Revlon, Inc.
Q4 2008 Earnings Call Transcript

Published: 12 Feb 2009

[Operator:]

Good morning, ladies and gentlemen and welcome to Revlon's Fourth Quarter 2008 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. Abbe Goldstein, Revlon's Senior Vice President, Investor Relations and Corporate Communications. You may begin, Ms. Goldstein.

[Abbe Goldstein:]

Thank you and good morning everyone and thank you for joining our call. Earlier this morning we released our results for the fourth quarter and year ended December 31 2008. If you have not already received a copy of the earnings release, you can obtain one at our website www.revloninc.com. Here with me today are David Kennedy, President and Chief Executive Officer and Alan T. Ennis, Executive Vice President and Chief Financial Officer. On today’s call, David will briefly highlight the results for the year and provide a strategic update on the business. Alan will then review our financial results for the quarter and the year in detail. Before we get started, I would like to remind everyone that our discussion this morning might include forward-looking statements, which are subject to the Safe Harbor Provisions of the Private Securities Litigation Act Reform of 1995. Information on factors that could affect the company’s results from time-to-time and cause them to differ materially from such forward-looking statements is set forth in the company’s filings with the SEC including our 2007 Form 10-K which we will file in about two weeks. Our remarks today will include a discussion of adjusted EBIDTA and free cash flow which are non-GAAP measures that are defined in the footnotes to the release we issued this morning and are reconciled in the case of adjusted EBITDA to the net income or net loss and in the case of free cash flow to net cash provided by our use in operating activity. The most directly comparable GAAP measures in the accompanying financial tables. In relation to U.S. share results unless otherwise noted our discussion this morning of mass retail share is that of the U.S. mass retail dollar volume according to AC Nielsen which excludes Wal-Mart as well as regional mass volume retailers, prestige department stores, Internet, door-to-door, television shopping, perfumeries and specialty stores all of which are outlets for cosmetic sales. The AC Nielsen data is an aggregate of the drug channel, Target, Kmart and food and combo stores and represents approximately two thirds of the company's US mass retail dollar volume. And finally, as a reminder our discussion this morning should not be copied or recorded. With that I would now like to hand it over to David.

[David Kennedy:]

Thank you Abbe and good morning everyone. First, I would like to make a few brief comments on our financial results for the year follow by an update on the progress we made in 2008 in executing our strategy. Then I will turn it over to Alan, to review our 2008 financial results. Overall during the year, we improved our operating margins generated positive free cash flow and net income from continuing operations and improved our capital structure by reducing debt by $110 million. While our net sales for the year were down 1.5%, we were very pleased with the strong growth of Revlon color cosmetics in the U.S. and in key countries around the world. Gross profit margins expanded to 63.5% in 2008 from 63% in 2007. Operating profit improved to $155 million in 2008 compared to $118 million in 2007 and operating profit margin significantly increased to 11.5% in 2008 from 8.7% in 2007. We had net income from continuing operations of $13.1 million in 2008 compared to a net loss on continuing operations of $19 million in 2007. And we generated positive free cash flow with $26 million compared to negative free cash flow of $17.1 million in 2007. During 2008, we continue to make progress executing our strategy. We continue to build and leverage our strong brands, focusing on the key drivers of profitable growth. Innovative high quality consumer preferred products, effective brand communications, appropriate levels of advertising and promotion, and superb execution with our retail partners. We further strengthened our product offering in the color cosmetics category with the introduction of a comprehensive lineup of Revlon and Almay new products for 2008 and for the first half of 2009. The product launches included unique offerings for the mass channel innovations, and products, and packaging and line extensions within the Revlon and Almay franchises. It is important to note that we continue to concentrate on insuring, that we have a strong pipeline of new products each and every year in all segments of the mass color cosmetics category. We supported our new product launches, as well as our existing product lines with effective creative advertising coupled with integrated promotional activities. Inline with our plan for a more focused allocation of advertising and promotional spending we supported our brands throughout the year including, increase spending in the fourth quarter of 2008 compared to 2007. This resulted in consumption growth in the product lines and segments in which we focused. For example, in the U.S. the Revlon brand in the face segment grew 12.6% in the fourth quarter and 12.2% in the year significantly faster than the category segment growth of 5% in the fourth quarter and 3.3% in the year. The Revlon brand growth in the face segment was driven by three important 2008 new product launches namely, Revlon ColorStay Mineral foundation, Revlon Custom Creations foundation, and Revlon Beyond Natural Makeup, which was supported by TV and print advertising featuring Halle Barry and Jessica Alba as well as promotions in each quarter of 2008. We signed Jennifer Connelly, and Elle Macpherson to represents the Revlon brand along with Halle Berry, Jessica Alba and Beau Garrett. We engage, Gucci Westman world-renowned makeup artist to service Revlon's Global Artistic Director and Leslie Bibb to represent the Almay, brand along with Elaine Mellencamp and Marina Theiss. In our Revlon beauty tools business, we launched several new products during the year and recently introduced the superior quality Revlon Pedi-EXPERT our entry into the fast expanding foot-smoothing pedicure tool segment. We continue to realize positive results from our focused marketing activities in support of Revlon Colorsilk hair color and for the Mitchum brand we continued the successful Mitchum Man advertising campaign, and in the fourth quarter we launched a significant package upgrade. Our international business continued to grow driven by strong growth of Revlon color cosmetics primarily in the Asia-Pacific region and Canada while operating margins continued to expand. We completed the $107 million sale of our non-core Bozzano brand, a leading man’s hair care and shaving line of products in Brazil. Revlon brand color cosmetics continue to be marketed in Brazil, through Revlon’s current third party distributor. We’ve reduce debt by $110 million in 2008, we use $63 million of the net proceeds from the Bozzano sale to reduce the $170 million MacAndrews & Forbes Senior Subordinated Term Loan, leaving $107 million of the loan outstanding we are saving $7 million in annualized interest expense as a result of this repayment. In addition, the maturity date of the MacAndrews & Forbes loan was extended to August 2010. We use the balance of the Bozzano sale proceeds of $32 million in addition to our free cash flow from operations to reduce revolver borrowings. We continue to see the benefits of our day-to-day intense focus on rigorous cost control and initiatives to continuously improve efficiency. Favorable manufacturing efficiencies contributed to the improvement in gross profit margin. In the U.S., we completed a restructuring of our sales force, reducing staffing while better aligning our resources to serve our customers and efficiently implement our strategy. During 2008, we continued to strengthen our organizational capability recruiting talented and experienced executives in all functions throughout the company. As we look forward to 2009, while we expect economic conditions and retail sales environment to remain uncertain around the world, we believe that we are better positioned, that in many years to maximize our business results in light of these conditions. Specifically, we have strong global brands, at highly capable organization, and sustainable reduced cost structure and an improved capital structure. We are encouraged by the continued growth throughout 2008 in the mass channel color cosmetic retail sales in the US and in key markets around the world, despite the uncertain economic conditions. We are also encouraged that in January 2009, according to AC Nielsen, the U.S. mass retail color cosmetics category expanded 3.6% and the Revlon brand color cosmetics gained 0.7 percentage points, growing faster than the category resulting in a dollar share of 13.3%. We are continuing to execute our strategy and manage our business while maintaining flexibility to adapt to changes in the business conditions. We are also continuing our intense focus on the key growth drivers of our business, which overtime we believe we will generate profitable net sales growth and sustainable positive free cash flow. So, with that let me hand it over to Alan, who will take you through the financial results in detail.

[Alan T. Ennis:]

Thank you Abbe, thank you David and good morning everyone. As we normally do I would like to build upon David’s introductory financial comments and take you through a more detailed review of our financial results? So, starting with the P&L for 2008, net sales in 2008 were $1.347 million a decrease of $20.3 million or 1.5% compared to $1.367 million in 2007. Foreign currency fluctuations negatively impacted net sales by $8.3 million, which accounted for six tenths of 1% of the net sales percentage decline. Excluding foreign currency fluctuations, net sales of Revlon brands color cosmetics increased 9%, driven by the strong new product introduction specifically higher shipments of favorable product return partially offset by higher promotional allowances. Increased net sales of Revlon brand color cosmetics were off set by declines in net sales of Almay specifically higher shipments offset by higher product return and higher promotional allowances. In addition, to lower net sales of certain fragrance and beauty care brands. In the United States net sales in 2008, were $782.6 million a decrease of $21.6 million or 2.7% compared to $804.2 million in 2007. Higher net sales of Revlon brand color cosmetics were offset by lower net sales of Almay fragrance and beauty care products. In 2008 higher net sales of Revlon ColorSilk and Revlon Beauty Tool were offset by the cycling of 2007 launches of Revlon colorist hair color, Revlon Flare fragrance and Mitchum Smart Solid antiperspirants and deodorants. In our international operations, net sales in 2008 were $564.2 million an increase of $1.3 million or two tenths of 1% compared to $562.9 million in 2007. Excluding the unfavorable impact of foreign currency fluctuation of $8.3 million, net sales increased by 1.7% as a result of higher sales of Revlon and Almay color cosmetics, Revlon Beauty Tools and Mitchum antiperspirants and deodorant, partially offset by lower net sales of fragrance and hair care products. Regionally, higher net sales in the Asia-Pacific and Latin America regions were partially offset by lower net sales in the Europe region. In our Asia-Pacific region, which is comprised of Asia-Pacific and Africa, net sales increased 3.7% or 6.7% excluding the impact of foreign currency fluctuations to $265 million compared to $255.6 million last year. This growth was primarily due to higher shipments of Revlon color cosmetics throughout the region and higher shipments of beauty care and fragrance in South Africa. In our Europe region which is comprised of Europe, Canada, and the Middle East, net sales decreased 4.9% or 4.7% excluding the impact of foreign currency fluctuations to $200.8 million compared to $211.1 million last year. Lower shipments of fragrance and color cosmetics in the U.K., Italy, and certain distributor markets were practically offset by higher shipment of Revlon and Almay color cosmetics in Canada. In our Latin America region, which is comprised of Mexico, Central America, and South America, net sales increased by 2.3% or 2.4% excluding the impact of foreign currency fluctuations to $98.4 million compared to $96.2 million last year. This increase was primarily driven by higher net sales in Venezuela and Argentina, practically offset by lower shipments of beauty care products in Mexico and lower shipments of fragrances and color cosmetics in several distributor markets. Moving down the rest of the P&L for Revlon, Inc. for 2008, consistent with our business plan and the increased level of new products introductions we supported our brands with a more focused allocation of advertising and promotional spending throughout the year. Let me remind you that from a financial reporting perspective, promotional allowances are recorded as a deduction to arrive at net sales while advertising cost are recorded within SG&A in the P&L. In 2008 advertising and promotional spending across all our brands remained largely unchanged. We increased spending on our color cosmetics brand while we had lower spending on certain beauty care brands as a result of the cycling of the prior year spending of a launches of Revlon ColorSilk Hair Color, Revlon’s Flare fragrance and Mitchum Smart Solid antiperspirants and deodorant. These specific actions contributed to our performance in the marketplace in 2008, as reflects in the U.S. mass retail dollar share and dollar volume growth related to the Revlon and Almay brands and the segments in which our new product launches and advertising and promotional spending were focused. In 2008 our gross profit margin improved by 50 basis points to 63.5% from 63% last year. We saw benefits from favorable changes in sales mix, and favorable manufacturing efficiencies. SG&A expenses of $709.3 million improved by $26.4 million to $735.7 million last year. The improvement in SG&A expenses for 2008 as compared to 2007 was driven primarily by three factors

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Karru Martinson of Deutsche Bank. Your line is open.

[Karru Martinson:]

Just kind of start with housekeeping. On the other cash flow that your correct the – it’s 15 cash usage of $15 million –15?

[Unidentified Company Representative:]

Yeah, in 2009 correct.

[Karru Martinson:]

Correct. Okay. I just wanted to make sure on that. As we look out at 2009, and kind of the advertising spend, are we looking at kind of a similar level going forward here? Or are we are going to see some pullback and then how would that can be weighted through the course of the year?

[Unidentified Company Representative:]

Well, as we’ve indicated, we will – we are going to support our brands. We are continuing to support them appropriately with advertising and promotional expenditures. We’ll support all of our new product launches and that’s the approach. In addition to that, of course as we look out, we are going to maintain flexibility in order to adapt to whatever the business conditions are. Let me remind you that throughout 2008, in the U.S. and then key countries around the world, the mass color cosmetics market continue to grow. We saw that even in January

[Karru Martinson:]

Okay. And in terms of the, but 2010 kind of debt maturities, obviously the Rights Offering seems like it’s on hold for now. I mean, kind of what’s the mindset here as here as we go through 2009 in terms of addressing that?

[David L. Kennedy:]

Well, a couple of points clearly, first of all as I mentioned, we are in a good position and that we do not have any debt maturing in 2009. The MacAndrews& Forbes loan as you know was extended to August 2010. Having said that we’re still committed to doing the Equity Rights offering. Obviously, we are watching the markets closely to assess the timing at this point. So our strategy has not changed. We just have to wait and see what’s happened to the marketplace.

[Karru Martinson:]

Taking a step back and looking at the broader picture. I mean, are you seeing any shifts in your customer’s behavior in terms of trade downs, and kind of reaching, perhaps for out of the prestige market into kind of the mass market?

[David L. Kennedy:]

Well let me answer that, in the cosmetics category, what we have deciding is continue to grow in mass as we’ve indicated. We have also noted that in the U.S., again in prestige, cosmetics are down. However, it’s very difficult to – it’s extremely difficult to know whether there is actually shifting going on between channels. In addition to that, in mass cosmetics again in the U.S. with the data that we’ve had, we’ve not seen any indication of trade down. In fact, dollar volume is actually somewhat ahead of unit volume increases. So it doesn’t appear that the people, at least in mass cosmetics are trading down.

[Karru Martinson:]

Thank you very much guys.

[David L. Kennedy:]

Thanks Karru.

[Operator:]

Thank you our next question comes from the line of Reza Vahabzadeh of Barclays Capital. Your line is open.

[Reza Vahabzadeh:]

Good morning.

[Unidentified Company Representative:]

Good morning Reza,

[Unidentified Company Representative:]

How are you Reza?

[Reza Vahabzadeh:]

Thanks. So when you look at the fourth quarter EBITDA comparisons year-over-year Alan, I mean, basically, is it just a reflection of somewhat lower shipments in the U.S. and higher returns offset by lower A&P spending?

[David L. Kennedy:]

It was couple of things. The primary driver of the lower EBITDA year-over-year actually is increased level of advertising and promotional spending.

[David L. Kennedy:]

That would be the single biggest driver. There obviously was some negative impacts of foreign currency driven by the - the impact of conference at the top line. But they are the two biggest drivers. It would be increased advertising and promotional spending, which we have planned to and indicated in the third quarter call.

[Reza Vahabzadeh:]

Right.

[David L. Kennedy:]

And the unfavorable impact of currency.

[Reza Vahabzadeh:]

But did the shipments and number match you own internal plans?

[David L. Kennedy:]

Yeah it did.

[Reza Vahabzadeh:]

It did, okay. And then, as we look ahead to 2009, are there particular quarters where the timing of shipments are A&P and ad spending will change this year versus last year?

[David L. Kennedy:]

Well, as you know in the U.S., and it’s different outside the U.S., but in the U.S., there are typically two major periods of product introductions. So the cycle does something like this. First half 2009, new products start to ship in the fourth quarter of 2008 and continue to ship into the beginning of the first quarter of 2009. Then, when we believe we’ve reached the appropriate distribution, we will commence the appropriate advertising and promotional campaign. So there is a lag between when a sale is recorded in our financial statements and when you would actually A. See the product at retail. B. See the commencement of the advertising and C, See those retail sales show up in Nielsen. The second cycle then in relation to - for example, second half of 2009, you would see shipments starting in the back half of the second quarter and trickle into the third quarter, and you would have that same lag effect on the timing of advertising and promotional spending and when you would see the sales of those products show up in the Nielsen. It’s different outside the U.S. The U.S. is - outside the U.S. they don’t have such a regimented cycle, it’s more of a continual flow of new product introductions to the world.

[Karru Martinson:]

But there is no difference in the timing of those patterns this year versus last year to your knowledge? Nothing significantly different.

[David L. Kennedy:]

Talking about ’09.

[Karru Martinson:]

Yeah, ’09 versus ’08, there is no significant change in patterns.

[David L. Kennedy:]

Well it’s possible because it really depends on the timing of the new product launches.

[Karru Martinson:]

Right.

[David L. Kennedy:]

And even though Alan outlined the general launch cycle in the U.S. that can actually change somewhat.

[Karru Martinson:]

Right, so are your new plan launches from a timing standpoint, do you know if they are going to be about the same time as prior year or are they going to be different?

[David L. Kennedy:]

I mean, it’s broadly consistent.

[Alan T. Ennis:]

Broadly consistent but let me caution you there could be some differences.

[Karru Martinson:]

Okay. Got it.

[David L. Kennedy:]

Just one other point on that as you think about our international operations, as I did mentioned if exchange rates stay where they are today, there would be an impact on reported net sales comparability in the first three quarters of next year, driven by currencies.

[Karru Martinson:]

I see, okay. And then, on the cash flow lines, you mentioned that the other line item will be a use of cash of $15 million, which is less than your pension contribution number. Is there an offsetting, working capital or some other item?

[David L. Kennedy:]

Well, let me explain it to you. The - what you see, the way I outlined it is that the cash flows that I talked about start at EBITDA and bridge the way down to cash flow. So clearly the pension expense but the accrual for pension expense will be recorded in EBITDA.

[Karru Martinson:]

I see.

[David L. Kennedy:]

Well you would see in your movement in working capital really it’s a delta between your expense and your contribution.

[Karru Martinson:]

Okay, so you don’t need to add any – the contribution has not moved any actual expense this year. Okay and then, last question. Are you seeing any signs of inventory destocking in the U.S. or abroad and where are we in that cycle if you will?

[David L. Kennedy:]

Well first of all, let me remind you as we’ve done on prior calls that, retailers today manage and we work with them to manage the level of inventories and try very closely. Targets have been set, and we work with all the retailers in order to make sure that we got the appropriate level of inventories in tray. We’ve not seen anything to change that pattern. We’ve not seen any major changes to what the retailers are doing today in the tray than we’ve seen over the past year or two or three.

[Karru Martinson:]

Thank you very much.

[David L. Kennedy:]

Thanks enough.

[Operator:]

Thank you. Your next question comes from a line of Carla Casella of JP Morgan. Your line is open.

[Carla Casella:]

Hi

[Unidentified Company Representative:]

Good morning Carla.

[Carla Casella:]

Good morning. My questions related to permanent display spending. It looks like it’s ticking up a bit in ’09. Is that just because of the number of products introductions or do you do need do some more spending on your displays or is that strategy to potentially gain some more shelf space.

[David L. Kennedy:]

Well Carla its actually reported 2008 spending was around $47 million, what I said is we expect to be approximately $50 million in ’09. So it’s broadly inline in ’09 where it was in ’08.

[Carla Casella:]

Okay and..

[David L. Kennedy:]

And that by the way that’s consistent with where it was in 2007 as well.

[Carla Casella:]

Right exactly. And then it looks I just want to clarify the EBITDA, adjusted EBITDA that you gave does not adjust out the two gains, and then also it doesn’t adjust for the restructuring charge you took in the fourth quarter?

[David L. Kennedy:]

That’s Correct. The only thing that’s excluded from it, in that context is the BAZANO transaction?

[Carla Casella:]

Okay

[Unidentified Company Representative:]

But the two one-time gains are in there and the restructuring is in there too.

[Carla Casella:]

Okay and I know prior questions asked about the destocking, but I’m wondering, how would you – would you say your trade inventories - the inventories at the trade level, are they pretty clean across channels or are there any channels that you are worried about that maybe carrying too much inventory of either old products or even some of the new ones?

[David L. Kennedy:]

As we monitor our inventory levels in trade at the key customers, we don’t see any change, any significant change year-over-year even over the past few years.

[Carla Casella:]

Okay. Okay that’s great. Thanks, that’s all I had.

[Unidentified Company Representative:]

Thanks Carla.

[Operator:]

Thank you our next question comes from the line of Kevin Ziets of Pauly Capital. Your line is open.

[Kevin Ziets:]

Hi, good morning.

[Unidentified Company Representative:]

Good morning Kevin.

[Unidentified Company Representative:]

Good morning Kevin.

[Kevin Ziets:]

I just wanted to know if you could quantify that currency impact in the fourth quarter because it looks like your gross margins held up reasonably well.

[Alan T. Ennis:]

Yeah, we didn’t quantify it specifically. The way to think about is Kevin, in the fourth quarter, the way to think about it would be the sales decline resulting from currency was $23 million. And way to think about it would be to look at our margin structure. So our operating income margin and if you would assume that margins applies to our international business, then you could work out what the currency impact on OI is.

[Kevin Ziets:]

So there was no additional impact from the 40% sourcing of those international sales from North Carolina?

[Alan T. Ennis:]

It was very material and I’ll tell you why. Inventory turns around times a year. And so, while our international businesses were purchasing inventory from our U.S. manufacturing facility in the fourth quarter, most of that inventory, on average in general would be on the balance sheet at the end of the year and that would start to bleed through into the first quarter. So, there is a lag because of inventory turns with - when that transaction impact would hit the P&L

[Kevin Ziets:]

And so, what you’re saying is I guess some of that, more expensive inventory if you will is going to flush through in maybe the first quarter, first few - for or most of 2009?

[Alan T. Ennis:]

Yeah, well certainly in the first quarter and then if rates stay where they are today then that would continue to correct.

[Kevin Ziets:]

Okay, and then I guess with regards to the ad spend, I know you are always saying that you are going to spend at competitive levels. I’m just looking at the Mitchum share year-over-year and some of the areas where maybe brought down spending, it does look to have impacted market share. Just, I guess - just want to get a sense of whether you are going to be more just as kind of focus on the new launches or if you are going to be more broad based in terms of the ad spends going forward? And then well, maybe just answer that to start.

[David L. Kennedy:]

As far as the Mitchum brand is concerned, remember that we launched a major new product in 2007. So we spent significantly behind that launch. As it’s customary when you launch the new product. In that category, and in the hair color category, and even in fragrance category, the number of new product introductions is much, much less than in the color cosmetics category. So you won’t see us spending at levels because we’re not launching new products every year in those categories. So, as we go forward, of course if we do launching products we’ll spend at appropriate levels to be competitive depending upon the product line, whether it’s an extension, whether it’s a major new product and so forth.

[Kevin Ziets:]

Right. I guess I guess, thinking on those lines you have the Pedi-Expert coming up. That’s kind of seems like a more major new product line.

[Unidentified Company Representative:]

Right.

[Kevin Ziets:]

And just want to balance that against maybe what you are seeing in terms of just advertising rates out there. Is there any opportunity to bring your costs down?

[David L. Kennedy:]

You mean in terms of advertising rates?

[Kevin Ziets:]

Yes.

[David L. Kennedy:]

Well I see this that we have processes in place and we’ll manage to get and to take advantage whatever favorable rates that we can give in advertising and really across the board in all of our raw materials for example. So whatever is favorable out there, we believe that we can be very aggressive and to take advantage of it.

[Kevin Ziets:]

And maybe you mentioned this but what were the restructuring costs that were taken during the fourth quarter?

[David L. Kennedy:]

It’s relating to the restructuring of our sales force in the U.S.

[Kevin Ziets:]

Okay, could you - a little more color on that?

[David L. Kennedy:]

Well, what we did is, realign our sales force to our customer base in a more effective and efficient way, and accordingly we reduced staffing levels, but we believe that we’ve got a more efficient and in fact a better aligned sales force against our customer base.

[Alan T. Ennis:]

The charge we took Kevin in the fourth quarter was about $3 million.

[Kevin Ziets:]

And the anticipated annualized savings?

[Alan T. Ennis:]

We expect the savings to be more than that on an annualized basis.

[Kevin Ziets:]

Okay and will hit pretty immediately.

[Alan T. Ennis:]

Yeah the restructuring was done in November, December. So savings will be started.

[Kevin Ziets:]

Okay great. Last question is on the new product launches and whether in general, you’ve been able to - just maybe whether you’ve been able to open up any new channels of distribution or expand existing channels with the launches that you’ve come out with?

[Alan T. Ennis:]

We are broadly distributed in the U.S. We are into every mass channel to a significant degree outside the U.S. we’re in all the channels that strategically we think that we can compete, and so we believe that we’ve got very good strong access to the consumer in the U.S. and in all the countries around the world. So, we really think our focus should be on increasing the turnover per store door per door and that's our focus.

[Kevin Ziets:]

Okay, I guess just one more on the L'Oreal, I think they’ve said that they are increasing their ad spend and there are promotional stance. So just wondering whether you are seeing an increased level of competition in general out there?

[David L. Kennedy:]

Well, remember that L'Oreal, operates in a number of categories in which we don’t compete.

[Kevin Ziets:]

Right. I think that they were speaking particularly about the U.S. mass, but I’m maybe…

[David L. Kennedy:]

Yeah, well. They still have – they still operate in a number of categories in which we don’t compete. So, I would say broadly speaking at this point, although we haven’t seen all the data yet for the fourth quarter. But we’ve seen no significant change. I would say broadly speaking, in the patterns of advertising and promotional spending in 2008, that we’ve seen in prior years.

[Kevin Ziets:]

Okay, that's great. Good luck guys.

[Alan T. Ennis:]

Thanks Kevin

[Operator:]

Thank you, our next question comes from the line of Walter Branson of Regimen Capital. Your line is open.

[Walter Branson:]

Thank you, just a couple things. Going back to the kind of timing of the numbers. So, in 2008 you did have, broadly different timing, I think with strong year-over-year growth in adjusted EBITDA in the first two quarter then decline in the fourth quarter. Was there a significant change in the calendar in 2008 in terms of new product shipments and A&P spending, versus 2007 that explains a lot of that.

[Alan T. Ennis:]

Well, in fact that does explain it. We had – we did have a - I would say a – I don’t know if you call it, significant, but a moderate change in the calendar. We introduced more products for 2009 earlier, which means later in the year in the 2008. And in addition we supported our products throughout the year. And we had a more even support based on the products that we launched for ’08 throughout the year versus ’07. That makes sense?

[Walter Branson:]

Yes, and just, and maybe looking at the immediate future. In the first quarter of ’09, is it broadly comparable in terms of shipments of new products and A&P to the first quarter of ’08 or significantly different?

[Alan T. Ennis:]

Well, as we said, we will have and our intent is to have strong new product pipeline in cosmetics, each and every year and that’s what we will continue to do.

[Walter Branson:]

Okay and then in terms of the large increase in A&P spending in the fourth quarter, can you give us a sense, whether in dollars or percentages, what the magnitude of that was on a year-over-year basis?

[Alan T. Ennis:]

What I can tell you Walter is that the preponderance of the difference between our EBITDA in the fourth quarter of last year versus the fourth quarter of this year, was advertising and promotional spending.

[Walter Branson:]

Okay.

[Alan T. Ennis:]

As I mentioned earlier there was a negative impact of currency so if you strip that difference really would be increased level of spending in advertising and promotion.

[Walter Branson:]

Okay, so that’s obviously a pretty significant change and given that significant change, were you disappointed that the Revlon brand did not increase its share for the quarter?

[David L. Kennedy:]

No in fact we were very pleased because the advertising in the U.S is very focused on certain segments and we call that out I think in the script, we got very good performance in all those segments in which we focus the advertising and the promotion. We also saw that in January as well.

[Walter Branson:]

Okay, thank you.

[David L. Kennedy:]

Thank you Walter.

[Operator:]

Thank you, our next question comes from the line of Mary Gilbert of Imperial Capital, your line is open.

[Mary Gilbert:]

Thank you.

[Unidentified Company Representative:]

Hello Mary.

[Alan T. Ennis:]

Good. Very well.

[Mary Gilbert:]

I wanted to just get a clarification on the reversal in the gains, in the quarter you had is it $4.3 million gain and then a $5.9 million non-core trademark?

[Alan T. Ennis:]

Let me try to clarify. That was in relation to the full year, so..

[Mary Gilbert:]

Okay the 5.9 was full year, okay?

[Alan T. Ennis:]

That was the sale of the non-core trademark happened in the first quarter, and..

[Mary Gilbert:]

Okay.

[Alan T. Ennis:]

And the Mexico plant sale happened in the second quarter. So there was no one-time gains in the fourth quarter, but in relation to the yea, obviously, there were.

[Mary Gilbert:]

Okay, so there were no reversals or anything in the fourth quarter correct?

[Alan T. Ennis:]

Except the restructuring charge, and increased advertising and promotion expense in accordance with our clients.

[Mary Gilbert:]

Yeah, which we got that. So basically, yes so we have backed out we are going to get closer to $69 million for the quarter. Yeah for the quarter so then therefore for the full year what I need to do is, there was the $4.4 million reversal, the $4.3 million gain, and the $5.9 million gain. Correct? Those all are the adjustments?

[Alan T. Ennis:]

You are trying to put these into your models?

[Mary Gilbert:]

Yeah

[Alan T. Ennis:]

Yeah that’s correct.

[Mary Gilbert:]

Okay super. Okay got it. So that’s kind of inline with what I’m looking for and then I wondered in looking at the cash requirements for 2009 it looks like it’s going to be somewhere around $220 million in total. I know you haven’t said that but you did give us some color on what’s going on with the currency and we’ve gone over that in the past and I guess I wanted and then we have an idea of the pension expense impact. So, on that basis do you except to have potentially if we sort of look at the current demand that we’re seeing in the market in the way the categories acting that you would be slightly cash flow and negative to the tune of may be $20 million to $30 million?

[Alan T. Ennis:]

That was something we are going to answer on the call, obviously, Mary. But I think we have given you enough information to be able to model that fairly appropriately.

[Mary Gilbert:]

Okay, and then one other thing on the revolver, how much did you have drawn on the revolver and how much outstanding in LC’s?

[Alan T. Ennis:]

The revolver was undrawn at the end of the year and we continue to have around $30 million of LC’s.

[Mary Gilbert:]

Okay perfect.

[Alan T. Ennis:]

One important point, I just want to reemphasize you are thinking of the cash flow. As you think about interest as I mentioned, interest in 2008 was $123 million,

[Mary Gilbert:]

Right

[Alan T. Ennis:]

Obviously we’ve reduced debts during 2008 and rates have come down. So, as you think about modelling interest in 2009 you have to bear in mind those factors.

[Mary Gilbert:]

Great.

[Alan T. Ennis:]

It should be a positive impact to us.

[Mary Gilbert:]

Exactly, yeah okay. Yes okay…

[Alan T. Ennis:]

Also I would keep in mind that as I indicated earlier that we’ve got processes in place to take advantage of any cost savings that may arise from indirectly from improved prices in commodities, advertising rates, et cetera. And as well, we will continue to day-to-day control our costs, very well. Plus, we will get the benefit of the restructuring of the sales force.

[Mary Gilbert:]

Got it. Yeah, so basically with these initiatives, you’re targeting and you’ve done this in the past. I have seen you do it. You’re targeting to be at least cash flow neutral, it sounds like.

[Unidentified Company Representative:]

Well, again, we’ll leave you to work it out. But, I would take your comments, very carefully particularly as it concerns our ability to take advantage of whatever costs savings are there in terms of our input costs, rates on advertising, as well as controlling the day to day costs around here.

[Mary Gilbert:]

Okay, and then also with regard to…

[David Kennedy:]

As well as an interest rates as well as Alan pointed out.

[Mary Gilbert:]

Yeah. And then with regard to the rights offering that's definitely going to be 2009 and then or could it be pushed out?

[Alan T. Ennis:]

So, what we said Mary, that the expiration of that loan, was extended to August 2010, to give us some flexibility in terms of timing. We haven’t identified or committed to specific timing to do the right suffering. Although, we are committed to doing it.

[Mary Gilbert:]

Okay, got it. So, it could be pushed off into early 2010, if necessary?

[David Kennedy:]

Correct.

[Mary Gilbert:]

Okay, great. That’s super. Most helpful. Thank you, very much.

[David Kennedy:]

Thanks, Mary.

[Unidentified Company Representative:]

Thanks.

[Operator:]

Thank you, our next question comes from the line of Connie Maneaty of BMO Capital Markets. Your line is open.

[Connie Maneaty:]

Good morning.

[Unidentified Company Representative:]

Good morning, Connie.

[Unidentified Company Representative:]

Hi, Connie

[Connie Maneaty:]

Thanks. What is the split in pension expenses between costs of goods and SG&A?

[Alan T. Ennis:]

I will, the total pension expenses in 2009, we expect to be as I mention $20 million to $25 million. I don’t know the specific answer for you. I do know that a significant portion is in SG&A. There is a component in cost of goods, but it is certainly less than half the number.

[Connie Maneaty:]

Okay.

[Alan T. Ennis:]

I mean that’s I mean you could model that, less than $10 million is in costs of goods and the balance of the 20 to 25 would be in the SG&A.

[Connie Maneaty:]

Okay, and did you, I don’t know if you I didn’t see it in the release. Did you give the sales growth rates for the international segment?

[Alan T. Ennis:]

Yes.

[Unidentified Company Representative:]

Yes, we did.

[Alan T. Ennis:]

Yes I told about specifically.

[Connie Maneaty:]

Okay.

[Unidentified Company Representative:]

Yeah.

[Connie Maneaty:]

I mean for the fourth quarter and not the full year.

[Unidentified Company Representative:]

Yes I think we did.

[Unidentified Company Representative:]

Yes.

[Connie Maneaty:]

Okay. I’m sorry about, that the U.S. business, sales declined in 2008 in three of the fourth quarter. And so the U.S. sales growth rate declined 2.7% this year and it rose 5.1% last year. If we take out, I mean what’s the big swing factors here the colorist launch last year?

[David Kennedy:]

That was a part of it, for sure. There was also allowances. And then you have to take into account returns and I don’t know remember where we were for the whole years, was favorable for the whole year.

[Alan T. Ennis:]

Right, yeah. That the real big drivers, as you point out would be cycling the launch of those beauty care products we talked a bit.

[David Kennedy:]

Colorist and Flare and Mitchum.

[Alan T. Ennis:]

And Mitchum.

[David Kennedy:]

And Mitchum Smart Solid. You know the pipeline sales primarily.

[Unidentified Company Representative:]

The increase in promotional which as you know is a deduction you arriving in that sales.

[Connie Maneaty:]

So, as we look forward, I mean are there one time events that are going to swing the growth rate in the U.S. business in 2009?

[David Kennedy:]

Are they one time events? There are onetime event, you may like a new product launch or something like that.

[David Kennedy:]

This 2009 a normalized year.

[Connie Maneaty:]

Yes.

[David Kennedy:]

It’s really going depended on what success we have with new products. With new products and that we may launch in the other categories. Many experts for example, which we’re launching, I mean obviously we don’t know what the performance is going to be. We have very high expectation. We are very optimistic about it. And if it works then, it’s going to create some growth.

[Connie Maneaty:]

Okay, and would you describe the impact on the gross margin from foreign exchange? What’s coming up in the next couple of quarters, would you describe it is material or immaterial?

[Alan T. Ennis:]

Well, material is subjective.

[David Kennedy:]

Well, it also depends on what the exchange rates do as well.

[Connie Maneaty:]

Well, assuming they stay where they are.

[Alan T. Ennis:]

I would say that in the first three quarters of 2009. If rates stay where they are, you would see fairly significant impacts in the top line. Within constituencies, you also have the transaction impact. So I would say that the impact in gross margin could be significant.

[Connie Maneaty:]

Okay.

[David Kennedy:]

One other point just to help you think about it, I mean the four major currencies that you need to think of it. Or from our standpoint, in other words, bigger markets. Would be the Australian dollar, the Canadian dollar, the South African rand and the U.K. pound, there the four major currencies that you should track relative to our international business

[Connie Maneaty:]

Okay

[David Kennedy:]

I would also call out again. There will be other factors involve, which can could be positive to that is effect of whatever we see in terms of efficiencies. Our manufacturing and supply chain as well as, if we are able to gain better input costs. And to the extents of we can get pricing and pass on whatever the transactions effect might be.

[Connie Maneaty:]

Most of the companies have already, talked about having price increases announced. So, you have announced price increases, yet?

[David Kennedy:]

We have not announced any price increases in the U.S. However, let me point out that in the color cosmetics category in the U.S. that dollar volume is ahead of unit volume. So, I believe that everyone is taking process, as they introduce new product launch at relatively higher prices.

[Connie Maneaty:]

Right, but what about price increases in international market to offset the FX effect?

[David Kennedy:]

We are considering and we’ll evaluate whether it can and it should take price increases. We will take those, but we will also – we will take those where we can but we'll balance that out with being comparative.

[Connie Maneaty:]

Okay, I understand that you are pleased with the impact of higher advertising has ahead on the specific product, that you are targeted. But when do you suspect all this effort will translate into sustainably growing market share for both Almay and Revlon?

[David Kennedy:]

Well, it will depend obviously on the continued effectiveness of our new products and as well as the effectiveness of our overall marketing. We believe that we are in a very good position today. We believe that we are making tremendous progress and we’re very optimistic about our ability to continue to maintain our share and if our new products work well, then we believe that will be able to grow share overtime. We believe strongly in our strategy it’s very focused, we’ve got a tremendous capability with all of our people in house now, we strengthen that over the past two years and I think you’ve seen the progress that we made over the past 2.5 years approximately. Also I would go on to say that we want profitable share growth, we will be able to sustain that share growth and so, we will balance share growth that was profitability as we go forward.

[Connie Maneaty:]

And just one final question, I think you said that the sales in the fourth quarter, 7.5% decline in the U.S. and 10% decline overall, as well as adjusted EBITDA, they all make your expectations?

[Unidentified Company Representative:]

Yes they were in line with our clients.

[Connie Maneaty:]

Okay, great thank you.

[Unidentified Company Representative:]

And we by the way, we attempted to call out in the third quarter. What we expected to do in the fourth quarter in terms of our advertising and promotional expenditures.

[Connie Maneaty:]

Right, I remember that. Okay thanks very much.

[Unidentified Company Representative:]

Thanks Connie.

[Operator:]

Thank you our next question comes from the line of Mark Kaufman of Source Capital. Your line is open.

[Mark Kaufman:]

(Inaudible)

[Unidentified Company Representative:]

Hello. Operator, can we go to the next caller please.

[Operator:]

Thank you, our next question comes from the line of (Brandon Austin of VINATOR). Your line is open.

[Unidentified Analyst:]

Hi, guys.

[Unidentified Company Representative:]

Hi, good morning.

[Unidentified Company Representative:]

Good morning.

[Unidentified Analyst:]

Can you guys, so, could you guys guide to negative cash flow from operations, because I can’t run our guide but hopefully, negative cash flow from operations but positive, not positive but neural free cash flow is that the plan?

[Unidentified Company Representative:]

I don’t understand your question.

[Unidentified Analyst:]

So, I thought you guys said earlier in the call that you expect 2009 to have negative cash flow from operations but neutral free cash flow.

[Unidentified Company Representative:]

No, we haven’t ever seen anything like that. We outline the factors so, that you could calculate and your own estimate of cash flow.

[Unidentified Analyst:]

Okay, can you that debt relief that you guys got obviously that's quite helpful. The debt release that you guys go until 2010. Was that – what’s debt more seen you, the stuff that you got relief on or the rest of debt?

[Unidentified Company Representative:]

Rest of the debt. But they…

[Unidentified Analyst:]

Rest of the debt.

[Unidentified Company Representative:]

You will just see - when you say relief, we extended MacAndrews & Forbes term loan, which is subordinate of debt to August 2010. And the other two pieces of debt that we have are seen your term loan which matures in January 2012 and our 9.5% senior notes which mature April 2011.

[Unidentified Analyst:]

Okay and are you guys going to have to I miss the part on the pension, the pension liability are you guys going to have to take some more cash to fund the pension liability or how do you plan on dealing with that situation?

[Unidentified Company Representative:]

You know what I said, specifically, was in relation to cash contribution for pension that we expect the cash contributions would be approximately $12 million to $17 million higher in 2009, then they were in 2008.

[Unidentified Analyst:]

Okay. And could we talk a bid about the competitive environment. I guess everyone out there seems to be having a tough time. Is this – is there an opportunity or is there a necessary retrenchment in the industry, in general and your opinion?

[Unidentified Company Representative:]

I haven’t seen nearly retrenchment. As we have indicated the category in the U.S. and in key markets around the world for cosmetics continues to grow. We are very pleased with it. We saw that growth in the U.S. in January. We see no change in terms of the competitive environment. So it seems or now, anyway that we are very well positioned.

[Unidentified Analyst:]

Okay and on the right offering I guess last thing, on the rights offering is that – is that necessarily going to be equity or could that done in a form of debt convert are you guys.

[Unidentified Company Representative:]

It will be equity rights offering.

[Unidentified Analyst:]

Equity rights offering. Okay, thanks a lot guys.

[Unidentified Company Representative:]

Thank you.

[Unidentified Company Representative:]

Thanks, Brandon.

[Operator:]

Thank you our next question comes from the line of Ben Vaderaten of Canyon Capital. Your line is open.

[Benjamin Vaderaten:]

Hi, my question was answered thank you.

[Unidentified Company Representative:]

Thank you, Ben

[Unidentified Company Representative:]

Good morning. And he has gone.

[Operator:]

Thank you, our next question comes from the line of Mark Kaufman of Source Capital. Your line is open.

[Mark Kaufman:]

Hi, good morning gentlemen.

[Unidentified Company Representative:]

Good morning, Mark.

[Unidentified Company Representative:]

Hi, Mark.

[Mark Kaufman:]

Here is my question, when I look at your numbers for the fourth quarter you talk about Revlon being a positive and Almay being a negative. And of course down a couple of paragraphs or maybe it’s next paragraph talk about the takeaway. AC Nielsen saying that, Almay did quite well. So, the difference between those two events because you had a lot returns, which obviously don’t show up AC Nielsen and returns of all product that reduced your overall revenue on Almay or is there something else going on in the channels that AC Nielsen doesn’t follow?

[Unidentified Company Representative:]

But in terms of our shipments returns was the major factor, in fact I think we called out we actually had hired shipments. I should say in terms of our sales.

[Mark Kaufman:]

Right.

[Unidentified Company Representative:]

So we had higher accrued returns. Primarily based on our marketing plans for ’09 and the products we expect to discontinue.

[Unidentified Company Representative:]

Okay.

[Mark Kaufman:]

So it would seem to me that, well, maybe going forward, that if we gets some follow up through that there is actually some pretty good interest in the Almay brand? Right.

[Unidentified Company Representative:]

The Almay brand is very strong. We had a very good quarter. We had a very good year with the Almay brand. And we did very well in eye and face. That’s what we focused, we launched hydracolor lip in ’07, and we were really cycling the launch of that product as you know in the pipelines of that, so, we feel very good about the Almay brand.

[Mark Kaufman:]

So there is a possibility here, that we might see shipments higher than returns going forward or it may – maybe, I’m over stating case as far as how?

[Unidentified Company Representative:]

Well, I think if you look back at our average return experience of the past two years. It’s continued to improve. As we get much better and managing our offering and our in-store inventory.

[Mark Kaufman:]

And okay, thanks very much.

[Unidentified Company Representative:]

Thanks, Mark.

[Operator:]

Thank you. Our next question comes from the line Walter Branson of Regiment Capital. Your line is open.

[Walter Branson:]

Thanks, just a follow up on – your sales. So, looking back on my notes and correct me, if I’m wrong, I saw that first quarter ’09 new launches were projected to be up 50% in SKU’s year-over-year. So, I would expect that a sales gain in Revlon brand for the fourth quarter, because you ship those launches. But actually your shipments were lower in the fourth quarter, of ’08 than ’07, but you said they met your expectation. So, what am I looking at wrong here?

[Unidentified Company Representative:]

I’m not sure what you’re looking at. First I have to get some indication of where you’re getting your…

[Unidentified Company Representative:]

One point, I guess the number of SKUs year-over-year is necessarily indicative, of higher dollar shipments depends on the type of SKU, the make up of where that would go on the wall, so, it is not necessarily a direct correlation between the number of SKUs and how that would effect shipments.

[Unidentified Company Representative:]

But also if I understand, what you are saying, the shipments in the fourth quarter will come towards the end and their shipments into the retailers, there can be a difference. So, when the shipments occur, and when they actually show up on counter as well.

[Walter Branson:]

Okay, but I guess, I'm just looking at…

[Unidentified Company Representative:]

Try to match those through statistics that you pointed out, that is sometimes very difficult because the differences in shipment patterns and retail sales patterns.

[Walter Branson:]

Okay, well. Let me ask in other way. Do you look at your first quarter ’09 launches, has been stronger than your first quarter ’08 launches? And you know whether answer yes or no. How the shipments of those first quarter ’09 launches, mostly in fourth quarter or significantly in first quarter as well?

[Unidentified Company Representative:]

Well as far as whether they are strong or not. I guess the marketplace will be the judge. I believe, we would launch in terms of number products and product lines. Similar number probably speaking and I would say that the shipment pattern there, is broadly speaking then about the same as what you’re seen in prior years.

[Unidentified Company Representative:]

And we think about it is in terms of retail space. So, our space on the wall, and some space of the wall, I mean in 2009 as we expect largely unchanged what it was in 2008 and in 2007. So there is a fixed amount of LINEAR feet in the wall some put products.

[Walter Branson:]

So I guess what you’re attributing the, and as you said give me your expectations. So, lower shipment of Revlon product in the USM in the fourth quarter year-over-year?

[Unidentified Company Representative:]

I think it was just timing.

[Walter Branson:]

Okay, okay good thank you

[Operator:]

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

[David Kennedy:]

Thank you everyone. For being on the call today, we really appreciate it. Let me just reiterate a couple things, in closing, I believe we are better positioned than in many years to maximize our results, in light of the uncertain economic conditions. We have strong global brands with an extensive multiyear pipeline of new products. We have a highly capable organization. We have a sustainable reduced cost structure and we have an improved capital structure. And we will continue to intensely focus on executing our strategy and believe that overtime, that will generate profitable net sales growth and sustainable positive free cash flow, thank you.

[Operator:]

Thank you and this concludes today’s conference call. You may now disconnect.