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Edited Transcript of REV earnings conference call or presentation 8-Aug-19 12:30pm GMT

Q2 2019 Revlon Inc Earnings Call

NEW YORK Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Revlon Inc earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Debra G. Perelman

Revlon, Inc. - President, CEO & Director

* Eric Warren

Revlon, Inc. - VP, Treasurer & Head-IR

* Victoria L. Dolan

Revlon, Inc. - CFO

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Conference Call Participants

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* Carla Casella

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

* Grant Jordan

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

* Hale Holden

Barclays Bank PLC, Research Division - MD

* Jacqueline Elizabeth Crawford

Jefferies LLC, Fixed Income Research - Analyst

* Jenna Loren Giannelli

Goldman Sachs Group Inc., Research Division - Fixed Income Analyst

* Mary Ross Gilbert

Imperial Capital, LLC, Research Division - MD of Institutional Research Group

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Revlon earnings call. My name is Lydia, and I will be your coordinator for today's event. Please note, this conference is being recorded. (Operator Instructions) I will now hand you over to your host, Eric Warren, Vice President, Treasurer and Head of Investor Relations, to begin today's conference. Thank you.

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Eric Warren, Revlon, Inc. - VP, Treasurer & Head-IR [2]

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Thank you, Lydia, and good morning, everyone, and thank you for joining the call. Earlier today, the company released its financial results for the quarter ended June 30, 2019. If you've not already received a copy of the earnings release, a copy can be obtained on the company's website at revloninc.com. On the call this morning are Debbie Perelman, our President and Chief Executive Officer; and Victoria Dolan, our Chief Financial Officer. The discussion today might include forward-looking statements that are based on current expectations and are provided pursuant to the Private Securities Litigation Reform Act of 1995. Information on factors that could affect actual results and cause them to differ materially from such forward-looking statements is set forth in the company's SEC filings, including its Q2 2019 Form 10-Q. The company undertakes no obligation to publicly update any forward-looking statements, except for the company's obligations under the U.S. federal securities laws. Remarks today will include a discussion of certain GAAP and non-GAAP results. Consistent with past reporting practices, non-GAAP results exclude certain nonoperating items that are not directly attributable to the company's underlying operating performance. These adjusted measures are defined in the earnings release and are also reconciled in the financial tables at the end of the release. Please also note that certain amounts provided throughout this call have been rounded. The call today should not be copied or recorded. And with that, we'll turn the call over to Debbie.

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [3]

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Thank you, Eric. Good morning, everyone, and thank you for joining us. Our second quarter 2019 results reflect both the continued momentum and growth in many of our key markets and brands as well as the ongoing challenges facing the U.S. mass color cosmetics industry. Though our total company net sales declined 3.3% on a constant currency basis, profitability remained strong, with adjusted EBITDA growing 28% versus prior year quarter from $37 million in second quarter 2018 to $47 million. Removing the impact of foreign exchange, adjusted EBITDA grew 32% versus second quarter 2018. This was our fourth consecutive quarter of quarter-over-quarter adjusted EBITDA growth. Our international business continues to show strong net sales growth with our 2 largest brands, Revlon and Elizabeth Arden, both posting double-digit growth during the second quarter. Revlon net sales grew 12% on a constant currency basis, primarily driven by our Revlon color cosmetics business, which grew an impressive 19%. Growth was driven by new product innovation in the market, strong in-store activation as well as retail sales growth in key markets.

Continuing to highlight our performance in the international markets, the Elizabeth Arden segment net sales grew 20% on a constant currency basis over the prior year quarter, with skin care driving this momentum.

Elizabeth Arden skin care net sales grew double-digit in all of our international regions, driven by our Prevage and Ceramide franchises. First half 2019 launches in our White Tea fragrance collection and Eight Hour franchise also contributed to the momentum of this brand. China continues to be a strong market with 73% net sales growth on a constant currency basis over the prior year quarter. The Elizabeth Arden segment also showed strong double-digit net sales growth in a number of our other markets, including Korea, Australia and South Africa.

Our e-commerce business remains an important growth driver for the company, now representing approximately 7% of our global net sales as compared with approximately 5% in the second quarter of 2018. We continue to strengthen our direct-to-consumer capabilities with elizabetharden.com net sales growing 42% versus the prior year quarter and the launch of fleshbeauty.com in June. In this recent quarter, we also went live with the relaunch of our American Crew direct-to-consumer sites. While we saw strong growth in our international and e-commerce operations, we continue to see headwinds in our North America business, which declined 13% on a constant currency basis, due in large parts the overall declines that our industry is experiencing in the U.S. mass color cosmetics market. We experienced declines across the Cosmetics portfolio, including Revlon and Almay, as well as, we continue to cycle through space loss for Pure Ice and Sinful. In order to mitigate the broader market forces weighing down our industry, we remain committed to our core strategies and investing in our brands, which continue to excite and engage our consumer. I'll now hand the call over to Victoria, who will share details on our second quarter results before we begin Q&A.

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Victoria L. Dolan, Revlon, Inc. - CFO [4]

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Thank you, Debbie, and good morning to everyone on the call. Let me start by highlighting our second quarter results. On an as-reported basis, net sales for the second quarter of 2019 were $570 million, a decline of 6% versus the prior year quarter. On a constant currency basis, net sales decreased 3.3%, driven by declines in our Portfolio and Fragrances segment, partially offset by strong growth within our Elizabeth Arden segment while the Revlon segment net sales were essentially flat versus prior year period.

As reported, operating loss for the quarter was $9 million, a $49 million improvement compared to the prior year quarter. The improvement in operating loss was driven by lower selling, general and administrative expenses as well as lower acquisition and integration costs. The lower SG&A is mainly attributable to lower overhead cost and lower brand support versus prior year to align marketing initiatives with new product launches. Nonworking media spend declined versus prior year, driven primarily by cost reductions from the transition to our internal agency. We also benefited from nonrecurring charges in the prior year period associated with the reacquisition of Elizabeth Arden intellectual property and the ERP implementation, remediation efforts.

As reported, net loss for the quarter was $64 million, an improvement of 48% versus the prior year period. The lower net loss was driven by the lower operating loss described previously, partially offset by higher interest expense. Finally, adjusted EBITDA improved $10 million or 28% to $47 million in the second quarter of 2019 compared to $37 million during the prior year period. Next, I would like to turn to our segment results. Revlon segment net sales in the second quarter of 2019 were $252 million, representing a 3% decrease on an as-reported basis or essentially flat to the prior year period on a constant currency basis. The decrease in as-reported net sales was driven by lower net sales of Revlon color cosmetics in North America, due in part to weakness in the U.S. mass retail market, partially offset by higher net sales of color cosmetics and ColorSilk in our international markets. Revlon segment profit decreased by $11 million over the prior year quarter to $26 million, driven by the segment's lower net sales and lower gross profit margin, partially offset by lower general and administrative costs.

Elizabeth Arden net sales were $117 million, representing an 11% increase on an as-reported basis or a 15% increase on a constant currency basis. This improvement was mainly driven by higher net sales of Elizabeth Arden skin care products, including Ceramide and Prevage, principally in our international territories. Elizabeth Arden segment profit was $3 million, an increase of $9 million versus prior year period, primarily due to the segment's higher net sales and higher gross profit margins. Net sales for our portfolio segment were $119 million in the second quarter of 2019, a decrease of 20% on an as-reported basis or a 17% decrease on a constant currency basis. This decrease was primarily driven by lower net sales of CND nail products as well as Almay and SinfulColors cosmetics.

Portfolio segment profit was $6 million, an increase of $11 million versus the prior year period as a result of lower brand support and general and administrative expenses, offset by the segment's lower net sales.

Finally, net sales of our Fragrances segment were $83 million in the second quarter of 2019, representing a 13% decrease on an as-reported basis or an 11% decrease on a constant currency basis. This decline was driven by North America, in large part by the weakness in the overall mass Fragrance category as well as proactive actions taken to limit excess inventory in markets.

Fragrances segment profit in the second quarter of 2019 was $13 million, a $2 million increase compared to the prior year period, primarily as a result of lower general and administrative expenses and distribution costs, partially offset by the segment's lower net sales.

Turning to liquidity. Cash used in operating activities during the first 6 months of 2019 was $41 million or an improvement of $149 million versus the prior year period, primarily attributed to the lower net loss in the quarter and an improvement in working capital as well as onetime costs incurred in 2018 related to the remediation of the ERP implementation. Free cash flow used in the first 6 months of 2019 was $53 million compared to $220 million used in the prior year period. The improvement in free cash flow usage was primarily driven by decreased use of cash and operating activities and lower capital expenditures. During the first half of 2019, we spent $12 million in capital expenditures and $20 million on permanent displays. As of June 30, the company had approximately $108 million of available liquidity, consisting of $63 million of unrestricted cash and cash equivalents; $23 million in available borrowing capacity under the revolving credit facility; $30 million in available borrowing capacity under the 2019 senior line of credit, less float of $8 million.

On August 6, the company finalized a new 4-year $200 million senior secured term loan facility. The loan's net proceeds of approximately $187 million will give us fresh resources to continue to invest in our core strategies, drive profitable growth and also be used for other general corporate purposes. Inclusive of the new financing, as of August 6, 2019, the company had approximately $260 million of available liquidity.

And finally, to provide an update on our optimization program, we remain on track to deliver the anticipated cost reductions across our company. I'll now hand the call over to Debbie for closing comments.

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [5]

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Thank you, Victoria. In closing, despite the headwinds in North America mass color cosmetics, we remain focused on investing in our brands and core strategies. We are making good progress in our ongoing efforts to transform our company. With that, we will now 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) Our first question comes from the line of Hale Holden of Barclays.

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Hale Holden, Barclays Bank PLC, Research Division - MD [2]

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I have two questions for you. On the new secured term loan, I was wondering if you could give us any thought into doing that as a 4-year facility versus shorter-term facility, like you did last year? And whether [MacAndrews & Forbes] was on the other side of it? Or if it was a third-party loan?

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Victoria L. Dolan, Revlon, Inc. - CFO [3]

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Thank you for the questions. So this new capital infusion is a 4-year loan, as you point out. It's important for our business as it provides us the capital that we need, as we said, to invest in our core strategies, to invest in innovation and to be used for general corporate purposes, in addition to being able to accelerate our transformation efforts. The partner that we -- that did this loan with us is [Ares Capital Management]. They are already part of our capital structure. And so I think this deal with them shows their continued support for our business.

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Operator [4]

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Our next question comes from the line of Carla Casella.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [5]

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In the past, you've commented that you expect to delever by the end of the year to a level where you believe you can refinance the 2021 maturity. Is that still the plan? And in conjunction with that, can you give us how much you expect the optimization savings to be for '19? And how much you've achieved through the first half of the year?

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Victoria L. Dolan, Revlon, Inc. - CFO [6]

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Okay. So two good questions. So I think this infusion of capital, as I said before, allows us to continue to invest in our business to be able to deliver against our core strategies, to be able to deliver against innovation and to be able to accelerate our transformation efforts. It will better position us to be able to refinance those bonds. And so as the time is appropriate, we will be refinancing the bonds.

On your second question, in terms of the transformation program, we do not disclose the specific amount of savings. But I will remind everybody that, that we announced the transformation in November of 2018, that we said we expected to deliver savings of between $125 million and $150 million on an annualized basis and that we expected most of the program to be complete by the end of 2019 and we are on track to do that.

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Operator [7]

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Our next question comes from the line of William Reuter of Bank of America.

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Unidentified Analyst, [8]

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This is Mary on for Bill. So my first is just on e-commerce. What percent of your business do you ultimately think this will grow to? And what sort of margin impact do you expect as this continues to grow?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [9]

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Mary, thank you for the question. With regards to e-commerce, as I mentioned, we continue to see strong growth. With the increase as a percent of sales going from 5% in 2018 second quarter to 7% in second quarter 2019, we remain very focused in terms of expanding our capabilities with regards to e-commerce. When I look at the competitive sets, and I won't comment specifically in terms of giving forward guidance for ourselves, but when I look at the competitive set that really hover around 10% to 15%, we look to be competitive there. And with regards to impact on margin, I'm not going to comment on that. But thank you for the question.

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Unidentified Analyst, [10]

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Sure, and just one more for me. If you could just update us on your expectations with tariffs? I know last quarter, you had said you didn't expect it to be material. But is there any change to that? And if you could just touch on your exposure to China?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [11]

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So we do -- are impacted by tariffs. It's something that we are constantly monitoring and working at ways to mitigate that. When we look at our margin, which I'm sure you will -- somebody will ask me about the margin bridge, tariffs are having an impact on our margin. But we're not going to disclose the specific amounts.

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Operator [12]

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Our next question comes from the line of Jenna of Goldman Sachs.

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Jenna Loren Giannelli, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [13]

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Given the bifurcation in some of the branded regional performance, have you given it any updated thoughts on potential asset sales or monetizations of some of the better-performing assets?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [14]

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So we are always looking at M&A opportunities with regards to our business. But where we stand today with our brands, we feel comfortable with where we are.

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Jenna Loren Giannelli, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [15]

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Okay. And then just on the cost savings. I appreciate that you're not going to break out how much we've realized year-to-date. But can you just remind us the mix of those $125 million to $150 million between COGS and SG&A that you foresee?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [16]

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Sure. It's roughly half and half.

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Jenna Loren Giannelli, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [17]

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Okay. And then just finally. As we -- it seems like we've had the last 2 quarters some lower brand support and marketing expenses helping out the SG&A line. How should we think about that for the rest of the year? Is this sort of a temporary tailwind? Or something that we can think of as a good normalized run rate?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [18]

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So thank you for the question. I'm not going to provide forward guidance. But I just want to point to what Victoria had highlighted, which is, we're seeing cost efficiency within our brand support, when we brought in the internal agency as well as when we signed up our new media agency that's driving savings. We still remain committed to investing in our brands, and we do that. And we invest in the brands on a quarterly basis.

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Operator [19]

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Our next question comes from the line of Mary Gilbert of Imperial Capital.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [20]

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I wanted to follow-up on the new term loan. It sounds like the vast majority of it is going to fund the company's initiatives, whether it's innovation. I wondered if we could learn more about how those funds will be used specifically? And also, will the company consider repurchasing, let's say, some of the 24s, the bonds, that are trading in the 60s?

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Victoria L. Dolan, Revlon, Inc. - CFO [21]

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So as I said, the -- this is a new capital infusion for us. It is important infusion of capital for us to be able to invest. And as I said, our core strategies, our innovation, our transformation as well as for general corporate purposes, we are not going to break out the mix of that spend, and we're not going to give forward statements in terms of what we're going to do from a capital structure standpoint.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [22]

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Okay. And then with regard to innovation. How should we think about innovation in the back half for the year across the brands? And then I wondered if you could give us an update on Flesh Beauty. What the response has been to the company's new DTC launch? And just how you see the growth potential there?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [23]

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Mary, thank you for the question. With regards to innovation in the back half, I'm not going to comment specifically, but what I will say is it's competitive to where we have been in the past and to the industry itself. With regards to Flesh, we continue to remain very optimistic about that brand. We did launch the direct-to-consumer site. It is early days, but we are seeing a very positive response, particularly with the millennial consumer.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [24]

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Okay. Great. And then my last question. With regard to excess inventories in Fragrance, has been -- has that been rectified? And is it attributed to specific brands? And also, are you implementing initiatives to address the weakness in the mass channel associated with that -- with Fragrances, just in terms of the structure of how consumers are able to interact or not interact with Fragrances in the mass channel?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [25]

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So with regards to the excess inventory on Fragrances, we are always monitoring the inventory levels that are in the market across the Fragrance brands. And on specific ones, that remains very active within our teams and within the company. With regards to the fragrance industry in and of itself, in the U.S. mass market, we are continuously working with our retail partners in order to address the weakness in the category.

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Operator [26]

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

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [27]

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You talked about the weakness in North American mass market for the Revlon brand. Can you talk about how your efforts are going to grow sales more in the specialty channel and not just online, but specialty?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [28]

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Yes. Thank you. So I think it would be helpful also just to understand what's driving the decline in the U.S. mass color cosmetics category and how we look at it. So if you look at what drives growth within the category, it is driven by innovation. And in the first half of 2019, we've seen a 15% reduction with regards to innovation. We've also seen a reduction in foot traffic within stores for the cosmetics industry as well as increased promotionality across the category, which is impacting this industry. And we're working to execute our strategies in order to mitigate that decline from an industry overall. With regards to specialty, our brands are in specialty channel, and we're always working with the retailer set in order to grow and address their consumer.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [29]

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So I appreciate the color. How do you -- so how do you define innovation? Is that just new product introductions or the pace of new product introductions?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [30]

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It is new product introductions, and the pace would be inherent to that as well.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [31]

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Okay. And so are you saying that it's an industry-wide problem that's hurting traffic in the mass channel? Is that what you're implying?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [32]

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When you look at what has been launched in first half of 2019, there is a reduction in innovation as well as a reduction in foot traffic in store. We believe very strongly that the retail store experience is very important to the category and very important to our brands, and we continuously work with our retailers in order to enhance our own experience and enhance the experience of the consumers within the store.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [33]

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Okay. I've got one more question. So on the new term loan, I saw that that's secured by a first lien on the American Crew brand. Are there other brands like that, that are unpledged to the existing debt agreements?

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Victoria L. Dolan, Revlon, Inc. - CFO [34]

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No, no. I mean, no, we're fine.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [35]

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So American Crew is the only unpledged brand that you could have secured against that line?

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Victoria L. Dolan, Revlon, Inc. - CFO [36]

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Well, we could do others, but we have no plan to do that at this time.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [37]

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Okay. So that's what I was asking. Are there others...

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [38]

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I'm sorry, I didn't -- sorry. Yes. Didn't understand the first question.

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Grant Jordan, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [39]

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Which -- do you offhand which are the other large ones would be in that bucket of unpledged?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [40]

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No, we're not -- I'm not -- we're not going to talk about that today.

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Operator [41]

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Our next question comes from the line of Steph Wissink of Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [42]

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I just want to follow-up on a question on tariffs. Have or will you take pricing to help cover some of the cost of the tariffs? And if you're willing to quantify that, that would be helpful.

And then a second question just related to your comments on marketing and the effectiveness of some of your activation programs. Can you give us an update on what you're digital versus your traditional mix is or paid versus earned media? How you think about that balance today and then evolving over time?

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Victoria L. Dolan, Revlon, Inc. - CFO [43]

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So I'll take the first one on pricing and I'll let Debbie do the marketing one. And on pricing, we are always looking for opportunities across our portfolio of brands as well as our geographies. And obviously, the mix and in them -- and how we go-to-market is different market-by-market, but it's something that we constantly evaluate to look for those opportunities and where our products sit within the competitive frame of pricing. So it's something that is part of what we do on a regular basis. And as we said, with tariffs, we'll have to see how many prices we can take to mitigate it. As I said, we have a number of mitigation strategies, which includes pricing and could be -- also include change of sourcing.

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [44]

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So with regard to the marketing mix question. I'm not going to break out the specific mix. But what I will say is that, we have shifted to be more digital. And it really depends on the brand in terms of what that mix is looking at digital versus traditional, meaning that it might change by category, by brand, by channel.

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Operator [45]

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

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Jacqueline Elizabeth Crawford, Jefferies LLC, Fixed Income Research - Analyst [46]

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This is Jacqueline Crawford on for Karru. Just that as that you revised on your CapEx and permenant wall display guidance for 2019? And just in the wake of the fresh financing from this new term loan, I was wondering what the reason for this was?

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Victoria L. Dolan, Revlon, Inc. - CFO [47]

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So when we look at our investment levels, regardless of source of capital, we're looking at how we invest our cash across many elements of our portfolio. It could be how we invest in brand support, permanent displays, capital for our business, accelerating our transformation program. And we're looking at the ROI across all of those different -- all of those different elements. So I would not anticipate a change in what we're seeing in that range for the year.

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Jacqueline Elizabeth Crawford, Jefferies LLC, Fixed Income Research - Analyst [48]

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Okay. And then can you just talk a little bit more about the weakness that you saw in Revlon North America, kind of what drove the difference here between the first quarter and the second quarter performance? And then just in regard to Almay, are we still expecting some new products from them in the second half?

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [49]

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So with regards to -- just so I understand, with regards to Revlon, you're interested in the factors towards -- of the decline in the U.S. and -- in U.S.?

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Jacqueline Elizabeth Crawford, Jefferies LLC, Fixed Income Research - Analyst [50]

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Yes, exactly.

In North America in the Revlon segment, just with Q2 being a reversal from Q1.

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Debra G. Perelman, Revlon, Inc. - President, CEO & Director [51]

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So with regards to the Revlon business, overall, the business declined approximately 2%.. With regards to U.S. mass. We were impacted by the decline in the category as well as, what I call, broader market forces. But what I will point to you, is that the market itself has been -- it was declining as of June 30, about 4.3% and Revlon was declining less than our market at about 3.5%. So we've been able to grow share in the quarter. We continue to remain confident in the brand and confident that we continue to resonate with the consumers in the U.S. mass market as well as we've been able to show real strength on the Revlon brand in the international market. With regards to the question on Almay. We are always looking to put innovation in the market. We have an exciting refresh coming into the market now on the Almay brand, which we're leaning heavily into our clean heritage having really been the first hypoallergenic brand in the market. And you will see that rolling out now, and we are we're coming out with the first-to-mass biodegradable face makeup remover, which is also rolling out now. So a lot of excitement happening on the Almay brand.

Seeing no additional questions, let me say thank you to all who have joined the call today, and a special note to our team members around the Revlon world who are listening.

Thank you for all the efforts you make every single day, especially your contributions in driving our strong results this quarter. I am proud of all that we have accomplished together, and I'm excited about our future as we strive to build an even stronger global business that will be our foundation for achieving long-term profitable growth. Thank you.

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Operator [52]

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Thank you for joining today's conference. You may now disconnect your lines.