Revlon Inc (REV) 2017 Q3 法說會逐字稿

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 with me this morning are: Fabian Garcia, President and Chief Executive Officer; and Chris Peterson, Chief Operating Officer and Chief Financial Officer.

The discussion this morning might include forward-looking statements that are based on current expectations and are provided pursuant to the Private Securities Litigation Reform Act of 1995. Information on factors that could affect actual results and cause them to differ materially from such forward-looking statements is set forth in the company's SEC filings, including 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 Laws.

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 present the GAAP and non-GAAP results, as if Revlon and Elizabeth Arden were a combined company for all of 2016. From a segment view, all of Elizabeth Arden's operating results have been included in the Elizabeth Arden segment.

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

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

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

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 retailer, 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 demonstrate vitality with net sales growth plus 5% pro forma XFX 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 brand 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 underdeveloped, representing less than 5% of total company sales. This past quarter, we completed a test implementing best-in-class A+ content on Amazon across several Revlon color cosmetics SKUs. The content helps inform consumers about the product and provides facts, visuals and consumer ratings to stimulate purchase intent. The results to date are outstanding, and have produced a high double-digit sales lift over the prior measured period for all of the SKUs involved.

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

Turning now to the Elizabeth Arden integration synergies. We remain on target to deliver $190 million over the next several years, an increase over the $140 million originally estimated at the time of the deal 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 transitions to co-locations in 11 cities around the world. The remainder of our 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.

Given 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 restore sustainable profitable growth.

For most of last year, we were laser focused on ensuring the successful integration of Elizabeth Arden and the realization and acceleration of the synergies and the tangible value they represent for the newly combined companies. As I have just detailed, we have made great progress in this area and are exceeding original expectations. In January, after implementing a new brand-focused organizational structure, we began to have a clearer understanding of our brand's performance within our reporting segments and the challenges and opportunities at hand. We also recognized the need to improve our skill set and the expertise required to win in an increasingly digital beauty landscape.

In the spring, when we had the 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 natives joined our New York headquarters focused on 3 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 e-retailer sites and drive increased revenue across channels. The project creates and implements more engaging content for all e-retailers. The initial rollout encompasses more than 100 products from Revlon, Elizabeth Arden and Almay, and includes new brand initiatives designed for online purchase.

The second work stream is aimed at improving our consumer engagement across social media platforms and further developing our influencer and community management strategy and practice.

The third work stream is focused on ensuring we have the right technologies and data solutions to enable efficient management of our digital properties and functionality globally. This includes content, digital assets, customer relationship and social management systems 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 of 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 are 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 revealed its new campaign, Reveal The True You with actress, screenwriter and producer Rashida Jones in a new role as Almay Insider. Consumers can begin to experience the brand in it's 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 East 86th Street.

You may have also seen a new digital campaign for Elizabeth Arden, which launched 2 weeks ago in YouTube and Facebook featuring Reese Witherspoon as Storyteller-in-Chief. The 4 video segments tell the story of the brand's founder, one of a powerful and crusading woman and the parallels between Ms. Witherspoon, a celebrated entrepreneur, change agent and champion of women and Ms. Elizabeth Arden. The new digital campaign will also be featured on Reese's and the brand's social platforms.

Finally, and as mentioned before, you can also expect to see a bold new campaign for Revlon debuting in January, which aims to recapture the brand's iconic ownership of color and beauty leadership and modernize its women's 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 4 quarters, we have focused on transforming the company and building a strategic foundation and capability that will enable us to achieve our vision of becoming a top 10 global beauty company capable of competing effectively in the new digital economy. The road to growth is full of bumps, but the destination remains clear and attractive. I look forward to sharing with you in the future quarters the results of these initiatives. Chris?

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 4 macro trends that are disrupting the beauty industry.

First, consumers are increasingly choosing to engage with brands online through influencers, 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 to 24 months to as short as 6 months for some categories.

And fourth, beauty consumers now have a variety of immersive ways to experience the brands they love in specialty beauty retailers, via subscription services delivered to their home or through mobile beauty services wherever 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 detailed for you the multimillion 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 3 fast-track innovation tests for Revlon, Almay and Elizabeth Arden. Each of these will be developed within 9 months from concept to purchase. And we have forged 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 and 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 nonoperating costs, primarily acquisition-related, during the third quarter.

Adjusted EBITDA of $54 million decreased by 48.9% compared to pro forma adjusted EBITDA in 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 and 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 in consumption, inventory de-stocking 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 an 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 brands 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 9 months of 2017 as compared to the same period of 2016. Elizabeth Arden segment profit was $32 million in Q3, representing a 21% decline on a pro forma basis and 31% sales growth on a pro forma XFX basis during the first 9 months of 2017 as compared to the same period in 2016. Elizabeth Arden segment profit was $32 million in Q3 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 relaxation 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-year 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 an as reported and XFX decrease of approximately 20% and 22%, respectively, primarily resulting from 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 in 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 $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 September 30, 2017, we had drawn $244 million on the company's revolving credit facility, and had approximately $200 million of liquidity, 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 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 turn around the company's financial performance and return it to sustainable growth.

We will now open up the call to questions.

(Operator Instructions) Our first question comes in from the line of Grant Jordan calling from Wells Fargo.

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

Sure. So the U.S. business has higher margins than the international business, driven by a couple of different factors. Number one are 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 than the U.S. business. That being said, we believe the 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.

Would that primarily be through scale, or it's through changes with how you go-to-market?

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

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

I would suggest that we wait for the first quarter to see the national rollout will be in Ulta and in other retailers.

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

It is.

It is a (inaudible) rollout, yes. So if you go to the store on 86th Street and 3rd Avenue, with the Ulta store that just opened, we have the new Revlon and Ulta displays that are backlit up, and you can see them in that store, which I think it's 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 Fabian said.

Okay. And then my last question, it was just trying to think about the U.S. consumer business. Like obviously it's a channel that has been under a lot of pressure. Are you concerned? Like how do you -- I guess, my concern is that as that channel's 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.

Yes. Obviously, we have seen some of that this year, and we are electing not to play in that excessive 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 are taking steps to enhance the consumer experience and give consumers a better access to testers, better access to innovation, better access to new products that are only found in this channel. So in a way, playing the playbook of the more premium specialty beauty retailers. We just completed, Chris and I, with our top local management in the U.S. a visit to our top 10 customers in the 3 channels where we compete. And we are quite encouraged to see the reactions and their openness to try new things, be able to give us more space, to try merchandising solutions in the different categories. So if you go to some of the more famous of our 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 in which they are acting. I don't think everything is lost in the mass channel.

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

When you guys look at the inventory de-stocking that you had, was that -- is that inventory de-stocking done and completed and behind you? And kind of where is that share growing? Are retailers kind of scaling back or are there new brands taking that space? And how should we think about the presence in retail?

Yes, so it's -- the inventory de-stocking is not related to space losses. What's happened in the inventory de-stocking is as the category has declined, inventories -- or 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 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.

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

So most of the return pressure was related to a 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.

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

That's right.

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 multiyear process? This is not something that you guys can kind of turn on a dime here to grow e-commerce, but this is going to take 6, 9, 12 months and beyond?

I would say 2 things. So yes, this is a multi-year process to complete all of the steps of the transformation agenda. That being said, it's not -- 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's sales, but we're starting to see positive traction and accelerating traction as we get in to some of these initiatives.

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 sense of urgency. The good news about online is that it responds quickly to what you do. So I think we need to be prepared for bumps in the road but we need to be steadfast 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 of a strategy that is clearly defined. So it will take some time, it will be multi-year but as I said, the destination is very attractive.

The next question comes in from the line of Steph calling from Jefferies.

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

I prefer not to give you these 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 a one-way communication to consumers with creating that user-generated content that micro influencers will write about when they love the products you have. The 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 these will change. And I would also add that we will be flexible because if we were to start the year, and I'm going to make this up, with a 30% allocation of brand support on traditional media, and we were to find out the one of our programs is working really hard for us in any category or in any brands, in any social media platform, we will have the flexibility to double down on that activity. So it is very difficult to predict on a formulaic basis what is the right balance for any given of our brands.

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 per linear foot is in your bricks-and-mortar partners? How close are you to equalizing some of the inventory in the trade relative to the sell-through cadence?

We've had, as Fabian mentioned, top to top customer readings with our top 10 customers. We're excited about the Almay relaunch, where broadly our space is holding or we're gaining 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.

Okay. And then 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?

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 Elizabeth Arden.com. It's the business that we sell through e-retailers and it's the business that we sell through e-retail platforms. So when you look at that -- those 3 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.

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

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

Looks like on the display spend, is that mostly for Ulta or is it for Almay or a little bit of both? And should we expect it just to remain in that $70 million-plus level going forward?

Yes, so 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 a combination of those 2 things that has it a little bit elevated in the current year. I -- it's hard to say. We haven't given guidance for next year with regard to where we are, but those are the 2 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. And 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 funded it across a significant part of the portfolio.

And for next year, as Chris has indicated, we're in the process of doing budget. But given the data that we have and the conversations we've had with our customers, expect to see the new walls beyond a couple of large retailers. We are going to expand these walls 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 that the enhancement of the consumer experience by the brick-and-mortal 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.

Okay. And both Almay and Ulta then are 1Q rollouts, is that right?

Correct.

Okay. And then on a -- 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 the interest or the debt?

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 the way to bringing the money back from a tax perspective.

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

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

Okay. And then you've got a big transformation agenda. Do you have the liquidity within your current capital structure to address that? 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?

So the way would I describe the liquidity is 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 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 foresee any need to go-to-market and do anything differently.

Okay, great. And then on the synergies, you 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?

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 insourcing, logistics and distribution center consolidation, et cetera. I believe that of the synergies that we're targeting this year, about 75% are SG&A-related and 25% are cost of goods. And that will flip as we go into next year, and cost of goods will become a bigger portion.

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

First, on the return that you mentioned, the Revlon one-time replacement product. How much was that hit to gross margin in the quarter?

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.

Is there any additional color you can give, just given that it's onetime?

Well, I guess what I would say is I think we called out 3 primary factors of which this was one, and they were all kind of in the same range.

And then just on the CapEx that you gave, I know you're not giving guidance for '18. But $50 million of that CapEx this year was for the integration of Arden, right, so that shouldn't repeat in '18, correct?

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 less next year of integration capital versus this year.

And then just lastly, as look at the cost structure here, obviously, given the decline in sales, are you -- is there -- what's the ability here to kind of take out SG&A? Are you guys looking at opportunities to reduce SG&A here and kind of look at -- take down the cost structure?

We are. And that's focused on a variety of different areas, including the Elizabeth Arden integration, which is, as I mentioned, majority of the $55 million to $60 million of cost synergies in the current year are related to SG&A. But we're not stopping just by looking and 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.

To contextualize that remark, Colleen, also we have to bear in mind that we're building capabilities, new capabilities, new skill sets, becoming more fit in this digital economy. So the allocation of resources between SG&A and innovation would change as well as brand support. So what we believe is there is, I'm going to call it a complete relook at the shape of the P&L. So that they can allocate our resources, will then make us more competitive digitally. And that will have repercussions in the SG&A and the brand support.

The next question comes in from the line of Mary Gilbert calling from Imperial Capital.

I wonder if you could give us the roadmap on how we should look at the trajectory since we are talking about a multiyear plan. And looking at this quarter, would you say 1/3 of the decline in EBITDA, and this may be incorrect, that's why I want to get a confirmation, 1/3 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, the Ulta initiative. So I wanted to kind of see how we look at the trajectory of improvement, where next year going against some very easy comparisons and with some of the initiatives 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?

Yes. Mary, we're not going to give you the number. But we look at it with cautious optimism because every element you have mentioned is in place. These things are happening, and we're seeing progress in -- as Chris put it early green shoots in our transformation. So we don't want to give overly optimistic guidance because we recognize that we have not delivered the quarter. But the want to let the facts do the talking as we go forward. But we look at the trajectory with optimism.

And if you were to look at the building blocks, I think you've mentioned the right ones. We feel the positive building blocks that we expect are 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 in brick-and-mortar retail, which is primarily affecting the U.S. market.

Right, which is the more profitable side. So that's why I was trying to figure out the puts and takes and would we actually get 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 side, of course, it makes all the sense in the world. But as you pointed out, it's 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?

I think digital can move quickly. And I think that digital is also very profitable for us. And in fact, in many cases, we expect digital to 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.

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?

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.

So Mary, just a small clarification. Not all of our top 10 customers are mass. So I just want to be sure this is properly characterized.

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?

As I'm -- 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.

So our next question comes in from the line of [Tom Radionoff] calling from Core Partners.

I wanted to ask you, so obviously you are relaunching Almay, which is helpful. But CoverGirl, so Coty is talking 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 the fact that L'Oreal appears to be doing well and kind of taking some market share. What are your thoughts in terms of how you're looking at that core piece of the business going into next year? And what sort of investments you need to make to position yourselves accordingly?

First of all, we are not only relaunching Almay. We outlined some of the activity on our major brands, Revlon, of course, and on Elizabeth Arden. We're getting a lot of activation next year with a new campaign, the bold new campaign that I described for Revlon starting in the first quarter. We have brand-new innovations that we, obviously, cannot unveil right now. But (inaudible) is going online first, and it's going to brick-and-mortar. We feel really strong about those kind of ride-or-die products that we were talking to you about. A key retailer told us that we're 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 us, feel good because they're giving us space, more space for our brand. So there is a comprehensive work going on to make our brand more relevant, make our innovations stronger, make our innovations faster. And that is going to 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 channels 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 off-line. So let's see what happens.

Okay. Helpful color, appreciate that. And I wanted to go back to the liquidity question. So clearly, to the extent of Q3 is peak depending on how Q4 goes, you probably generate some level of cash. But nonetheless come I'm kind of curious, when you guys think about the transition process here over the next I guess, 3, 4, 5 quarters as you're repositioning the portfolio, more likely than that you probably burn some amount of cash. As you think about that, what's your perspective on actually either increasing the size of the revolver or maybe getting some incremental secured debt just to kind of bridge you to presumably 2019, 2020 when hopefully all of these initiatives are going to be behind you and you'll be in a better position? But between now and then presumably you probably need some incremental cash on the balance sheet.

Yes. I don't think we -- 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 cost synergies. 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.

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 planograms 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 thoughts on that maybe next year, are you getting any indications? Have you already had these conversations? Or are these conversations that are going to happen at some point in the future? And also totally unrelated to this but I think it's an important question for everyone on the call. As far as Investor Relations, I'm just kind of curious how you guys think about putting someone in that role going forward so we have the ability to speak with someone. And I appreciate the answers to all these questions.

I'll take the first one, and Chris will take the second. So we have had those conversations with our key retailers as part and parcel of the discussion agenda when we went to visit them. Obviously, the walls are appearing in the first quarter were negotiated much earlier this year. And the pace at which some of our key retailers are changing their fixtures is much faster now. So the conversations are not in the prefix (inaudible) before. So we're getting more space for the most part. It changes customer-by-customer. And we're very focused and making sure those were supporting our brand are going to get a lot of our support. So we're going to start to roll that out in the first quarter of next year and the conversations continue because we want to have better -- our new walls in more stores in North America and around the world. As to Investor Relations, Chris?

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.

We have no further questions coming through. So I'll hand it over to Fabian for any concluding remarks.

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 these times, and their continued support for the future of the company. And I want to wish everybody happy holidays and we'll see you when we disclose the fourth quarter.

Ladies and gentlemen, thank you for joining todays call and you may now replace your handsets.