $22 million and operating income by $5.2 million. Next, consistent with our historical practice, while we’re not providing specific guidance for adjusted EBITDA for 2010, I am going to reiterate certain 2010 cash flow information, none of which has changed from the guidance we provided during our second quarter conference call.

Capital expenditures are expected to be approximately $20 million for 2010. Permanent display expenditures are expected to be approximately $40 million. Cash interest expense is available by reference to our public filings, which detail the composition of the company’s capital structure and applicable interest rates.

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. However, in the ordinary course of our business, our working capital flows may vary as a result of a number of factors on a quarterly basis.

One final item, I would like to make you aware of, is disclosure in our third quarter 10-Q filed earlier today regarding our U.S. deferred tax assets. As a result of the company’s cumulative U.S. taxable income since 2008 and based upon current expectations for future taxable income in the U.S., we are likely to reduce the valuation allowance on our U.S. deferred tax assets in the near term perhaps as early as the fourth quarter of 2010.

This one-time non-cash benefit could be as high as the full valuation allowance at December 31, 2009 of approximately $300 million. This would benefit net income in the period of such reduction. If this were to occur, then beginning with the quarter following such reduction, the tax provision would reflect a higher effective tax rate impacting net income. However, any increase in the effective tax rate would not affect the company’s cash taxes paid until the U.S. tax loss carry-forwards were fully utilized.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Carla Casella with J.P. Morgan.

Alan Ennis

Good morning, Carla.

Operator

Carla, your line is open.

Mili Seoni – J.P. Morgan

Hi. This is Mili here for Carla.

Alan Ennis

Good morning.

Mili Seoni – J.P. Morgan

Morning. Could you give us some color on which part of the U.S. business was weak, was it sales into the supermarkets, drugs -- drugstores or was it someone cutting back shelf space?

Chris Elshaw

Okay. Well, as I said earlier, our intent to improve our performance in the U.S. and in particular, on the Revlon and Almay brands. So, just in response to the point on shelf space, we have seen no significant changes in our shelf space. Each focus really on the areas we talked about.

First of all, we are optimizing our brand support mix and that is the mix between media pressure, using our creative that has tested well and the promotional debt, which we had reduced in the quarter. So, as we said, we believe the increase in media pressure did not fully offset the impact of the reduction in promotional debt, but we also have some great new products there and they performed very well. We are very pleased with those. So, we are focused on continuing to refine the brand support mix to generate sales growth.

Secondly, as we said, we believe there is room for improvement in our in-store execution. We will be implementing some changes, some new graphic and layout changes to our permanent display wall. And, also, in terms of promotional displays, we are introducing some more impactful and eye-catching displays. So, we think those changes will improve our competiveness at point of purchase and that will benefit both our strong new products and our existing base business.

And, finally, as we also mentioned, we have appointed a dedicated general manager to the U.S. business to provide increased focus. And, as we mentioned, John has a successful track record with Revlon in various roles.

Mili Seoni – J.P. Morgan

Thank you.

Operator

Your next question comes from the line of Reza Vahabzadeh from Barclays Capital.

Alan Ennis

Good morning, Reza.

Reza Vahabzadeh – Barclays Capital

Good morning. I had a question also on U.S. sales. You mentioned the weakness was focused on Almay and Revlon brands, but can you also talk about which product lines experienced the greatest weakness? From our perspective, it looked like Beauty Tools and Hair Color products were fine, but can you just talk about where the weakness was concentrated by product line in the U.S.?

Chris Elshaw

We don’t disclose individual product line performance. What I will say is we have been very pleased with the performance of some of our new products. I talked about those earlier, Revlon PhotoReady makeup has performed very well, Revlon Grow Luscious Mascara, Revlon Just Bitten Lip Stain + Balm, which are the new products we introduced. However, they weren’t sufficient to offset some of the decline in the base business.

Reza Vahabzadeh – Barclays Capital

Right. I guess I’m just trying to understand why the base business was weaker year-over-year despite what seemed to be manageable year-over-year comparisons.

Chris Elshaw

So, we believe that is due to the items I laid out, such as the balance in brand support. We are constantly, as we said, refining the balance between advertising and promotion to drive sales. We think that is an area we are very focused on. The in-store, where we talk about we’re making improvements to our in-store permanent wall displays as well as our promotional displays and, of course, having the focus of a dedicated U.S. general manager.

Reza Vahabzadeh – Barclays Capital

Great. And then as far as the category, how do you think you performed versus the category in the third quarter?

Chris Elshaw

Well, as we said at the beginning and as we said previously, we don’t actually discuss the Nielsen results because they only represent a part of our business.

Reza Vahabzadeh – Barclays Capital

Right. But you see more data beyond Nielsen, right?

Chris Elshaw

There is other panel data available, but as we’ve said from the start of this year, we stopped disclosing the Nielsen data and just talked about our net sales performance.

Reza Vahabzadeh – Barclays Capital

Okay. So, the strategy of increasing media pressure but reducing promotional debt, is that something that is likely to be ongoing in the fourth quarter and beyond?

Chris Elshaw

Well, we haven’t made any statements about our fourth quarter media. What we are saying is we will continue to refine the balance between those two drivers. It is an ever-changing picture, consumers, customers, retailers, they are all constantly refining how we approach the category as are we. And we are refining the balance between our advertising and promotion support.

Reza Vahabzadeh – Barclays Capital

What are you seeing in terms of advertising rates?

Chris Elshaw

Well, we just completed the upfront, as you are probably aware. As we mentioned earlier in the year, we switched to MediaCom, which is the largest media buyer in the U.S. market. And based on that knowledge, we think we have achieved very competitive rates for the new upfront broadcast year, which starts October this year to September next.

I think it is common knowledge that last year media rates declined significantly and have increased somewhat in this broadcast year. But we are very pleased with our negotiations. And we’ve not only got good rates, we have also improved the quality of our TV placements.

Reza Vahabzadeh – Barclays Capital

Fair enough. And then just a question of working capital. I noticed that prepaid expenses were up year-over-year and so was accounts payable, but working capital has been in use in the third quarter. Is that likely to unwind in the fourth quarter? Any comments on that would be helpful.

Steven Berns

Right. So, with regard to the prepaid question you are asking, clearly, on a quarterly basis is a function of a number of various items, those balances will shift around. So, there is nothing significant to mention there.

With regard to the full year cash flow, as we had talked about, we’ve given guidance on working capital that we effected that for the full year are the working capital items other than the ones that I specifically called out would be a use of cash of approximately $20 million. So, we called out permanent cabinetry, capital expenditures and taxes paid, as well as needing to look at cash interest paid. So, on a full-year basis, we are comfortable with the guidance we gave on this call, which is consistent with what we said on our second quarter.

Reza Vahabzadeh – Barclays Capital

Thank you much.

Steven Berns

Thanks, Reza.

Operator

Your next question comes from the line of Grant Jordan with Wells Fargo.

Grant Jordan – Wells Fargo

Good morning. Thanks.

Chris Elshaw

Good morning, Grant.

Grant Jordan – Wells Fargo

I just wanted to drill down a little bit more on the advertising spend. How much of the increase was allocated to the U.S. versus the rest of the world?

Chris Elshaw

We don’t disclose the split of advertising by region.

Grant Jordan – Wells Fargo

Okay. Just generally, directionally, is that part of the increase in advertising, is that part of the shift from promotional dollars to advertising or is that a separate investment to try to drive the product?

Chris Elshaw

Yeah. I mean, our increase in advertising dollars is, of course, aimed with increasing our rate of sale. As we said, we are constantly balancing those two factors of advertising spend and promotional spend in conjunction with the new product launches too and maintaining the base business.

So, it is not a straightforward equation. We are constantly refining it. And that is what we are saying here today, we are going to be constantly refining that in order to drive net sales growth.

Grant Jordan – Wells Fargo

Okay. You mentioned in the press release a little bit about you benefited from lower material costs. What is your outlook going forward for material costs?

Steven Berns

As you are probably aware, going forward, there has just been an increase from the 2008 levels in general in commodities, but we believe that our gross margins and our operating margins, which we’ve talked to, are really where we are focused on delivering competitive operating margins. And we believe that we will be able to take all the actions necessary to achieve those competitive margins. So, whether it be in costs from commodities or other.

Grant Jordan – Wells Fargo

Okay. Thank you.

Operator

Your next question comes from the line of Connie Maneaty with BMO Capital Markets.

Connie Maneaty – BMO Capital Markets

Good morning.

Alan Ennis

Good morning, Connie

Steven Berns

Good morning.

Connie Maneaty – BMO Capital Markets

Is Julia Goldin on the call?

Alan Ennis

No, she is not, Connie.

Connie Maneaty – BMO Capital Markets

Okay. Could you tell us in your conversation with her what she thought the opportunity of Revlon was? I am interested to hear about what a fresh set of eyes sees with the brand? And I suspect you have probably had those conversations.

Alan Ennis

Well, it is early in her tenure, as you can appreciate, Connie. She has been here for a couple of months. She is actually in Europe this week visiting our retail partners and our businesses in the U.K. and in France and in Italy this week. The reasons that she joined Revlon to -- and not speaking for her, but based on our discussions, I mean, she views the Revlon brand as one of the world’s most iconic brands, period.

The second reason is that she believes, as do I and as do we, that there is tremendous opportunities for not only the Revlon brand but for the portfolio of brands to drive profitable growth. And she thinks there is many things that we can do strategically and tactically to deliver that growth. So, she believes, I believe, as I do, in the opportunity of taking the portfolio brands to the next level.

Connie Maneaty – BMO Capital Markets

Okay. Didn’t you -- haven’t you always had a general manager for the U.S.?

Alan Ennis

No, we haven’t. Prior to May of 2009, Chris Elshaw essentially was managing that business. Obviously, with his expanded role, taking on the broader regions responsibility, we looked at the requirements to deliver execution in the U.S. region, thought it was appropriate to put somebody under Chris Elshaw to really focus on execution in the U.S.

Connie Maneaty – BMO Capital Markets

Okay. So, this is the first time since his role expanded that somebody is completely dedicated to the U.S.?

Alan Ennis

That’s correct.

Connie Maneaty – BMO Capital Markets

Okay. The changes that you suggest making to the U.S. business sounds very tactical. You know, changing some of the displays, tinkering with the advertising and promotional mix but I guess what I’m concerned about is that often times when we hear about the success of the new products, they haven’t lifted up the base business. And this has been going on now for the better part of a year and a half.

And I am wondering, if you are losing the base Revlon and Almay customers. What does it take to get them to buy not only the new products, but to be loyal consumers of what the icon is known for?

Chris Elshaw

Well, I mean, you made the point that these changes are tactical and they are refinements of the tactics. We don’t have a strategic problem with the Revlon brand as you can see from success in other markets around the world. These are tactical market changes. As you know in this category, 15% to 20% of sales every year are in new products, which inevitably means there is a decline in the base business. It occurs at varying levels depending upon how you execute these tactics.

So, I don’t see any strategic problem there. I don’t see any problem that is insurmountable in any way. It’s a question of how we execute those tactics to maintain the balance between new products and supporting the base.

Alan Ennis

I think another point there, Connie, two other points. First of all, a focus on execution and hence bringing the general manager in to really drive that I think is going to be a significant help.

A broader point strategically, the product pipeline that we have across our brands into 2011, 2012 is as strong as I have seen it and with Alan Meyers as our Chief Science Officer, Annette Falso in Product Development and now with Julia on the marketing front, I feel very confident that we can make the appropriate refinements in the U.S. business to drive growth.

Connie Maneaty – BMO Capital Markets

How much consumer knowledge do you have about the women who buy your products? Would you consider that a strength or something that can also be built up?

Chris Elshaw

There is always room for improvement there. We do have a detailed tracking study which we update every quarter. So we are tracking brand health attributes. With Julia’s arrival, we will be increasing our focus there as well, of course, because more knowledge about the consumer is always helpful. But we do have a good base of knowledge there.

Connie Maneaty – BMO Capital Markets

Okay. Thanks.

Chris Elshaw

Thanks Connie

Operator

Your next question comes from the line of David Wu with Telsey Advisory Group.

David Wu – Telsey Advisory Group

Hey, good morning, everyone.

Chris Elshaw

Good morning, David.

David Wu – Telsey Advisory Group

Hi. I just have three questions. First, EMEA performed very well and can you talk about what is driving the growth, you know, end-markets like the U.K.? Is it just from consumers that are responding well to the product or is it also from expansion of distribution points?

And, secondly, can you talk about any new product launches planned for the fourth quarter? And just lastly, when will the new promotional displays hit the stores in the U.S.? Thank you.

Chris Elshaw

Okay. So, EMEA, as we said, the growth in the U.K. is driven by the Revlon brand. It is performing strongly as Revlon color cosmetics. It is also performing strongly in Charlie fragrances there. There has been some distribution increase over the prior year in Revlon cosmetics, but the same store rate of sale is improving very well in that brand. So, overall it is a very healthy picture there.

In terms of the new products pipeline, we have not announced any specific products at this stage. We will be announcing shortly. As soon as we make that announcement, you will see that. And in terms of the new promo displays, they are related to new promotions going in store at the start of next year. So, you will start to see them appear the very end of this year in store and the start of next year.

David Wu – Telsey Advisory Group

Excellent. Thank you.

Operator

Your next question comes from the line of Marianne Manzolillo with Angelo Gordon.

Marianne Manzolillo – Angelo, Gordon

Good morning. You stated before that every year about 15% to 20% of your sales are from new products. Do you expect to hit that number this year, then?

Chris Elshaw

We’re talking about, when I say proportion of sales, I’m talking about conception of our sales were just in the range of that at this stage.

Marianne Manzolillo – Angelo, Gordon

Okay. So, again, you are believing it will hit that level then or perform to expectations this year?

Chris Elshaw

Yeah. We are in that range in this quarter.

Marianne Manzolillo – Angelo, Gordon

Okay. Great. Your improvement in gross margin this quarter, was that perhaps helped by lower promotional spending, then?

Steven Berns

So, when it comes to the gross margin, what we have talked about is that our focus has been really on delivering competitive operating margins. We did have lower allowance on color cosmetics in the period and that, as you see in our 10-Q, increased gross profit percentage function of net sales by about 0.5%. And so that really would be the only significant driver in response to your question.

Marianne Manzolillo – Angelo, Gordon

As far as the other factors that caused the improvement in gross margin, do you expect them to continue? I think, the other factors you cited were, what, lower returns, lower inventory obsolescence.

Steven Berns

Right. With regard to the gross margin, certainly the discussion that we had on this call and in our 10-Q are just with regard to the quarter. Our focus as we stated last quarter, is delivering competitive operating margins. So, period-to-period, you are often going to see a movement in all of the parts that contribute to those operating margins, which include gross margin.

As we indicated in the past, the factors which drive that are really brand support, timing and size of new product launches, just to name a couple. And so all in all, we are pleased with our operating margins this year, which we believe are competitive.

Marianne Manzolillo – Angelo, Gordon

What about the pricing for your products, your base Revlon products? Are you happy with where they are priced versus the competition or do you think that needs some tinkering?

Chris Elshaw

I think our price positioning is competitive. What we referred to earlier was a balance between promotional price and an ongoing price and that is what we are refining.

Marianne Manzolillo – Angelo, Gordon

Refining in what way?

Chris Elshaw

Well, as I said in comparison to media and the new product introductions in the base business, that is a complex set of factors which we are constantly looking at. What is the most appropriate balance between an ongoing price, a promotional price, the frequency with which you promote, those kind of things, is what we are refining.

Marianne Manzolillo – Angelo, Gordon

Okay. You also stated something that hurt the gross margins was the product mix. So, which products would have hurt that margin?

Steven Berns

So, what we have stated is that we had some products which are sold in the U.S. versus some products which are sold overseas have different margins just because of the price positioning and the area of distribution.

So, as you know, we participate in the mass channel in the U.S. but overseas we participate both in the mass channel and in the beauty advisor channel as a function of how the consumer prefers to purchase their products. So, gross margins and operating margins will swing as a function of the spending to drive those growth -- that growth.

Marianne Manzolillo – Angelo, Gordon

And where would the margins be more or less, how would they vary?

Steven Berns

We don’t really discuss that. It’s on a global basis. We’re managing the overall portfolio of brands and regions.

Marianne Manzolillo – Angelo, Gordon

I see. And then, also, in Europe you stated that the U.K. was a driver of some of the growth. Which specific products is it in the U.K. that drove the growth there?

Chris Elshaw

As I said earlier, it was Revlon color cosmetics and also the Charlie fragrance line.

Marianne Manzolillo – Angelo, Gordon

I see. Any specific color cosmetic products and is that product sold here in the U.S. as well?

Chris Elshaw

As you know, our product portfolio is fairly global, so it’s basically the same product mix.

Marianne Manzolillo – Angelo, Gordon

Okay. That’s great. And then just regarding the display spending, it sounds as if you may perhaps be spending more on display spending next year?

Alan Ennis

As we are looking at some of the refinements we are making in the U.S., this year, as Steven mentioned, we will spend approximately $40 million on display spending. We have been at that run rate for a number of years now. And I would expect that to continue. So, it is really how we feel about making the best return on investments off that level of spending going forward.

Marianne Manzolillo – Angelo, Gordon

Okay. Okay. Great. Thank you.

Alan Ennis

Thank you.

Operator

Your final question comes from the line of [Ania Walks with CX].

Ania West – Ciax Advisors

Hi. This is [Ania West from Ciax Advisors]. You mentioned that MediaCom is going to improve your media coverage. Can you tell us when that will start?

Chris Elshaw

So, we appointed MediaCom earlier this year, actually. They already had an impact on our 2010 media buying. They have represented us in the 2010-2011 upfront buying process, so they have handled all those negotiations for our media, which started in October and runs through next September.

Ania West – Ciax Advisors

Okay. In terms of TV, different TV times, has that started already?

Chris Elshaw

The new upfronts have already started, it started October.

Ania West – Ciax Advisors

Okay. And following on Connie’s question about the consumer knowledge, can you remind us who is your target customer?

Chris Elshaw

Well, it is a broad consumer. We operate in the mass category and like all mass brands, our target and our consumer reflects the general demographics of the population.

Ania West – Ciax Advisors

I see. Okay. Thank you.

Alan Ennis

Thank you, Ania.

Operator

And I am going to turn it back over to Mr. Ennis for any further comments or closing remarks.

Alan Ennis

Thank you, Christina. Thank you for joining our call. This morning, as I mentioned, we are strengthening our brands. We are investing in our organizational capability and improving our financial profile and, as we discussed at length, we remain focused on delivering profitable net sales growth. I want to take this opportunity to thank all of our employees for their focus and education -- focus and execution during the quarter. We look forward to sharing our full year results with you in February of next year. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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