Revlon's (REV) CEO Fabian Garcia on Q3 2017 Results - Earnings Call Transcript

Revlon, Inc. (REV) Q3 2017 Earnings Conference Call November 3, 2017 9:30 AM ET

Executives

Fabian Garcia - President and Chief Executive Officer

Christopher Peterson - Chief Operating Officer and Chief Financial Officer

Analysts

Grant Jordan - Wells Fargo Securities, LLC

Karru Martinson - Jefferies LLC

Stephanie Wissink - Jefferies LLC

Carla Casella - J.P. Morgan Securities LLC

Colleen Burns - Oppenheimer & Co.

Mary Gilbert - Imperial Capital

Tom Radionov - Corre Partners Management LLC

Operator

Good morning everyone, and thank you for joining the call. Earlier today, the Company released its financial results for the quarter ended September 30, 2017. If you have not already received a copy of the earnings release, a copy can be obtained on the Company's website at revloninc.com.

On the call this morning are Fabian Garcia, President and Chief Executive Officer; and Chris Peterson, Chief Operating Officer and Chief Financial Officer.

We 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 actual results and cause them to differ materially from such forward-looking statements is set forth in the Company's SEC filings, including the Q3 2017 Form 10-Q which was filed earlier this morning. The Company undertakes no obligation to publicly update any forward-looking statements, except for the Company's ongoing obligations under the U.S. federal securities law.

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, remarks today will include pro forma results, which presents the GAAP and non-GAAP results as if Revlon and Elizabeth Arden were combined company for all of 2016. From a segment view, all of Elizabeth Arden's operating results have been included in the Elizabeth Arden segment.

In addition, consistent with our past reporting practices, the Company has identified certain non-operating items that are not directly attributable to the Company's underlying operating performance. The adjusted measures are defined in the earnings release and also reconciled in the financial tables at the end of the release. And finally, our discussion today will also 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, we will turn the call over to Fabian.

Fabian Garcia

Thank you, Courtney. Good morning to all and thank you for joining our call today. As you saw from our press release, the Company's financial performance was disappointing and continues to be disproportionately impacted by soft sales in the U.S. market, mid-tier department stores and professional channels which account for approximately half of the total company sales.

The declines in the U.S. can be attributed to the continued migration of consumers to specialty beauty retailers, online purchasing, store closures, inventory reductions among several mass retail partners, incremental adjustments to returns and markdowns, and inventory rebalancing with select salon distributors. These factors were further exacerbated by lost sales in Florida and Texas related to the hurricanes where the Revlon business has historically been well developed.

While the U.S. remains a significant challenge to our overall Company performance, our international business continues to Revlon's trade vitality with net sales growth plus 5% pro forma xForex for the period. This growth was driven by double-digit net sales increases from Revlon color cosmetics as well as solid net sales increases from Elizabeth Arden and American Crew.

With year-to-date international net sales gains up 7%, we are encouraged by the strength and global appeal of our iconic brands in international markets. The growth trajectory we have sustained and the tremendous potential for continued expansion and development. Another bright spot in the quarter continues to be online sales. Year-to-date, our total online sales have grown 31% yet remain under developed representing less than 5% of total Company sales.

This past quarter, we completed a test implementing best-in-class eight platform build on Amazon across several Revlon color cosmetics SKUs. The content helps inform consumers about the products and provides facts, visuals and consumer ratings to stimulate purchase intent. The results to date are outstanding and have produced a high level digit sales lift over the prior measured period for all of the SKUs involved.

We recognized a tremendous growth potential that online channels represent for our business and are doubling down on building capabilities in these area. We are encouraged by our quick ramp up and by the response of our business to our initiatives in this important channel.

Turning now to Elizabeth Arden integration synergies, we remain on target to deliver $190 million over the next several years, an increase over $140 million originally estimated at the time of the closing. In the third quarter, we delivered $17 million of synergies and $42 million fiscal year to date. Based on these results, we expect to achieve synergies between $55 million and $60 million for the year at the high end of our previous target range.

The value capture as we have previously reported is driven by supply chain in-sourcing, logistics and distribution, procurement, and real estate consolidations. To date, we have announced all transition to co-locations in 11 cities around the world. The remainder of synergies is from the implementation of shared services and consolidation in our commercial organization enabling functions and their related costs.

We have implemented shared services in accounts payable, accounts receivable, general accounting and payroll in North America and are expanding that program across the Europe, Middle East and Africa region.

During this quarter's financial performance, I think it is important to look back and reflect on what's going on and how we are acting to really store sustainable profitable growth. For most of last year, we were laser focused on ensuring the successful integration of Elizabeth Arden, and a realization, and acceleration of the synergies and the tangible value they represent for the newly combined company.

As I have just detailed, we have made great progress in this area and are exceeding our regional expectations. In January, after implementing a new brand focused organizational structure, we began to have a clear understanding of our brand performance within our reporting segment and the challenges and opportunities at hand.

We also recognize the need to improve our skill set and the expertise required to win in an increasingly digital beauty line. In the spring, when we have a new leadership team on board, we began to implement bolder actions and investments to transform our business model.

Our objectives are to improve the consumer experience in brick and mortar stores, advance our ability to accelerate online sales, strengthen social media engagement with consumers and reduce innovation cycle times. Let me highlight a few of these initiatives.

In July, we kicked off an engagement with SapientRazorfish, a leading digital consulting agency, focused on creating immediate online value and developing the foundation for our digital future. A few weeks ago, a large team of digital makers joined our New York headquarters focused on three work streams.

The first is centered on developing a frictionless path to purchase online. This work stream will enable consumers to more easily find and buy our products on the retail side and drive increased revenue across channels. The project creates an implement more engaging content for all the retailers.

The initial rollout encompasses more than 100 products from Revlon, Elizabeth Arden and Almay, and includes new brand initiative design for online first. The second work stream is aimed at improving our consumer engagement across social media platform and further developing our influencer and community management strategy impact.

The third work stream is focused on ensuring we have the right technologies and data solutions to enable efficient management over the digital properties and functionality globally. This includes content, digital assets, costumer relationship and social management system and e-commerce platforms.

As part of our commitment to continuing to build our digital capability and in parallel with our investments with SapientRazorfish, we are taking steps to elevate our own marketing team's digital skill set.

Closing out on the topic or enhancing our digital future, our new beauty lab digital studio in our New York office is now fully operational. The studio has been fully booked since it opened and we're applying a best practice, content development approach to all the work produced in the studio.

Focusing now on our brands, you have probably seen that Almay reviewed its new campaign reveal it through you with actress, screenwriter, and produce, Rashida Jones in a new role as Almay Insider.

Consumers can begin to experience the brand in its newly designed backlit merchandising unit at Ulta, the first retail partner to feature this new Almay look. I encourage you to check this out in the first Ulta Manhattan store on these 860.

You may have also seen a new digital campaign for Elizabeth Arden, which launched two weeks ago in You Tube and Facebook featuring Reese Witherspoon as a storyteller in chief. Before video segment tell the story of the brand founder, one of a powerful and crusading woman and the perils between Ms. Witherspoon a celebrated entrepreneur change agent and champion of women and Ms. Elizabeth Arden. The new digital campaign will also be feature on Reese's and their brand social platforms.

Finally, and as I mentioned before you can also expect to see a bold new campaign for Revlon review in January which aims to recapture the brands iconic ownership of color and beauty leadership and modernize its women empowerment point of view. Before I turn the call over to Chris, I want to reiterate that even in the face of a quarter like this I remain very optimistic about the future and our ability to return the Company's financial performance to sustainable profitable growth.

For the past four quarters we have focused on transforming the Company and building a strategic foundation and capabilities that will enable us to achieve our vision of the climbing a top 10 global beauty company, capable of competing effectively in the new digital economy. Their road to growth is full of bumps, but the destination remains clear and attractive. I look forward to sharing with you in future quarters the results of these initiatives. Chris?

Christopher Peterson

Thank you, Fabian, and good morning, everyone. I want to start by providing a little more color on our transformation strategy. As background we believe there are four macro trends that are disrupting the beauty industry. First, consumers are increasingly choosing to engage with brands online through influencer's, social media, and e-retail platforms. Consumers are searching for product information tutorials, ratings and experience.

Second, consumers are increasingly choosing to buy beauty products online. Third, product innovation cycle times are contracting from 12 months to 24 four months to a shortest six months for some categories. And fourth, beauty consumers now have a variety of immersive ways to experience the brands they love and specialty beauty retailers they are subscription services delivered to their home or through mobile beauty services or ever they like.

What hasn't changed is that consumers are still drawn to novelty and high quality on trend and breakthrough innovations which remain the lifeblood of the industry. And most importantly consumers are still choosing and trusting leading brands in the sector. The sector is experiencing a profound shift and we are taking significant and decisive action to transform the Company to win over the next several years.

Fabian has already deep tell for you the multi-million dollar investment we are making to rapidly advance our digital capabilities. We expect the SapientRazorfish project will deliver significant online growth. Consistent with the disruption in the way consumers engage with brands we are making a significant shift in our media mix and investment from traditional print and broadcast to social media and macro and micro influencers on owned, earned and paid platforms.

To respond to the ever accelerating pace of innovation we are reducing our internal cycle times and have started three fast track innovation tasks for Revlon, Almay and Elizabeth Arden. Each of these will be developed within nine months from concept to purchase. And we have forge relationships with a few strategic third-party partners from whom we can source on trend and category disruptive innovation more quickly than we can develop and produce ourselves.

We are also learning how to launch digital first and how this distribution approach can further accelerate innovation cycle time. We continue to focus on delivering the cost synergies that we have committed to when we acquired Elizabeth Arden and are determined to identify opportunities to accelerate and realize additional cost reductions.

And as I said on my first earnings call I believe that there are significant opportunities for improvements in operational excellence. Much of this is related to core systems and processes which should improve our cost structure and facilitate our speed to market through better data collection and information management and ultimately faster decision making.

We have several initiatives behind this including new ERP systems, a simplification of our SKU portfolio, rationalization of our distribution center network, and a new management reporting and forecasting system to name a few. All of these initiatives are contributing to an aggressive transformation agenda for the Company which we expect to lead to better financial results over the next several years.

I would now like to take you through the Company's performance for the quarter. Starting with total company results, we reported net sales of $667 million, an increase of 10.2% over the prior year quarter driven by the Elizabeth Arden acquisition. On a pro forma XFX basis net sales decreased by 11.6%, which continues to be driven by declines in the U.S. mass retail channel and offset by international growth of approximately 5%.

As reported gross margin was 56.4% compared to 59.8% in the prior year period. The decline was largely driven by the addition of the lower gross margin Elizabeth Arden business higher sales returns and incentives and unfavorable mix. Adjusted gross margin was 56.5% compared to pro forma adjusted gross margin of 58.8% in the prior year period, a decline of 230 basis points. This was due to higher sales returns in incentives and unfavorable mix partially offset by the realization of approximately $5 million of pro-forma synergies within cost of sales during the quarter.

Also during the quarter the Company realized approximately $17 million of cost synergies associated with the Elizabeth Arden acquisition. As reported net loss was $32 million compared to $5 million in the prior year period. The Company incurred approximately $13 million of non-operating costs primarily acquisition related during the third quarter. Adjusted EBITDA $54 million decreased by 48.9% compared to pro forma adjusted EBITDA on the prior year period, driven by the declines in net sales partially offset by realized pro forma synergies and cost reductions of approximately $17 million.

Moving to segment results, the Consumer segment reported net sales of $307 million down 11% on an as-reported in XFX basis compared with the prior year period. The decline was driven by net sales declines in the mass retail channel in North America due to continued softness and consumption, inventory destocking by certain retail customers and higher sales returns and incentives, which adversely impacted net sales of Revlon and Almay color cosmetics.

These net sales declines were partially offset by growth in net sales of the Revlon brand internationally. Consumer segment profit was $33 million in Q3 representing and as reported and XFX decrease of 59% versus the prior year quarter, primarily due to lower gross profit as a result of the net sales declines in North America and higher returns as well as higher brand support expenses.

Turning now to the Elizabeth Arden segment we finished the quarter at $248 million in net sales. On a pro forma basis net sales decreased 10% or 11% on an XFX basis driven by lower net sales of heritage and designer fragrances, primarily within the U.S. mass retail channel. Of note, the Elizabeth Arden brand experienced 4% net sales growth on a pro forma XFX basis during the first nine months of 2017 as compared to the same period of 2016.

Elizabeth Arden segment profit was $32 million in Q 3 representing a 21% decline on a pro forma basis and 31% decline on a pro forma XFX basis primarily driven by lower net sales partially offset by lower cost of sales due to the realization of supply chain synergies.

Finally, in the Professional segment. Net sales were $107 million down 10% on an as reported and 12% on an XFX basis versus the prior quarter. This was driven by continued lower net sales of CND nail products and American Crew men's grooming products as the Company continues its effort to tighten distribution and manage trade inventory for the American Crew brand. Professional segment profit was $19 million in the third quarter representing and as reported and XFX decrease of approximately 20% and 22% respectively, primarily resulting from a lower gross profit driven by the declines in net sales.

Turning to liquidity, free cash flow was a use of approximately $344 million in year-to-date 2017 compared to a use of $101 million in the prior year period. The decline and free cash flow was driven by higher investment in inventory, which is due in part to the seasonality of the Elizabeth Arden business, higher payments for interest, restructuring, acquisition and integration costs, permanent displays, as well as higher capital expenditures. These uses of cash were partially offset by favorable changes in accounts receivable and accounts payable.

In 2017, we expect to spend approximately $100 million to $101 million in capital expenditures and approximately $65 million to $75 million and permanent displays. Our expected capital expenditures for 2017 include approximately $50 million for the integration of Elizabeth Arden. As of September 30, 2017 we had drawn $244 million on the Company's revolving credit facility and had approximately $200 million of liquid consisting of $79 million of unrestricted cash and cash equivalents and $126 million in available borrowing capacity under the revolver.

In closing, we've had another challenging quarter for the U.S. and believe that it will take time to restore growth to that portion of the business. As you have heard from both Fabian and me we are taking bold actions to transform the Company and have invested strategically behind capabilities that will enable us to compete in an increasingly digital environment. We have strong brands that are desired around the world with demonstrated appeal and we have a very experienced beauty leadership team that is energized by the opportunity to turnaround the Company's financial performance and return it to sustainable growth.

We will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes in from the line of Grant Jordan calling from Wells Fargo. Please go ahead.

Grant Jordan

Good morning. Thanks for taking the questions.

Fabian Garcia

Good morning, Jordan.

Grant Jordan

I guess my first question, obviously the Group and International has been positive and only that will continue. Can you speak broadly about that differential between margins and the International business versus the domestic business?

Christopher Peterson

Sure. So the U.S. business has higher margins than the International business driven by a couple of different factors. Number one, the scale of the business in the U.S. is much greater it's about half of the Company's business. The International business is a little more fragmented which means it has higher SG&A costs and our go-to-market model in international oftentimes goes through distributors to certain countries, which gives us a slightly lower gross margin in the International business and the U.S. business. That being said we believe that we have an opportunity to increase profitability in the International business going forward and so we are working a plan to do that over the next several years.

Grant Jordan

With that primarily be through scale or is it through changes and how you're going to market?

Christopher Peterson

It's both, it's through scale, through clustering and through changes in the way we go to market.

Grant Jordan

Okay. All right. You talked a little bit about the favorable Ultra display. When could that potentially be a bigger rollout that you guys?

Fabian Garcia

I would suggest that we wait for the first quarter, to see the national rollout of those be in Ultra and in other retail.

Grant Jordan

Okay. So that that could be a first quarter rollout as what you said?

Fabian Garcia

It is…

Christopher Peterson

It is the rollout, yes.

Fabian Garcia

Okay. so if you go to the store on 86 Street in Third Avenue with the all the store that just opened we have the new Revlon and Ultra displays that are backlit up and you can see them in that store, which I think is a significant difference in in-store presence versus what we had previously. It's rolling across all of the balance of the stores in the first quarter as they've been set.

Grant Jordan

Okay. And I'm my last question, yes just trying to think about the U.S. Consumer business like obviously as a channel that has been under a lot of pressure are you concerned like how do you I guess my concern is that channels under pressure all the competitors there are going to fight for a smaller pie and so it just becomes kind of a cycle down, down, down?

Fabian Garcia

Obviously, we have seen some of that this year and we are electing not to play in that excess it promotional environment. But I am hopeful with the conversations we've had with many of our customers in the brick and mortar mass channel that they have taken steps to enhance the consumer experience and give consumers a better access to innovation, better access to new products that I only found in this channel, so way playing the play book of the more premium specialty beauty retailers.

We just completed [indiscernible] with our top local management in the U.S. and visit to our top 10 customers in this three channels where we compete and we are quite encouraged to see their actions and their openness to try new things, we are able to us more space to try merchandising solutions in the different categories.

So if you go to some of the more famous retailers today you start to see that change in the market. So I am hopeful that as always in life there is a response to the original decline in the later part of last year and early this year. And I am also encouraged by the speed with which they are acting. So I don't think everything is lost in the mass channel.

Grant Jordan

Okay. Great. Thank you very much.

Fabian Garcia

Thank you very much Grant.

Operator

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

Karru Martinson

Good morning.

Christopher Peterson

Good morning.

Karru Martinson

When you guys look at the inventory destocking that you had, is that inventory destocking done and completed and behind you and kind of where is that share going, is our retailers kind of scaling back or are there new brands taking that space and how should we think about the presence in retail?

Christopher Peterson

Yes. The inventory destocking is not related to space losses. What's happened in the inventory destocking as the category has declined inventories - customers have made decisions to reduce inventory to match consumption at brick-and-mortar retail. And so if the category is down 3% or 4%, a number of customers have chosen to reduce their inventory by 3% or 4% which compounds the ship in if you will impact of that.

Inventory reduction over the long-term, I believe is a good thing for the company and for the industry because I believe that it's going to make the inventory that we have much more productive and it's going to lower ultimately the cost of introducing new innovation as you have less returns to take. So it's hard to say that it's over. It's going to depend on how fast the consumer shifts to online purchase and if the consumer continues to shift to online purchase which I expect.

And the brick-and-mortar business continues to be under pressure, you would expect retailers to continue to reduce the amount of inventories that they have in stores. But I think we've seen the biggest aspects of that that we're going to see at least in the short-term.

Karru Martinson

And then focus on the return side of the equation, I mean you talked about lower gross margins with Elizabeth Arden in the incentives and returns of the mix, can you kind of bridge us as to what parts of that really drove down the gross margin, was Elizabeth Arden the bulk of it or how much of that return pressure will we continue to see?

Christopher Peterson

So most of the return pressure was related to an initiative that was launched 18 months ago on the Revlon brand actually that we received. We discontinued because it wasn't working. We're replacing it with a new product innovation and so that I view is more of a one timer as our new product innovation comes out and replaces that.

Karru Martinson

Okay. So that's not something that should continue here as we go into the fourth quarter and beyond?

Christopher Peterson

That's right.

Karru Martinson

Okay. And just lastly, thank you for all of the information in terms of the steps that you're taking, but when we talk about the big macro trends, am I wrong to kind of read that this is going to be a multi-year process, this is not something that you guys can kind of turn on a dime here to grow e-commerce that this is going to take six, nine, 12 months and beyond.

Christopher Peterson

I would say two things. So yes, this is a multi-year process to complete all of the steps of the transformation agenda. That being said, we're starting to see some green shoots, so Fabian mentioned in the remarks that our e-commerce business was up 31% year-to-date, but in the third quarter we were up 49%. So our e-commerce business is accelerating its growth rate. We're still at a very low base. It's only about 3% of the company sales, but we're starting to see positive traction and accelerating traction as we get into some of these initiatives.

Fabian Garcia

I would add to that that we have taken all these actions with great sense of urgency and we're building capabilities with the same thing sense of urgency. The good news of our online that is in response weekly to what you do. So I think we need to be prepared to bumps in the road, but we need to be that fast in our implementation of making the company competitive in this digital landscape.

The playbook is not a secret. We know what we need to do. We have seen that working and when it works, the results are outstanding. So we're in implementation over a strategy that is clearly defined. So it will take some time. It will be multiyear, but as I said, the destination is very attractive.

Karru Martinson

Thank you very much guys, appreciated it.

Christopher Peterson

Thank you, Karru.

Operator

The next question comes in from the line of Steph, calling from Jefferies. Please go ahead.

Stephanie Wissink

Hi, good morning everyone.

Fabian Garcia

Good morning.

Stephanie Wissink

Just a couple of follow-up questions on your marketing strategy, I heard you mention a shift to digital, also a shift to using maybe some micro or mid-size influencers. Could just give us a sense of your total marketing budget today? What percentage is in like I see your traditional format versus what is online and digital and what your goal would be over the next couple of years in terms of the balance?

Fabian Garcia

I prefer not to give you this numbers because they're going to change. The way we're looking at this is you need a balance of traditional media and new media, you need a balance between the one way communication to consumers with creating that user generated content that micro-influencers will write about when the law of the products you have a so-called ride or die products.

And we are starting to get a lot of learning in the area of how to get those influencers to write organically about it. The focus of our innovation is to give them those kinds of products. So they will write about them organically and we will complement their reach to their audiences with more traditional media.

So all of this will change and I would also add that he will be flexible because if we were to start the year, I'm going to make this up. We were 30% of allocation of brand support on traditional media and we were to find out that one of our programs is working really hard for us in any category, or in any brand, in any social media platforms, we will have the flexibility to over ground on that active. So it is very difficult to predict on a formulaic basis what is the right balance for any given our brand.

Stephanie Wissink

Okay, that's fair. Just one follow-up on the inventory de-stocking question, just wondering if you would give us a sense of where your productivity for a linear footage in your bricks-and-mortar partners? How close are you to equalizing on some of the inventory in the trade relative to this ultra cadence?

Christopher Peterson

So we've had - as Fabian mentioned, top-to-top customer meetings with our top ten customers. We're excited about the Almay relaunch, where broadly our space is holding or we're gaming space, notably in Ulta where we're doubling our space. That's coming in the first quarter. So from a productivity standpoint, I think we feel like we're in a good position and I think we're focused on returning the company to growth, which obviously will improve those statistics over time.

Stephanie Wissink

Okay, thanks. And just one final on the shift to online, can you just give us a sense of what your online business is growing today relative to the bricks and mortar declines that we're seeing?

Christopher Peterson

Yes, so I think I mentioned that our online business in the third quarter was up 48% and that's a global number, and that's a mix of when we say our online business let me describe it. It's our direct to consumer business that we have largely through elizabetharden.com. It's the business that we sell through e-retailers and it's the business that we sell through e-retail platform.

So when you look at that, those three in total that represents about 3% of the business. That business was up 48% in the quarter and it's up 31% year-to-date. And so that's what's giving us a little confidence that even though we're relatively at the beginning of the digital transformation. We're already starting to see the growth rate accelerate in the business.

Fabian Garcia

Also to complement that it's growing very fast in North America and in Asia with high 30s of year-to-date and also we're growing in Europe upper 20s, so it's not just here.

Stephanie Wissink

Thanks guys. Very helpful.

Christopher Peterson

Thank you.

Operator

The next question comes in from the line of Carla Casella, calling from JPMorgan. Please go ahead.

Carla Casella

Hi. One question on the display spend, is that mostly for Ulta or for Almay, or little bit of both and should we expect this to remain in that $70 million plus level going forward?

Christopher Peterson

Yes. It's elevated because of the Almay Restage, but also because we're investing in backlit displays on the Revlon brand as well, and so it's the combination of those two things that has a little bit elevated in the current year. It's hard to say we haven't given guidance for next year with regard to where we are, but those are the two factors that are causing a slight uptick in the current year.

And we've tested both of these walls, the Revlon wall and the Almay wall. What we've seen is that when we put it in, we see a significant uplift in the business and the uplift allows us to say that the investment in the display spending is a very good return on investment proposition for the company which is why we've funded it across a significant part of the portfolio.

Fabian Garcia

And for next year, Chris has indicated we're in the process of doing budget, but given the beta that we have and the conversations we've had with our customer expect to see the new walls beyond a couple of large retailers. We are going to expand these wells in many retailers. And some of our retailers are in the process of lighting up their own walls for the past year. This is back into the context of that conversation. The enhancement of the consumer experienced by the brick-and-mortar mass retailers is happening and as far as the Revlon and the Almay brands are concerned, we have commitments by them to allow us to upgrade our walls.

Carla Casella

Okay. And both Almay and also then our 1Q rollout is that right?

Fabian Garcia

Correct.

Carla Casella

Okay. And then I have a balance sheet question, the cash that you're sitting on how much of that is international versus domestic and do you have any issues about repatriating it to pay your interest or the debt?

Christopher Peterson

So the majority of the cash that we have on the balance sheet is international, but we have a very good pipe that allows us to repatriate cash to the company or to the U.S. without incurring tax liability. So there's no constraint with regard to bring the money back from a tax perspective.

Carla Casella

Okay, great. That's very helpful. And then I was surprised to see the ABL included in short-term debt even up to 2021 facilities that because of a covenant on it or the way the agreement is written?

Christopher Peterson

It's a constant repayment, so there's no.

Carla Casella

Okay. And then you've got a big transformation agenda. Do you have the liquidity within your current capital structure to address it or do you think you may have to come to market and then alternatively would you consider selling a brand if you needed additional liquidity to fund your transformation agenda?

Christopher Peterson

So the way I would describe the liquidity is that we're at our peak liquidity point now, so the way that the business cash flows is that typically this is the time of year when we've invested the most in inventory and our in receivables balance is relatively high because we are shipping in inventory for the holiday season. And so when you look at the flows during the year, we expect and anticipate that our cash position to improve as we ship the inventory and collect the receivables for the holiday period and move into other parts of the year. So we're very comfortable with our liquidity position and don't perceive any need to go to market and do anything differently.

Carla Casella

Okay, great. And then on the synergy issue broke out, how much was in cost of goods sold versus SG&A from this quarter and we appreciate that. Can you give the same numbers for year-to-date?

Christopher Peterson

Yes, so the majority of the synergies is in SG&A at this point. And let me just see if I've got that here. But let me back up and step back and give you. So of the $190 million synergies that we're looking for in the long-term about 60% is in cost of goods, 40% is in SG&A.

But the timing of that is different because the SG&A synergies we get earlier as part of the program, the cost of goods synergies take a little bit longer because they rely on manufacturing and sourcing, logistics and distribution center, consolidation et cetera. I believe that of the synergies that we're targeting this year about 75% our SG&A related and 25% our cost of goods, and now we'll flip as we go into next year and cost of goods will become a bigger portion.

Carla Casella

Okay, great. It's really very helpful. Thank you.

Christopher Peterson

Thank you, Carla.

Operator

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

Colleen Burns

Hi, thanks for taking the questions. First on the return that you mentioned, the Revlon one-time replacement, which product, how much was that hit to gross margin in the quarter?

Christopher Peterson

We don't disclose at that level of detail, but it was a significant factor, which is why we called it out in the reconciling items.

Colleen Burns

Is there any additional color you can give just given that it's one time?

Christopher Peterson

Well, I guess what I would say is, I think we called out three primary factors of which this was one and they were called kind of in the same range.

Colleen Burns

Thanks. And then just on the CapEx that you gave, I know you're not giving guidance for 2018, but $50 million of that CapEx to share was the integration of Arden right that shouldn't repeat in 2018, correct?

Christopher Peterson

Correct. There will be some capital next year that continues as part of the integration, but the integration capital will go down eventually and we expect it to be the less next year of integration capital versus this year.

Colleen Burns

And then just lastly as you look at the cost structure here, obviously given the decline in sales. What the ability here to kind of take out SG&A you guys looking at opportunities to reduce SG&A here and kind of look at take down the cost structure?

Christopher Peterson

We are and that's focused on a variety of different areas including the Elizabeth Arden integration, which is as I mentioned the majority of the $50 million to $60 million of cost synergies in the current year are related to SG&A. But we're not stopping just by looking at the integration. We're looking more broadly across the Company at SG&A reduction opportunities and going after a number of different areas, including purchasing, including how we go to market in certain parts of the world and including how we operate the Company and how we're managing across the organization so.

Fabian Garcia

To contextualize that remark Colleen also we have to bear in mind that we're building capabilities, new capabilities, new skill set becoming more fit in this digital economy. So the allocation of resources between SG&A and innovation with change as well as brands support. So what we believe is there is a market at completely look at the shape of the P&L. So that we can allocate our resources, we then make it as more competitive digitally and that will repercussions in the SG&A and the brand support.

Colleen Burns

Thank you for the color.

Christopher Peterson

Thank you.

Operator

The next question comes in from the line of Mary Gilbert, calling from Imperial Capital. Please go ahead.

Mary Gilbert

Thank you. Good morning.

Christopher Peterson

Good morning.

Mary Gilbert

I wondered if you could give us the roadmap on how we should look at the trajectory since we are talking about a multi-year plan and looking at this quarter, would you say a third of the decline and EBITDA and this maybe incorrect. That's why I want to get a confirmation.

A third of the decline is related to sort of the non-recurring de-stocking and then how do we look at the next quarter in terms of declines and then going into the first quarter against easy comparisons when EBITDA was down about 50% and we have the relaunch of Almay.

We also have - and then we also have a launch within Revlon and then of course Ultra initiative. So I wanted to kind of see how we looked at the trajectory of an improvement where next year going again some very easy comparisons and with some of the initials that you do have and what's going on in the mass channel, sort of the puts and takes? Can you kind of help us map that out?

Fabian Garcia

So Mary we're not going to give you the numbers. But we look at it with cautious optimism. Because every element you have mentioned these in place these things are happening and we're seeing progress in [indiscernible] early green shoots in our transformation. So we don't want to be overly optimistic guidance because we recognize that that we have not really where the quarters. But we run to lead the facts do the talking as we go forward, but we look at the trajectory with optimism.

Christopher Peterson

And if you were to look at the building blocks I think you've mentioned the right one, we feel the positive building blocks that we expect or the e-commerce and digital growth. The new innovation the relaunch of Almay, International growth et cetera. The negative building blocks if you will are primarily related to the continued declining store traffic and brick and mortar retail which is primarily affecting the U.S. market.

Mary Gilbert

Right, which is a more profitable side that's why I was trying to figure out the puts and takes and would we actually given him a recovery in EBITDA next year, going against this year with again with some of these relaunches and some of the other initiatives. Because I feel like what you're doing on the digital five courses makes all the sense in the world but as you pointed out it such a small component of the business. So that's going to take a while before it really has a more material beneficial impact? Is that fair to say?

Christopher Peterson

I think digital can move quickly and I think that digital is also very profitable for us. And in fact in many cases we expected digital be more profitable than brick and mortar. So I think - and the other thing I would say is when we talk to our top 10 customers in the U.S. all of them are focused on growing their digital business and we believe that we've got a big opportunity to work with them to grow our business with them and help them grow their business. And so we're optimistic on the online opportunity that we have ahead of us and we're starting from a relatively low point.

Mary Gilbert

Got it. But I guess because of the top 10 customers being in the mass channel that's where you could get potentially this acceleration with their online business?

Christopher Peterson

Yes, that's right so virtually every one of our top 10 customers is focused on digital and we believe the cosmetics I mean the cosmetics market in the beauty market in the U.S. is growing. It's just that it's not growing in brick and mortar mass channel, but it's growing overall and what we're focused on is changing our model so that we catch up and effectively leapfrog from a digital standpoint and drive growth through that channel so that we can better capture growth in the U.S. market.

Fabian Garcia

So Mary just a small clarification not all of our top 10 costumers are mass, so this one to be sure this is properly characterized.

Mary Gilbert

Okay. All right. Also just kind of following up on the liquidity question that was asked earlier? So you feel very comfortable with your liquidity? How do you see changes in working capital for this year and kind of going out given all the puts and takes?

Christopher Peterson

Yes, we feel very comfortable with our liquidity position. As I mentioned the third quarter is typically the peak quarter for liquidity draw because in the fourth quarter we've generally ship in the inventory, we generally have started to collect a lot of the holiday inventory that was shipped in. So our liquidity view is that we are moving out of the peak draw period into more of the cash collection cycle over the next couple of quarters which has us very comfortable with our position.

Operator

Our next question comes in from the line of Tom Radionov, calling from Corre Partners. Please go ahead.

Tom Radionov

Hey. Good morning, guys. And thank you for taking my questions. I wanted to ask you - so obviously you're relaunching Almay which is helpful, but CoverGirl, so Cody is taking about the relaunch of CoverGirl which obviously is a meaningful competitor, just kind of curious as you think about that and kind of thinking about the size of Almay which is significantly smaller versus the Revlon brand and what the competition is doing with that relaunch and in fact that L'Oréal appears to be doing well and kind of taking some markets share. What are your thoughts in terms of how you are looking at that core piece of the business going into next year and what sort of investments you need for make to position yourselves accordingly?

Fabian Garcia

First of all, we're not only relaunching Almay. We outlined some of the activity on our major brand, Revlon, of course and on Elizabeth Arden we are getting a lot of activation next year with a new campaign, the new campaign that I described for Revlon's I think in the first quarter. We have brand new innovation that we obviously can unveil right now, but some of it is going on line first, it is going to brick-and-mortar. We feel really strong about those kind of ride or dye products that we were talking to you about. A key retailers told us that for the first time bringing first to mass products ahead of the Indies.

So we feel very good about their feedback and we feel very good about how they are putting their money behind that feedback because they're giving us space, more space for our brand. So there is a comprehensive work going on to make our brands more relevant, make our innovation stronger, make our innovation faster, and that is when I hit the market next year.

So our competitors are doing the same. Every major brand here is trying to compete and get back market share and bring the consumer back to the channel where we all compete. So the market will tell who wins. I don't want to comment on their plans, but we are prepared to compete effectively in the very beginning of the year and going forward for the entire duration both online and offline. So let's see what happens.

Tom Radionov

Okay. Helpful color. Appreciate that. And I wanted to go back to the liquidity question, so clearly to the extent Q3s peak depending on how Q4 goes, you probably generate some level of cash, but nonetheless I'm kind of curious when you guys think about the transition process here over the next I guess three, four or five quarters as you are repositioning the portfolio more likely not you probably burn some modest cash.

As you think about that like what's your perspective on actually either increasing the size of the revolver or maybe getting some incremental security that just to kind of bridge it to presumably 2019 to 2021 when hopefully all of these initiatives are going to be behind you and you would be in a better position, but between now and then presumably you probably need some incremental cash on the balance sheet.

Christopher Peterson

Yes. Our view is that we don't think we need incremental cash on the balance sheet, so one of the things that's going on that maybe we haven't or that we've talked a little bit about is that one of the choices that the company made which I think is a good choice is to accelerate the work on the Elizabeth Arden cost synergies. So when the deal was originally put together, the target was for $140 million of cost synergies. As we got into it, we saw an opportunity to go for more cost synergies and to accelerate the achievement of those costs energies, but in order to do that it required greater near-term investment.

And so part of what you're seeing now is a heavier investment that we're making this year in terms of getting those synergies. As we move to next year, we expect the synergies to be significantly bigger next year than this year. And the investment to get those synergies should start to come down. And so you'll have the integration impact which should be a cash help next year versus this year coupled with the transformation agenda that we're working on. And so I think that's what gives us comfort that we're in a good position from a liquidity standpoint at the current time.

Tom Radionov

Got it. And last question, as you think about next year, I'm not really sure when the conversations with your retail partners, regarding their plan at ramps for next year take place, but I'm guessing it's probably happening now or it's going to be happening soon. Just curious when you think about your shelf space currently versus your sort of parts on where that maybe next year? Are you getting any an indication, have you already had these conversations or these conversations that are going to happen in some point in the future?

And also totally unrelated to this, but I think it's an important question for on the call. As far as Investor Relations, I just kind of curious how you guys think about, putting someone in that, in that role going forward. So we have the ability to speak with someone and appreciate the answer some of these questions. Thank you very much.

Fabian Garcia

I'll take the first one and Chris will take the second. So we have had those conversations with the retailers who is part of the discussion agenda when we went to visit them or usually there was appearing in the first quarter where negotiated much earlier this year and they pace at which some of our key retailers are changing their fix versus much faster now. So the conversations are not in the prefix as you before.

So we're getting more space for the most by the changes customer-by-customer and we're very focused in making sure those who are supporting our brand are going to get a lot of our support. So we are going to start to roll that out in the first quarter of next year and the conversations continue because we want to have our new roles in more stores in North America and around the world according, as to Investors Relations, Chris…?

Christopher Peterson

Yes, as to Investor Relations, our philosophy is that we want to be transparent with regard to where the company is and we have a very strong focus on ensuring that we have the adequate and proper disclosure as required for the investment community. So let me start by saying that. We're working through filling the Investor Relations position and more to come on that. We can talk at the next call.

Tom Radionov

Okay, thank you very much again, appreciated.

Fabian Garcia

Thank you, Tom.

Operator

Okay, we have no further questions coming through. So I'll hand back over to Fabian for any concluding remarks.

Fabian Garcia

Thank you, Courtney. Thank you all for joining the call today and for your questions and for your interest in our business, and special thanks to our teams around the world for their perseverance, especially at this time and their continued support for the future of the Company and I want to wish everybody happy holidays for you when we disclose the fourth quarter.

Operator

Ladies and gentlemen, thank you for joining today's call and you may now replace your handset.