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Executives

Amy Low Chasen

Sherilyn S. McCoy - Chief Executive Officer and Director

Kimberly A. Ross - Chief Financial Officer and Executive Vice President

Analysts

Christopher Ferrara - BofA Merrill Lynch, Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Joe Lachky - Wells Fargo Securities, LLC, Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

Gregory Hessler - BofA Merrill Lynch, Research Division

Javier Escalante - Consumer Edge Research, LLC

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Nik Modi - UBS Investment Bank, Research Division

Avon Products (AVP) Q4 2012 Earnings Call February 12, 2013 9:00 AM ET

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] I'll now turn the conference over to Amy Chasen, Group Vice President, Investor Relations.

Ms. Chasen, you may begin your conference.

Amy Low Chasen

Good morning, and thank you for joining us to review Avon's fourth quarter and full year results. With me today on the call are Sheri McCoy, Avon's CEO; and Kimberly Ross, our Executive Vice President and CFO.

Sheri will make some introductory comments and then Kimberly will take you through our results and provide preliminary color on our outlook. Then we'll have our usual Q&A session.

With that, I refer you to the cautionary statement in today's earnings release, as well as to our non-GAAP reconciliation, which is available on the Investor Relations section of our website. As usual on the call, we will focus on these adjusted non-GAAP financial measures.

I'll now hand the call over to Sheri.

Sherilyn S. McCoy

Thank you, Amy. Good morning. By now you've seen our press release with results for Avon's fourth quarter and 2012. As I said in the release, the business is showing early signs of stabilization, which is good. We have a lot of work ahead of us, but I'm confident that we'll continue to make progress toward the financial goals that we laid out for you in the third quarter call, achieving mid single-digit revenue growth and an adjusted low double-digit operating margin by 2016.

My remarks this morning will be brief as we look forward to seeing many of you at CAGNY next week. At CAGNY, I will provide you with more perspective on our plans to return Avon to growth. But this morning, I wanted to reflect for a moment on 2012.

I do believe we are beginning to gain traction in key areas and the organization is engaged and working hard against our priorities. Let me give you a sense of where I'm seeing progress. These fall mostly into the areas of market performance, cost management and talent development. First, we've delivered improved performance in some of our key geographic markets. In Brazil, we've strengthened the management team and they are making important improvements in the business. As I've said before, this is a very management-intensive business and it is critical that we have strong leadership teams on the ground. There is substantial work to be done to stabilize and then consistently grow Brazil. But the Avon Brazil team is making progress. They are creating locally relevant product offerings with improved marketing and merchandising, and importantly, they've made substantial progress on inventory management and have built improved processes in this area. And they continue to address service issues.

Likewise in Russia, we have a very strong team and the business is now moving in the right direction. We have a good pipeline of new products and the Avon Russia team has taken an innovative approach to enhancing the representative experience.

On the other hand, U.S. is not delivering the results we need. We continue to work through the process of redistricting and are also increasing focus on improved marketing execution. And we've taken action to reduce costs and improve efficiencies, but the business results remain weak.

While the U.S. team is working hard to address the situation, clearly this is performance that needs to be improved. As I've said before, we are committed to doing whatever it takes to fix our U.S. business, working aggressively to put an effective stabilization plan in place.

Next, in the area of cost management, we've become much more disciplined and I'm seeing improvement across the organization. Importantly, we've also made strides in inventory management and working capital. We've completed the initial actions of our $400 million cost management initiative. This included a reduction of headcount of approximately 1,500 and the closure of several facilities, including the Pasadena and Atlanta distribution centers in the United States. And we've exited 2 underperforming markets: South Korea and Vietnam.

I'm pleased to say that we completed this initial round of actions with minimal disruption to the business and we are continuing to aggressively address cost in the area of both SG&A and cost of goods sold.

As we announced in late January, we've appointed a new Senior Vice President of Supply Chain and Business Transformation, Dave Powell. In addition to managing the supply team -- supply chain, Dave will be leading business transformation efforts to ensure we hit our cost management targets and we've put in place the processes to ensure those savings are sustainable. Dave has a very strong track record of delivering results and I'm thrilled that he's joined my team. Dave joins a number of other strong additions to Avon's executive team. And all in all, I have a good management team in place with a mix of direct sales and consumer products experience. And I can't emphasize enough the importance of building strong leadership and a robust talent pipeline.

We are keeping the organization focused on stabilizing the business by growing sales, reducing costs and improving talent capabilities. We are focused on what matters most and prioritizing resources against the highest impact areas that will drive growth. We also continue to challenge the status quo and identify opportunities to simplify our business, ensuring that we maximize our resources. In this vein, we are currently evaluating strategic alternatives for Silpada.

Finally, one of the things that I'm most encouraged about is the change we are starting to see in how the organization works. We've put the representative back at the center of our business, we have a renewed focus on understanding consumers and are rebuilding our own employees' pride in product. And most important, we're beginning to act as one team with a common set of objectives and the shared purpose of restoring Avon to growth.

I'll now turn it over to Kimberly for a more detailed look at the fourth quarter and year end results. Kimberly?

Kimberly A. Ross

Thank you, Sheri. Today I'll start by providing a high level of the results for 2012 and then I will cover the quarter. As Sheri said, we are going to keep our comments focused on the results since we will be speaking with you again next week in Florida.

Sales for the year were flat in constant dollars or down 5% on a reported basis due to currency translation. Adjusted operating margin was 6.5%, down 380 basis points due to higher supply chain costs and mix, which was impacted by investments in unit-driving offers. Actions to flow excess inventories, mainly in Latin America, also had an impact. Additionally, operating margin declined due to higher overhead, investments in RVP and negative foreign exchange. Reduction in advertising partially offset these negative impacts.

We reported adjusted EPS of $0.85 per share and cash from operations of $556 million. We made solid progress on working capital management, particularly in the latter part of the year, and I'll come back to this in a bit.

With that said, let's talk about the Q4 results and then I'll also give you some color on how we're thinking about 2013. During the quarter, we made some overall progress, but we still have a lot of work to do to ensure the progress we've made is sustainable and to continue to drive recovery in some key markets, most notably the U.S. Our constant dollar revenue was up 1% for the quarter. On a reported basis, sales were down 1%, impacted by currency.

Positive growth in Latin America and Europe offset weakness in North America and Asia. Units rose 2%, driven mostly by Latin America, in line with our strategy to grow units and regain market share. Europe also posted growth, benefiting from our focus on unit-driving offers across all price tiers in that region. Price mix was down 1% in the quarter due to lower Beauty sales in North America and focus on unit-driving offers. These items were partially offset by price increases in inflationary markets in Latin America.

Active Representatives were up 1%, largely driven by increases in Latin America due to strong additions in Brazil. North America continued to decline double digits due to lingering disruption from the redistricting.

Adjusted gross margin was down 130 basis points to 59.9%, largely due to unfavorable mix. This reflects the flowing of more unit-driving offers in several key markets and actions to flow excess inventory, mainly in Brazil. Adjusted operating margin was down 20 basis points to 9.2% in the quarter. We were able to partially offset the gross margin decline with better expense control. Net brochure costs were down in every region except Asia. Overhead as a percentage of revenue and legal expenses were also down. Adjusted EPS was $0.30 per share compared to $0.39 a year ago. With that said, let me move to the regional discussion.

Starting with Latin America. Sales rose 7% in constant dollars, driven by increases in Active Representatives and units. Brazil constant dollar sales were up 10% with Active Representative growth of 9%, benefiting from continued appointment growth. Beauty was up nicely driven by new products' success including Christmas gift sets, Color Trends, Blue Rush Paradise and our continuing effort to drive trial and consumption of Avon Care. The strong unit growth I mentioned earlier was the result of the strategy to grow units and improve market share as well as offers to flow excess inventory. We saw strong results in Fashion and Home as we benefited from improved merchandising and the price adjustments we took in quarter 2.

While we are encouraged by the progress we made in Q4, Brazil's results are still being pressured by service challenges and competition. We will continue to focus in 2013 on improving service and strengthening brand health by delivering a stronger, more relevant product portfolio. Continuing to drive the Brazil recovery remains a key priority for our team.

Growth in Mexico continues, but at a lower rate than in recent quarters. The 4% constant dollar growth was driven by strong Representative additions, though we continue to work on improving retention. One example is a new incentive program we recently launched to build retention by providing insurance to Representatives who have achieved certain goals. This will only be available while they remain active and we expect this to help improve retention rates over time.

I'd also mention that in Mexico we are seeing some slowing in GDP growth and retail growth in general, which could have some impact on results in 2013. We also expect a softer Q1 in Mexico, as early signs indicate we missed the mark on some of our merchandising decisions in recent brochures. We believe that this has now been fixed and should not be an issue in future campaigns. In addition, the timing of the Easter holiday in 2013 versus 2012 will reduce delivery days at the end of the quarter, leading to a weaker result in quarter 1 in Mexico.

Venezuela was up 2% in both reported and constant dollars as growth slowed significantly. The growth was driven by pricing as both Representative growth and units were down. The economic and political turmoil remain high, impacting consumer confidence, which is resulting in reduced activity. I'll come back and further discuss Venezuela in a bit.

Argentina, revenue was up, primarily driven by pricing to keep up with inflation, but the underlying orders and units are soft due to the economic challenges in that market. GDP growth is slowing, there is a high inflation and we are seeing import and price controls. And the local currency is devaluing as well, but we are cautious on the outlook for Argentina.

Latin America adjusted operating margin was 10.8%, up 50 basis points, largely due to lower net brochure costs and improved bad debt. Distribution expenses also improved due to the elimination of the dual distribution cost last year. Gross margin was impacted by the net effect of price mix, partially due to the planned flow of excess inventory in the quarter, as well as foreign exchange. Operating margin was also negatively impacted by higher RVP.

In terms of the outlook for Latin America, we feel good about early signs of progress in Brazil. With that said, we expect quarter 1 growth to slow, partly due to the timing of Easter. In addition, we are watching Mexico closely, given some of the recent slowing, as well as Easter timing, which impacts Mexico more than other Latin American markets.

Moving to Europe. Sales rose 2% in constant dollars driven by 5% unit growth as a result of flowing unit-driving offers across all price tiers as well as an increase in Active Representatives. Active Representatives rose about 1% and average order was up 1%. U.K. sales declined 2% in constant dollars. The sales decline was due to lower Active Representative count. Average order was up, benefiting from the success of AF-33 as well as Christmas offerings. However, we expect Q1 results to be softer as we continue to work through our executional challenges.

Russia sales rose 3% in constant dollars due to better unit growth driven by the flow of unit-driving offers across all price tiers and an increase in Active Representatives in that market. We saw good progress in growing our Fashion and Home category due to the success of seasonal brochures. In addition, we had success with our new higher-end Luxe Color line, which was developed specifically for the Russian consumer and appears to be resonating well.

Turkey sales declined 1% in constant dollars due to lower average order. Our execution in this market remains very volatile and we continue to work to identify the key problem areas.

South Africa sales continues to grow, rising 8% in constant dollars in the quarter, driven by a strong average order. We believe we have now found the right balance in managing our order growth, along with the right level of credit risk. However, comparisons are more difficult in quarter 1 given that the change in credit terms didn't take place until second quarter last year.

Adjusted operating margin in Europe was 14.5%, down 100 basis points due to lower gross margin brought by negative mix due to planned investment in unit-driving offers. This decline was partially offset by improved bad debt and net brochure costs, primarily in Russia. Looking ahead, we expect current trends to continue in Europe.

Turning to North America. The region remains challenging and reported a 12% sales decline. Active Representative count remains soft as we continue to experience disruption from the redistricting. Average order was up 1%, which is a decline from recent quarters. The weakening was due to softness in our new product launches, as well as poor reception to our current year Christmas offerings compared with a stronger offer last year.

Additionally, sales at Silpada were down 18% due to lower average order and a decline in Active Representatives.

Adjusted North America operating margin was 5.2%, up 160 basis points due to lower overhead expenses primarily from lower compensation costs related to the redistricting initiative. We also had lower advertising. Additionally, gross margin was up due to improvements in Silpada, resulting from the lower price of silver and more positive product mix. Increases in RVP were an offset.

In the near term, trends in North America are likely to remain soft as we won't lap the redistricting changes until quarter 3. We have a new recruiting and retention campaign in place this quarter to stimulate recruitment, coupled with a focus on retention, but there is still more work to be done. In addition to the redistricting benefits taking longer than we expected, we need to improve our marketing and merchandising execution. We have recently made changes to our marketing team in the U.S., but it will take time to witness improvements in this area.

Fixing North America remains a key priority. As we've said in the past, this is a complex business and it will take time to fix, but we are committed to taking whatever steps are necessary to return the U.S. market to health.

In Asia, sales declined 6% on a constant dollar basis due to continued weakness in China. We continue our focus on independently-owned retail locations, Beauty boutiques, in China.

The Philippines was up 2% on a constant dollar basis due to growth in Active Representatives and average order. This growth is slower than in recent periods, in part due to the tightening of our credit policies in this market. We have some work to do to strike the right balance in this area over the next several months.

Some of our other markets were weaker as well, including Australia, Malaysia and Taiwan, though India and Thailand reported strong double-digit growth.

Adjusted operating margin was 8.8% in Asia, down 80 basis points. This was largely due to weaker gross margin, which was caused mainly by unfavorable net impact of pricing and mix due to the flow of excess inventory, as well as foreign exchange.

Now I'll take you through 4 adjustments we had to our GAAP results in the quarter. The first is Silpada. As a result of the weaker-than-expected performance in quarter 4 and corresponding lowering of our long-term estimated growth, we have taken a non-cash impairment charge in the quarter of $209 million. As Sheri said earlier, we are evaluating our strategic alternatives for Silpada.

Secondly, we had charges associated with our cost savings initiative. We recorded total cost to implement restructuring in the quarter of $58 million, primarily related to our most recent cost savings initiatives.

Third, in quarter 4, we have recorded a benefit of $24 million in Venezuela, relating to the release of a provision associated with the excess cost of acquiring U.S. dollars at the regulated market rate as compared to the official exchange rate. This provision was released as a result of capitalizing the associated intercompany liabilities.

Lastly, in addition to the above items, during the fourth quarter of 2012, we determined that we may need to repatriate offshore cash to meet our domestic funding requirements. As a result, we recorded an increase to the provision for income taxes of $168 million. All of the above items, except for the restructuring charges, are non-cash items.

Moving to cash flow. Cash from operations for the quarter was $337 million, down $72 million from last year, primarily as a result of lower net income, partially offset by improvements in working capital. Cash from operations for the year was $556 million, down $100 million from last year, primarily as a result of lower net income and higher payments associated with CTI restructuring initiatives. This has been partially offset by working capital improvements as well as lower contributions to the U.S. pension plans and a payment in 2012 associated with a long-term incentive compensation plan.

Working capital improved by 12 operational days, with improvements in all regions. Inventory was the key driver as we continue to make solid progress and ended the year down 9 days on an operational basis due to process improvement and flowing of excess inventory. In addition, we had a timing benefit of about 3 days, which will reverse in quarter 1.

In short, we made progress in the year on working capital and we are working on further initiatives for continuous improvement and to ensure that we sustain the progress we experienced this year.

Moving to the capital structure. This has been a key area of focus for me. Let me start by saying we are currently in compliance with our financial covenants at year end. In the fourth quarter, with the support of our relationship banks, we successfully negotiated an amendment to our $1 billion syndicated facility to allow exclusions for certain non-cash items, such as the devaluation of the Venezuelan currency and the non-cash impairment of Silpada in China. It also allows an exclusion for up to $400 million of cash charges for items related to restructuring and settlement of legal matters.

However, the process of renegotiating with our private placement note holders has taken longer than we would have liked, and it has not been constructive. Consequently, we have notified the holders of our decision to redeem the notes, which will require us to pay a make-whole premium of approximately $65 million, in addition to the $535 million face value of the notes. We intend to repay these notes by the end of March and we are able to fund this from our cash on hand overseas.

While we are not pleased with the outcome, we believe it is a necessary step to remove the covenant uncertainty and allow us to focus on the rest of our capital structure. The debt capital markets are healthy and we are currently in advanced constructive discussions with our bankers regarding the refinancing of our syndicated credit facility and the upcoming debt maturities. We will keep you updated as we advance the refinancing activity.

Looking forward to 2013, we remain focused on driving sales, operating profit and cash flow improvement. We are managing to a very conservative level of sales growth and we are putting measures in place to drive the necessary sustainable recovery. But we aren't going to get ahead of ourselves until we witness clear signs of sustainable improvement in key markets. And we continue to be diligent on cost, so we're expecting some margin recovery, but modest at this point.

Recall that we've stated that the measures we've taken to date are not expected to benefit results until the latter part of this year. As I've indicated in the past, in my experience, turnarounds tend to not be linear, so you may not see a straight-line recovery quarter-after-quarter in terms of the growth rate for both sales and margins.

As you saw, last Friday, the Venezuelan government announced its intention to devalue the bolivar from VEF 4.30 per U.S. dollar to VEF 6.30 per U.S. dollar. We estimate the one-time P&L impact on quarter 1 results to be approximately $50 million, primarily reflecting the write-down of net monetary assets and deferred taxes. Additionally, hyperinflationary accounting requires us to carry some nonmonetary assets, primarily inventory, at historical cost, whereas sales are reported at the devalued rate. We estimate this will have an impact of approximately $50 million in 2013, primarily in the first half of the year.

As we've done in the past, both of these items will be adjusted for the purpose of our adjusted non-GAAP results. In addition, had the devaluation happened at the beginning of 2012, we would have had an approximate 2% impact on both revenue and adjusted operating profit, assuming no mitigating factors such as price increases.

On cash flow, we continue to focus on driving improvement, especially in the area of working capital, and as I've previously indicated, sustainability is just as important as generating results in any given quarter.

With that said, I look forward to seeing you next week at CAGNY. And now I'll turn this back to Sheri for a few closing remarks.

Sherilyn S. McCoy

Thank you, Kimberly. As you've heard from Kimberly, we have a number of complex issues that we're dealing with to move the business forward. Today, we have early signs of stabilization in some key market, a strong management team in place and a disciplined approach to cost and cash management. We have a lot of work to do, and as we move forward into 2013, there are likely to be a few bumps along the way. But with that said, I'm confident that we're in a good position to continue making progress toward our goals.

I look forward to seeing you at CAGNY next week, and we'll now open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Chris Ferrara.

Christopher Ferrara - BofA Merrill Lynch, Research Division

It's Bank of America. Can you guys talk a little bit more, I guess, about the negotiation process with the private placements and the decision to repatriate the cash? And I guess can you talk a little about what the implication is for credit costs going forward?

Kimberly A. Ross

Yes. So this is Kimberly. I guess let's start with the repatriation of the cash. So under the accounting rules of APB 23, and I promise not to go very technical here, but every year management needs to assert if earnings will remain permanently reinvested abroad or not. Due to the potential need for cash in the U.S., we were no longer able to continue to assert that the earnings would continue to be reinvested abroad, and thus we took the charge for $168 million that is a non-cash charge. That then allows us to be able to bring cash back when we need cash, and however much we might need, of those balances that are abroad, which will allow us to be able to meet any potential obligations that we have here in the U.S. So I think the key thing for us, as I said before, is we need it to move forward, we were not having constructive discussions despite the fact that we put very different -- we put different proposals on the table to the note holders. But ultimately, we just need to move the uncertainty and move forward with getting our refinancings in place. And so we're in very active dialogue at this point in time. And I can't give you all the details of that, but we're looking forward to being able to say more in the near future on it.

Operator

Your next question comes from Lauren Lieberman.

Lauren R. Lieberman - Barclays Capital, Research Division

It's Barclays. I was just curious, you guys mentioned sort of an "innovative approach" to the Representative experience in Russia. Could you just talk a little bit of about what you're doing there that's different?

Sherilyn S. McCoy

Sure, Lauren. This is Sheri. The Russian team really came in and started looking at what the local consumer insights were, as well as starting to work closely with Representatives. They have gone digital, as it relates to the brochure. And online, they've done a terrific job on the social media front, where they have Facebook pages for their Representatives. They've used Google in terms of people being able to find Representatives. And then they've worked hard to look at their Sales Leadership model and making sure that it was easy for people to advance from a title standpoint. So they've really taken an integrated approach and I really -- I would say contemporized to the approach to going to market. So we've been very impressed with what they've been able to do and we're sharing those learnings with other markets.

Lauren R. Lieberman - Barclays Capital, Research Division

How long have they been at that? Because I think, I'm just curious how long it took to kind of get there on this -- in this sort of updating of and getting onto social media and online?

Sherilyn S. McCoy

They've started working on this and they've typically been a little more advanced on online than some of our other markets. But they really took a hard look at it beginning in first quarter -- first, second quarter of last year and also brought in some new marketing capabilities into their markets, so very locally oriented. And that's where they started focusing on local product offerings as well as the digital approach. So I would say several months.

Operator

Your next question comes from the line of Bill Schmitz.

William Schmitz - Deutsche Bank AG, Research Division

U.S. Deutsche Bank. Can you talk about just like the interaction between gross margin and inventory, so this sort of unit focus, which I agree with, how much of that is just cleaning up a lot of the legacy inventory that's in the system before you kind of work on price realization? And how much of it is like the real sort of ongoing strategic direction? And then could you actually say what the gross margin would've been if you didn't sort of flow some of the stuff through or is that just too hard to calculate? And then I have a follow-up.

Sherilyn S. McCoy

Yes, Bill, the impact on the gross margin from the flowing of excess inventory is about 60 basis points. And to your comment about strategy, it -- really looking at how we have offerings at all price tiers, so if we look at math and we look at the value area, we look at core math and upper math. Our focus needs to be that we are getting people in at the lower levels, so we have to have units at that level, but certainly we see the opportunity to trade up, particularly in some of our categories.

William Schmitz - Deutsche Bank AG, Research Division

Okay. And would you -- how would you describe the inventory situation now? And I do have a follow-up, I promise. Like, are you happy with the inventory levels or there's still a lot of work to be done to get some of the legacy stuff out of the system?

Sherilyn S. McCoy

I think we've made really good progress during the year, Bill, in 2012. With that said, I think we still have a bit of work to do. And I think also we need to make sure that we have consistency of the processes around the globe to ensure sustainability. So a couple of things we're doing is, for example, going to rolling inventory days now versus a point in time, which will also, I think, help in the business to try to reduce down peaks and valleys in our inventory. And I think some markets have -- are more advanced with regards to really having the process in place to ensure that we're really on top of flowing the inventories on a consistent and regular basis. Also, we are revisiting the life cycle, especially on Fashion and Home inventories, and we'll be shortening that down a bit, so we'll continue to have some flow of inventories there. But I would say we're making pretty good progress since 2012 on that.

William Schmitz - Deutsche Bank AG, Research Division

Really great. And then the follow-up is if you look at the One Simple Sales Model and the redistricting in the U.S., I know you did something similar in Mexico 3 or 4 years ago and there was also kind of like a 1.5-year period of disruption. So is the U.S. implementation worse than Mexico? Why is it different? And then maybe, do you see a light at the end of the tunnel?

Sherilyn S. McCoy

Well, certainly the U.S. has had major disruption and it's a much bigger market and we had a more -- a larger impact as we looked at the number of people that were impacted, so it's taken us time to get through that. I will say that as we look at our strategy going forward, it really needs to be an integrated approach, and we've been very focused on the redistricting and the sales component of it. Our opportunity is really to shore up the brand and the marketing and merchandising, and that's where the team is really focused. So we have to get both of those working in balance. So we need to continue to work through the redistricting, and the team is very focused on that with the recruiting efforts, et cetera. But we also need to make sure that the product proposition is right. And so that's an area of focus for us moving forward.

Operator

Your next question comes from Wendy Nicholson.

Wendy Nicholson - Citigroup Inc, Research Division

From Citigroup. Just following up on the U.S. comment. First question, can you remind us how big Silpada is? So what would the U.S. results have been ex Silpada? But the bigger picture question is, within the U.S., you talked about, I think some of the new products falling short of expectations. And I guess, could you give us a sense of your confidence that you have a handle on the U.S. business? In other words, once you get through the redistricting issues, do you have a sense for what drives that business and what you want it to look like and how much money you need to throw at it to get it growing again, sort of how you feel about the business?

Sherilyn S. McCoy

Yes. I think, Wendy, it goes back to the point I was making with Bill. I think it's going to take us time while we're working through the stabilization on the field. But at the same time, it is really important to make sure that we continue to improve the brand relevance. So a lot of our effort's on digital social media, making sure we get the right marketing and merchandising. We have made a change to the marketing organization in the U.S. to get it more focused on understanding the consumer insights and making sure we're more relevant there. So that's the area that I think we need to shore up moving forward, and the area that I'm going to be very closely focused on with the U.S. team. Our new CMO who comes in, Patricia, she has also been looking at the total brand -- branding approach for the company and will be closely working with the U.S. team, because that's the area that I think we need to continue to strengthen. On Silpada, Kimberly...

Kimberly A. Ross

Yes. On Silpada, we don't normally break it down, but sales are about $155 million for that business in 2012.

Wendy Nicholson - Citigroup Inc, Research Division

Okay. And then just as a follow-up, is it fair to say, Sheri, that kind of with the state of the U.S. business, that any margin recovery for the company next year is going to be weighted to the other regions, and the U.S. probably is still an area for reinvestment and less margin recovery?

Sherilyn S. McCoy

Yes, I think the way I would look at the U.S. is really to slow the decline and really to prevent it from being a drag on the rest of the business. I'm not looking for it to contribute, but we're -- we want to slow the decline and make it less of a drag. Our focus is really on some of the developing markets in terms of the growth areas and margin improvement.

Operator

Your next question comes from Ali Dibadj.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

I'm from Bernstein. Just to follow up a little bit on the thread that a couple of questions have asked. Just, do you have any sense at all about kind of the go-forward cost to really start growing the business? Because it looks like this quarter, there's really good expense control and continued, I guess, stagnation or bottoming, depending if you're a bull or a bear, of the top line. But with what we've been hearing from Natura spending more in Brazil, for example, your own desire, appropriately so, to increase Rep incentives and branding, some of the tax rate going up, potential issues in Mexico and then, of course, kind of the U.S., parts of Asia Pacific and Europe still being tough. Do you still believe like you did 1 quarter ago that you won't actually need to spend more overall as a company going forward? And then perhaps you can also talk to us in that context about the description you made of the U.S., "whatever it takes" to fix the U.S. Do you -- like how do we ensure that there's not going to be good money thrown after bad, and does "whatever it takes" also potentially include just getting out of the U.S.?

Sherilyn S. McCoy

Yes. Certainly, I think, as we look at the opportunity for growth, I think there are a couple of things that we need to be focused on. One is optimizing our geographies and understanding the role that each of the geographies play. So certainly making sure that we're investing behind the faster-growing markets and we will continue to do that. We also know that there's an opportunity to strengthen the effect -- effectiveness of our spend. If you look at some of the decisions that we had made relative to putting money behind Representative incentives or advertising, I'm not sure that was as effective as we would like it to be. So moving forward, we need to make sure that we focus the money in the right places and focus on what matters most and make sure that it's effective. As it relates to the U.S. market, look, it's a big market in general. It's only -- if you look at North America, for us, it's about 15% of our sales. But it's important relative to the brand name, it's important to continue to support that business. And we're doing everything we can to make sure that it's successful. Again, we're very thoughtful in terms of how we're placing our resources and so we'll make sure that we're looking at the effectiveness of spend. That doesn't mean, Ali, that we're going to get everything 100% right. We're going to -- there are going to be times when we're going to be making mistakes along the way, but we're very focused on doing the right thing and building the business for the long term.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

So you don't think you have to actually increase the level of spend overall? And then, that's one question, and the follow-up really is just around the people. It sounds like you made some people moves. Where are you on that trajectory, kind of what inning, if you want to tell us, where on the trajectory of people moves?

Sherilyn S. McCoy

Sure. And I've said this, I think, repeatedly on the calls that I fundamentally believe that people drive results and that it's a very management-intensive business and we have to have the right local leaders and local teams in place. I think we've made a lot of progress in that area and we're supporting people from an internal development standpoint as well as supplementing external. And we will continue to do that moving forward. It's critically important that we do that and make sure that people have all the tools they need to continue to drive the business.

Operator

Your next question comes from Joe Lachky.

Joe Lachky - Wells Fargo Securities, LLC, Research Division

I'm with Wells Fargo. So I wanted to focus my questions on Asia Pacific. And I guess you recently announced you're exiting South Korea and Vietnam, and obviously, you sold your Japanese operations a few years ago. China is still down and it appears you're giving up on the direct sales model in that country. I guess, correct me if I'm wrong, but with the possible exception of the Philippines and India, it seems like every location is struggling. I mean, is that evidence that a direct sales model doesn't work in Asia? And do you have a growth or expansion strategy for the region?

Sherilyn S. McCoy

Sure. Asia is certainly a very important region, and you look at the macro factors in terms of growth and population, and certainly that's an area that I think has tremendous possibilities. I will say I'm disappointed with where we are relative to that in terms of our overall footprint. I think we have an opportunity to do a lot more there. If you look at competition, there are a number of very successful direct sellers and direct selling makes sense and works there. I think some of the questions and challenges we have is whether direct selling works with our model in certain markets. And so we have an opportunity to continue to focus in that area and make some decisions. We have made the decision to move away from South Korea, not because it wasn't a good direct selling market, because it is, it's just we came in late. Given the amount of investment that we needed to put behind it, it really didn't make sense and we felt that our investment would be better for other areas. But certainly, I have my sights on Asia Pacific. Right now, we're stabilizing some of our other key markets, but I think there's tremendous opportunity for us to really be more bold there and figure out in a bigger way.

Operator

Your next question comes from Connie Maneaty.

Constance Marie Maneaty - BMO Capital Markets U.S.

BMO. Just a follow-up to Joe's question, and then my question. If you were late to South Korea in direct selling and decided to pull out, is your focus now on the Beauty boutiques in China your decision that you were also late to direct selling in China as well?

Sherilyn S. McCoy

I think China is a complex situation. Obviously, a very big market. We've had some strategic shifts multiple times in that market. So kind of in retail, in direct selling, in retail. We've had challenges relative to channel conflict. The way I would explain China is really that right now we need to stabilize where we are. We've said last quarter, we are predominantly Beauty boutiques. We need to stabilize where we are, build the brand and get the brand back because it's a very brand-focused country. Once we do that, then we can talk about the future. But right now our focus is giving the Beauty boutique owners, the entrepreneurs, the tools that they need to build the business and continue to restore the brand and then determine what makes sense going forward.

Constance Marie Maneaty - BMO Capital Markets U.S.

And that leads to my -- that actually leads to the question I wanted to ask you, which is, how has Avon's brand equity fared throughout these years of disruption? I know it means different things in different countries, but how has it fared? And where do you see the challenges and opportunities for the brand?

Sherilyn S. McCoy

Sure. And you're absolutely right. It does-- it's in different places, in different parts of the world. The positive side of it is we have extremely high brand awareness. There's a lot of goodwill towards the brand and a lot of optimism that's associated with the brand. In certain areas, we haven't done a good job of making the brand relevant and contemporary, and I think we have an opportunity to do that, particularly in some of our more developed markets and so we'll be focusing on that. And we have opportunity to make sure that we continue to build the underpinnings of the brand. So making sure that the beauty, the packaging, the components all ladder up to the brand. And then as we talk about it, making it more aspirational. So one of the things that our new CMO is working on is looking at brand relevance and brand health in a more holistic way, and then we'll be working with the individual markets to improve the brand health and brand relevance.

Operator

Your next question comes from Mark Astrachan.

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

It's Stifel. Curious how the underlying assumptions for mid single-digit revenue growth long term and then the double digit operating margin expectations have evolved as you've had more time in the business? And then talk a bit, too, about where you are as far as representing -- Representative earnings potential is as well, in terms of just how you've thought about that, where need to be, where you are today.

Sherilyn S. McCoy

Sure. So as we look at the goals that we set forward, certainly from a top line perspective, if you look at where the Beauty market is projected to grow over the next 5 years, it's projected to grow about 6%. Developing markets are projected to grow about 12%, so double that. And if you look at our split of business, we're about 75% in developing markets and 25% developed, so we over index from that standpoint. And certainly, looking at some of the innovation and capabilities we have as we went through that, we felt that was reasonable. Kimberly and I spent time visiting all of our top markets to understand their growth potential as well as where they were from an operating margin perspective. And as we looked at that, coupled with building the plans from bottom-up as it relates to 2013 and some other things, we felt comfortable with that. That doesn't mean they're not aggressive goals, but those are things that we felt that were important, to put a stake in the ground, get the organization focused on that. And we're very confident that we are going to continue moving forward and delivering on our goals. As it relates to the Representative earnings, again, it varies and it's -- we're in a little bit of different places and different parts of the world. I think we have an opportunity to always make sure that we are listening to our Representatives, understanding how we make it clear for them to earn, bringing the right product portfolio in place and then making sure that the incentives allow them to earn. And so I think we have places where we've done a nice job, there are other areas where we have work. So it's a very broad question, but I think we have an opportunity to continue to focus on that. And one of the things I've talked a lot about with the organization is making sure that the Representative and the consumer is at the center. We need to make sure that we're continuing to evolve with the market and making sure -- for example, where we have digital applications or we have different ways of getting service to them. Those are things that we have to make it easy for her to earn. And we're very committed to doing that and we have a lot of work underway in the various regions to drive that piece.

Operator

Your next question comes from Greg Hessler.

Gregory Hessler - BofA Merrill Lynch, Research Division

Yes, Bank of America. I just wanted to dig deeper on the comments about the plans to take out the private placement notes. Do you -- I guess, do you plan to use the proceeds from the repatriated cash to take those notes out at the make-whole? And then my second question, the follow-up, would just be, would you ultimately plan to term out -- to basically term out those notes via some sort of refinancing? I guess I was just a little confused on your comments. What exactly you plan to refinance versus what you plan to pay down with cash on hand?

Kimberly A. Ross

I think my comment was that if we needed to, we can -- we have sufficient cash to pay down those notes, but we are in very advanced discussions with our bank groups with regards to working on refinancing, both of our credit facility as well as refinancing of upcoming maturities. So again, we'll provide you the details as we move forward. And I think the good news is that the capital markets are healthy at this point in time. And we've removed the uncertainty now by making it clear what we're doing with regards to the term notes. So all of our focus now is moving on very quickly getting refinancing in place.

Operator

Your next question comes from Javier Escalante.

Javier Escalante - Consumer Edge Research, LLC

Consumer Edge Research. I would like to -- if you can comment on Brazil and you can help us understand the impact of this flowing excess inventory by breaking out the 10% local sales growth into volume growth and pricing? Also, if you consider Q4 as to be a clear sign of sustainable improvement, given that yourself and Natura has been losing market share for 2 years and this market is growing at 18%.

Sherilyn S. McCoy

Yes. As it relates to the overall performance in Brazil, as I've said, we are happy that we're seeing signs of progress and stabilization there. Certainly, we recognize that we have a lot more work to do to gain share, but we're moving in the right direction. I think the team is very focused on the consumer proposition, the Representative earnings and improving service. As it relates to the question on inventory gross margins...

Kimberly A. Ross

Yes, I think -- it's very hard to break out exactly how much it is due to price and how much it is to mix. I mean, I internally call it mix-flation because it all kind of comes together. What I can say is obviously, there was an impact with regard to the flowing of the excess inventories, particularly in Fashion and Home. But with that said, we also saw good movement of units in Fashion and Home because we're getting the right products in the catalog and also with the price reductions that we took earlier in the year. With that said, Beauty was also up, as I've said in my speech. So we saw units up in both categories, be it Beauty and Fashion and Home. And Fashion and Home impacted both by the core catalog as well as by flowing excess inventories.

Operator

Your next question comes from Leigh Ferst.

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

I'm with Wellington Shields and I was wondering if you could give us more information on how you're going to stimulate the top line, perhaps give examples by regions or countries, where you're going to focus on the Reps, the brochures, pricing, advertising, et cetera.

Sherilyn S. McCoy

Yes. I think that -- and I'll talk a bit more about this on CAGNY. We actually have 3 focus areas as we drive top line growth. One is getting the consumer proposition right, which is making sure that we have the right product offerings and marketing approach, 360 marketing approach. The second area is making sure that it's easy for the Representatives to earn and that we are really -- we see them as a competitive advantage. They are the social connection between the brand and the consumer, so that's an area that I'll talk some about. And then the third area is optimizing our geographies and making sure that we're putting the resources against those areas that we think that we're going to drive the most growth. So those -- that gives you sort of a top line of how we're thinking about growth.

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

Can you give us examples of differences by geography?

Sherilyn S. McCoy

Well, certainly I think we have different -- so as an example, we are much more heavily skewed on -- in fragrance in Latin America than we would be in Asia Pacific, and so we will be looking at how we have local offerings of fragrance in that market. When we look at China, our focus needs to be on skincare, so there'll be different priorities there. We also have slightly different models from a sales model perspective and so we'll be evolving those differently. So it does differ by geography. I think we have the capabilities of doing that. But again, we need to make sure that we put the Representative and the consumer and have the local insights in each geography to make sure we're addressing that. And there's areas where we're very similar in markets, across markets, and there's areas where there are differences, and understanding that and making sure we put the resources appropriately is critically important.

Operator

Your next question comes from Linda Bolton-Weiser.

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

B. Riley Caris. Kimberly, can I just ask you to clarify on the cash flow? I remember some very rough guidance you gave, I think, in the very beginning of the year that operating cash flow in the year would be flattish in 2012. But I was a little confused about $100 million of unusual positives that I think you mentioned were in 2011. So can you just clarify like were there positives in 2011 that then caused this decline and so you meant it would be flat excluding those positives? And I mean, the operating cash flow level is the lowest it's been in like 10 years, so I'm just wondering how worried we should be. And I know you don't want to give guidance, but I'm hoping cash flow will grow in 2013. So can you just comment a little bit on that?

Kimberly A. Ross

Yes. Let me first start by clarifying I did not give guidance for 2012. So what I gave at that point in time was an example. And at that point, I noted that we had $100 million of pension contributions that were made in 2012 that -- in 2011, I'm sorry, that were not repeated in 2012. For this year, I think our cash generation, especially in the latter part of the year, we saw improvement in it, again, because we had improvement in working capital. I mean, working capital improved by 12 days. So I think the overall emphasis that we have internally, we did this in 2012 and make cash as part of the incentive. So I think the overall mindset internally around cash and working capital has improved and we'll continue to focus on that during 2013.

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

And can I just ask one follow-up? It has to do with a similar question that was asked about Asia and direct selling in Asia. In North America, there's not really an identifiable beauty business that is doing well in beauty direct selling in North America. Tupperware has a business. Their business is declining and actually had an operating loss in the fourth quarter. Do you have intelligence about Mary Kay and whether Mary Kay grows in the U.S.? I mean, what is it that tells us that beauty in direct selling will work in North America? And if it's not going to work, if you're going to have declines, even more moderate declines, then it seems like the cost-cutting has to be even more significant and very weighted towards North America.

Sherilyn S. McCoy

Yes. Certainly, if we look at direct selling in general, not just beauty, direct selling is growing in North America. Avon is, obviously, the big brand in North America. And with us declining, it impacts the overall. So my focus is on getting the brand so it is relevant, and making sure that we define direct selling in a new way in North America, and that's really where the energy will be focused. So it's still very committed to making a difference. With that said, we are going to continue to drive cost out at the same time, but we need to make sure that we are getting the brand relevant and continuing to work with our Representatives, who are very committed to our business, to give them the products they need to make them successful.

Operator

Your final question comes from Nik Modi.

Nik Modi - UBS Investment Bank, Research Division

UBS. I just wanted to get your perspective on advertising spend versus RVP. It looks you're able to stabilize the business but still moderating the advertising spend. So a couple of years ago, advertising spend was a big push, it didn't look like it was very effective. So I just wanted to get your early thoughts on kind of the role each plays on Avon's P&L.

Sherilyn S. McCoy

Yes. I'll talk about it from just an overall perspective. As we -- what we need to do is make sure that we are supporting our Representatives and they are ambassadors, and in some ways, they are media because they actually represent the product and the brand. At the same time, we will use advertising where it makes sense and where we have a differentiated story. I think there are a lot of vehicles that we have to actually get our brand voice out there. And word of mouth is critically important, which is the Representative. I think we can do a lot more from a digital and social media perspective and more grassroots components. Advertising, it's very expensive to do it. We need -- you need to make sure you have share of voice and we will focus it and target it. But we -- I think we have an opportunity to really improve the effectiveness of our spend. And so when I look at the buckets, in my mind, I don't necessarily break RVP and there's advertising. I look at what's going to the Representative to support her in her business and how are we continuing to build the relevance to the brand for the consumer. And I think we have a lot of opportunities to use those 2 components together to actually drive our business. And so it's not an either/or, it's looking at what's the key message and where can we be most effective to drive our business. Okay, we all set?

Kimberly A. Ross

Yes.

Sherilyn S. McCoy

All right. Well, thank you, everyone, and we look forward to seeing you in CAGNY.

Operator

This concludes today's conference call. You may now disconnect.

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