Revlon's (REV) CEO Fabian Garcia on Q2 2017 Results - Earnings Call Transcript

Aug. 04, 2017 4:49 PM ETRevlon, Inc. (REV)
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Revlon, Inc. (NYSE:REV) Q2 2017 Earnings Conference Call August 4, 2017 9:30 AM ET

Executives

Siobhan Anderson - CAO and Treasurer

Fabian Garcia - President and CEO

Chris Peterson - COO and CFO

Analysts

William Reuter - Bank of America/Merrill Lynch

Grant Jordan - Wells Fargo

Jenna Giannelli - Citigroup

Karru Martinson - Jefferies

Hale Holden - Barclays

Carla Casella - J.P. Morgan Securities LLC

Colleen Burns - Oppenheimer & Co.

Chris Mittleman - Mittleman Brothers

Operator

Good morning, ladies and gentlemen and welcome to Revlon’s Second Quarter 2017 Earnings Conference Call. At the request of Revlon, today’s conference call is being recorded. If you have any objections, you may disconnect at this time.

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

Siobhan Anderson

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

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

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

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

In addition, consistent with our past reporting practices, the company has identified certain non-operating items that are not directly attributable to the company’s underlying operating performance. The adjusted measures are defined in our earnings release and are also reconciled in the financial tables at the end of the release. And finally, our discussion today will include XFX variances, excluding the impact of foreign currency fluctuations on the period over period variances. Our discussion this morning should not be copied or recorded.

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

Fabian Garcia

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

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

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

We are pleased to report that Elizabeth Arden has posted its 10th consecutive quarter of net sales growth. The brand grew across skincare, color cosmetics, and fragrance, driven by successful new product introductions including the renovation of the brand's largest global franchise, Ceramide which is experiencing double-digit growth.

Other important franchises that have contributed to growth in the quarter, includes the launch of White Tea fragrance, which is among the top five brand new women's fragrance launched year-to-date, as well as strong performance in PREVAGE.

The Elizabeth Arden brand achieved double-digit growth in China and Travel Retail, as well as continued growth in Northern Europe, South Africa, Spain, Korea, Hong Kong, and the U.K.

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

Turning now to online sales, while our business is still underdeveloped in e-commerce and on e-retailer sites, we are stepping up progress in the U.S., and key markets around the world. Elizabeth Arden continues to achieve strong double-digit growth in e-commerce and on retailer.com sites in the U.S., U.K., and China.

Although building from a still small base, Revlon has substantially improved its performance on Amazon, with more than 80% consumption growth for the same period and we expect that these will provide a significant source of future net sales growth.

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

Continuing with positive highlights, we remain on track to deliver integration synergies of $190 million by 2020, with approximately $14 million in synergies realized in the second quarter. Year-to-date, we have achieved synergies and cost savings of approximately $24 million and we are confident in our ability to capture between $50 million and $60 million in synergies for the full-year. The synergies realized to date are derived first from the in sourcing of manufacturing of Elizabeth Arden, whose fragrances we are now feeling at our Oxford, North Carolina, [indiscernible] Spain and El Carretero Mexico factory.

Significant savings were also realized in the consolidation and renegotiation of indirect and direct procurement agreements, leveraging the company's new enhanced scale and finally the implementation of shared services in some key regions where we operate. Further and while we have yet to realize the full synergy benefits from office co-locations, our Toronto and Sydney offices were co-located during the quarter. And on September 5th, more than 150 employees currently at Elizabeth Arden Union Square Office, will be welcomed to Revlon's One New York Plaza headquarters.

I like to now review our strategy and some investment decisions and choices we have made during the quarter to adapt to the current reality. Paramount to our long-term strategies, our focus on strengthening our brands and making them relevant, particularly for younger consumers. Consistent with previous reports, the repositioned Almay brand, which celebrates individuality, inclusiveness, and self-expression continues to receive very strong acceptance from the trade including specialty retailers as was reported in WW the last week.

Although there are some new product launches in the second half of this year, consumers will experience the fully restaged brand across all touch points, starting in the first quarter of 2018. Last month, we announced Grey as our new global creative agency of record for all traditional and digital advertising, promotion, and activation marketing. Grey brings significant beauty expertise and digital know-how to the partnership. They have already developed an exciting new campaign for Revlon, which we will review towards the end of this year.

You may have also seen the new advertising campaign for Elizabeth Arden featuring Reese Witherspoon, which began to appear in May print and online media. Reese embodies the confidence and entrepreneurial spirit of Ms. Arden, and have strong appeal within and beyond the brand's current consumer base.

With increased investment this year and continued efforts to modernize the brand and the product portfolio, we expect to sustain at current growth trajectory. Another tenet of our long-term strategy is to make our brands accessible to consumers whatever and however they shop for beauty, which informs our geographic expansion and approach to channel diversification.

Building on a strong international growth trajectory, we continue to focus on large and fast-growing geographies. This quarter, Revlon color cosmetics reentered Germany, the sixth largest beauty region in the world, through a strategic distributor relationship. The Revlon brand is now present in 1,600 new doors and provides incremental growth in Europe.

Aligned with diversifying our distribution, we have made important advancements in our e-retailer and e-commerce expertise and capability. To further step change our progress in these area, earlier in the quarter we partnered with a leading digital consulting firm to elevate our approach and execution with e-retailer, refine our digital engagement strategy and organize our teams for greater effectiveness.

Even the need for faster speed to market, we have also taken important steps to accelerate our new product development process. Last month we recruited an experienced beauty industry professional to strengthen the product development functions, and to ensure that we can more quickly respond to emerging trends, we have reestablished strategic partnerships with select third-party manufacturers to augment our in-house innovation capabilities. As a result of our efforts to accelerate and improve innovation, our second half new product pipeline is the strongest I’ve seen since I joined the company last year.

Before I turn the call over to Chris, I want to say that I remain very optimistic about the future and our ability to return at Company's financial performance to profitable growth. For the past four quarters, we have focused on transforming our company and building a strategic foundation and capabilities that will enable us to achieve our vision of becoming a top 10 global beauty competitor.

I remain confident in our long-term strategy and the actions we have taken to modernize our iconic brand, develop faster and better innovation, diversify into high-growth channels, strengthen our digital engagement and e-commerce capabilities and continue to expand globally. I look forward to sharing with you in future quarters the results of these initiatives. Chris?

Chris Peterson

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

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

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

I like to highlight a few of these priorities, and how we have adapted our strategic focus and investment resources. We began with how we innovate and develop new products. Our assessment concluded that we needed to significantly accelerate the concept of commercialization process.

We are taking action to do this including restoring our product development function with new leadership, taking a fresh look at the new product development process, and identifying a few strategic product and packaging suppliers with which we can collaborate for accelerated innovation. Our goal is to create a fast-track innovation capability with a six-months speed to market cycle time.

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

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

In addition to planning and implementing actions and initiatives to ensure that we achieve long-term growth objectives, we've also have some quick wins this quarter. In the area of cash management, we’ve communicated an extension of our payment terms, which will be effective in August from most of our North American suppliers. We’ve repatriated more than $88 million of cash from international subsidiaries back to the U.S without tax implications.

We have reprioritized our capital expenditure budget to focus on new product development and cost reduction projects. We increased our investment in integration activities in order to accelerate synergy capture from the acquisition of Elizabeth Arden. And we have begun to implement shared services globally, consolidating our back office accounting groups in North America and EMEA.

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

Starting with total company results. We reported net sales of $646 million, an increase of 32% over the prior year quarter, driven by the Elizabeth Arden acquisition. On a pro forma XFX basis, net sales decreased by 4% mainly driven by challenging North America retail environment, which more than offset strong international growth.

On a brand basis, net sales grew on our two largest brands, Revlon and Elizabeth Arden. This was more than offset by sales declines in Almay, SinfulColors, CND, and American Crew. As reported, gross margin was 58.5% compared to 64.9% in the prior year period. The decline was largely driven by the addition of the lower gross margin Elizabeth Arden business, as well as higher promotional costs during the quarter.

Adjusted gross margin was 58.7% compared to pro forma adjusted gross margin of 62% in the prior year period, a decline of 330 basis points. This was due to higher promotional costs in North America associated with a more promotional retail environment, less overhead absorption and the unfavorable impact of product mix, partially offset by the realization of approximately $3 million of cost synergies.

During the quarter, the company realized approximately $14 million of cost synergies associated with the Elizabeth Arden acquisition. As reported net loss was $37 million compared as reported net income of $8 million in the prior year period. The company incurred approximately $20 million of non-operating costs primarily acquisition related and have higher interest expense during the second quarter.

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

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

The Revlon brand grew net sales during the quarter driven by the international business. Consumer segment profit was $69 million in Q2, representing an as reported decrease of 15% or 14% XFX versus the prior year quarter, primarily due to the decline in net sales in North America.

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

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

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

In 2017, we expect to spend approximately $100 million to $120 million in capital expenditures and approximately $65 million to $75 million in permanent displays. Our expected capital expenditures for 2017 include approximately $50 million for the integration of Elizabeth Arden. As of June 30, 2017, we had drawn $87.5 million on our revolving credit facility and had over $300 million of liquidity, consisting of $83 million of unrestricted cash and cash equivalents, as well as $231 million in available borrowing capacity under our revolver.

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

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of William Reuter from Bank of America. Please go ahead.

William Reuter

Good morning, guys.

Fabian Garcia

Good morning.

Chris Peterson

Good morning.

William Reuter

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

Fabian Garcia

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

William Reuter

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

Fabian Garcia

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

William Reuter

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

Fabian Garcia

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

Chris Peterson

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

William Reuter

Okay. So you took the charge now, so therefore we should actually see the relationship between the sell-in of new products and the charge you took now, it should be favorable in the back half of the year. I would imagine …

Fabian Garcia

Yes.

William Reuter

Okay. I will pass to others. Thank you.

Fabian Garcia

Thank you, William.

Operator

The next question comes from the line of Grant Jordan from Wells Fargo. Please go ahead,

Grant Jordan

Good morning. Thanks for taking the questions. You talked a little bit about just the shift you’re seeing out of the mass channel? Can you talk a little bit about what those mass retailers are doing to respond, whether you’re seeing better inventory levels, different levels of promotion, that sort of thing.

Fabian Garcia

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

Fabian Garcia

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

Grant Jordan

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

Fabian Garcia

Next quarter 2018.

Chris Peterson

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

Grant Jordan

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

Fabian Garcia

Almay and Revlon to start.

Grant Jordan

Okay, great. Okay. That's all I had. Thank you.

Fabian Garcia

Thank you, Grant.

Operator

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

Jenna Giannelli

Hi. Good morning.

Fabian Garcia

Good morning, Jenna.

Jenna Giannelli

Good morning. As you guys mentioned that just on key rationalization coming up, I mean, obviously a lot of talk about brand optimization in investment. So can you speak a little bit to just what would be your appetite maybe by -- maybe a smaller growing prestige type brand. And then similarly are there any thoughts on just that divestiture as a potentially noncore -- or what are you thinking of this noncore assets?

Chris Peterson

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

Jenna Giannelli

Okay. And then on noncore, is there anything you’re thinking about in that …?

Chris Peterson

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

Jenna Giannelli

That’s helpful. And then just on the professional segment, as we’re thinking about that, is that really just a comparability issue that you had a lot of strength in CND when [indiscernible] kind of came on for this scene and that were just up against tough comp or do you think this is something that’s more secular and brand specific that’s going on?

Fabian Garcia

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

Chris Peterson

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

Jenna Giannelli

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

Fabian Garcia

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

Jenna Giannelli

Thanks so much.

Fabian Garcia

Thank you, Jenna.

Operator

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

Karru Martinson

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

Chris Peterson

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

Karru Martinson

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

Fabian Garcia

I think there are two steps, because Karru, first of all there is no innovation going into the market right now with current Almay packaging. You would start to see the new Almay graphics on walls in some stores going forward. You will see the new Almay graphics in the Almay Web site that went live this week, and even start to see advertising aligned with that new positioning starting next week and in September. And gradually as we phase in the new packaging that we will start to show in four stores towards the end of the year, and in full force in the beginning of the year.

Karru Martinson

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

Chris Peterson

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

Karru Martinson

Thank you very much, guys. I appreciate it.

Fabian Garcia

Thank you.

Operator

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

Hale Holden

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

Chris Peterson

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

Hale Holden

Got it. And then second question is, I was fairly intrigued by the move to speed up innovation to potentially a six-month production line, start to finish. I was wondering what percentage of the core brands are or how many -- how large that could be and then what the cost may be associated for March [ph] integration associated with using the copartners would be versus doing them at your own facilities?

Fabian Garcia

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

Hale Holden

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

Chris Peterson

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

Fabian Garcia

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

Hale Holden

Great. Thank you very much for the time. I appreciate it.

Fabian Garcia

Thank you.

Operator

The next question comes from the line of Carla Casella from J.P. Morgan. Please go ahead.

Carla Casella

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

Fabian Garcia

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

Carla Casella

Okay.

Chris Peterson

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

Carla Casella

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

Fabian Garcia

We know it's not from Revlon. So I don’t know where its coming from, but frankly we are very focused on executing our part of that deal.

Carla Casella

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

Chris Peterson

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

Carla Casella

Okay, great. No, I would wholly agree with you and that’s the way the customer is shopping, you want to be there and you want to be front and center. I was just wondering if it's going to change the gross margin or the kind of SG&A spend on as we look at the brand and the business going forward?

Fabian Garcia

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

Carla Casella

Okay, great. And then on the professional side, can you give any granularity in terms of your distribution channels or the distribution mix on the professional side? I guess, this is the first time we start to call out on the nail salon. We -- how much of the business is at through nail salon versus I guess multipurpose type salon or pure retailers or retailers that do salon services?

Fabian Garcia

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

Carla Casella

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

Chris Peterson

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

Carla Casella

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

Fabian Garcia

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

Carla Casella

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

Fabian Garcia

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

Carla Casella

Yes. The Germany sounded interesting too. Is that -- was that rollout fully in 2Q or is that something that’s phased in over the quarter or not even seeing the full benefit of yet?

Fabian Garcia

We are expecting to see the benefits now. We are building distribution as we go. So we feel very good about how we had expected.

Carla Casella

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

Fabian Garcia

No.

Chris Peterson

No, we didn’t provided a specific detail.

Carla Casella

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

Chris Peterson

Yes.

Carla Casella

Okay, great. Thank you.

Fabian Garcia

Thank you.

Operator

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

Colleen Burns

Hi. Thank you.

Fabian Garcia

Hi, Colleen.

Colleen Burns

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

Chris Peterson

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

Colleen Burns

Okay. And you don’t -- you would see that budget being similar, let's say for next year [indiscernible] digital plans?

Chris Peterson

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

Colleen Burns

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

Chris Peterson

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

Colleen Burns

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

Chris Peterson

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

Colleen Burns

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

Chris Peterson

Yes.

Colleen Burns

Okay. Thank you.

Fabian Garcia

Thank you.

Operator

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

Chris Mittleman

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

Fabian Garcia

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

Chris Mittleman

Okay. But just in terms of the aggregate amount spent was -- would you comment on whether or not this last quarter was a much lower amount than 20% or for the year and you should be looking for more than 20%, because I’m just recalling that in the past periods when Revlon had success in gaining market share, usually it was in conjunction with a bit of an increase in ad spend, thinking about the 1990 to 1996 period. So I’m just wondering like what you're thinking is on that?

Fabian Garcia

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

Chris Peterson

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

Chris Mittleman

It makes sense. Thank you very much.

Fabian Garcia

[Indiscernible].

Operator

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

Fabian Garcia

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

Operator

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

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