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Revlon, Inc. (NYSE:REV)

Q4 2010 Earnings Call

February 17, 2011 9:30 AM ET

Executives

Elise Garafalo – SVP, Treasurer and IR

Alan Ennis – President and CEO

Chris Elshaw – EVP and COO

Steven Berns – EVP and CFO

Analysts

Reza Vahabzedah – Barclay’s Capital

Carla Casella – J.P. Morgan

Grant Jordan – Wells Fargo

Connie Maneaty – BMO Capital

David Wu – Telsey Advisory Group

Operator

Good morning ladies and gentlemen and welcome to the Revlon’s fourth 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 Garafalo, Revlon’s Senior Vice President, Treasurer and Investor Relations. You may begin Ms. Garafalo.

Elise Garafalo

Thank you. Good morning everyone and thanks for joining today’s call. Earlier today, we released our results for the year and fourth quarter ended December 31, 2010. If you have not already received a copy of our 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 provision 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 2010 Form 10-K, which we filed earlier this morning.

Next, our remarks today will include a discussion of the following non-GAAP measures; adjusted EBITDA, free cash flow and net income, net income per diluted share and the provision for income taxes in each case excluding the one-time non-cash tax benefit discussed in our earnings release. These non-GAAP measures are defined in the footnotes to our release and are also reconciled to their most directly comparable GAAP measure in the financial tables at the end of our release.

In addition, as previously disclosed, effective for periods January 1, 2010, we have made a change in the regional breakdown of our reported net sales. Specifically, Canada is reported as a separate region, where in prior periods before 2010, it was included in the Europe region, and South Africa is included as part of the Europe/Middle East/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.

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

Alan Ennis

Thank you Elise and good morning everyone. The execution of our business strategy in 2010 has enabled us to achieve meaningful progress. Guided by our vision of glamour, excitement and innovation through high quality products at affordable prices, we are focused on executing our business strategies; specifically, to build our strong brands, develop our organizational capability, drive our company to act globally, increase our operating profit and cash flow, and improve our capital structure.

Let me discuss some of our key accomplishments in 2010 under each element of our business strategy. First, building our strong brands; through a marketplace perspective, we introduced a number of successful innovative, high quality consumer preferred products across our entire portfolio. Most notably, Revlon Photo-ready makeup, Revlon Grow Luscious mascara and Almay Smart Shade and Intense Eye franchise extensions.

In addition, we significantly increased investment behind our brands this year. Following two years of declining net sales, we grew 2.3% in 2010. Strong performance in all of our regions outside of the U.S. was partially offset by a decline in the U.S. region. As we discussed on our last call, we have taken specific actions to address the challenges in the U.S. region, which Chris will discuss later in this call.

The next element of our business strategy is to develop our organizational capability. We significantly strengthened the capabilities of our leadership team this year through the key appointments including Alan Meyers as Chief Science Officer, Julia Golden as Chief Marketing Officer and we’ve made several general manager appointments including David Teasdale in Asia Pacific, Simon Worraker in Canada, Mark Wood in EMIA and John Collier in the U.S.

These individuals complement our highly capable team, which is focused on achieving our strategic objective of profitably growing our business.

The third element of our business strategy is to drive our company to act globally. This guides how we think, plan and act across all of our brands and regions. We are leveraging our brand positioning, our portfolio planning process and our brand communication plans on a global basis. We are focused on improving our operating efficiency through many activities including global supply chain management, which again, delivered improved inventory turns in 2010.

The last two elements of our strategy are to increase our operating profit and cash flow and to improve our capital structure. In 2010, we increased profitability achieving adjusted EBITDA of $260 million and operating income of $200 million.

We delivered and sustained highly competitive operating income at EBITDA margins. We achieved our third consecutive year of positive free cash flow and finally, we improved our capital structure by refinancing our term loan and revolving credit facilities and by reducing debt. Additionally, in November 2010, our credit rating was upgraded by Standard and Poor’s.

During this call, Chris and Steven will share with you the details of our 2010 performance, so with that, let me hand it over to Chris who will take you through our marketplace performance.

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 net company sales was slightly over $1.3 billion, an increase of 2.3% versus 2009. Higher net sales of the U.S. were partially offset by lower net sales in the U.S. On a brand basis, higher net sales of Revlon color cosmetics and Revlon Colorsilk hair color were partially offset by lower net sales of Almay color cosmetics and Mitchum antiperspirant deodorants.

Moving on regional sales performance for the year; in the U.S. net sales were $729.1 million, a decrease of $18.8 million or 2.5% compared to last year. The decline was primarily driven by lower net sales of Almay color cosmetics, Revlon Colorsilk hair color and Mitchum antiperspirant deodorants. These declines were partially offset by the higher net sales of Revlon color cosmetics.

Net sales of color cosmetics in the U.S. benefited from lower promotional allowances as we continue to optimize our brand support mix, and also benefited from lower returns, which is one of the benefits of our rolling portfolio planning process.

As we discussed in our last earnings call, we have several actions underway to improve our U.S. performance. Firstly, we continue to optimize our brand support mix between advertising, promotional activity and other drivers to be more effective.

Secondly, we are in the initial stages of enhancing our in-store execution. By the end of 2010, we have increased in-store promotional display pressure and in addition, we are currently implementing some exciting new graphic and layout changes to our permanent display walls.

And lastly, as we also said, we appointed a dedicated general manager who is providing day-to-day focus on the U.S. region.

We believe the actions we are taking will enhance our marketplace effectiveness over the long term and we remain focused on delivering sustainable, profitably net sales growth in the U.S.

Moving on to Asia Pacific, net sales increased $6 million or 3.2%. Higher net sales of Revlon color cosmetics, Revlon Colorsilk hair color and other beauty care products in the region, were partially offset by lower net sales of Revlon color cosmetics in Australia and Japan.

In Europe, Middle East and Africa, net sales increased $8.6 million or 4.7%. This increase was primarily due to higher net sales of fragrances throughout the region as well as higher net sales of color cosmetics and other beauty care products in South Africa.

In Latin America, net sales increased $32.1 million or 29.5%. 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 Colorsilk hair color, Revlon color cosmetics and other beauty care products in both Venezuela and certain distributor markets.

Lastly, in Canada, net sales increased to $1.4 million or 2.1%. This increase was primarily driven by higher net sales of Revlon color cosmetics, which were partially offset by lower net sales of Revlon beauty tools.

Now moving on to the performance by brand, Revlon color cosmetics net sales increased as compared to the prior year. Building upon our previous discussions throughout 2010, and with respect to our product performance, in the face segment, Revlon Photo-ready makeup continues to perform very well globally.

We extended the Photo-ready franchise with the addition of a new compact makeup containing an innovative screen, which transforms cream to liquid and results in a soft powder finish. We look forward to continued positive performance from our Photo-ready franchise.

We also introduced Revlon Colorstay (inaudible) makeup. This is the first mineral foundation that captures the hydrating benefits of coconut water in a light weight powder foundation. Revlon color state patented long wear technology; helps keep skin looking luminous and radiant all day.

In the eye segment, following the successful global performance of Revlon Grow Luscious mascara, our best mascara launch in recent years, we introduced Revlon customized mascara. Customized provides two different lash looks; length and drama or length and definition, with one revolutionary adjustable brush.

We are delighted that in January of 2011, customized was recognized by Women’s Wear Daily as one of only eight game changers in beauty. This award recognizes those products that either change a woman’s beauty regimen or creates a new product category.

In the lip segment, we introduced our strong performing Revlon Just Bitten lip stain plus balm. In a review of the year’s product launches in the U.S., Women’s Wear Daily awarded the best executed launch strategy to Just Bitten. This award, which according to Women’s Wear Daily, showcased big ideas implemented flawlessly, in an exceptional award for our brand, and is also a tangible demonstration of our focus on enhanced marketplace effectiveness in the U.S.

Continuing the lip segment, we also introduced Revlon Color Burst lip gloss. This new luxurious lip gloss contains our revolutionary elastic color technology and micro pore crystal formula, which distributes rich color pigments evenly for weightless color and vivid mirror-like shine.

And lastly in the nail segment, we have expanded our products offering to include a range of scented nail color as well as Revlon Top Speed, an advanced line of nail color that dries in 60 seconds. These new products have now been introduced in the U.S. and Canada and are performing very well.

Moving on to the Almay brand, net sales of Almay declined as compared to 2009. Net sales were lower in the U.S. However, outside the U.S., net sales were up slightly. We remain focused on building the Almay brand and in support of this, our recent new products introductions include; Almay wake-up makeup, a light-weight powder foundation that uses encapsulated water to instantly delivery cooling hydration to sooth the skin while providing full coverage and giving a healthy, well rested glow. Wake-up makeup was also one of just eight products recently recognized by Women’s Wear Daily as game changers in beauty.

Next, Almay’s Smart Shade pressed powder, which is an extension to our successful Smart Shade franchise, utilizing Almay’s patented technology. This is the first pressed powder for this franchise as we continue to broaden the Smart Shade product assortment to meet additional consumer needs.

And lastly, Almay Intense Eye smokey eye kit, which helps consumers achieve the smokey eye look with ease. Smokey eye is performing extremely well in the marketplace.

In women’s hair color, we were pleased with the increased net sales of both our core Revlon Colorsilk hair color and our new Revlon Colorsilk Luminous range. We continue to expand distribution of this highly successful brand around the world.

In antiperspirant deodorants, net sales of Mitchum declined year over year. We continue to support the Mitchum brand and in 2011 we will build on Mitchum’s established efficacy positioning with the introduction of Mitchum Advanced Control containing fresh defense technology.

And finally, with regard to Revlon beauty tools, we continue to bring innovative new products to the market including Crazy Shine, a nail buffer that gives their nails 400% more shine instantly. Crazy Shine has shown early signs of success in the marketplace.

Now I’ll turn it over to Steven to walk you through the rest of our financial results.

Steven Berns

Thank you Chris. Since Chris has already discussed our net sales performance, I will begin with gross margin performance for the year. Our gross margin improved to 65.5% versus 63.4% in 2009. Gross margin in 2010 was positively impacted by a few factors; first, lower cost related to inventory obsolescence and sales returns, second, savings related to procurement initiatives and our 2009 restructuring actions, third, lower allowances and last, the positive impact on cost of sales from foreign currency fluctuations. These improvements were partially offset by the unfavorable impact of product mix during the period.

SG&A increased $37.5 million to $666.6 million primarily due to higher advertising spending to support our brands. We increased media pressure while benefiting from lower advertising rates as compared to 2009. In addition, SG&A was also impacted by higher compensation expenses, which were partially offset by savings from our 2009 restructuring and lower pension expense.

Operating income was $199.8 million compared to $170.8 million and adjusted EBITDA was $260.4 million compared to $236.5 million in the same period last year. Both operating income and adjusted EBITDA in 2009 included net restructuring charges of $21.3 million.

We achieved a total $30 million of expected annualized savings associated with our 2009 restructuring program. Our 2010 results include incremental savings of $15 million from this program as compared to 2009.

Next, let me take a moment to discuss the impact on our 2010 results of a significant one-time, noncash tax item. For those of you who have followed us know, and as we discussed in our third quarter 10-Q, we have significant U.S. deferred tax assets on our balance sheet, against which, given our historical losses, we maintained a valuation allowance.

Since we have delivered three years of cumulative positive taxable income in the U.S. as of December 31, 2010, we reduced the valuation allowance on those tax assets in accordance with U.S. GAAP. As a result of this reduction, the provision for income taxes in 2010 included a one-time non-cash tax benefit of $260.6 million.

So, on the face of the P&L, the provision for income taxes in 2010 was a benefit of $247.2 million, which is comprised of two components; first, a $260.6 million one-time tax benefit I just discussed and second, income tax expense of $13.4 million. The provision for incomes taxes in 2009 was an expense of $8.3 million.

It is important to note that the reduction in the U.S. deferred tax asset valuation allowance has no impact on the company’s cash flow or liquidity, and with regard to cash paid for income taxes, we paid $16.2 million in 2010 compared to $14.9 million in 2009.

Net income was $327.3 million or $6.26 per diluted share compared to net income of $48.8 million or $0.94 per diluted share in the same period last year. Excluding the one-time tax benefit of $260.6 million, net income in 2010 would have been $66.7 million or $1.28 per diluted share.

Also, net income in 2010 included $9.7 million of expenses associated with the March refinancing of our revolving credit and term loan facilities. In 2009, net income included $21.3 million of net restructuring charges and a $5.8 million net loss related to the early extinguishment of debt.

Moving on to cash flows, net cash provided by operating activities was $97.2 million compared to $109.5 million and free cash flow was $82.3 million compared to $97.7 million.

Now moving on to the P&L for the fourth quarter of 2010, net sales were $369.2 million or an increase of 9% as compared to the fourth quarter of ‘09. This increase was driven primarily by higher net sales of both Revlon and Almay color cosmetics.

In the United States, net sales increased 7.5% to $201 million compared to the fourth quarter of 2009. This increase resulted primarily from lower returns as well as lower promotional allowances as we continue to optimize our mix of brand support.

Moving now to Asia Pacific, net sales increased $7.5 million or 14.9%. This increase was driven by higher net sales of Revlon color cosmetics and other beauty care products throughout the region, most notably in Australia.

In Europe, Middle East and Africa, net sales increased about $.5 million or .9%. In Latin America, net sales increased $8 million or 24.1%. This increase was primarily due to higher net sales of Revlon color cosmetics and Revlon Colorsilk hair color. Higher selling prices in Venezuela, reflecting market conditions and inflation, accounted for approximately two-thirds of the $8 million net sales increase in the region.

Lastly, in Canada, net sales increased $1.2 million or 6.4%. This increase is primarily due to higher net sales of Revlon color cosmetics.

Moving on to operating income for the fourth quarter of 2010, operating income was $67.8 million compared to $62.3 million and adjusted EBITDA was $83.3 million compared to $77.9 million in the same period last year.

The provision for income taxes was a benefit of $256.4 million, which is again, comprised of two components; first, the $260.6 million one-time tax benefit I noted earlier, and second, tax expense in the quarter of $4.2 million. The provision for income taxes in the fourth quarter of 2009 was an expense of $8 million.

Net income was $269.2 million or $5.66 per diluted share. Excluding the one-time tax benefit, net income was $35.6 million or $0.68 diluted share compared to $12.8 million or $0.24 per diluted share in the fourth quarter of last year. Net income in the fourth quarter of 2009 included a $13.6 million loss related to the early extinguishment of debt.

Turning now to cash flow, operating cash flow was $47.2 million compared to $32.3 million and free cash flow was $43.5 million compared to $29.5 million in the same period last year.

On the liquidity front, our unutilized borrowing capacity and cash on hand as of December 31, 2010 was $185 million, which is comprised of $73 million of available cash and $112 million available under our revolving credit facility. Our revolver was undrawn at year end and we had $21 million of standby letters of credit issued under this facility.

As it relates to capital structure, in 2010 we refinanced our term loan and asset based revolving credit facilities, which extended maturities. We reduced debt by over $17 million and we continued to improve our debt to EBITDA ratio.

Now moving on to 2011 let me update you on several factors we expect to impact our 2011 financial performance. First, consistent with our historical practice, I’m going to provide you our expectations regarding certain 2011 cash flow information.

Capital expenditures are expected to be approximately $20 million. Permanent display expenditures are expected to be approximately $40 million. Pension plan contributions are expected to be approximately $30 million. Cash interest expense can be estimated by reference to our public filings, which detail the composition of our capital structure and applicable interest rates. And lastly, cash paid for income taxes is expected to be approximately $20 million.

Next, with regard to 2011, I have two P&L items to note. First, with respect to taxes, and as a reminder to what we mentioned in our Q3 earnings call, as a result of the reduction in the U.S. deferred tax valuation allowance, going forward we expect that our tax provision on the income statement will reflect a higher effective tax rate.

Any increase in the effective tax rate is not expected to impact the company’s cash taxes paid until our U.S. tax loss carry forwards are fully utilized. We refer you to our tax footnote in the 10-K filed this morning for further information regarding the composition of our taxable income and the expiration dates with respect to our tax loss carry forwards.

Second, with respect to the P&L, consistent with our strategy to build our strong brands, we currently intend to support our brands with increased advertising spending in the first quarter of 2011 as compared to the first quarter of 2010 due to increased media pressure and higher advertising rates.

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.

Operator

(Operator Instructions) Your first question comes from the line Reza Vahabzedah with Barclay’s Capital.

Alan Ennis

Good morning Reza.

Reza Vahabzedah – Barclay’s Capital

Good morning. So when you look at the categories that you compete in in the U.S. and international markets, what’s your general outlook for the category performance as a whole?

Steven Berns

Well as you know Reza, we don’t forecast category performance in any of the markets. Clearly what we do is focus on driving net sales growth and doing that profitably over time. So we’re not in a position to forecast category growth.

Reza Vahabzedah – Barclay’s Capital

Right. I guess I was looking at more, looking for directional color, not specific percentage change.

Steven Berns

Yeah, we don’t provide that forward-looking Reza.

Reza Vahabzedah – Barclay’s Capital

Got it. And then as far as retailers, inventory levels, are we at roughly flat levels versus the prior year or are we getting to maybe 2007 levels?

Chris Elshaw

We haven’t seen any significant changes in our total business over inventory levels in the recent months. We continue of course to work very closely with our retailers. We want to optimize our inventory levels with them because that’s good business for both of us so it’s a constant thing we work on with them.

Reza Vahabzedah – Barclay’s Capital

Fair enough. And then you talked about marketing pressure being up in the first quarter. Any color as far as marketing pressure for the full year?

Chris Elshaw

No, we only issue that for the first quarter. Obviously we’re very focused on supporting our new products and driving profitable sales growth and hence we are going to increase our marketing pressure in the first quarter.

Reza Vahabzedah – Barclay’s Capital

Got it. And you talked about the gross margin benefit from currencies. Could you just elaborate on that and whether that is sustainable into 2011?

Steven Berns

The change in 2010 was a result of the fact that we have favorable foreign currency fluctuations versus the U.S. dollar okay. So because a number of our products for a large portion of our U.S. markets, a large number of those products are manufactured in our Oxford, North Carolina facility. When there is a weaker U.S. dollar, it makes it favorable for those markets to purchase from the North Carolina facility.

Obviously as a result of currency changes this year that could be positive or negative. We just don’t know how that will play out.

Alan Ennis

Let me just add on that if I can Reza. As you know, we don’t provide gross margin guidance. As we’ve stated in the past, our focus is going to be on competitive operating margin. Period to period as you know, there are a number of factors that contribute to that including gross margin. So all in all, we’re pleased with where our operating margins finished in 2010 and I think it’s a highly competitive level.

Reza Vahabzedah – Barclay’s Capital

Great. I guess what my – another way to ask that question is, if that benefit represents a tough comparison in the following year.

Alan Ennis

Yeah, once again, we don’t know what currencies are going to do and so clearly, that’s a variable that will just be played out.

Reza Vahabzedah – Barclay’s Capital

Got it. Thank you.

Alan Ennis

Thank you Reza.

Operator

Your next question comes from the line of Carla Casella with J.P. Morgan.

Carla Casella – J.P. Morgan

Hi. I’m wondering if you could give us a little bit more color in terms of your ship in versus sell through at the retailers and how that trended during the quarter and if you’ve got any insight into in the new year how that looks so far.

Chris Elshaw

Well as you know, we don’t discuss shipments and we’re not discussing retailer performance per se. What we say is, if you look at our net sales over time, they’re the best indicator of the success of our product portfolio.

Carla Casella – J.P. Morgan

Okay, I guess I’m trying to get at; your sales in the fourth quarter are a lot stronger than we expected. I’m wondering if you could give us a sense for how much of that was new product ship in versus just a regular holiday replenishment.

Chris Elshaw

So if you talk about the U.S. in particular, yes our sales in fourth quarter were up 7.5%. I would say one quarter doesn’t make a trend. I would remind you that for the full year in the U.S. we were actually down 2.5%.

However, as we said on the last call, and I reminded you earlier, we are very focused on addressing the U.S. performance. We said in Q3 and have been working on in Q4, three specific things in order to raise our U.S. performance. One was optimizing our brand support mix to be more effective. Second was improving our in store execution so we can more positively influence the consumer at point of purchase. And then third as we said, we appointed a U.S. general manager and he’s focused on the day-to-day performance.

So while we’re pleased with the progress of those actions, it is important to note that in the fourth quarter, the increase in net sales of color cosmetics resulted primarily from low returns, which is one of the benefits of our rolling portfolio planning process as well as lower promotional allowances and that is one of the benefits of optimizing our mix of brand support.

So as you know, there is also in addition to return allowances, there are a number of factors that can impact sales from period to period. I’m thinking of things like timing of new product introductions, advertising behind them, promotional activity, retailer actions, all these things.

So I reiterate, I think the best guide to our performance is our net sales over time.

Carla Casella – J.P. Morgan

Okay, great. And then as we look to 2011 and the new products that you’ve launched and are launching, is the timing pretty similar to last year or is there going to be any significant changes?

Chris Elshaw

The timing is broadly similar because it’s driven by retailer reset dates.

Carla Casella – J.P. Morgan

Okay.

Alan Ennis

And as you know Carla, in the U.S., the U.S. operates somewhat differently from outside the U.S. In the U.S., there is typically two resets during the year, the first half and second half. Outside the U.S. it’s not as strict as that and so new products launch throughout the year.

Carla Casella – J.P. Morgan

All right. I’m trying to remember back to see if are we lapping any big launches that we’ll have to be aware of in first or second quarter.

Chris Elshaw

No, I think 2010 launches were fairly typical, so there is nothing to be concerned about there from a lapping standpoint.

Carla Casella – J.P. Morgan

Okay, great. And then when you talk about in store execution, point of purchase, can you give a little more color on exactly what’s changed and when you started putting in or executing the changes and I might have missed it if you gave your outlook for displacement.

Chris Elshaw

Well we said back on the prior earnings call that we had in place some activities on

Improving our in store execution. That focuses in two areas. One was promotional display pressure and as we ended 2010, we have an increase in our in store promotional display pressure. And secondly, on our permanent wall displays and we’re just in the process now with the resets with implementing some exciting changes to our graphics and approach on our wall sets. Those are the two main areas.

Alan Ennis

I mean we’ve always been focused on that Carla. We made I think a concerted effort once we appointed John Collier to the U.S. region to really focus on making sure we get the point of purchase as effective as it can be, so when the consumer is at our wall or looking at a bank of promotional displays, that she selects a Revlon or Almay product ahead of the competition.

Display, you asked a question about display spend. Our permanent display spending as in the walls around the world, we expect it to be about $40 million in 2011.

Carla Casella – J.P. Morgan

Okay, great. Thank you.

Alan Ennis

Thank you Carla.

Operator

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

Grant Jordan – Wells Fargo

Good morning. Thanks for taking my questions.

Alan Ennis

Good morning Grant.

Grant Jordan – Wells Fargo

Some of my questions have been answered but really just to follow up on the U.S. business here. You have talked about changing your brand support away from promotion more to advertising. Was there anything in the fourth quarter that you could gauge as to how that’s working and how that’s resonating with the consumer?

Chris Elshaw

Well as we say, we’re continually optimizing our brand support mix and it’s not just a question of advertising. I mean advertising is obviously very important because it not only promotes short spend sales, but it builds longer term brand name equity. But it’s a mix between advertising, promotion, in-store display, in-store activity. All those things, and we adjust them continually through the year because sales move in relation to new product launches.

So it’s something we’re very focused on and as Alan mentioned now having our new U.S. general manager focus on that day-to-day is a big help.

Grant Jordan – Wells Fargo

And then as you reduce the promotional spending, have you gotten much push back from retailers on that?

Chris Elshaw

We work extremely closely with our retailers on our promotional plans so when we work with them, we have a joint business planning process every year, which is pretty typical for major retailers, and in that joint business planning process we agree activities with those retailers to drive their retail sales and our retail sales in their stores.

Alan Ennis

Just to clarify, promotional spending over the last number of years has been fairly consistent. We haven’t reduced promotional spending.

Grant Jordan – Wells Fargo

2010 promotional spending was similar to what you’ve been spending in the past several years.

Alan Ennis

Yes, and that’s in relation to the wall, so resets at the wall. So then Chris talked about putting in some new graphics and some new displays. But again, that’s all within the confines of that $40 million that we’re talking about.

Grant Jordan – Wells Fargo

You mentioned earlier about I think the term used was marketing pressure in the first quarter. Is that just you guys spending more money on your brands or is there something competitive that you’re expecting?

Chris Elshaw

Well what we actually said was our advertising spending would increase in the first quarter and media pressure means more GRP’s and better quality of GRP’s and then also as we said, increased rates in the first quarter too.

Grant Jordan – Wells Fargo

And my last question, on the balance sheet, there was a pretty big increase in deferred income taxes under current assets. I assume that’s part of some of the tax issues that went on in the quarter. Maybe just give us some color on that.

Steven Berns

That’s correct. The deferred tax assets showing up on the balance sheet are in relation to the release of the valuation allowance that I discussed earlier in my prepared remarks.

Grant Jordan – Wells Fargo

Okay, and so will that balance come down as you go throughout the year, that deferred income tax?

Steven Berns

As I mentioned in the assets that are now on the books as the assets are utilized in conjunction with profitability on a perspective basis, that’s when the assets will be reduced and as I referred to on the call, if you refer to the tax footnote in the 10-K filed this morning, you’ll see the expiration dates of those NOL’s detailed in that footnote.

Grant Jordan – Wells Fargo

Okay, great. That’s all I have.

Operator

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

Connie Maneaty – BMO Capital

Good morning.

Alan Ennis

Morning Connie.

Connie Maneaty – BMO Capital

Can you help us just for modeling purposes since it’s not going to affect cash taxes paid, what we should be using for an effective tax rate in 2011?

Steven Berns

Well we think that – as you know, we don’t guide on tax rate. What we think is appropriate is that you look at our business totality and look at the places in which we refer to our net sales activity. I don’t think – we have never guided to effective tax rate, and we think it’s not really a focus for us. The focus is on cash taxes. We have provided guidance on cash taxes and as we’ve indicated, the valuation allowance reversal, which results from the profitability change over the past three years does not impact cash taxes.

So cash taxes will not change and that really once again is the guidance that we provide. So I understand that on effective tax rate you will have a change, but what we’ve guided to is just that the composition of our taxable income and the jurisdiction in which it’s earned will be the driver of that.

Connie Maneaty – BMO Capital

Okay, so essentially we should just guess.

Steven Berns

I think you just have to use the information we provide in the 10-K and the statutory rates that are out there to make your own conclusion.

Alan Ennis

Connie, in the 10-K, and I think it’s footnote 12 when you take a look at that, there is a comprehensive disclosure around all of our taxes. It talks about taxable in the U.S., outside the U.S. It talks about the NOL’s that we have. It talks about the expiration of the NOL’s. There is a whole body of disclosure in there and our view is that there is adequate information there to allow you to do something more than guess. I think you can get a lot closer than this.

Connie Maneaty – BMO Capital

Okay. In the U.S., first of all in the fourth quarter, were U.S. shipments up or down?

Chris Elshaw

Well as you know Connie, we don’t actually record shipments and a number of factors of course affects sales from period to period. So we talked about our returns and allowances, but also new product launches, promotional activity, all those kinds of things. So we’re not going to disclose shipments, but as we said, net sales over time are going to be the best indicator.

Connie Maneaty – BMO Capital

Okay. In the last eight quarters, there have been two instances of U.S. sales growth so the first quarter of 2009 and the fourth quarter of 2010. And I think in your prepared remarks you indicated that you thought you were on a path towards sustainable U.S. sales growth. Did you say that or was I imagining it?

Alan Ennis

No, so we didn’t say that. A couple of things; first of all we’re pleased with the performance in the U.S. in the fourth quarter. We believe that we’re doing a lot of the right things to drive U.S. business to be profitable and to grow. Having said that, one quarter doesn’t make a trend.

You know we have a dedicated general manager. We’re focusing on execution. We think we’ve got the right product for our portfolio planning process. So our expectation is that we would drive profitable growth from that region as in all of our regions, but we didn’t provide any guidance or expectation as to specifically what would happen in 2011.

Connie Maneaty – BMO Capital

So in 2009 and in 2010, in the two quarters where the company reported U.S. sales growth, in each of those quarters, was the increase based primarily on lower promotional allowances?

Alan Ennis

No, a variety of factors. And again, above net sales you’ve got gross sales, your returns, allowances. You have a bunch of moving parts up there. So it depends on, and I don’t have the first quarter 2009 in front of me, but it depends on the specific drivers.

What we indicated for the fourth quarter of 2010 is that the increase was primarily as a result of lower returns and lower allowances.

Connie Maneaty – BMO Capital

Should this be a factor though that we should expect in every quarter or is there kind of a year-end clean up or a once a year cleanup of returns and allowances? Is this part of the P&L as well? It’s just a black box so there’s no way to put any judgment into what one should expect for sales growth without some sort of sense of how you manage this portion of your business.

Alan Ennis

There’s certainly no one-time clean ups in the fourth quarter. Let me just state that first of all. Second of all, you know we don’t provide sale growth targets for any of our regions and we’re not going to.

What I will tell you is that we are focused on building our brands. We’ve got a great team of people in place now and I think we are focusing on doing all the right things in our markets around the world. And so I would expect that over time, we’ll deliver against our strategic objective of profitably growing the business.

Connie Maneaty – BMO Capital

Okay, thanks so much.

Alan Ennis

Sure.

Operator

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

David Wu – Telsey Advisory Group

Hi. Good morning everyone.

Alan Ennis

Good morning David.

David Wu – Telsey Advisory Group

Congratulations on a great quarter. First, can you talk about the sales performance across the distribution channels in the U.S. and whether you’re gaining a greater hold? I mean the faster growing channels such as the drug store chains.

Chris Elshaw

Well our businesses are broadly represented since we are a mass business of the drug and mass market chains. I’m not quite sure what you’re asking.

David Wu – Telsey Advisory Group

Whether or not there is any sort of discrepancies across the drug stores versus the mass retailers versus the various outlets within the U.S.

Chris Elshaw

We continue. It really goes back to the joint business planning piece you know. We don’t really work it in a channel approach. We’re very focused on our individual retailer relationships so we’re focused on irrespective of what happens in the general marketplace, having a growing business with each of our key retailers and that’s the purpose of our joint business planning approach.

Alan Ennis

We don’t talk about specific performance with any of our retailers for obvious reasons.

David Wu – Telsey Advisory Group

Right. Great, and then also how do you see raw materials packaging costs trending in 2011?

Alan Ennis

If you look at commodities, you’ll see that certainly in the last few months you’ve seen some increase in some commodities including oil. What I will tell you is that we went through a fairly rigorous exercise in 2009 and into the first part of 2010 to make sure that we were getting the best rates regarding all of our inputs.

I will also tell you that there is no significant commodity that represents a material portion of our cost of goods so oil would probably be the biggest one as it relates to distribution and also as it relates to plastics. But it’s not a material component of our input costs.

And having said that, over time what we have done is we’ve been able to offset any cost pressures with cost efficiencies elsewhere in our operation.

David Wu – Telsey Advisory Group

Great. And then just lastly, as we look out longer term, where do you see the opportunity for operating margin expansion?

Alan Ennis

Well I think as you’ll see from our results, we achieved about a 15% NOI margin and that, if you look across the competitive set, you’ll see is a highly competitive NOI margin. So what we’re focused on now is driving profitable growth. I think the next phase for us is to really start to drive growth in each of our regions and do that while sustaining highly competitive margins.

David Wu – Telsey Advisory Group

Great, thanks. And just specifically now as you grow out internationally, should we expect to see some pretty good expense leverage particularly in the Latin American markets?

Alan Ennis

When you say expense leverage, what do you mean?

David Wu – Telsey Advisory Group

Better traction on costs just given you know top line growth.

Alan Ennis

Listen, I think we delivered a competitive margin in 2010 and the objective from here is to drive top line growth.

David Wu – Telsey Advisory Group

Great. Thank you.

Operator

And at this time there are no further questions. I would now like to turn the conference back over to Mr. Ennis for any closing remarks.

Alan Ennis

Thank you very much all of you for joining our call this morning. As I mentioned, we are strengthening our brands, investing in our people and improving our financial profile. Our focus in 2011 will be to build upon the solid foundation and competitive margin structure we’ve established.

As we start a new year, I would like to take this opportunity to express my sincere appreciation to all of our employees around the world for our many accomplishments in 2010. So we look forward to reporting our first quarter 2011 results in April. Thank you.

Operator

Thank you. This concludes today’s Revlon fourth quarter 2010 earnings conference call. You may now disconnect.

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Source: Revlon CEO Discusses Q4 2010 Results - Earnings Call Transcript

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