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Revlon, Inc. (NYSE:REV)

Q2 2011 Earnings Conference Call

July 28, 2011 09:30 ET

Executives

Elise Garofalo – Senior Vice President, Treasurer, and Investor Relations

Alan Ennis – President and Chief Executive Officer

Chris Elshaw – Executive Vice President and Chief Operating Officer

Steven Berns – Chief Financial Officer and Executive Vice President

Analysts

Carla Casella

Jeff Kobylarz

Zeke Kramer

David Wu

Operator

Good morning, ladies and gentlemen, and welcome to Revlon’s Second Quarter 2011 Earnings Conference Call. At the request of Revlon, today’s conference call is being recorded. (Operator Instructions)

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

Elise Garofalo – Senior Vice President, Treasurer, and Investor Relations

Thank you, (Tinica). Good morning, everyone, and thanks for joining today’s call. Earlier today, we released our results for the second quarter ended June 30, 2011. If you have not already accessed a copy of our second quarter 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 would 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 2010 Form 10-K and our 2011 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. These non-GAAP measures are defined in the footnotes to our release and are also reconciled to their most directly comparable GAAP measures in the financial tables at the end of our release. And finally, as a reminder, our discussion this morning should not be copied or recorded.

With that, I will turn the call over to Alan.

Alan Ennis – President and Chief Executive Officer

Well, 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. This underpins everything we do. We realize this vision by executing the five key elements of our business strategy, which are designed to drive profitable growth. These elements are 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.

With regard to building our strong brands, during the second quarter of 2011, we made progress in a number of areas. From a top-line perspective, we delivered net sales growth of 4%, excluding the benefit of currency fluctuations driven by the U.S. and the Asia-Pacific regions. Our brands performed well in the marketplace and we are very pleased with both new and core product performance during the period. Our recent acquisition of Sinful Colors is transitioning well and we are pleased with its marketplace performance.

As we have discussed for sometime, we believe that the drivers of profitable growth are first, innovative high-quality consumer preferred brand offering; second, effective brand communication including appropriate levels of advertising and promotion; and third, superb execution with our retail partners to provide optimal in-store offering.

Our results in the quarter benefited from our focus on these drivers specifically. We are focused on our three-year global portfolio plans for our key brands in order to meet the needs of our consumers globally. This enabled us to have a compelling product offering across both our core and new products. Next, our brand communication is benefit driven, compelling to the consumer and consistently delivered across all touch points, including traditional media, in-store and a variety of digital platforms.

Lastly working alongside with our retail partners globally, we are creating and engaging shopper environment with eye-catching in-store displays and effective promotional activity.

With regard to our strategic objective of increase in our operating profit and cash flow, for the quarter we maintained competitive operating margins, while growing the top-line. We continue to support our brands at appropriate levels in the marketplace and invest in growth opportunities globally.

Our negative cash flow in the quarter was impacted primarily by the timing of debt interest payments, which Steven will discuss later. It is important to note, that it was not driven by any change in the underlying business.

With regard to our strategic objective of improving our capital structure, we refinanced our bank credit facilities in the quarter resulting in lower interest rates and extended maturities. Annualized savings associated with refinancing are an estimated $10 million.

So, in summary, driving profitable growth comes to brands and people. We have incredible talent and capabilities, broad geographic reach and strong global brands. Overall, we had a strong quarter and I am pleased with our performance so far in 2011.

So with that, I will hand it over to Chris, who will talk about our marketplace performance.

Chris Elshaw – Executive Vice President and Chief Operating Officer

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. Net sales in the second quarter were $351.2 million, an increase of 4% versus the second quarter last year. This increase in net sales was driven by Sinful Colors and Revlon color cosmetics.

From the regional standpoint, in the United States, net sales increased $15.6 million, or 8.7% primarily due to the inclusion of net sales of Sinful Colors and higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. It is important to note that net sales in the U.S grew in the quarter, excluding the results of Sinful Colors.

In Asia Pacific, net sales increased $4.2 million, or 8.6%, due to the higher net sales of Revlon color cosmetics in China, Australia and certain distributor markets.

Moving on to Europe, Middle East and Africa, net sales decreased $3.4 million, or 6.8%, primarily due to lower net sales of Revlon color cosmetics in the U.K. and Italy, and lower net sales in certain distributor markets.

Worthy of noting this region for the second year in a row, Revlon will be the official make-up partner for Britain and Ireland’s Next Top Model 2011. Revlon is a perfect partner to (indiscernible) on trend of make-up looks and inspiration for the series given our longstanding tradition of having some of the most inspiring, successful and beautiful women in the world as our brand ambassadors. Elma Pearson one of Revlon's global brand ambassadors, is a presenter, judge and executive producer of the series.

In Latin America, net sales decreased $1 million, or 3.5%, primarily due to lower net sales in Mexico, Venezuela and certain distributor markets, which were partially offset by higher net sales in Argentina. With respect to Venezuela, lower net sales in the second quarter resulting from the previously announced June 5th fire was largely offset by higher selling prices given market conditions and inflation. We have not recorded any sales in Venezuela since the fire.

Steven will provide more details later in the call. In Canada, net sales decreased $2.24 million, or 11.5 % primarily due to lower net sales of Revlon color cosmetics.

Now moving on to the performance by brand, starting with Revlon color cosmetics, net sales increased during the quarter, as compared to prior year. In the face segment, we recently launched Revlon Age Defying with DNA Advantage, a revolutionary full coverage make-up with moisturizing benefits that help protect the skin’s DNA to fight the signs of ageing. 96% of women using this make-up, so flawless, younger looking skin in just two weeks.

In the Lips segment, Revlon Colorburst Lipgloss, which continues its global rollout is a new luxurious lipgloss that contains our innovative Elasticolor technology and micropore crystal formula, which distributes rich color pigments evenly for weightless color and vivid mirror-like shine. This lipgloss is performing well in the marketplace.

In the Eye segment, building up on our highly successful Revlon Grow Luscious franchise, we introduced Grow Luscious Plumping Mascara. We recently launched a 60-second commercial directed by Oscar Award winner Darren Aronofsky, starring brand ambassador Jessica Biel with music producer Pharrell Williams in the course of this product launch.

And lastly in the Nail segment, Revlon Top Speed, our advanced line of nail color that driving 60 seconds has been introduced in several countries and we are pleased with its performance in marketplace. Top Speed was recently recognized by The Oprah Magazine’s April awards.

Moving on to the Almay brand, net sales were down modestly in the quarter as compared to the prior year. As we continued to build out, Almay’s core franchises, our Intense i- Smoky-i shadow launched earlier this year continues to be successful in the marketplace. In addition, we also introduced some new franchise expansions under the Wake-Up Makeup franchise and the Get Up & Grow mascara.

In women’s hair color, net sales of Revlon ColorSilk grew in the second quarter. We continued to expand this reach of Revlon ColorSilk including Revlon ColorSilk Luminista. In anti-perspirant deodorants, net sales of Mitchum in the second quarter of 2011 were essentially flat year-over-year. As we stated in our last call, we continue to spill the Mitchum brand and have built on Mitchum’s established efficacy positioning with the introduction of Michum advanced control containing FreshDefense technology. We have also engaged another advertising and recently launched a new advertising campaign in suppose of this new product. And finally, our Revlon beauty tools business continues to perform well in the marketplace.

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

Steven Berns – Chief Financial Officer and Executive Vice President

Thank you, Chris. As we have already discussed our net sales performance, I will begin with our gross margin performance in the quarter. In the second quarter of 2011, our gross profit margin was 65.3% versus 67.3% in the second quarter of 2010. Gross margin in the 2011 period was unfavorably impacted by product mix, higher allowances, and higher cost related to inventory obsolescence and sales returns. These unfavorable impacts were partially offset by favorable foreign currency fluctuations and lower pension expense.

SG&A increased $8.1 million to $181.5 million versus the second quarter of 2010 primarily due to the impact of unfavorable changes in foreign currency and higher permanent display expenses. Operating income in the second quarter of 2011 was $47.8 million compared to $47.3 million in the same period last year.

Adjusted EBITDA in the second quarter of 2011 was $66.3 million compared to $61.7 million in the same period a year ago. Operating income and adjusted EBITDA benefited from higher net sales partially offset by higher cost of sales and higher SG&A. As I have mentioned in previous earnings call, we continue to focus on delivering competitive operating margins. Period-to-period, there are number of moving parts contributing to our operating margins which are influenced by several factors including the mix of products sold, brand support, and the timing and size of product launches just to name a few.

Overall, we are pleased with our operating margins in the second quarter and the year-to-date periods. Net income in the second quarter of 2011 was $6.5 million or $0.12 per diluted share compared to net income of $16.4 million or $0.31 per diluted share in the same period last year. Net income in the second quarter of 2011 included pre-tax charges of $11.3 million related to the early extinguishment of debt as a result of the refinancing of our bank credit facilities. Net income also included a foreign currency loss of $1.7 million related to the re-measurement of Revlon Venezuela’s balance sheet due to a change in the exchange rate used to translate Revlon Venezuela’s financial statements. Specifically we began using a rate of 5.5 bolivars per U.S. dollar, in the second quarter which was the average rate at which the Company has accessed U.S. dollars, in place of Venezuela’s official exchange rate of 4.3 bolivars per U.S. dollar.

Net cash used in operating activities in the second quarter of 2011 was $20.8 million compared to net cash provided by operating activities of $9.3 million in the same period last year. And free cash flow in the second quarter of 2011 was a negative $24.2 million compared to positive free cash flow of $5.3 million in the same period a year ago. Cash flow in the second quarter of 2011 was impacted primarily by the timing of cash interest payments on our term loan. Total interest payments in the quarter were $41.0 million compared to $24.4 million in the second quarter of 2010. In addition we have higher permanent display spending of $14.7 million in the quarter compared to $7 million in the same period last year.

Now, looking at the P&L for the first six months of 2011, my commentary on net sales will exclude the impact of changes in foreign currency. Net sales in the first six months of 2011 was $684.4 million, an increase of 5.4% compared to the first six months of 2010. In the United States net sales increased $19.7 million or 5.5%. In Asia-Pacific net sales increased $8.3 million or 8.8%. In Europe, Middle East and Africa, net sales increased $1.4 million or 1.5%. In Latin America net sales increased $5.9 million or 12.1%. In Canada, net sales decreased $800,000 or 2.3%.

Operating income was $92.5 million compared to $92.7 million in the first half of 2010 and adjusted EBITDA was $124 million compared to $122.8 million in the same period last year. Net income was $16.9 million or $0.32 per diluted share compared to $18.6 million or $0.36 per diluted share. As a reminder, net income in the first six months of 2011 included pretax charges of $11.3 million related to the 2011 refinancing. And net income in the first six months of 2010 included $9.7 million of expenses associated with March 2011 refinancings.

Turning now to cash flow, year-to-date cash flow provided by operating activities was $3.3 million compared to $40.5 million in the same period last year. Free cash flow year-to-date was negative $2.5 million compared to positive $33.5 million in the same period last year. Cash flow in the 2011 period was primarily impacted by the timing of Interest payments on our term loan debt. The first six months of 2011 included $57.1 million of Interest payments compared to $38.5 million in 2010. In addition there was a higher use of cash for permanent display spending and other working capital during 2011 period as compared to the same period in 2010.

On the liquidity front, our unutilized borrowing capacity in cash on hand as of June 30, 2011 was $144.2 million comprised of $43.1 million of available cash and $101.1 million of available under our revolving credit facility. At June 30, 2011 we had approximately $10 million borrowed under our revolver.

As previously announced during the quarter, consistent with our strategy to improve our capital structure we refinanced both our bank term loan and revolving credit facilities which lowered our interest rates and extended debt maturities. The cash cost of both transactions totaled approximately $4.6 million. with respect to the P&L charges associated with these refinancings we recorded a charge of $11.3 million during the second quarter of 2011 comprised of a write-off of $9.4 million of previously capitalized debt cost and a $1.9 million charge of both fees and expenses which were expensed as incurred in connection with these refinancings. Based on current debt levels and LIBOR base rate annualized interest savings would be approximately $10 million.

Now let me take a couple of minutes to discuss the fire in our Venezuelan facility in a little more detail, specifically the accounting for the quarter and the status of insurance recovery with respect to the fire. In early June, our manufacturing facility in Venezuela was destroyed by fire. As a reminder, during 2010 Venezuela represented approximately 3% of the company’s consolidated net sales and 2% of the company’s consolidated operating income. As a result of the fire, we recorded a $4.9 million impairment loss in the second quarter related to the net book value of Venezuela’s inventory, property plant and equipment which was destroyed by the fire.

In the quarter, we also reported $4.9 million of income in a related insurance receivable as it was probable that our insurance recovery related to the fire would be at least equal to the net book value of the inventory, property plant and equipment destroyed. This income entirely offset the $4.9 million impairment loss which I just mentioned. Subsequent to June 30, we received confirmation that our insurers agreed to an interim advance payment of $15 million to be paid to the company with respect to the fire. We expect to receive these proceeds in the third quarter of 2011. At this time an assessment of the extensive damage and the fire’s impact on our business in Venezuela is ongoing and therefore the final amount and timing of the ultimate insurance recovery is unknown.

With respect to our ongoing business in Venezuela we are currently evaluating options to minimize the disruption and at this time are unable to estimate the full year impact of the fire on our financial results in Venezuela.

Now moving onto our balance of 2011, consistent with our historical practice I am going to provide certain 2011 cash flow information none of which has changed from the guidance we provided during our last earnings call. 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 firings 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. As a reminder with respect to operating cash flow in general the timing of these cash flow items just noted as well as other working capital items can vary from quarter-to-quarter based on a number of factors.

We continue to closely manage our key working capital accounts including receivables, payables, and inventory. 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).

Chris Elshaw

Good morning Reza.

Unidentified Analyst

Good, just on the current sales trends in some of the non-US market, Canada sales were down FX as well as Europe, at ex-FX which was different than in last quarter. Any comment or color on that why ex-FX sales are down this quarter plus they were up last quarter?

Chris Elshaw

Yes, Reza. Let me start with Canada, Europe and ME, so as we stated net sales ex-FX declined $2.4 million in the quarter and that was primarily due to lower net sales in the Revlon post sales metrics. On a year-to-date basis net sales effect declined just $800,000 and that was primarily driven by all means. But if you look at our marketplace performance year-to-date Revlon continues to maintain its position and we’ve also been very pleased with our all means performance. In terms of EMEA again those (indiscernible) ex-FX declined $3.4 million in the quarter and that was primarily due to lower net sales of Revlon color cosmetics in the UK and Italy and in certain distributor markets.

On a year-to-date basis however net sales increased $1.4 million and losses in the UK I wouldn’t say despite the net sales decline, we are very pleased with the marketplace performance in color cosmetics. In particular with respect to Revlon color cosmetics and so Revlon beauty care products. suffice to say that in all regions we’re very focused on driving cost for growth and as we talked about before timing of net sales in marketplace performance on a quarter basis building on much perfectly. So, as we say those over time we think our net sales trend increases our performance but I think you have to say any one quarter in isolation.

Unidentified Analyst

Great. So, I mean in other words the timing of shipments of old or new products probably impacted the second quarter performance versus first quarter or at least or is partly reflecting event.

Chris Elshaw

I’d say we don’t breakout shipments versus multiplayer performance in that way. But if you look over time you will see performance in net sales is an indication of our business fund. The underlying business we’re very pleased with. As I said we’re very pleased with our performance in the UK.

Unidentified Analyst

Got it. And in Latin America, were sales flattish excluding the Venezuela issue?

Chris Elshaw

Well, I’d say not quite, net sales were down $1 million or 3.3%. That was due to lower net sales in Mexico and Venezuela (indiscernible) in distributor markets partially as I mentioned by higher net sales in Argentina. But on a year-to-date basis net sales increased $5.9 million in that region and that was driven by Revlon cosmetics and beauty care products.

Unidentified Analyst

Got it.

Chris Elshaw

Slight exception. There was a slight decline in net sales. I don’t think it’s why all of the markets grew.

Unidentified Analyst

Got it. And then turning to gross margins, obviously this quarter gross margins lower year-over-year first quarter was up and obviously display spending I don’t know impact on that display spending was up, almost 200 basis points year-over-year. What else contributed to the gross margin decline year-over-year?

Chris Elshaw

So first our focus is on operating margins. And certainly from quarter-to-quarter there will be some variability in gross margins. Specifically in the second quarter our gross margin was 65.3 versus 67.3 as I mentioned earlier and gross margin in the quarter as you’ve just indicated was impacted by a few factors and let me just reiterate those. One was currency and I should say product mix was an impact was an unfavorable impact on gross margin in the quarter. So, we had certain products that had a higher cost of group in the mix that was sold relative to products that were sold in the prior period. Secondly had higher allowances in the quarter which also impacted gross margin and we also had higher cost in obsolescence and sales returns which I discussed. And some of these were all – all of these unfavorable trends were offset by favorable foreign currency fluctuations and lower pension expense. And so, there were a number of factors and so when we look at that we see about the 65.3 it’s worthy of note to say that on a year-to-date basis our gross margin is 65.6% compared to 65.9% in the same period last year and 65.5% for the full year 2010.

Unidentified Analyst

Got it. And in Sinful, MEA the sales of Sinful what were they in the quarter, as a percentage of prior year sales?

Steven Berns

Well, as we as you know we don’t breakout sales by brand new region. Suffice to say excluding Sinful sales in the US region increased.

Unidentified Analyst

Got it. Thank you.

Chris Elshaw

Thanks Reza.

Operator

Your next question comes from the line of Carla Casella.

Carla Casella

Hi, I have another question on Sinful Colors. It sounds like it’s a very successful launch. Can you talk about the sell-through of the brand versus the selling in and when if you already are in the replacement cycle for that or this fiscal selling period?

Alan Ennis

I’m not quite sure what you are saying. We took over of an existing business. So, there is a program of promotion and display that was in place in that and we have been working with since that time. Suffice to say we are very pleased with the marketplace performance for central substantial it got a great business model, its based on qualitative product at an attractive price with lots of attractive promotion. So, we are very happy with how is going.

Carla Casella

That’s great. I guess, I was trying to get a sense for this hold about the same amount of inventory in the chancel is that a brand it hold more or less inventory of the Revlon products?

Chris Elshaw

Yes, I wouldn’t say there are any distinguish in purchase about inventory on simple versus on another products.

Carla Casella

Okay. And then when you look at your new products, what percentage of your sales you plan to come from new products this year and do you think that should be greater or less than last year.

Chris Elshaw

Well, as we said before we don’t actually break down the absolute proportion, but we do say that in the category between 15% and 20% of retail sales every year come from new products and we aim to be competitive each and every year in that way.

Carla Casella

Okay great. Thank you.

Operator

Your next question comes from the line of Connie Maneaty

Zeke Kramer

It is actually Zeke Kramer for Connie. I was wondering if you could talk about little bit what growth on the increasing net sales in the U.S. at Sinful Colors and I know you said you don’t break out since for brand but I was wonder if you could certain give us some help on I guess the order of negative of the increase in the US accent for.

Alan Ennis

And as we said in our remarks the increase was primarily driven by the simple color and Revlon colors and magic and Revlon color okay color and excluding simple the US business was up in terms of what we think about the US performance so will be very focus on driving growth and as you know we talk about this some more cause we put in place, particular reduction to positive effect how ask before on that first of all is going to less time optimizing our brand support mix between advertising promotion activity and I know drivers so its more effective. Secondly we have been working on enhancing our Intel execution by the end of the last year we have increased our in still promotion of slight pressure and more recently will be implementing some exciting new traffic and lot of changes to our chemical and further as you said we pointed dedicated general months for US business things providing very effective days they focus from the US region so we believe gross in the range of basis of our improvement in the US business.

Zeke Kramer

Great thank you.

Operator

Your next question comes from the line of David Wu.

David Wu

Hi good morning everyone. Your first when you looks like the SG&A expense which are came down meaningfully can you talked about that would drove with the client?

Alan Ennis

What I mean if you look at 10Q which is five this morning if you listening to the comment most of decline most of increase year-over-year was actually driven currency so X currency not a huge increase in SG&A what we are doing they can sure that we are spending local right level in terms of dollars spend

Steven Berns

What I mean if you look at 10Q which is five this morning if you listening to the comment most of decline most of increase year-over-year was actually driven currency so X currency not a huge increase in SG&A what we are doing they can sure that we are spending local right level in terms of dollars spend underwrite mix between what could captured in SG&A what could capture net sales so if go where we expected to be extreme the currency charges.

David Wu

Okay and just two quick confirm in the quarter the adds sales ratio up versus last year?

Alan Ennis

I don’t recall it was up or down versus last year I don’t get moved meaningfully David.

David Wu

Okay and are there any changes we have been on the mix.

Steven Berns

Is it ongoing its an ongoing process we are constantly looking at all of the media let’s get in traditional media online etcetera and so its changes quarter-to-quarter but nothing fundamental I don’t believe in generally its driven by our own view on what’s the most effective media working with the retails partners through a joint business plan in terms of and how you are execute but nothing yet we seeing to be call us.

David Wu

Okay. It seems like we have heard that ad rates have been going up, especially the back half, are you seeing rate increases?

Alan Ennis

Well, of course, as you saw over the last, with the upfront there was lot of talk in the price about what the rates were. We work with Mediacom. It’s one of the largest media advisor in the industry, so we are relying on them to make sure that we have the best combination of quality, quantity, and rates in our media buying.

David Wu

Great. And on Venezuela, how are you mitigating the impact from the fire, are you planning to ship any product other than U.S. plans in the meantime?

Alan Ennis

Right now, we are currently evaluating all options and our focus is to minimize disruptions on our Venezuela business. Obviously, it’s a moving fee stand as I will take actions with (indiscernible).

David Wu

Great. And then just lastly on Europe, can you talk about sort of where you are in terms of expanding distribution and whether you are gaining traction with that?

Alan Ennis

In Europe in general or a specific country?

Unidentified Analyst

Both?

Alan Ennis

I mean our distribution base hasn’t significantly changed. I mean what you find with Revlon is we generally distributed in the places where people are buying cosmetics already. Our real focus is about increasing churn and productivity in those outlets. But as I say, yeah, the UK is a significant market in Europe and we are certainly very pleased with our progress there on Revlon cosmetics.

Unidentified Analyst

Excellent. Thank you very much.

Alan Ennis

Thanks.

Operator

Your next question comes from the line of Jeff Kobylarz.

Jeff Kobylarz

Hi, good morning. Just curious the 140 basis point hit to your gross margin you said by mix in, can you say with the acquisition of Sinful Color was there inventory write up that caused kind of a one-time impact on gross margin in this quarter?

Alan Ennis

As you know the Sinful acquisition closed on March 17 and the accounting is that we do write up those assets, but that was not a material movement in the gross margin and it was a first quarter event. So the product mix that we are talking about is when we have sales of certain products within color cosmetics and our beauty care portfolio, they are at various margins. And depending on the sales of those products (indiscernible), the gross margin can vary from period-to-period, but as I mentioned earlier in the call, in our prepared response to another question, our gross margin both in 2010 as well as in the latest 12 months as well as for any measure period this time recently has been around the 65.5% range.

Jeff Kobylarz

Okay, thanks. And about simple color, can you comment about how the traders responded to your acquisition of the company and is there any change in the growth rate for Sinful just given that you guys are the owners now?

Alan Ennis

Well we run Sinful as a standalone business. We have a dedicated (indiscernible) for that business and it’s run entirely separate from Revlon. The relations with the trade are excellent and we continue to take full of answers back.

Jeff Kobylarz

All right. And then also can you comment about the sales of new products in the first half of this year compared to the first half of last year, just how are they performing?

Alan Ennis

Well, as we said earlier, in our quarter one call two we are pleased with our new product developments. As I commented earlier, we target to be competitive in the category which is 15% to 20% of retail sales in new products. And that really comes from our three-year rolling global portfolio plaque. So as we set out sometime ago as part of our strategy we need to have a strong new product pipeline in this category. So we implemented this three-year rolling portfolio plan. The benefit is that you get earlier sight of your new products, you are able to make sure that the technology is excellent and you are able to prepare for (indiscernible) to the launch. So we are consistently focused on that and making sure that we are meeting with these all our consumers globally.

Jeff Kobylarz

All right. Thanks for your help. That’s it.

Operator

Your next question comes from the line of (indiscernible).

Unidentified Analyst

Yeah, hi. Could you comment please on your inventory levels at the $141.8 million at the end of the second quarter, that’s higher than it’s been for a while?

Chris Elshaw

Yeah, I think at any period end then I will hand it over to Steven, like in any period end inventory is going to move around. There is nothing fundamentally different about our business that would indicate that inventory is anything other concern.

Unidentified Analyst

Okay. So we should expect it to decline as the decline as the years go on.

Alan Ennis

I didn’t say that, I think you need to anticipate, whatever you choose to anticipate, but I’d say is that nothing fundamentally different about our business as it relates to inventory. Obviously, we did add the Sinful Colors brand to our portfolio, which does have some inventory, but net in net nothing fundamentally different from worldwide business point.

Unidentified Analyst

Okay, all right. It should by year end it should be comparable to last year’s year end, is that perhaps any timing or temporary differences?

Alan Ennis

I wouldn’t conclude that. It’s up to you to conclude.

Unidentified Analyst

Okay. And how much of an increase would be attributable to the Sinful Colors business?

Alan Ennis

We won’t disclose.

Unidentified Analyst

I’m sorry

Alan Ennis

That’s not something that we disclose.

Unidentified Analyst

I see, okay. And then regarding the permanent display spending, is that been capitalized this part of property and equipment?

Steven Berns

The accounting for differs around the world. In the U.S. typically it is capitalized and amortized over the three year period and in certain markets that by the U.S. it is capitalized. But also in certain markets outside the U.S. and China for example, its expenses does incurs.

Unidentified Analyst

Okay. Okay, great. All right. Thank you.

Steven Berns

Thank you.

Operator

We do have a follow-up question for the line of [Reza].

Unidentified Analyst

Yes. Just as a follow-up, you mentioned in your remarks that in the second quarter allowances as well as returns were higher year-over-year. I was running if you can comment on that because it seems like returns and allowances have been moderating year-over-year in the last few quarters for the part.

Steven Berns

With regard to allowances that’s going to be a function of as activity both of our new products as well as our core business in any particular quarter vary through period to period to period as a function of our selling activity. However, we don’t see a change in the overall level of allowances that are driving our business as Chris and Alan both mentioned earlier. We look for a mix of advertising and promotion that will drive profitable brand growth

Unidentified Analyst

And is it roughly flat year-over-year or year-to-date?

Steven Berns

I just don’t have that in front of me at the moment [Reza]

Unidentified Analyst

Got it and then you talked about FX being helpful to your gross margin is that function of selling products reduced out of U.S. to appreciating currency countries away from us?

Steven Berns

No, we are manufacturing majority of our products more than 50% in the U.S. (indiscernible) Carolina facility we have been selling both products to overseas markets and then in addition we are translating the financial statements of our foreign subsidiaries, non-US subsidiaries those financial statements then translated back to U.S. dollars, transaction and translation impacts that are reflected in financial payments.

Unidentified Analyst

Okay. That’s what I meant to say. Quite used to it in a more eloquent way. And then lastly, the toner business in U.S. for the category I mean have you seen any improvement in the category broadly speaking or any softness versus first quarter or to prior year.

Chris Elshaw

The category continues to be positive. This is a highly competitive category. It’s got a lot of strong players like ourselves who are competing constantly everyday plus it follows the group of the retailers who will complete very hard against each other so. All that has produced fairly good to category so far this year.

Unidentified Analyst

So, is it category sales were up in the second quarter? What happened in the first quarter?

Chris Elshaw

Yes.

Unidentified Analyst

They were? Okay and retailer posture on color cosmetics and beauty care, is that also constructive?

Chris Elshaw

Yes. I mean that they continue to see as a good category. We have very strong relationships with each of the major customers. As Alan mentioned earlier, we work very closely on joint business confidence and maximize performance. So, it’s a place to be.

Unidentified Analyst

Thank you.

Operator

Thank you, ladies and gentleman. I would now like to turn the call back to Mr. Alan Ennis for closing remark.

Alan Ennis – President and Chief Executive Officer

Thank you. Thank you very much for joining our conference call. We look forward to speak with you when we report our third quarter results end of this year. Thank you.

Operator

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

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