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Edited Transcript of REV earnings conference call or presentation 4-Aug-17 1:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Revlon Inc Earnings Call

NEW YORK Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Revlon Inc earnings conference call or presentation Friday, August 4, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher H. Peterson

Revlon Consumer Products Corp. - COO

* Fabian T. Garcia

Revlon, Inc. - CEO, President and Director

* Siobhan Anderson

Revlon, Inc. - CAO, Senior VP, VP of IR, Treasurer and Corporate Controller

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Conference Call Participants

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* Carla Marie Casella Hodulik

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Christopher Philip Mittleman

Mittleman Brothers, LLC - Managing Partner and CIO

* Colleen Burns

Oppenheimer & Co. Inc. - Co-Head of Fixed Income Research

* Grant Jordan

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Walter Hale Holden

Barclays PLC, Research Division - MD

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Revlon's Second Quarter 2017 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 like now to turn the call to Ms. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin, Ms. Anderson.

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Siobhan Anderson, Revlon, Inc. - CAO, Senior VP, VP of IR, Treasurer and Corporate Controller [2]

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Thank you. Good morning, everyone, and thanks for joining our call. Earlier today, we released our financial results for the quarter ended June 30, 2017. If you have not already received a copy of the earnings release, you can obtain one on our website at revloninc.com.

On the call with me this morning is Fabian Garcia, our President and Chief Executive Officer; and Chris Peterson, our new Chief Operating Officer in charge of operations and Chief Financial Officer.

Before I turn the call over to Fabian, I would like to remind everyone of a few items. First, our discussion this morning might include forward-looking statements that are based on our current expectations and are provided pursuant to Private Securities Litigation Reform Act of 1995. Information on factors that could affect our actual results and cause them to differ materially from such forward-looking statements is set forth in our SEC filings, including our Q2 2017 Form 10-Q, which we filed earlier this morning. We undertake no obligation to publicly update any forward-looking statements, except for the company's ongoing obligations under the U.S. federal securities laws.

Next, our remarks today will include a discussion of certain GAAP and non-GAAP results. On an as-reported basis, Elizabeth Arden's results have been included in the company's financial performance beginning on the acquisition date of September 7, 2016. However, in order to provide comparative discussions, our remarks today will include pro forma results, which present the GAAP and non-GAAP results as if Revlon and Elizabeth Arden were a combined company for all of 2016. From a segment view, all of Elizabeth Arden's operating results have been included in the Elizabeth Arden segment.

In addition, consistent with our past reporting practices, the company has identified certain non-operating items that are not directly attributable to the company's underlying operating performance. The adjusted measures are defined in our earnings release and are also reconciled in the financial tables at the end of the release.

And finally, our discussion today will include XFX variances, excluding the impact of foreign currency fluctuations on the period-over-period variances. Our discussion this morning should not be copied or recorded.

And with that, I will turn the call over to Fabian.

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [3]

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Thank you, Siobhan. Good morning to all, and thank you for joining our call today. As you saw from our press release, while our financial and net sales performance in the U.S. remains soft for the quarter in a challenging retail environment, there were encouraging results in many other areas of our business. We believe that the strategic initiatives we have implemented provide the basis for our optimism and expectations for sequential improvements in total company performance.

Now let me turn to highlights from the quarter. I will also provide more detail on some of the actions that we have recently undertaken to enhance our capabilities, strengthen our brand, accelerate global expansion and diversify our distribution in fast-growing channels aligned with our strategy for long-term profitable growth.

Revlon, our flagship brand, remains strong with comparable net sales growth for the quarter and year-to-date versus a year ago. Net sales growth was driven by strong performance in Asia, Europe and Latin America in both color cosmetics and hair color. It's great to see how this iconic brand continues to demonstrate its resilience, color authority and strong global awareness and popular appeal.

We are pleased to report that Elizabeth Arden has posted its 10th consecutive quarter of net sales growth. The brand grew across skin care, color cosmetics and fragrance, driven by successful new product introductions, including the renovation of the brand's largest global franchise, Ceramide, which is experiencing double-digit growth. Other important franchises that have contributed to growth in the quarter include the launch of White Tea Fragrance, which is among the top 5 brand-new women's fragrance launched year-to-date as well as strong performance in PREVAGE. The Elizabeth Arden brand achieved double-digit growth in China and travel retail as well as continued growth in Northern Europe, South Africa, Spain, Korea, Hong Kong and the U.K.

And lastly, in the quarter, our fragrance brand portfolio also demonstrated growth led by our core brands, including Christina Aguilera, Britney Spears and Juicy Couture in Europe and Latin America.

Turning now to online sales. While our business is still underdeveloped in e-commerce and on e-retailer sites, we're stepping up progress in the U.S. and key markets around the world. Elizabeth Arden continues to achieve strong double-digit growth in e-commerce and on retailers of com sites in the U.S., the U.K. and China. Although building from a still small base, Revlon has substantially improved its performance on Amazon with more than 80% consumption growth for the same period, and we expect that this will provide a significant source of future net sales growth.

The company also continued its strong international growth trajectory, achieving a plus 8% pro forma growth XFX, driven by double-digit growth in Asia and Latin America and strong performance in Europe. Net sales growth in these regions was driven by distribution gains in Germany, Austria, Spain, Argentina and Brazil and market share gains in Mexico and the U.K.

Continuing with positive highlights, we remain on track to deliver integration synergies of $190 million by 2020 with approximately $14 million in synergies realized in the second quarter. Year-to-date, we have achieved synergies and cost savings of approximately $24 million, and we are confident in our ability to capture between $50 million and $60 million in synergies for the full year. The synergies realized to date are derived, first, from the insourcing of manufacturing of Elizabeth Arden, whose fragrances we are now filling at our Oxford, North Carolina plus Spain and Queretaro, Mexico factories. Significant savings were also realized in the consolidation and renegotiation of indirect and direct procurement agreements, leveraging the company's new enhanced scale. And finally, the implementation of shared services in some key regions where we operate.

Further, and while we have yet to realize the full synergy benefits from office co-locations, our Toronto and Sydney offices were co-located during the quarter. And on September 5, more than 150 employees currently at Elizabeth Arden Union Square office will be welcomed to Revlon's 1 New York Plaza headquarter.

I'd like to now review our strategy on some investment decisions and choices we have made during the quarter to adapt to the current realities. Paramount to our long-term strategy is our focus on strengthening our brand and making them more relevant, particularly to younger consumers. Consistent with previous reports, the repositioned Almay brand, which celebrates individuality, inclusiveness and self-expression, continues to receive very strong acceptance from the trade, including specialty retailers as was reported in WWD last week. Although there are some new product launches in the second half of this year, consumers will experience the fully restaged brand across all touch points starting in the first quarter of 2018.

Last month, we announced Grey as our new global creative agency of record for all traditional and digital advertising promotion and activation marketing. Grey brings significant beauty expertise and digital know-how to the partnership. They have already developed an exciting new campaign for Revlon, which we'll debut toward the end of this year.

You may have also seen the new advertising campaign for Elizabeth Arden featuring Reese Witherspoon, which began to appear in May print and online media. Reese embodies the confidence and entrepreneurial spirit of Ms. Arden and has strong appeal within and beyond the brand's current consumer base. With increased investment this year and continued efforts to modernize the brand and the product portfolio, we expect to sustain our current growth trajectory.

Another tenet of our long-term strategy is to make our brands accessible to consumers wherever and however they shop for beauty, which informs our geographic expansion and approach to channel diversification. Building on our strong international growth trajectory, we continue to focus on large and fast-growing geographies. This quarter, Revlon color cosmetics re-entered Germany, the sixth largest beauty region in the world, through a strategic distributor relationship. The Revlon brand is now present in 1,600 new doors and provides incremental growth in Europe.

Aligned with diversifying our distribution, we have made important advancements in our e-retailer and e-commerce expertise and capabilities. To further step change our progress in this area, earlier in the quarter, we partnered with a leading digital consultant firm to elevate our approach and execution with e-retailers, refine our digital engagement strategy and organize our teams for greater effectiveness. Given the need for faster speed-to-market, we have also taken important steps to accelerate our new product development process. Last month, we recruited an experienced beauty industry professional to strengthen the product development function. And to ensure that we can more quickly respond to emerging trends, we have re-established strategic partnerships with select third-party manufacturers to augment our in-house innovation capability. As a result of our efforts to accelerate and improve innovation, our second half new product pipeline is the strongest I've seen since I joined the company last year.

Before I turn the call over to Chris, I want to say that I remain very optimistic about the future and our ability to return our company's financial performance to profitable growth. For the past 4 quarters, we have focused on transforming our company and building a strategic foundation and capabilities that will enable us to achieve our vision of becoming a top 10 global beauty competitor. I remain confident in our long-term strategy and the actions we have taken to modernize our iconic brand, develop faster and better innovation, diversify into high-growth channels, strengthen our digital engagement and e-commerce capabilities and continue to expand globally. I look forward to sharing with you in future quarters the results of these initiatives.

Chris.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [4]

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Thank you, Fabian, and good morning, everyone. I want to start with some initial impressions I've had since joining Revlon in mid-April. Over the past 3 months, I have met with our commercial teams and visited stores in North America, Europe and Asia. I have traveled to our 2 largest manufacturing facilities. I have met with every function head and reviewed each of the critical projects and processes across the company. Based on this, I believe the company has a significant number of strengths from which to build and a significant number of opportunities for improvement.

Starting with the strengths. I'm impressed with the company's portfolio of strong, global iconic brands. With on-the-ground operations in over 25 countries and distribution in 150 countries, the company is well positioned for continued international growth. I believe that the company's deep expertise and passion for beauty is a competitive advantage. I'm delighted to have the opportunity to work with a seasoned, talented and committed leadership team, all of whom are aligned behind the vision to create a world-class beauty competitor.

I've also seen there are significant opportunities for improvements in operational excellence. Last month, we convened a subset of our leadership team to assess each area of the value creation chain. This included how we develop, source and manufacture, market, sell and distribute our products. We also took a critical look at the enabling functions against best-in-class competitors to see where competency gaps existed and where we needed investment and new capabilities. I'd like to highlight a few of these priorities and how we have adapted our strategic focus and investment resources.

We began with how we innovate and develop new products. Our assessment concluded that we needed to significantly accelerate the concept to commercialization process. We are taking action to do this, including restoring our product development function with new leadership, taking a fresh look at the new product development process and identifying a few strategic product and packaging suppliers with which we can collaborate for accelerated innovation. Our goal is to create a fast-track innovation capability with a 6-month speed-to-market cycle time.

The second capability we need to improve is in digital communications and e-commerce. The consumer is increasingly choosing to engage with brands online and purchase behavior shifting from brick-and-mortar retail stores to e-commerce fulfillment. We expect this trend to continue and plan to invest in our ability to win in this channel. We already have critical learnings from our digital consultant's assessment in the areas of how we are organized and key processes and strategies that will accelerate our growth and performance.

Finally, we have significant opportunities to realize cost reductions across the company. We are driving cost synergies associated with the Elizabeth Arden acquisition with more to come. We are planning to simplify our SKU portfolio in the coming months, and we are taking a fresh look at our organization to enable better agility and faster decision-making.

In addition to planning and implementing actions and initiatives to ensure that we achieve long-term growth objectives, we have also had some quick wins this quarter. In the area of cash management, we have communicated an extension of our payment terms, which will be effective in August for most of our North American suppliers. We have repatriated more than $88 million of cash from international subsidiaries back to the U.S. without tax implications. We have reprioritized our capital expenditure budget to focus on new product development and cost-reduction projects. We increased our investment in integration activities in order to accelerate synergy capture from the acquisition of Elizabeth Arden, and we have begun to implement shared services globally, consolidating our back-office accounting groups in North America and EMEA.

Now turning to our financial performance for the quarter. As a reminder, some of the comments I'm about to make are based on non-GAAP results and are reconciled in our press release.

Starting with total company results. We reported net sales of $646 million, an increase of 32% over the prior year quarter, driven by the Elizabeth Arden acquisition. On a pro forma XFX basis, net sales decreased by 4%, mainly driven by a challenging North America retail environment, which more than offset strong international growth. On a brand basis, net sales grew on our 2 largest brands, Revlon and Elizabeth Arden. This was more than offset by sales declines in Almay, SinfulColors, CND and American Crew.

As-reported gross margin was 58.5% compared to 64.9% in the prior year period. The decline was largely driven by the addition of the lower gross margin Elizabeth Arden business as well as higher promotional costs during the quarter. Adjusted gross margin was 58.7% compared to pro forma adjusted gross margin of 62% in the prior year period, a decline of 330 basis points. This was due to higher promotional costs in North America associated with a more promotional retail environment, less overhead absorption and the unfavorable impact of product mix, partially offset by the realization of approximately $3 million of cost synergies. During the quarter, the company realized approximately $14 million of cost synergies associated with the Elizabeth Arden acquisition.

As-reported net loss was $37 million compared to as-reported net income of $8 million in the prior year period. The company incurred approximately $20 million of non-operating cost, primarily acquisition-related and had higher interest expense during the second quarter.

Adjusted EBITDA of $61 million in the second quarter of 2017 decreased by 32.7% compared to pro forma adjusted EBITDA in the prior year period. This was driven by declines in net sales and higher cost of goods sold, partially offset by realized pro forma synergies of approximately $14 million. While down versus the prior year, the company's pro forma net sales and adjusted EBITDA performance represented a sequential improvement versus the first quarter of 2017.

Moving to segment results. The Consumer segment reported net sales of $336 million, down 7% as reported and 6% on an XFX basis compared with the prior year. The decline was driven by a challenging North America retail environment. In addition, we recorded an incremental sales return reserve in the second quarter related to the anticipated returns that we expect to occur when we relaunch the Almay brand later this year. The Revlon brand grew net sales during the quarter, driven by the international business.

Consumer segment profit was $69 million in Q2, representing an as-reported decrease of 15% or 14% XFX versus the prior year quarter, primarily due to the decline in net sales in North America.

Turning now to the Elizabeth Arden segment. We finished the quarter at $199 million in net sales, up 5% on a pro forma XFX basis, driven by the continued growth of Elizabeth Arden branded products as well as heritage fragrances. Elizabeth Arden segment profit was $20 million in Q2, representing a 15% decline on both a pro forma and XFX basis, driven by lower gross margin due to a release of obsolescence reserves in 2016, which did not repeat in 2017.

Finally, in the Professional segment. Net sales were $106 million, down 14% as reported and XFX versus the prior year quarter, driven by declines in CND due to continuing softness in price erosion in the nail salon category globally. In addition, we have taken proactive measures to tighten distribution and reduce excess inventory in the trade in order to minimize diversion, which resulted in lower sales of American Crew in North America. Professional segment profit was $10 million in the second quarter, representing an as-reported and XFX decrease of approximately 60%, primarily resulting from lower net sales.

Turning to liquidity. Free cash flow was a use of $179 million in year-to-date 2017 compared to a use of $71 million in the prior year period. The decline in free cash flow was driven by higher payments for interest, restructuring and integration costs as well as higher purchases of inventory and permanent displays and higher capital expenditures. These uses of cash, which were mostly related to the Elizabeth Arden acquisition and integration work, were partially offset by favorable working capital changes. In 2017, we expect to spend approximately $100 million to $120 million in capital expenditures and approximately $65 million to $75 million in permanent displays. Our expected capital expenditures for 2017 include approximately $50 million for the integration of Elizabeth Arden.

As of June 30, 2017, we had drawn $87.5 million on our revolving credit facility and had over $300 million of liquidity, consisting of $83 million of unrestricted cash and cash equivalents as well as $231 million in available borrowing capacity under our revolver.

In closing, we have put in place a sound strategy to drive value creation and long-term growth. We are making the right choices now to transform the company to win over the next several years. In the past quarter, we have made progress on enhancing key organization capabilities. We began to implement numerous strategic initiatives to strengthen our brands, product portfolio and global distribution. All of these efforts we expect will yield sustainable growth and enable our vision of becoming a top 10 global beauty competitor.

With that, I would like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of William Reuter from Bank of America.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [2]

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My first question is it sounds like, for example, with the core Revlon brand that your ex -- in Asia and Europe and the rest of the world, the trends are substantially different than those that you're seeing in North America. Can you talk a little bit about why, with that brand, you're having success elsewhere that you're not having here?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [3]

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Okay. Well, thank you for the question, William. First of all, we are very encouraged by the trends in Revlon. That speaks to the resilience of the brand and the high awareness of the brand as well as its traction everywhere. We are expanding into markets and gaining share in other markets, as I described in my remarks. Even in the U.S., we're seeing improvement quarter-to-quarter in sales, and we're holding share in what is a very competitive environment, as I'm sure you have seen in the public domain data for market share. So we're also seeing, specifically in hair coloring improvement with the measures that we took last year to improve the bundle with which we compete. So we're encouraged by the strength of this brand and it speaks to rightness of our strategy because we start by making the brand as strong as we can. We believe the issues in the U.S. are more market-related and market share-related and more market-related than brand health-related. So that is the basis for our optimism with our larger brand.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [4]

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Okay. I guess following up on your last comment there, it sounds like you guys generally believe that it's the category of brick-and-mortar in North America that's challenging. How do you feel that your share has changed in recent history with regards to the Revlon brand in North America?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [5]

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Well, that's public domain. The share is holding. It depends on what period you take, but we feel good about how the brand is faring. What we have seen and we have talked about since late last year, but this has been going on for a while, is the consumer shift from brick-and-mortar to online and also from mass to beauty specialty. And we have very laser-focused actions taken in both growing channels. So I spoke a bit about our performance with the largest e-retailer in the world. We talked, and I think I believe we have reported, for the first time, our performance online, which continues to be very encouraging for us. And with one of the largest beauty specialty retailers, we have made tremendous progress with both Almay and Revlon, and we will see that progress reflected in the market in the beginning of 2018 as they convert their walls to the new fixtures that we have put in place and have tested indeed with one of these retailers. So we feel very good about how we're responding to the market.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [6]

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Okay. And then just lastly for me, with the relaunch of Almay, do you expect that there will be a onetime, I guess, initial sell-in where you'll have some really strong sales that will materially impact your P&L, I guess, in the third quarter?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [7]

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We expect to begin to see the impact of the relaunch towards the end of this year and to start to see that in the beginning of 2018. There will be an offset between returns and the sell-in, but we expect performance to turn to the positive at the end of this year.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [8]

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The other thing I would add to that is that, in the second quarter, we did take an incremental returns charge that anticipates the relaunch, and so we expect that that will turn around as we get to the back half of the year.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [9]

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Okay. So you took the charge now. So therefore, we should actually see the relationship between the selling of new products and the charge that you took now. It should be favorable in the back half of the year, I would imagine.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [10]

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Yes.

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Operator [11]

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

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [12]

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You talked a little bit about just the shift you're seeing out of a mass channel. Can you talk a little bit about what those mass retailers are doing to respond, whether you're seeing tighter inventory levels, different levels of promotion, that sort of thing?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [13]

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Yes, I will comment on 2 dimensions. First, their short-term response, but also their long-term response. I think short-term response, we're seeing a lot of promotional activities to bring the consumer back to the stores. We have seen, obviously, they're lowering the inventories because this is very much an algorithmic -- algorithm-driven calculation, right? If consumption goes down, inventories go down. But I think the most important thing to think about is the actions that many of them -- actually, I would say, most of them are taken to improve the in-store beauty experience for the consumer unequivocally and I would say across all of the retailers that I have met personally with my teams in North America. They are committed to bringing the beauty consumer back to their stores, and they have taken specific steps to improve their experience through enhancements of the walls, including testers, opening up the space in fragrance. So a lot of the merchandising activities that we help the consumer have a much better beauty experience in the store. So I am encouraged by what they do. I don't believe the trend is going to turn immediately. And I think in this day and age and in the world in which we live, we need to be competitive in every retailer environment online and offline.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [14]

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The only other thing I would add to that is, in addition to the in-store investments, we're also seeing the retailers focus on investing disproportionately in their own e-commerce business. And we believe that we have a significant opportunity to step change our presence on those e-retailer.com sites. And so we are putting in place the capability and the strategies now to really step change our capability to drive our market share through the e-retailer.com sites.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [15]

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Okay, that's helpful. And then I think you alluded to -- you've got a better presentation or display going into one of the specialty retailers. Can you talk about when we would expect to see that in stores and when it would start to show up in the results?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [16]

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First quarter 2018.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [17]

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Is when it shows up in the stores, and we should be shipping some of the pipeline in the fourth quarter.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [18]

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Okay. And what products will that be on your side?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [19]

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Almay and Revlon to start.

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Operator [20]

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The next question comes from the line of Jenna Giannelli from Citi.

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Unidentified Analyst [21]

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So just some SKU rationalization coming up and obviously a lot to talk about brand optimization and investment. So can you speak a little bit to just what would be your appetite maybe buy a smaller growing prestige-type brand. And then similarly, are there any thoughts on this divestiture as a potentially noncore -- or what you're thinking of as noncore assets?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [22]

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Yes, so I think our primary focus at the moment is on the integration of Elizabeth Arden. We have a significant amount of projects going on across the company to realize cost synergies and fully integrate that acquisition. That being said, we continue to look at smaller tuck-in acquisitions, but we don't comment publicly on where we are on those going forward. But again, our primary focus is on the Arden integration at this point.

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Unidentified Analyst [23]

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Okay. And then on noncore, is there anything you're thinking about on that part?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [24]

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On noncore, we've done an analysis to look at the current brand portfolio and to look at the current SKU portfolio, and what we found is that there are a significant number of opportunities to reduce the small and underperforming brands and SKUs. We expect this to be a cost-savings improvement effort rather than an effort that's going to materially affect the revenue of the company because what we're focused on is really the tail brands here and tail SKUs.

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Unidentified Analyst [25]

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That's helpful. And then just on the Professional segment. As we're thinking about that, is that really just a comparability issue that you had a lot of strength in CND when gel polish kind of came on to the scene and that we're just up against tough comps? Or do you think this is something that's more secular and brand-specific that's going on?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [26]

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As we have been reporting for some time now, CND has been suffering from the value entries in the professional nail polish market, which is a trend now that's gone on for a couple of years. Second is we have not had relevant innovation to differentiate CND, and bring it back to its preeminent positioning that it once had, as you're referring to. That is changing because, coming in this quarter, we're starting a series of innovations that would allow us to address the specific issues of pricing in the gel segment as well as bringing innovation that will be a breakthrough for CND. So we expect sequential improvement in this brand going forward.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [27]

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The other thing that's affecting the Professional segment is the American Crew brand. And on the American Crew brand, with the softness in consumption in the channel, we have decided to take proactive steps to reduce the inventory in the channel to try to minimize diversion. And so we are constraining shipments at the moment on American Crew, which is having a short-term impact, but we believe that this is the right thing for the long-term health of the business going forward.

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Unidentified Analyst [28]

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That's helpful. And then just one more, if I may. It's great to hear that you're making progress on Amazon, and I did notice just from my consumer eye that you guys seem to get some better product placement as a featured sponsor versus even a couple of months ago. So definitely I did notice of that. But could you speak to a little bit more just what the magnitude of that relationship might look like over time and maybe the relative profitability on -- of that channel? And just -- I know that last quarter, you said that e-com penetration was about 3% for the overall company, but -- just an update on that and where it stands at this point?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [29]

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Yes, let's take that in steps. Obviously, we will not comment on the profit by channel, but what we can say is we are delighted to know that you're noticing the improvement. To dimensionalize the share, the potential of growth in this channel, you have to think about the fact that we are a top 5 brand in brick-and-mortar, but we are not a top 5 brand online. We are #11 as far as we can tell. So there's a lot of growth for Revlon in the online channel, obviously, as we seek fair share. We did comment on the progress we were making online. You are right on your initial estimates, but it's 2 worlds. The Elizabeth Arden brand has a much greater penetration of online in its business more, over 10% and that number continues to grow. And it is not only in the U.S. It is driven by the U.S., the U.K. and China. And the numbers I'm looking at here are between triple-digit and very high double-digit for most markets. So we're very encouraged by that and by the learnings that they provide, the total company and specifically for reapplication on the Revlon brand and the rest of our brands. And last but not least, we are laser-focused on building capabilities so that we can sustain growth and step change the growth of the company in this channel. So far, we are making good progress. The indices look terrific, they're very high. But we are looking to achieve critical mass in the channel so that we can see that in the overall growth trajectory of the company.

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Operator [30]

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The next question comes from the line of Karru Martinson from Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [31]

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Just to follow up on the -- when you talk about making step change -- step changes in the capabilities, what are those investments that you need? I mean, is this more staff? Or is this marketing dollars? What is changing here on the ground for you?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [32]

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Yes, so let me take that. And I think that we're going to be able to do this in a way that we self-fund it as part of us -- our fresh look at the organization. But effectively, in order to activate more aggressively on e-retailer.com, we need a couple of improvements in our process in our system. We need to have a better content management system, a better digital asset management system. We need to have copyright that is developed and written for online as opposed to -- for brick-and-mortar. And then we need to have a sales and customer-focused capability that allows us to activate with A+ content as it's defined by the key e-retailers. So over the last 1.5 months, we have brought in a digital consulting firm that we've had go through our process to do that. And in that process, we've uncovered a tremendous number of opportunities for improvement. And so we are focused now on making those improvements, but we believe that, by reallocating resources within the company, we're going to be able to turn this capability on over the next 6 to 12 months in a way that unlocks the potential in a very different way than what the company has done historically.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [33]

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Okay. And just to clarify. I thought Almay was going to be launching here in the third quarter. It sounds like the bulk of that launch though will be more fourth quarter weighted and full benefit really starting in next year. Am I mistaken there? Or am I hearing that correctly?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [34]

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I think there are 2 steps to that, Karru. First of all, there's no innovation going into the market right now with current Almay packaging. You will start to see the new Almay graphics on walls in some stores going forward. You will see the new Almay graphics on the Almay website that went live this week. And you're going to start to see advertising aligned with that new positioning staffing next week and in September. And gradually, as we phase in the new packaging that will start to show in 4 stores at the end of the year and in full force in the beginning of the year.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [35]

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Okay. And then in terms of your liquidity and your capital structure, if not looking at tuck-in acquisitions, are there opportunities for you to buy back debt here in the open market?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [36]

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Yes, I think we wouldn't -- we don't comment on that publicly. I think what we're focused on is, first of all, let me start by saying, we feel very comfortable with our liquidity position for the next 12 months and beyond. As I mentioned on the call, we've taken a number of steps on cash management that has improved our position over the past quarter, including repatriating international cash back to the U.S., which we were able to do without tax consequences, extending payment terms for many of our North America suppliers. And one of the other things that I would say that's -- that we're doing is we're increasing our investment in synergies, which I mentioned on the call as well. And so that's creating a short-term use of cash that we expect to be a source of cash as we go forward and begin to reap the benefits of the synergies.

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Operator [37]

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The next question comes from the line of Hale Holden from Barclays.

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Walter Hale Holden, Barclays PLC, Research Division - MD [38]

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A couple of quick ones. On the SKU rationalization plan, the first one was if you could give us a sense of what percentage of revenue you're thinking that those brands or products might account for? And then the second part of that was it wasn't clear to me if that was just related to the Arden portfolio or was across Revlon and Arden as a combined company?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [39]

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So I'll give you a couple of thoughts on this. So first of all, we expect to do the SKU rationalization without any impact to revenue. So when we look at the SKU portfolio, the bottom 25% of our SKUs account for less than 5% of the company's revenue. We believe that there is a way to do this where we actually can simplify and grow the company's revenue at the same time that we're doing this effort. This is -- we are looking across the whole company, it's not just on Arden. And I think the bigger opportunity is on a lot of the regional and local brands than it is on the company's largest brands.

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Walter Hale Holden, Barclays PLC, Research Division - MD [40]

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Got it. And then second question is, I was fairly intrigued by the move to speed up innovation to potentially a 6-month production line, start to finish. I was wondering what percentage of the core brands or how many -- how large that could be? And then what the costs may be associated or margin degradation associated with using the co-packers would be versus doing it at your own facilities?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [41]

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We have ambitions that this will account for 10% or thereabouts of the new product that we will bring to market at any given point in time. And there are 2 offsets for the margin hits. One offset is the significant improvement one should get from sales by going to market much faster and going to market to specific channels that are growing. And second, the amount of savings that we would produce with the programs that Chris outlined. So it's a combined effort to ensure that, first and foremost, we're serving our consumers and customers with the speed today that the market demands.

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Walter Hale Holden, Barclays PLC, Research Division - MD [42]

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Got it. And then I heard your comments on the professional channel, both around the inventory management for the Crew brand and then the CND innovation. But just broadly, I was wondering if you could give us a sense of how many quarters do you think it might take before we got to sort of a stabilization point for that level of decline?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [43]

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Yes, I think that it's a different story between CND and American Crew. So as Fabian mentioned on CND, we have -- we had very little innovation to no innovation in the first half of the year and we have very strong innovation coming in the second half of the year. So we expect the innovation in the second half of the year to have a material impact on the CND trend given the change. On American Crew, I think we're monitoring the inventory levels in the trade. I expect it to continue for several quarters. But again, I think it's the right thing to do to drive the brand health on a going basis.

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [44]

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I will add one thing to that comment, which is to the latter point, Hale. The most important thing here is the health of the brand, and we feel very good about that. And the shoe that we have to deal with is the temporary inventory balance here because if you remember, we go to market in the United States through a series of wholesalers and distributors. So they have -- we have to monitor the trade inventories at several levels here, and we do not want diversion or any other action of inventories to impact the health of the brand, which we believe, today, remains very strong.

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Operator [45]

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The next question comes from the line of Carla Casella from JPMorgan.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [46]

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It looks like you increased your display spending estimate by about $5 million on both the upper and lower end. Is that -- what's that specifically related to?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [47]

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That's specifically related to Almay and the efforts we are starting to put in place to upgrade the Revlon wall.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [48]

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Yes, we've had -- we've now presented the Almay brand to all of the U.S. retailers, and we've had very strong acceptance. And in fact, our -- we have commitments to gain space on the brand when we do the restage. And so that's part of what's driving the incremental spending is the incremental space that we're going to get as a result of the restage.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [49]

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That's great. And do you know where you're taking that share from? Is any of it coming from Revlon? Or is it mostly coming from specialty brands or other mass brands?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [50]

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We know it's not from Revlon, so I don't know where it's coming from. But frankly, we are very focused on executing our part of that yield.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [51]

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Okay, great. And then on the online side of the business, is there any sort of similar payments for -- I know it wouldn't be display spending, but is it (inaudible) or a display or a -- is your marketing expense going to change or your kind of cost structure going to change as you push more on to these online channels?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [52]

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So without going too deep, selling through e-retailer.com sites should be a competitive advantage for the company from a structure standpoint. The spending pattern will be a little bit different because your marketing spend on online channels is a little different than the marketing spend if you're going through TV and print and so forth. That being said, you get faster inventory turns. You don't have the wall display spending. You can get your innovation to market faster because you don't have the in-store effort. And so we believe that the transition of the marketplace can be a good thing for the company over the next several years.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [53]

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Okay, great. No, I totally agree with you. I mean, if that's where the customers shopping, you want to be there and you want to be front and center. I'm just wondering if it's going to change the gross margin or the SG&A spend on -- as we look at the brand and the business going forward.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [54]

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Yes, we think it has the potential to be a positive for us from a margin standpoint as that shift happens.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [55]

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Okay, great. And then on the Professional side, can you give any granularity in terms of your distribution channels or the distribution mix on the Professional side? I guess, because this is the first time we saw a call out on the nail salon weakness, how much of the business is it through nail salon versus, I guess, multipurpose-type salons or pure retailers or retailers that do salon services?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [56]

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We're not going to get into a lot of granularity, but conceptually there are a few differences by region. So in some parts of the world, we go direct to hairdressers, for example, and barbershops, that would be more in Europe. In the United States, we go through wholesalers or distributors. And for nail salons it's the same kind of tier distribution. And if you think about what goes to which channel, the brands are somewhat indicative of that. So for CND, we go through nail salons. And Revlon Professional hair color will go through hairdressers and American Crew will go through barbershops. So it's a very -- a varied channel of distribution and multilayer depending on geography.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [57]

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Okay, great. Have you ever disclosed how much of the business is at CND?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [58]

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No. We don't get into that level of disclosure.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [59]

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Okay. And then you repatriated the $8 million of cash. Are you a bit -- able to do more on a tax-free basis? And how much of your cash overall is overseas?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [60]

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So yes, we have, effectively, the pipes to bring back international cash of a significant amount without incurring tax. So we are in a good position to do that. If you look at the current cash position, virtually all of the cash is offshore that we have today. And so -- but that cash, we could bring back in full if need be without incurring additional tax.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [61]

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Okay, great. And you got a lot of questions about the Almay and the timing of the relaunch. What about on the Arden and the Revlon products? Do you have any sense or can you give us some more sense for what the timing is on the new products that you talked about there?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [62]

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Third quarter is the beginning of the innovation phase. As we have been commenting since the beginning of the year, our innovation is second half SKUs, and there is a lot of innovation that is going to market right now around the world. So that is the reason why we feel very good about the balance of the year. And what I would say is just check out your online sites and your local stores to see what's coming.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [63]

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Yes, the Germany sounded interesting, too. Is that -- was that rollout fully in 2Q? Or is that something that's phased in over the quarter and we're not even seeing the full benefit of yet?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [64]

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We're expecting to see the benefits now. There is a -- we're building distribution as we go, so we feel very good about how we have started.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [65]

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Okay. And did you comment on how big the reserve was that you took for Almay in the quarter?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [66]

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No, we didn't provide a specific detail.

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Carla Marie Casella Hodulik, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [67]

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Okay. But is that something that you will adjust that reserve either up or down based on how the actual rollout goes over the next 2 quarters?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [68]

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Yes.

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Operator [69]

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The next question comes from the line of Colleen Burns from Oppenheimer.

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Colleen Burns, Oppenheimer & Co. Inc. - Co-Head of Fixed Income Research [70]

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Just to follow up on your comment on the digital plans. Did I hear you correctly that you expect to self-fund through operations? Or do you expect to increase CapEx to make some of those changes?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [71]

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We expect to be able to self-fund through operations, the organization investments that we need to make to create the capability internally. On the technology side, we expect to do this within our normal CapEx budget that we've outlined.

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Colleen Burns, Oppenheimer & Co. Inc. - Co-Head of Fixed Income Research [72]

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Okay. And you would see that budget being similar, let's say, for next year as it relates to these digital plans?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [73]

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Yes, we haven't provided guidance for next year on CapEx at this point.

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Colleen Burns, Oppenheimer & Co. Inc. - Co-Head of Fixed Income Research [74]

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Okay. And then just on working capital in the quarter, it was bigger than we were expecting. Was there any timing issues related to inventory or anything in this second quarter? And then any color you can provide how we should think about working capital for the year.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [75]

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So I think that -- a couple of things. So first of all, I mentioned in the prepared remarks that we have made a change in the company's payment terms in North America for most of the company's vendors that goes into effect in August. And so I expect that to be a cash help that we would -- will see in accounts payable going forward. I think on inventory, the inventory balance at the end of the second quarter was both to support the anticipated business that the company has coming in the third and fourth quarter and the new innovation pipeline, but also the inventory balances as a result of the sales trend that we saw in the first and second quarter.

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Colleen Burns, Oppenheimer & Co. Inc. - Co-Head of Fixed Income Research [76]

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Okay. And then just lastly, on the Elizabeth Arden profit decline in the quarter, how much was that obsolescent reserves that was in the prior year period. Did you quantify that or did I miss that?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [77]

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We didn't quantify it, but that was the driver of the profit decline.

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Colleen Burns, Oppenheimer & Co. Inc. - Co-Head of Fixed Income Research [78]

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Okay. So that was the whole -- basically the difference between the year-over-year?

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [79]

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Yes.

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Operator [80]

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The final question in the queue comes from the line of Chris Mittleman from Mittleman Brothers.

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Christopher Philip Mittleman, Mittleman Brothers, LLC - Managing Partner and CIO [81]

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Just wondering about your advertising spending. I know that runs normally around 20%, I think, and I just noticed anecdotally that there were no print ads in Allure I think for the first time that I can recall, either Revlon or Elizabeth Arden and CoverGirl and Maybelline are in there. So I'm wondering, did you guys shift to online already in terms of the ad spend? Or is this something where you're waiting kind of more for the second half of the year with the innovations to ramp up again?

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [82]

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It's more of the latter. We are obviously moving the balance of traditional and new media to follow where the consumer is, and that is a change that you should observe going forward. We still believe that the mix is appropriate, and we want to synchronize that mix with the innovations that are hitting the market. And the publications that we will use will match the specific target group of the brand that we may be advertising at any given point in time. So stay tuned for changes, but we believe the right balance is the way to go.

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Christopher Philip Mittleman, Mittleman Brothers, LLC - Managing Partner and CIO [83]

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Okay. But just in terms of the aggregate amount spent was -- would you comment on whether or not this last quarter was a much lower amount than 20% or -- for the year should we be looking for more than 20%? Because I'm just recalling that in the past periods when Revlon had success in gaining market share, usually, it was in conjunction with a bit of an increase in ad spend, thinking about the 1990 to '96 period. So I'm just wondering like what your thinking is on that.

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [84]

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We're thinking that we will continue to have competitive spend to sustain growth and drive growth. It is around 20% still. We're spending more money in international, and we are adjusting our spending in the U.S. that's in line with market changes.

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Christopher H. Peterson, Revlon Consumer Products Corp. - COO [85]

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And I -- the other point or question that you asked was around the quarterly timing, and we are lining up our brand support in line with our innovations. So given that the innovation plan, as we mentioned in the prepared remarks, is more back half-loaded, you will see our brand support line up against that innovation.

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Operator [86]

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There are no further questions in the queue. So that concludes today's Q&A session. Ladies and gentlemen, I will now turn the call back to your host for any concluding remarks.

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Fabian T. Garcia, Revlon, Inc. - CEO, President and Director [87]

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Yes, thank you very much for everyone who tuned in and is following the story. We've continued to be very encouraged by the green shoots that we see in the business. And I want to take this opportunity to thank everyone in the Revlon world for their daily contributions to our business and to our commitment to our growth strategies. Thank you very much. Have a wonderful weekend.

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Operator [88]

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Ladies and gentlemen, thank you for joining today's call. You may now disconnect your handsets.