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Edited Transcript of REV earnings conference call or presentation 3-Mar-17 2:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Revlon Inc Earnings Call

NEW YORK Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Revlon Inc earnings conference call or presentation Friday, March 3, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Siobhan Anderson

Revlon, Inc. - Chief Accounting Officer, Corporate Controller, Treasurer, and IR

* Fabian Garcia

Revlon, Inc. - President and CEO

* Juan Figuereo

Revlon, Inc. - EVP and CFO

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Conference Call Participants

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* Kevin Ziets

Citigroup - Analyst

* Grant Jordan

Wells Fargo Securities, LLC - Analyst

* Carla Casella

JPMorgan - Analyst

* Karru Martinson

Jefferies LLc - Analyst

* Hale Holden

Barclays Capital - Analyst

* Chris Mittleman

Mittleman Brothers, LLC - Analyst

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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 fourth-quarter 2016 earnings conference call. At the request of Revlon, today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Ms. Siobhan Anderson, Revlon Chief Accounting Officer and Treasurer. You may begin, Ms. Anderson.

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Siobhan Anderson, Revlon, Inc. - Chief Accounting Officer, Corporate Controller, Treasurer, and IR [2]

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Thank you. Good morning, everyone, and thanks for joining today's call. Earlier today, we released our financial results for the full year ended December 31, 2016. 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 are Fabian Garcia, our President and Chief Executive Officer, and Juan Figuereo, our 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 2016 Form 10-K, 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 US federal securities laws.

Next, our remarks today will include a discussion of certain GAAP and non-GAAP measures. 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 a comparative discussion, our remarks today will be on a pro forma basis, which presents the GAAP and non-GAAP results as if Revlon and Elizabeth Arden were a combined company for all periods discussed. 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 nonoperating and unusual items impacting the comparability of our period-over-period 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, unless otherwise indicated, our discussion today will be on an ex-FX basis, which excludes 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 Garcia, Revlon, Inc. - President and CEO [3]

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Thank you, Siobhan. Good morning to all and thank you for joining our call. Today we are reporting our quarterly performance for the second time as one company since completing the Elizabeth Arden acquisition last fall.

And there are four key points that I would like to highlight, which we will address in more detail during this call.

First, as a combined company, our business has clearly benefited from our enhanced portfolio of brands and our greater scale. Our profitability has continued to grow with even greater potential for growth in the future. All four of our reporting segments -- consumer, professional, Elizabeth Arden, and other -- delivered net sales growth for the full year.

Two, we remain very enthusiastic about our long-term growth potential and are focused behind a simple, brand-centric, three-pronged strategy to achieve our ambition to become a top 10 beauty company, which includes strengthening our brands to restore their relevance amongst consumers, especially millennials, expanding access to our brands wherever and however consumers shop for beauty, and optimizing our cost structures to find incremental funds to invest in our brand.

We have increased and accelerated our cost synergy, implemented a new organizational structure, and have begun to leverage the strengths of our combined brand portfolio, resources, and capability. And finally, we experienced some industry-wide challenges in the fourth quarter, particularly in December. Beauty consumers shifted their purchases from mass retailers to specialty beauty and online channels at accelerated rates. And there was slower foot traffic in midtier department stores.

The good news is that we are encouraged by recent market share gains and positive customer feedback to our plans to attract beauty consumers back to the managed channels. With that, I would now like to share more specific highlights for the quarter and our performance for the year.

As stated in this morning's earnings release, we ended 2016 with reported net sales of $2.3 billion, an increase of 21.9% over the prior year. On a consolidated pro forma basis, net sales were up 1.4% adjusted for foreign currency. As I said before, all four of our reporting segments -- consumer, professional, Elizabeth Arden, and other -- delivered net sales growth for the full year.

Our international business continues to be a strong growth driver. And we will continue to build on our momentum in key geographies while accelerating our expansion in Asia and the Latin American region. As I mentioned earlier, the fourth-quarter performance for our combined Company, however, was below our expectations, as we posted net sales declines of minus 2.7%, driven by softness in our consumer and fragrance business in North America.

If we take a closer look at the fourth quarter, our mass color cosmetics and fragrance businesses in the US were impacted by a combination of factors. As already mentioned, beauty consumers shifted their purchases towards specialty and online channels, and there was slower traffic in midtier department stores, particularly in December. Two key bright spots were our professional segment, which grew net sales 1.8%, and the Elizabeth Arden brand, which has now achieved its eighth consecutive quarter of net sales growth.

I will now provide more insight into the full-year net sales performance, update you on the Elizabeth Arden integration, and outline for you our strategic priorities for 2017. In 2016, our consumer segment grew plus 0.7% versus last year.

We benefited from the addition of Cutex international sales plus solid growth from both Mitchum Dry Advanced Spray and Revlon beauty tools. However, these gains were offset by lower net sales of Almay and Revlon ColorSilk, which we have previously reported.

In December, Revlon introduced three new product ranges under the ColorSilk brand, including color care shampoo and conditioner, Butter Cream longer-lasting superior permanent hair color, and Moisture Rich permanent hair color. These innovations are intended to restore growth in the ColorSilk franchise, and while they are still building distribution, the trade reception has been positive. We will provide updates on initiatives to enhance the modernity and drive growth for Revlon color cosmetics and Almay later in this call.

We continue to be very encouraged by the fact that both Revlon ColorSilk and Revlon color cosmetics continue to grow internationally, unequivocably demonstrating the strong global awareness and popular appeal for our iconic brand. These businesses grew at an exceptional rate of 9.4% internationally as we posted double-digit net sales increases in Argentina, Italy, Mexico, France, the UK, Japan, and Hong Kong.

Now turning our attention to our professional business. Net sales grew 2.4% for the year, driven by the continued strong growth of American Crew men's grooming products, the well-received launch of Revlon Professional Be Fabulous hair care range, and double-digit growth for Revlonissimo Colorsmetique professional hair color. These strengths were partially offset by continued softness in CND, which we have previously discussed and have already taken steps to address.

We are pleased to report that our professional business grew both in North America, 1.9%, and internationally, 2.7%, with double-digit net sales in the UK, Russia, Australia, and Ireland.

Turning now to the Elizabeth Arden segment, we finished the year 1.8% up, driven mostly by the Elizabeth Arden brand, designer fragrances, and international growth. As I mentioned previously, the Elizabeth Arden brand achieved its eighth consecutive quarter of growth, with net sales gains in both North America and internationally.

The growth momentum we are experiencing behind the Elizabeth Arden brand can be attributed to a combination of initiatives, including new product innovation, strategic efforts to modernize the brand's relevance and attract new consumers, and balanced growth across skincare, color cosmetics, and fragrance. In 2016, the Elizabeth Arden brand also grew online sales high-double digits and continued to leverage new digital strategies and campaigns that are aligned with changing consumer purchasing behavior. The brand's international growth can be attributed to strength in China, Germany, France, the UK, Taiwan, and New Zealand.

Also within the Elizabeth Arden segment, our designer fragrance brand experienced growth behind John Varvatos Dark Rebel Rider and Juicy Couture's Viva Rose. Our prestige fragrances also achieved double-digit sales growth in e-commerce. Growth in prestige fragrances was exclusive to international regions, including Germany and the UK.

Now turning to the integration of Elizabeth Arden and the continued progress we are making. I am pleased to confirm that we have increased our multiyear estimate of annualized synergies and cost reductions from $140 million to approximately $190 million. And we have developed plans to accelerate achieving those synergies so that we are able to realize the benefits to our business sooner and redirect some of the savings to fuel incremental brand investments.

In January, we also announced a new brand-centric organization structure built around four global brand themes: Revlon, Elizabeth Arden, fragrances, and portfolio of brands. The new structure is designed to optimize and focus our organization on strengthening our brands in order to better serve beauty consumers and quickly adapt to their changing behaviors and preferences.

Aligned with our strategy, the new brand-centric structure better positions us to grow and win across categories, channels, and geographies by delivering consistent, seamless, and exceptional brand experiences wherever and however our consumers shop for beauty. In addition to the cost synergies that we are beginning to realize, we have also started to explore with some of our key customers opportunities to accelerate top-line growth by leveraging the power of our larger combined portfolio of brands.

Over the past month, we have met with several mass retailers in the US to discuss strategies to strengthen their beauty offerings and in-store experience so that together we can restore growth and excitement in the mass channel and continue to win with beauty consumers. Now in their new roles, our teams are working more collaboratively and benefiting from our capability sharing, expanded customer and consumer insights, and more holistic commercial and brand-building know-how. I am encouraged to see how we are working better together.

Finally, let's talk about our priorities for 2017. Our first priority is to drive growth in the US, particularly in mass channels. As I mentioned earlier in recent meetings with our mass trade partners, we are encouraged by their feedback to the plans we have presented. These plans are designed to bring back consumers to this channel with great innovation, an elevated in-store beauty experience, and more compelling digital marketing that entices new and current consumers to seek out our iconic brand.

On the topic of our iconic brands, and as I have said in our last call, we are relaunching Almay in the second half of 2017, building on the brand's core equities with a modern, relevant positioning to restore growth. The new Almay celebrates individuality, inclusiveness, and self-expression, and taps into every consumers' desire to reveal their true beauty. We have begun to present the new positioning to our trade partners to very positive feedback and look forward to sharing with you more details on the next earnings call.

In addition to winning in mass retailers, we need to ensure we are capturing our fair share growth online and in other fast-growing channels. In February, the Revlon brand teamed up with Amazon behind an innovative campaign which features cobranded shipping boxes and a social activation campaign that invites consumers to share their personal views on what love means to them in three words: #loveinthreewords. Revlon is the first beauty company to execute a program like this with Amazon.

Another key priority is to continue to enhance our digital capabilities and relevance to consumers, particularly millennials. In January, to broaden Revlon's social reach and digital relevance, we announced the signing of Gwen Stephani as our new global brand ambassador and four new digital influences.

Gwen strongly resonates across generations of fans, including her 6 million Instagram and 7 million Facebook followers. And the new influences offer the potential to further amplify our messaging and consumer engagement.

You may have also seen last Sunday on the 89th Academy Awards, Revlon debuted the Love Project, a multimedia and social activation campaign featuring Lady Gaga, Pharrell Williams, and Ellen DeGeneres. The first 30-second video, which previewed on Lady Gaga's social media last week, generated within 24 hours of its posting nearly 1 million unique views.

The campaign, which aims to create meaningful connections with Revlon's consumers, particularly socially conscious millennials, achieved more than 570 million media impressions within 72 hours of its launch. This multifaceted program drives more consumers to revlon.com and further extends the call to action: #loveinthreewords.

As you have probably noticed by now, we have started 2017 with improving momentum fueled by the integration of Elizabeth Arden, a new organization that will place our brands at the center of our business strategy, and having identified incremental cost synergies that will enable us to invest more behind our brands, build new core capabilities in digital, product design, and innovation, and put the Company on a strong accelerated growth trajectory.

In summary, I am encouraged by the strength and resilience of our iconic brand and the actions that we are taking to make them even more modern and relevant. I am confident in our strategies to drive growth across channels and in key geographies, especially Asia. And certain that we have the team, the brands, and the capabilities it takes to build a top 10 brand world-class beauty competitor.

I will now turn the call over to Juan, who will walk you through a summary of our financial performance. Juan.

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Juan Figuereo, Revlon, Inc. - EVP and CFO [4]

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Thank you, Fabian, and good morning, everyone. As a reminder, unless otherwise indicated, our discussion today will be on a pro forma ex-FX basis where applicable. And when we discuss total Company results, please refer to the reconciliations of as-reported results to adjusted and pro forma adjusted results, which are provided as an attachment to the earnings release.

As Fabian walked you through the net sales drivers for 2016, I will focus on our profitability results. Starting with our total Company results, consolidated pro forma adjusted EBITDA was $409.4 million, a 9.7% increase over the prior year, driven by improved profitability of the Elizabeth Arden segment as well as lower non-restructuring severance in 2016.

Pro forma adjusted income from continuing operations before income taxes was $82.5 million in 2016, an improvement of 43.2%, driven by the same factors just discussed. But partially offset by higher depreciation and amortization expense in 2016, mostly related to the Cutex acquisition.

Moving to our segment profit results, consumer segment profit was $349.2 million in 2016, representing a decrease of 2.3%. This decrease was driven by the absence of a gain that benefited 2015 results due to the sale of a non-core consumer brand. Consumer segment profit also declined due to the unfavorable impact of FX transaction within cost of sales, partially offset by less spend on brand support, driven by shifts in consumer purchasing behaviors.

Switching now to the professional segment, segment profit was $99.4 million in 2016, a decrease of 3.4%. This decline was also driven by the absence of a gain that benefited 2015 due to the sale of a non-core professional brand. Excluding this gain, professional segment profit would have been essentially flat.

Moving to the Elizabeth Arden segment, segment profit was $106 million in 2016, representing an increase of 46.3%. This increase was primarily driven by higher net sales coupled with lower cost of goods sold as a result of cost reduction initiatives as well as the favorable impact of product and channel mix.

As for our other segment, profit decreased compared to 2015 primarily due to higher packaging and design expenses. It is important to note that other segment profit does not include the impairment charges of $23.4 million recognized in 2016, of which $16.7 million related to goodwill and $6.7 million related to intangible assets acquired in the CBB acquisition.

These non-cash impairment charges are primarily due to the change in Company's expectations regarding the future performance of the other segment in relation to the carrying amounts of CBB's goodwill and acquired intangible assets. We believe that our initial investment in the fragrance business through CBB was a helpful step. And now with the Elizabeth Arden acquisition, we have an enhanced platform to succeed in the fragrance business.

Turning to integration cost synergies, as Fabian indicated, we continue to make good progress with the integration of Elizabeth Arden. Over the course of the fourth quarter, we completed our detailed planning and identified incremental cost reduction opportunities that have allowed us to increase our synergy estimate from our previously announced $140 million to our new expectation of approximately $190 million. These cost reductions are expected to be realized over a multi-year period, with approximately $45 million to $60 million expected to benefit 2017.

In 2016, we realized approximately $3 million of cost synergies. To give you more context as to the makeup of the approximately $190 million of expected synergies, approximately 60% is being driven by supply chain projects, which include in-sourcing up to 90% of Elizabeth Arden manufacturing as well as consolidating distribution centers and realizing procurement cost reduction. The remaining 40% of expected cost reductions are being generated through SG&A reductions as a result of consolidating sales and marketing teams, back-office support, as well as office locations.

In order to realize these synergies, we expect to incur approximately $65 million to $75 million in restructuring and related charges, which consist of employee-related costs, lease termination, and other restructuring-related costs. In 2016, we incurred $34.5 million of restructuring costs related to the integration program.

In addition, we expect to incur approximately $100 million to $110 million of cumulative integration-related capital expenditures and approximately $70 million to $80 million of cumulative non-restructuring integration costs over the life of the program. Expected integration-related capital expenditures primarily includes supply chain investments to support the in-sourcing as well as IT investment to integrate our system. In 2016, we incurred approximately $20 million of non-restructuring integration costs.

Turning to liquidity, we generated $116.9 million in operating cash flow in 2016 compared to $155.3 million in 2015. We spent $59.3 million in capital expenditures and $52.1 million in purchases of permanent displays during 2016 compared to $48.3 million and $47.4 million, respectively, in the prior year.

In addition, we made pension contributions of $8.3 million and paid $21.9 million in cash income taxes during 2016 compared to $18.1 million and $25.4 million during the prior year. In 2017, we expect to spend approximately $100 million to $120 million in capital expenditures and approximately $65 million in permanent displays. Our expected capital expenditures for 2017 include approximately $35 million for the integration-related capital expenditures previously discussed.

We continue to feel good about our liquidity position. As of December 31, 2016, we had approximately $545.9 million of gross liquidity consisting of $167.1 million of unrestricted cash on hand and available borrowing capacity of $378.8 million on our revolver. We believe we have sufficient liquidity to meet our funding requirements over the next year, including for potential tuck-in acquisitions that the Company believes will help accelerate growth or strengthen our position.

In closing, with the first full quarter of combined results and operations with Elizabeth Arden under our belt, we continue to feel very good about the potential of the combined business. The new brand-centric organization, coupled with the operational improvement underlying most of the cost synergy projects that we have begun to implement, form the foundation of what we expect will be a lasting transformation that should enable the Company to accelerate growth and improve results for years to come.

Now I would like to turn the call back over to Siobhan. Siobhan?

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Siobhan Anderson, Revlon, Inc. - Chief Accounting Officer, Corporate Controller, Treasurer, and IR [5]

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Thank you, Juan. This concludes our prepared remarks and we would now like to open up the call for your questions. Operator, please prompt the participants for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Kevin Ziets, Citi.

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Kevin Ziets, Citigroup - Analyst [2]

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Thanks for taking my questions. The first is just -- I want to see if I understand that you -- if I understand this right. Are you -- is there a bit of a shift in your tone away from using your increased scale and breadth here to go after new channels, and particularly the specialty channel where the industry has been losing share to? And back towards defending your positions in mass or is that -- or do you think you are set up to do both at the same time?

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

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There is no shift in our tone. We have said we seek growth wherever and however consumers shop. We need to be strong in the mass channel, we need to see accelerated growth in specialty, and we have been on a quest to accelerate growth on e-commerce.

So there is absolutely no change in our tone. There was an accelerated rate of migration of consumers in December, but our strategy remains the same.

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Kevin Ziets, Citigroup - Analyst [4]

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Okay, great. And then could you talk about the efforts that you are putting forth? How quickly do you think you can effect change in the mass channel. The I think 9% decline rate that you had in the fourth quarter, is that something that we should expect through the first half of the year before you get Almay relaunched and some traction off of the new digital initiatives?

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

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I think this will be gradual. The magnitude of the December change was a surprise, but we have actions in place to start to see change as we go forward. This will be different retailer to retailer. Some retailers have already taken action to bring the consumer back. Others have taken lesser action, so I think we will see sequential improvement as we go through the year.

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Kevin Ziets, Citigroup - Analyst [6]

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Okay, great. And I appreciate all the color on the extra synergies and the spending. I guess my question is do you expect most of those additional savings to be used this year for increased advertising and brand support? Or do you think that some of the savings will fall down to the bottom line?

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

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I think we will have a balanced view here of savings that will be reinvested and savings that will feed our EBITDA. So it -- I think the first thing we need to do is to capture those savings, and we are on a path to accelerate the capture.

So we are very happy with how the pace of capture has been accelerated this year and in the course of the next few years. So relative to the investment model that we shared at the time of the financing, we're way ahead.

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Kevin Ziets, Citigroup - Analyst [8]

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Okay, that's great.

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Juan Figuereo, Revlon, Inc. - EVP and CFO [9]

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I would just like to add, Kevin, is that any investments -- reinvestments we make of synergies will be strictly behind growth and in a way that does not increase our structural SG&A into the future.

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Kevin Ziets, Citigroup - Analyst [10]

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Okay. Thanks. And then I don't know if you are in a position to give guidance or even just directionally whether you think EBITDA will be higher or lower on a full-year basis. And sort of cash flow, how that may shake out.

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Fabian Garcia, Revlon, Inc. - President and CEO [11]

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As you know as per the call last quarter, we indicated we would not be giving guidance on EBITDA or cash flow going forward. We will be reporting on our growth and our results.

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Kevin Ziets, Citigroup - Analyst [12]

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Okay. All right.

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Juan Figuereo, Revlon, Inc. - EVP and CFO [13]

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We did give you our estimates, though. Everything that is budgeted, so some of the cash pending, CapEx, etc. And we will provide enough color in every one of the calls to enable you to adjust your models when we have actual results announced.

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Kevin Ziets, Citigroup - Analyst [14]

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Okay. Is it fair to say that the amounts that were incurred related to restructuring and integration in 2016 were I guess accrued and spent? Or are some of those cash outflows still to come in 2017?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [15]

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This was mostly cash expenses.

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Kevin Ziets, Citigroup - Analyst [16]

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Okay, great. Thank you guys and good luck.

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Operator [17]

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Grant Jordan, Wells Fargo.

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Grant Jordan, Wells Fargo Securities, LLC - Analyst [18]

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Thanks for taking the questions. First, just a little more follow-up on the shift to specialty and online channels in North America. Can you talk about your relative position and how that has changed over the last year or two in those channels?

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

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Yes, I think as we have shifted from a channel-based organization to a brand-based organization, we are now in a position to leverage our combined portfolio with some of these specialty beauty retailers to a degree that we couldn't before. There is one of these retailers that it is literally the confluence of professional, prestige, and mass.

And for that particular retailer, we were going with three different salespeople before the acquisition. And we met with them recently, and the first thing to do is present our strategy. And the next thing to do is to present the fact that we will be going to that retailer now with one team that represents the entire portfolio of brands. And when you go with one team, you start dealing with different solutions for that particular retailer relative to their strategy and ours.

So I feel very good about the revenues and the incremental revenues that go in as one team, one in beauty represents with all specialty retailers.

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Grant Jordan, Wells Fargo Securities, LLC - Analyst [20]

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Okay, that's helpful. I guess as you think about the fragrance business specifically, did that have the same headwind as the rest of the beauty business shifting into those channels?

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Fabian Garcia, Revlon, Inc. - President and CEO [21]

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Not to the same degree as color cosmetics. So the fragrance business was its own self in the fourth quarter with the usual channel shifting in the mass fragrance business in the categories that are strategic to us, like designer. The lifestyle did very well. So we feel very good about that.

And obviously as you know, we have groomed our portfolio to minimize dependency on celebrity fragrances. And that poises us well for the future.

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Grant Jordan, Wells Fargo Securities, LLC - Analyst [22]

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Okay. And then last question, on the incremental cost saves, can you just remind us are there -- did you raise the amount of costs required to achieve the cost saves as part of taking the cost savings up from $140 million to $190 million? Or is the $65 million to $75 million of charges plus the incremental CapEx still the same?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [23]

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We raised the cost savings to get more synergies. Obviously, the level of activity, the depth at which you go on certain things increases, the cost increases. The good thing is that when you look at the costs overall versus synergy realization, we are well better than the benchmark in the markets in terms of ratio of cost to achieve versus synergies. So we feel very good about where we are landing with this.

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Grant Jordan, Wells Fargo Securities, LLC - Analyst [24]

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Okay, great. Thank you very much.

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Operator [25]

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Carla Casella, JPMorgan.

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Carla Casella, JPMorgan - Analyst [26]

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Just one follow-up on the costs and the savings. Have you said how much of the total costs you will incur will be cash versus non-cash?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [27]

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All of the costs will be cash incurred over time.

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Carla Casella, JPMorgan - Analyst [28]

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Okay.

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Juan Figuereo, Revlon, Inc. - EVP and CFO [29]

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The only thing that would be non-cash were the stuff that's not related to synergies that we talked about, write-off of intangibles.

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Carla Casella, JPMorgan - Analyst [30]

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Okay. And then you talked about online both from the competition but also as an opportunity standpoint. Can you talk about your online penetration for Revlon, Almay, Elizabeth Arden, and professional? Does it vary dramatically in where you have the most penetration as well as the most opportunity?

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Fabian Garcia, Revlon, Inc. - President and CEO [31]

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Good morning, Carla. This is Fabian. The way I would answer that question is Elizabeth Arden has a higher penetration than the rest of the brands because of the nature of the portfolio, the price points, and the fact that they were ahead of us in digital and e-commerce development.

So the good news is that we're learning from them to step up our game, and we want to see the penetration be a bit more even. But the consumer will decide that, not us.

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Carla Casella, JPMorgan - Analyst [32]

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Okay, great. And then in your discussions with the mass on improving that offering, is that what spurred the increase in the permanent display spend? And are we at a what you think could be a stable level of permanent display spend in that $65 million range, or could we see that move up sequentially?

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Fabian Garcia, Revlon, Inc. - President and CEO [33]

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The increase that you are hearing about has to do with the relaunch of Almay. And I think the only way to think about this is that all of our mass trade partners are keenly interested to lure the consumer back to their channel. And they are improving, for the most part, that in-store beauty experience.

I will invite you to visit some of the larger names in the space. You will be surprised to see the improvements that they are making in their walls, the improvements they are making with their service, the improvement they're making with the portfolio of brands they are offering, the improvement they are making with the overall experience in and outside of the store, and a lot of action digitally.

So I think this is good news all around for the consumer. It is good news all around for all of us who participate in omnichannel, and I think there's going to be a lot of competition going forward between channels. That is good for the consumer at the end of the day.

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Juan Figuereo, Revlon, Inc. - EVP and CFO [34]

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I would just like to add that as Fabian pointed out, the level of displays that we discussed we expect to spend reflects the launch of Almay. That is probably going to straddle two years. And so for two years, will be slightly -- should be a little higher than our average spend. And after that, we should come back down to the 55 lower [range].

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Carla Casella, JPMorgan - Analyst [35]

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Okay great. And then just one last question. You talked about the weakness in the department store channel, but also just the mass, the shift to online. The mass merchant, that shift -- are you seeing the same trend in mass merchant, food/drug, or -- and were you talking about them as a group? Or was that specifics to the mass merchants?

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Fabian Garcia, Revlon, Inc. - President and CEO [36]

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(technical difficulty) into them as a group.

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Carla Casella, JPMorgan - Analyst [37]

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Okay. Great, thank you.

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Operator [38]

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Karru Martinson, Jefferies.

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Karru Martinson, Jefferies LLc - Analyst [39]

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If you could just repeat the charges. I just want to make sure that I'm not double counting. I had $65 million to $75 million of charges associated with the integration, then $100 million to $110 million of CapEx integration. And then I thought I heard you say $70 million to $80 million of some non-restructuring charges associated with it. Or is that part of that original $60 million to $75 million?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [40]

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No, they are separate. Restructuring -- the $65 million to $75 million non-restructuring costs, which may include expert external support, those kinds of things, is $70 million to $80 million.

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Karru Martinson, Jefferies LLc - Analyst [41]

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Okay. And in terms of you guys called out $35 million of CapEx spend that will take place for integration this year, how should we think about the cadence of those other charges flowing through your results?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [42]

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They will be over the life of the program, and most of them will be incurred over the next three years.

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Karru Martinson, Jefferies LLc - Analyst [43]

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Okay. And now a number of your larger department store guys have highlighted store closures. Is there any kind of cadence that you are hearing from your customers? And how should we think about that when we model out the upcoming year?

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

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We have heard warnings in the public domain, so they are well documented and have been disclosed. So I will not go past that. We are, of course, prepared to balance those closures to move the consumers that we have from stores that are closing to stores that remain open. And other options for them to continue to shop for our brand.

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Karru Martinson, Jefferies LLc - Analyst [45]

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All right. Thank you very much, guys, appreciate it.

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Operator [46]

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Hale Holden, Barclays.

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Hale Holden, Barclays Capital - Analyst [47]

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Thank you for taking the call. I had a couple quick ones. Congrats on the Amazon box promotion. I actually think that's a relatively big deal. And I was wondering how you guys would define success there. It has to be more than just branding. You do expect to see a flowthrough on sales through Amazon on your products? Is that the way you're thinking about it?

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Fabian Garcia, Revlon, Inc. - President and CEO [48]

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Absolutely. Obviously, we are in the middle of the quarter, so we cannot comment. But if you think about these programs, there are several objectives. Obviously to enhance the brand equity. To learn a lot how to partner with the best retailers online. And number three, to monetize the effort. So we expect results -- positive results on the three fronts.

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Hale Holden, Barclays Capital - Analyst [49]

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On the synergy capture, I was wondering how much of that related to an acceleration of a co-manufacturing or bringing the Arden products into the Revlon manufacturing base. If that was going to happen faster than you kind of initially outlined last year.

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Juan Figuereo, Revlon, Inc. - EVP and CFO [50]

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Yes, a good portion of the incremental synergies comes from that from increasing the estimate of volume that we can in-source. But we also accelerated the timing of when we were expecting that to occur. So both higher amounts from in-sourcing and earlier realization.

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Hale Holden, Barclays Capital - Analyst [51]

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And then once you guys have completed that, do you have a rough-cut breakout of how much of your domestic sales would be manufactured domestically? In terms of if a border tax adjustment came through, how we would think about it?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [52]

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Yes, that's a great question, because that's something that we're looking at carefully. I would tell you that we are a net exporter because we have a very large manufacturings footprint in the US. So if that were to pass, it would be a net positive for Revlon. But we are still in the process of doing the analysis.

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Hale Holden, Barclays Capital - Analyst [53]

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I guess it's hard for you to know on your competitors, but I think that puts you in an atypically positive position versus some of the guys you would -- brands you would compete against, correct? Is that your view?

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Juan Figuereo, Revlon, Inc. - EVP and CFO [54]

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Yes, that would be correct. Although we have a global footprint in manufacturing, we are more in the US -- have a heavier footprint in the US than our competitors.

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Hale Holden, Barclays Capital - Analyst [55]

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Got it. And then one last question. Can you give us an update on Arden expansion into China and how that brand is flowing through there in Red Door and other places?

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

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Well, without going into details country by country, what we have highlighted is that we continue to do well in China, both in brick-and-mortars and online. We have done well because of our omnichannel strategy, so we are upgrading counters, making sure we are selling to higher-end retailers, a higher quality of doors.

Making sure we introduce in that market Asia-specific product innovations, especially in skincare and in foundations. And also making sure that the service we provide in those countries is very competitive. And last, but not least, continuing to learn how to be competitive online.

And as you know very well and I have heard from many, it -- there is a ever-improving game and an evergreen skill set. So we're very happy with how our Chinese subsidiary is managing the balance between online and off-line.

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Hale Holden, Barclays Capital - Analyst [57]

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Great. Thank you very much. We just signed up for at least two of your four social media influencers, so I look forward to seeing what happens there.

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Fabian Garcia, Revlon, Inc. - President and CEO [58]

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Terrific. Love in three words, remember.

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Hale Holden, Barclays Capital - Analyst [59]

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Love in three words. I will talk to you later.

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Operator [60]

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(Operator Instructions) Kevin Ziets, Citi.

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Kevin Ziets, Citigroup - Analyst [61]

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Thanks for taking the follow-up. Just a quick one. I guess on your -- one of your competitors' last calls, they cited high inventory levels in the consumer channels or in the mass channels. Can you talk about your positioning there and whether you think the near term, there is a need to promote to get those down? And then I have a couple more.

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

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No, we haven't. I will not make any specific comments about this issue because this has been a moving target throughout the year. It's happened every time they close a quarter and it is different in terms of each one of the retailers.

I think everybody right now is very focused on bringing the consumption back and making sure that we provide the consumer with better in-store experience. So I don't think the problem is the number one priority nor do I believe it is to the degree that we have experienced in the past.

Some of them have these algorithms that are based on consumptions that updates itself weekly using the most recent data. So the December numbers are going to come in into the algorithm sometime in the next weeks or so if they haven't already. So the actual purchases will be based on consumption that is depressed because of December.

As we recover the consumption in the stores, the algorithm will allow for higher replenishment. So I expect this to be quite mathematical in its sequence, and we shall see sequential improvement.

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Kevin Ziets, Citigroup - Analyst [63]

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Okay, great. And then a bit of a broader question. But I guess Cover Girl and Max Factor are being relaunched. You are obviously going through significant efforts with Almay and with the rest of your brands to drive traffic. Do you think it's -- there is a general downtrend in price point in those channels or an uptick in a more promotional environment for the next couple years with that level of competitive activity?

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

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I think this category is one of brand strength and premium brand equity. I don't believe and I don't want to believe that pricing is the way to build brands in a category where innovation is what drives brand equity.

So I don't know for -- I will not comment on the strategy of our competitors, but I will comment on our strategy. We have a very simple strategy. We need to make our brands stronger. We need to make them accessible to consumers wherever and however they buy, and we need to invest more in our brands. And obviously, that money will come from our P&L.

So that is our clear focus: that innovation and speed to market and making sure the consumer finds us wherever she's shopping. That's what we're doing.

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Kevin Ziets, Citigroup - Analyst [65]

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I guess I could've asked that better. Do you think you'll get extra shelf space out of your efforts? Or is your intention to perform better within the space that you have already?

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Fabian Garcia, Revlon, Inc. - President and CEO [66]

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The relaunch of Almay is unequivocally trying to get more space so that we can execute the full extent of what now is a brand that should have more shades and should be more represented in makeup. So it is our aspiration that we will start to get more linear space that this brand deserves in its new incarnation. So more to come as we negotiate with our partners in the trade.

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Kevin Ziets, Citigroup - Analyst [67]

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Okay, great. And my last question is I saw on the release that you launched CND product in the mass retail. Is that the first time that you've launched the CND brand in that channel? And how do you think about that strategy maybe more broadly about moving professional brands into the mass channel?

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Fabian Garcia, Revlon, Inc. - President and CEO [68]

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Yes, I would only edit a couple words. We have launched one of the CND line -- Vinylux it is called; longer-lasting gels -- that are launched in the premium mass channel. And in some of the channels that have already professional brands. So this makes us way more competitive in that channel.

And again, the concept here is when you think of brands and not channels, you start to expand to wherever the consumer is shopping for those brands. And that is a good example of the kind of expansion that we would be looking at.

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Kevin Ziets, Citigroup - Analyst [69]

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That's really helpful. Thank you, guys.

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Operator [70]

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Chris Mittleman, Mittleman Brothers.

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Chris Mittleman, Mittleman Brothers, LLC - Analyst [71]

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Congratulation on the progress you're making there. I wanted to ask about the marketing initiatives and the innovation with the Amazon thing. Is that going to be indicative of a higher amount of spending overall on advertising?

I know it usually runs around, I think, 18% to 20% of sales, something in that range. Are you guys looking to sacrifice a little bit of margin to increase overall ad spend or is this going to be more of a shift away from prints into these newer initiatives?

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Fabian Garcia, Revlon, Inc. - President and CEO [72]

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This is indicative of three things. One, our intent to make our brands stronger by investing more behind them in brand support, but allocating more of that brand support to the channels that matter to the consumers everywhere. So you cannot just be on TV or print or more traditional advertising, you need to be more active digitally.

So we are investing a lot more digitally as a percent of our total investment. And in 2017, our Company needs to increase the support behind the brands as we're having better content to show to our consumers. And the last thing that I believe this is indicative of is greater activity to drive to e-commerce.

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Chris Mittleman, Mittleman Brothers, LLC - Analyst [73]

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Okay. But what I was trying to figure out is if we're going to go from 18%, 19% spent on marketing, advertising, to 20%, 22%. Or is it going to be taking 1%, 2% away from print and putting that towards digital and keeping the overall amount the same.

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Fabian Garcia, Revlon, Inc. - President and CEO [74]

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Our spend in marketing is more towards the 20%. And so we have got to be more competitive in advertising spend, and we're going to spend more [in the year] of that money.

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Chris Mittleman, Mittleman Brothers, LLC - Analyst [75]

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Okay. Great.

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Operator [76]

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And with no further questions in the queue at this time, I would now like to turn the call back over to Fabian Garcia for any additional or closing remarks.

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Fabian Garcia, Revlon, Inc. - President and CEO [77]

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Thank you, Janie, and thank you very much for all of you for joining our call. And special thanks to our teams around the world for their hard work. They are the ones who make this happen. They're very focused on executional excellence and continue to be so committed to growing our Company. So thanks to everyone and we will talk to you next quarter.

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Operator [78]

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And again, that does conclude the call. We would like to thank everyone for their participation. You may now disconnect.