Avon Products Inc. Q4 2008 Earnings Call Transcript

Feb. 3.09 | About: Avon Products, (AVP)

Avon Products Inc. (NYSE:AVP)

Q4 2008 Earnings Call

February 3, 2009 9:00 am ET

Executives

Andrea Jung – Chairman, Chief Executive Officer

Charles W. Cramb – Chief Financial Officer

Renae Johansen – Vice President of Investor Relations

Analysts

Lauren Lieberman - Barclays Capital

Nik Modi - UBS

Wendy Nicholson - Citigroup

Chris Ferrara - Bank of America/Merrill Lynch

Alec Patterson - RCM Investment Management

Alice Longley - Buckingham Research

William Schmitz - Deutsche Bank Securities

Ali Dibadj - Sanford C. Bernstein

Linda Weiser - Caris & Company

Connie Maneaty - BMO Capital Markets

Andrew Sawyer - Goldman Sachs

Operator

Good morning. My name is [Tracy] and I will be your conference operator today. At this time I would like to welcome everyone to Avon’s fourth quarter earnings conference call. (Operator Instructions) I’ll now turn the conference over to your host Andrea Jung. Miss Jung you may begin your conference.

Andrea Jung

Thank you. Good morning everyone. Thanks for joining us to discuss Avon’s fourth quarter results. With me today are Chuck Cramb our CFO and Renae Johansen, Vice President of Investor Relations.

Since some of our remarks this morning may include forward-looking statements, I refer you to the cautionary statement in today’s news release. For today’s call I’d like to begin with just some high level comments on the quarter. Following my comments Chuck will add some additional financial perspective and then we’ll take your questions.

Following three quarters of strong performance in 2008, the worsening economic environment and the very significant negative movements in foreign exchange rates both factored in our fourth quarter results. We’re certainly not alone in dealing with volatile external headwinds. Having said that, I do feel good about the continued progress we made in the quarter to strengthen the underlying fundamentals of the business.

In general, we exited the year a stronger business than we were a year ago as we continue to manage for the long term. Active representatives in the quarter grew in every single region, Beauty grew in every single category in local currency. We also saw a number of very strong performances across our key geographies.

Certainly I’m very pleased with our healthy local currency growth in Latin America. Brazil delivered another impressive mid-teens local currency increase in the quarter on top of a large base. Growth was extremely well balanced between volume and pricing, with units up 9% and net per unit up 6%.

We also saw exceptionally strong growth in Brazil in each of our Beauty categories, led by a 37% local currency increase in the Skin Care categories. Against this broad-based strength, Brazil had annual revenues of almost $1.7 billion and an operating margin of approximately 24%. So I could not be more pleased with our results in defending share in this market over the past year.

I’m also very pleased with our stand-out results in Mexico, where we achieved double-digit local currency growth in the quarter for the first time in many years. In fact, fourth quarter was the seventh consecutive quarter of positive local currency growth as we continue to take back share in this important large market for Avon. Units in the quarter were up a very healthy 8%. We also saw exceptional strength here across our Beauty categories with 25% plus local currency sales growth in Fragrance, Color and Skin Care.

Looking at where we are today in Mexico versus where we were back in 2005, this is the story of a very successful turnaround. Our persistent, multi-year focus on rebuilding skill fundamentals, supported by investments in the representative value propositions have created a foundation for long-term, sustainable growth in this market. The prospect of sustainable growth in Mexico represents a significant, long-term opportunity for both the region and the corporation as a whole.

Another bright spot in the portfolio in the quarter was China, where revenue and local currencies grew 17%; active representatives grew 88%; the number of certified sales promoters in China is now almost 1 million and this was accomplished in just three years. We were pleased with our progress against representative activity in the quarter with the level exceeding 50% in the last month of the year. China’s results in the quarter also benefited from the record launch of our new, Rejuvenate Skin Care line as we continued to build the Anew franchise in this market.

In Western Europe where the macro headwinds worsened in the quarter we were pleased to deliver local currency growth in a tough environment. We saw solid performances in Turkey and the UK which continued to be key contributors to the region’s overall growth. The UK was able to grow active representatives 2% through an aggressive focus on recruiting programs. This included advertising and extensive publicity in newspapers across the country promoting the income benefits of becoming an Avon representative.

Turning to North America, as expected our performance in this region reflected the worsening economic crisis. Mirroring the general retail environment we saw a significantly greater decline in Non-Beauty than we did in Beauty. Active representatives in the quarter increased 1%. The team in North America is moving aggressively with a full plate of initiatives. These include stepped-up recruiting programs given the high unemployment levels. In fact you may have seen our recruiting ad this past Sunday leading into the Super Bowl.

We are also aggressively merchandising our Smart Value product offerings and I’ll talk a little bit more about this in a moment. That said, the outlook for North America remains difficult for 2009.

In Central and Eastern Europe the macro-environment shifted dramatically in the back half of the quarter leading to a 3% local currency revenue decline. As you know, over the past year we’ve increased the flow of mass premium products in this region as part of a very successful strategy to trade consumers up to higher priced offerings. With the unexpected degree of consumer contraction starting in November, our offer was not optimally balanced for the sudden economic shift.

The good news is that the team in Central and Eastern Europe has adjusted rapidly, and beginning with our March brochures we’ve shifted the mix to more entry price points to address new consumer realities. So that’s a perspective on our geographic performance.

Let me talk about some of the key operating indicators for the fourth quarter. After several years of strategic focus on innovation and brand image, I was pleased that the pricing actions we took in the quarter helped drive a 5% increase in net per unit more than offsetting a 3% unit decline. We continue to be confident in our pricing opportunities for 2009, particularly for our Skin Care and Fragrance innovations. Given the current environment, our response is to re-balance our price point mix.

We are fortunate that our model allows us flexibility to react quickly. Avon has a well balanced range at all price tiers and full control to reset the store, so to speak. This is one of our advantages in this current environment and one of our key priorities for 2009.

In terms of active representatives for the quarter, our broad based gains were fueled by a very strong recruiting engine with total additions up 14%. Growth in additions benefited from the continuing global rollout of sales leadership. We also sharpened our recruiting advertising to call out the relevance of Avon’s income generating opportunity in these challenging times.

However, the magnitude and speed of the consumer contraction pressured activity, particularly in Central and Eastern Europe. Overall, active representatives in the quarter were up 4%. Here again the strategy to bring more consumers to our store with strong door openers should benefit representatives’ activities.

Turning to our overall Beauty performance in a pressured consumer environment we were very pleased that a 2% decline in volume was offset by a 6% increase in net per unit as we successfully captured pricing on key innovations. Fourth quarter capped off another full year of strong Beauty growth for the company. Beauty revenue for full year 2008 was up 10% or 7% in local currency, reflecting strong growth in what we believe will be market share gains across the portfolio.

Category by category, full year revenue for Color grew 11% or 8% in local currency. This was on top of healthy growth in 2007 so we saw strength on strength as we continued to elevate innovation and enhance our image. Fragrance was also up a strong 9% or 8% in local currency for the full year with alliances and endorsements remaining a strategic pillar in this category.

We’ve been particularly pleased with the performance of both our Bond Girl and Ungaro fragrances which delivered combined revenues of $100 million in the fourth quarter alone, and that includes significant negative impact from currency.

In Skin Care, revenue increased 10% for the full year or 5% in local currency. We finished the year on an even stronger note with a double-digit local currency increase in fourth quarter as we continued to strengthen our flagship and new brands with the major launch of Rejuvenate.

In Personal Care, full year revenues increased 8% or 5% in local currency on the strength of improved merchandising. Personal Care will be an important category for us, particularly in 2009 given the broad range of value offerings in this segment.

So those are some of my thoughts as we finish out 2008. The story of the year is a tale of two chapters, a very strong first half and a tougher finish, but overall we feel good about our full year performance. This was the third year of solid strategic progress against our multi-year turnaround plan, despite the magnitude of the headwinds that no one could have predicted.

As we enter 2009, it would be safe to say that none of us has a crystal ball for how the year will play out. The unprecedented scale of the global economic downturn and the magnitude of the foreign exchange impact will certainly continue to pressure the business. At this juncture it’s prudent to assume that these pressures will continue for the foreseeable future, so with that we’re fully prepared to manage through a challenging year in 2009.

As I think about the year ahead, I’m confident that we’re well positioned to weather the storm. But first for me and by far most important, I believe Avon’s business model is uniquely advantaged and especially well suited to adjust to times like these. With people looking for ways to earn money and watching every dollar they spend, Avon offers both an income opportunity and Smart Value products. So we’re going to do what we always do, focus on opening doors and capturing share so that we’re well positioned when the crisis lifts as it eventually will.

With unemployment increasing dramatically in the United States and with recessionary fears spreading, promoting Avon’s income generating opportunity will be our most critical focus in 2009. Unlike other entrepreneurial opportunities, there’s minimal cost to start an Avon business. Also our brand name has 90% recognition world-wide and is consistently listed as one of the world’s global brands, so representatives are selling products that consumers know and want.

With these strengths in 2009 we’re shifting a greater portion of our total advertising and our RVP budgets against our recruiting efforts. We will also be taking advantage of other recruiting opportunities, including job fairs and Internet sites for job seekers.

In addition to representative recruiting, we’re also focusing on strategies to attract and retain customers by highlighting the value propositions of our products. We feel great about our products pipeline in 2009 as we continue to invest in key innovations. We’re also committed to sustain the gains we’ve made with pricing. The key in 2009 as I said will be to insure that we have the right split between mass premium and entry price points. Given the breadth of our product assortment, we’re moving quickly to insure the appropriate flow of offerings in the under $5 U.S. or equivalent range.

We’re moving with equal speed to sharpen our Smart Value messaging in our brochures all around the world. This includes creating Special Value sections as well as separate flyers and mini-brochures. For example, a 30-page mini-brochure in the U.S. will feature the cover headline, “Look Beautiful for Less”. In the UK a similar flyer has the cover line, “Want to be Beautiful on a Budget?” The message here is not about discounting. The goal is to remind consumers of our everyday low prices, or as we actually say in one of the mini-brochures, “Forget one day discounts. Avon prices will always be appealing because we believe that women should look and feel fabulous for less.”

In addition we’re combining this focus will clear messages about the ease of the Avon shopping experience compared with retail, emphasizing personal home delivery by your Avon representative with no delivery fees. So as we begin 2009, we feel good about our advantaged business model. But even beyond that, I believe our experience in managing through past recessions, coupled with the progress that we have made with our turnaround plan over the past three years puts us in an even better position to enter this turbulent year fully prepared to deal with the challenge.

You don’t get to be 123 years old as this company is without learning how to navigate economic downturns. Throughout history we’ve navigated crisis after crisis. These have included major currency melt [dines]. I myself have had to lead through the 71% drop in the ruble in ’98, the 56% drop in the real in ’99, and the meltdown of the Argentine peso in 2001. We’re very fortunate to have a leadership team on the ground that is steeped in experience.

Our general manager in Brazil for example is a 30-year veteran who spent many years in Venezuela leading that market through constant prices. Our general manager in Mexico is another 30-plus year Avon leader who led Argentina through that market’s prices in 2001. In both of our European business units as we confront volatile currency movements, we’re fortunate to have two regional operating leaders with nearly 60 years of combined experience between them. So expert management of currency devaluations is required as key competency at Avon.

Going all the way back to prove the point, even during the Great Depression Avon’s model thrived on aggressively reaching for new customers and representatives. So history says we have met each challenge with success and each time we’ve emerged stronger. This is what we know how to do and 2009 will be no different.

Beyond our decades of experience the thing that gives me the most confidence as we enter this challenging period is our success over the past three years with our bold turnaround plan. We therefore enter these unprecedented headwinds with stronger fundamentals, improved execution capabilities and better analytical insight into our consumers and our representatives. Most important, we have dramatically strengthened our brand and channel through record levels of investment.

Our advertising spend of nearly $400 million in 2008 is nearly three times the level in 2005 and a dimensionally greater level than in any previous recessionary period. So we’ve achieved break-through levels for the image and awareness of our brand. In 2009 our focus will be on mining for efficiencies in this environment. We will have more media impressions per dollars spent, resulting in increased visibility for the same level of investment.

In addition to more advertising, we’ve also increased our investment in the representative value propositions by more than $200 million over the past two years. With these investments we’ve stepped up the global rollout of sales leadership, improved representative commission structures and have also aggressively expanded our web-based business tools. The end result is a far more attractive business experience for any new representative joining us today.

To fund these investments as you know over the past three years we have dramatically transformed our cost structure to a full set of initiatives which remain on track to yield over

$800 million in savings and benefits. So we have proven a commitment to take costs out of this business. In light of the challenges of 2009, we are now moving aggressively to the next phase of bold cost transformation, building on our previous success over the past three years.

Beyond this the commitment to zero overhead growth and a constant turnaround mentality is now fortunately a way of life at Avon. So you can rest assured that we will do what we need to do to take costs out of this business. Underlying all of this has been the constant advantage of our balance sheet and our cash flow, always the strength of our model and certainly more important than ever. You saw our announcement this morning of our continued commitment to the annual dividend increase.

Chuck will talk more about the P&L and the balance sheet in a moment, but just let me give you a closing comment before I turn it over to him. There’s no doubt that 2009 will be one of the most difficult years in business history. You know, our commitment here at Avon and to our shareholders is to manage what we can manage and manage it well. We’re going to keep on doing all the right things for the business just as we have always done, opening new doors and bringing in new representatives and customers into the store.

We will build on our 123 year experience and our successful progress with our bold turnaround over the last three years. We will do what we know how to do, but we will also do what we need to do. And in doing both I can assure you that we will emerge a much stronger company, as we always have.

So with that I’ll turn it over to Chuck.

Charles W. Cramb

Thank you Andrea. My comments today will focus on our fourth quarter performance and a wrap-up of 2008. Given the current global economic environment and the dramatic impact of exchange on our results, I believe it’s important to also provide some thoughts to help you think about 2009 so I’ll do that as well. I’ll then elaborate more on 2009 when I see you at the CAGNY meeting in just a couple of weeks.

Andrea has provided a thorough review of the top line sales performance in her remarks, so I’ll move right to gross margin. Gross margin of 62.4% was 460 basis points ahead of 57.8% reported in the fourth quarter of 2007. Operationally, we had a 170 basis point improvement which was a result of improved pricing for existing products, data margins on new products and manufacturing productivity gains. These impacts were particularly strong in Latin America and Central and Eastern Europe.

Also in the quarter were benefits from our Strategic Sourcing Initiative which is ahead of plan. Dampening the favorable impacts were continued commodity cost pressures. As expected, commodity cost softening will take some time to work its way through to the P&L.

Also negative and what could be a major pressure in 2009 was a 30 basis point impact of transaction exchange on our product costs. As you know, we experienced some dramatic foreign currency rate changes during the fourth quarter. These are resulting in large increases in cost due to transaction exchange.

Since we carry roughly three months of inventory, many of the impacts have not yet worked their way through to cost of sales. That impact will be felt more in 2009. The rest of the gross margin improvement, about 320 basis points, was due to the absence of the final PLS obsolescence charge that we took at the end of 2007. In total, I think we are continuing to make good progress on gross margin expansion.

SG&A in the fourth quarter was 49.1%, favorable 140 basis points to last year. About half of our SG&A is period overhead expense. Of course we benefited from significantly lower cost implement restructuring versus the prior year. However, the real news is that on a constant dollar basis in the fourth quarter we nogged – that’s negative overhead growth.

SG&A excluding the period overhead expenses grew due to commodity price pressures on brochure costs and on distribution, and due to increased investments in RVP. Advertising was down modestly in the fourth quarter due to currency only. We continue to invest the same percent of sales on a local currency basis.

For the quarter then our operating margin was 13.3%, up 600 basis points from last year. The improvement was driven by the absence of obsolescence charges for PLS and the much lower cost implement restructuring, which together were 630 basis points. Exchange rates worked against margin due to transaction costs, as well as translation losses which reduced the wane of the higher margin international businesses.

Also, the disproportionate level of U.S. dollar costs for things like corporate expenses, R&D and below margin North America business further dampened our overall margin. Overall, currency reduced our margin in the quarter by about 120 basis points. Excluding the impact of currency from 2008, and the charges from 2007, we would have been up about 90 basis points in the quarter.

On all three of our major initiatives, that’s our Strategic Sourcing, our Product Line Simplification and Restructuring, I can say with confidence that we are on track. For the full year, our SSI or Strategic Sourcing Processes yielded a total benefit of nearly $135 million. Of this, $115 came as a result of specific cost reductions and another $20 million came from using the processes to avoid certain commodity cost increases throughout the year. Thus the total year benefit of the $135 million was well ahead of our target of $100.

Strong successes against chemicals and packaging, as well as the accelerated implementation of our overall program, led to the over performance. On Product Line Simplification or PLS we did deliver our projected benefit of roughly $40 million for the year, despite the tough macroeconomic headwinds which negatively impacted volumes. The bulk of the benefit came from stronger than average sales growth of what we call the opportunity products, or those products that benefited from increased exposure in our catalogs as we reduced other SKUs.

Performance was strongest in Latin America, which accounted for about half of the overall benefit, followed by Europe. North America lagged its targets, no doubt due in part to the tough U.S. economy. All regions reduced their size of lines in the year, the average reduction being about 10%.

On our restructuring efforts we generated savings of $270 million for the full year, with

$70 million of that occurring in the fourth quarter. This means that year-on-year we increased our restructuring savings by about $40 million from the $230 million we generated in 2007. All of our programs are on track and as a reminder, we expect savings to increase to about

$300 million in 2009 and grow into $430 million in 2011-12 when fully complete.

Let me now review the strength of our balance sheet cash flow. Year-end cash balances increased to $140 million versus December, 2007, rising to $1.1 billion. Although these funds are held offshore, the majority of the funds are held in dollar accounts and thus not exposed to currency fluctuations. Accounts receivable are down from prior year. Our credit terms with our representatives result in fairly quick collections, and we have less than one month of sales outstanding in receivables. There is some minor pressure upwards on bad debt, primarily in the U.S. but our strict global controls and operating model have minimized this impact.

Overall inventories are down about 3 days from a year ago, despite the general softening of sales experienced during the quarter. We are finally gaining traction, and thus I feel very good about our progress. We had double-digit reductions in Europe and Latin America for the year, while at the same time they improved their service levels. And these gains are sustainable, as they have been driven by business process changes.

North America is a different story. The economic pressures and the resulting sales shortfalls caused significant higher inventories and thus dampened our overall company performance. I do expect to see our inventory progress continue in 2009, led by North America though probably not until the second half as they first have to work down their existing stocks.

As we’ve discussed previously, our capital expenditures increased in 2008 to roughly

$380 million as we are investing in supply chain infrastructure projects, as well as in IT systems. We have carefully reviewed our spending needs for 2009 and are managing our cash conservatively. We are planning to reduce investments in 2009 to between $325 to say

$375 million.

Our total debt increased year-on-year by $390 million. We were not active with our share repurchase program during the fourth quarter, as we chose to preserve our liquidity in these turbulent times. Reflecting our solid balance sheet and continued outlook for healthy cash flows, we announced the 5% dividend increase this morning, our 19th consecutive year of increasing our regular dividend.

Well, that wraps up my comments on 2008 and now I’d like to offer some thoughts on how you should think about 2009. And before you even start to think otherwise, those of you who know me know that I do not believe in giving financial guidance and I am not about to start it now. Rather, my objective is to share our framework with regards to key components of our financial model.

As we have said, we cannot control currency so I’m not going to even attempt to forecast it. But we certainly can and must react to the problems and the opportunities that currency movements can create. We have always talked about long term, mid-single digit local currency sales growth as our planning model with accounting out that in some year’s growth might be somewhat above and in other years somewhat below that level. Given the current macroeconomic climate, I believe it is prudent to assume that local currency top line growth will be somewhat below that level.

Within sales, I believe we’ll have some shift towards more units and less pricing, reinforced by our ability to offer Smart Value. That is not to say that we are giving back pricing as everything that we have seen today so reinforces that our pricing decisions were correct and are holding. Assume the impact of currency on the top line, I believe the significant movements that we have experienced will give us opportunities for pricing action.

For example, some markets have had 30, 40, 50% devaluations. If these currency rates are structural and hold, then inflation is sure to follow in those markets. This should create a pricing opportunity for us, not necessarily as a price leader but on somewhat of a lag basis following the market. History has shown that our business model results in market share build, and eventually higher returns when we do take pricing.

In terms of gross margin, I know some of you are concerned that our Smart Value proposition may be a negative drain on gross margin as we shift to offer more products in a lower price range. We don’t think so. This is not a case of having to discount our higher priced units. We will be highlighting products that are already in our portfolio at the lower end of our existing product range. At worst, gross margin should be minimally impacted.

There will, however, be continued pressure on gross margin due to transaction exchange. By itself transaction expense alone could be material. So what causes it? Our major areas of exposure are euro sourcing to the UK and to non-euro markets in Central and Eastern Europe, including Russia and Ukraine. Although we have a major factory in Russia that supports Eastern Europe, even there we are experiencing unfavorable transaction exchange due to a large portion of our raw materials being priced in either euros or dollars.

We are also experiencing similar impacts in Latin America, particularly in non-beauty products. And even in North America we have unfavorable transaction exchange as almost all of our products for Canada are sourced from the U.S. In the short term, we cannot fully offset the negative pressures on gross margin that come from the dramatic shifts in currencies that we have recently seen.

However, we have operational actions that will help. Our Strategic Sourcing program is tracking ahead of target and we expect that to continue throughout 2009. We have had a focus on manufacturing productivity, and that too will continue to generate favorable returns in 2009. And we are looking at opportunities to change some of our raw materials and finished goods sourcing, both internally and externally, using exchange rate differentials to our advantage.

Finally, although not necessarily operational, we do expect to see some softening in commodity costs as a result of the tough macroeconomic environment. This softening may come slowly, as it needs time to work its way through the system, but I do expect it. All in all, transaction exchange by itself will be a major drag on gross margin, but we have aggressive plans to offset a good portion of that drag.

Thinking about how we invest in the business, particularly in advertising and the representative value of proposition, we believe we are on the right strategy and plan to stay the course. We also believe we are at about the right scale on each of these, so our focus is how to make each dollar invested even more productive or efficient.

For our period overhead expenses, the constant turnaround mentality has yielded impressive results. We have zogged, even nogged, but this is not the time to rest on past performance. With renewed energy, we are going to be even more aggressive on cost ups and we will enter a second phase of transforming the way we do business to benefit all elements. I’ll have more to say about that at CAGNY.

To wrap it up then, 2009 will be challenging but we will be proactive and we are going to focus on those things which we can control or manage, things such as our representative growth; our unit mix and our unit growth; our investments; our capital spending; and our overall cost structure.

Now I’ll turn the call back to the operator to commence the Q&A. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Lauren Lieberman - Barclays Capital.

Lauren Lieberman - Barclays Capital

I hate to be a bit backward looking, because I appreciate all the help of how to think about ’09 but I think there’s been so much focus at least last quarter on would you or would you not have hit that GAAP operating margin goal for ’08. So with the additional disclosure on the quarter about local currency profit grows, we’re getting to something like that you could have had a 13% GAAP margin for the year had there been no currency impact in the quarter. And then assuming that your original budget assumes some benefit say comparable to the first three quarters, you might have been somewhere around 13.4ish.

Is that a reasonable way to think about it since it’s a shortfall versus initial plan was maybe 40, 50 basis points, which would be completely understandable because of volume, any kind of last minute spending that you did to adjust to the sort of changes in the consumer environment?

Charles W. Cramb

I think so, Lauren. There’s a lot of pieces to what you just said which makes it a little bit difficult to answer without sitting down and going through it, but as we said originally we were going to have a margin that we thought would be approaching 14 or been a little bit under. Exchange certainly hurt us. It was running somewhat favorable to our thinking, which helps us to do some things on incremental investment. I wouldn’t put all the blame on exchange, though. We did not anticipate the macroeconomic conditions to be as strong or as negative as they were going into the latter half of the year.

But a big piece of it you’re right is exchange, both in terms of the translation which I know you have pretty good visibilities toward, but also what we tend to call transaction which is the change in our costs because of the currency impact on them. So I think net net you’re pretty much in the right ballpark.

Lauren Lieberman - Barclays Capital

And then if I think about ’09, would the big difference between the non-currency hit to margins in Q4 versus the non-currency hits to margins in ’09 be all of the things you’ve just kind of went through in terms of proactive things you’re doing to accelerate cost savings, because it sounds like that’s what we’re going to hear about at CAGNY, to help mitigate some of the impact from the macro-environment and the currency just sort of is what it is.

Charles W. Cramb

Yes, I think the currency is going to be what it is. I can’t even – I don’t even want to try to predict what it is, but we will manage through the costs. I think we feel pretty good. We’ve got what could be since we only have a little bit of transaction costs coming through in gross margin in the fourth quarter, that is going to be a big drag. But we feel that we can offset quite a bit of it, not all of it, but quite a bit of it through our productivity improvements on gross margin. That’s going to be one big look for next year.

Lauren Lieberman - Barclays Capital

And that will be a big topic I’m guessing at CAGNY you said.

Charles W. Cramb

Well, that’ll be I think a continuing topic throughout next year.

Operator

Your next question comes from Nik Modi – UBS.

Nik Modi – UBS

Chuck and Andrea, I just wanted to kind of get behind the whole recruitment strategy. In past cycles you’ve obviously stepped up recruitment but the retention has not been that great, so what plans are you putting in place to perhaps retain the reps that you plan to recruit over the next 12 months or so?

Andrea Jung

Yes, Nik, I just would look at it this way. I’m trying to make the point that I think you go into this sort of recessionary period a different company, really. Even on the representative value proposition than in previous cycles. I think that we have spent three years of heavy lifting not only on restoration of strong fundamentals but that incremental $200 million that allows representatives to make more. We’ve changed commission structures. We’ve given them more frequency in terms of brochures and a lot of investments over the last three years to sales leadership rollouts.

So I think it’s a fundamentally different proposition. And now we’ve got this heavy focus on recruiting which I think obviously structurally advantaged to open doors. And the push model is one I think that clearly advantages us. The way I would look at it is clearly the consumer contraction does play into representative activity. I just wouldn’t look at it so much as retention as activity.

The pressure is – she has to have customers to sell to. We have to make that connection between units and active representatives, so the strategy really is to make sure that there are door openers, ways that even if purchasing power is slightly down that the offer allows her to get in and open that door if you would, and develop that consumer relationship.

So the engine was very strong in the quarter, up mid-teens – the recruiting engine and the engine staff. We came into 2009 with a very strong engine staff. The number 4% reflects activity and I would just say our focus is on representative activity and I feel very good about the recruiting engine and a much stronger, fundamental base. Is that helpful?

Operator

Your next question comes from Wendy Nicholson – Citigroup.

Wendy Nicholson – Citigroup

My question has to do with kind of the concentration of your growth right now in Latin America. And given sort of the dramatic slowdowns that we’re seeing obviously in GDP growth from some of those big regions, and the very tough comps that I think you face in Brazil in the first quarter of the year, Chuck I know you don’t give guidance but just in terms of a sense of whether Latin America is going to continue to carry the day in 2009 or whether sort of we should assume some sort of dramatic slowdown there.

Charles W. Cramb

We have seen nothing, Wendy that would suggest a dramatic slowdown. So I don’t want to say carry the day but I will say that the prospects as we see them in Latin America right now as of today still look very, very strong. It’s a great market for us, where we’ve executed well. We’ve done extremely well. Mexico is a turnaround and is going to continue to be a driver in that geography. And in the case of Brazil, we’re not seeing anything right now that would suggest a meltdown or anything like we’ve seen in some other parts of the world.

Wendy Nicholson – Citigroup

And I was going to say is there something that makes that region – I mean obviously I know it’s a great direct selling market, but we would have thought that Russia was a great direct selling market, too. And Andrea your comments that Eastern Europe really kind of fell apart at the very end of the quarter, I mean I assume that that’s going to probably kind of persist here in the beginning of 2009. But in terms of Latin America why is it so much more resilient to the macro than even in Eastern Europe?

Andrea Jung

I don’t want to be an economist here and talk about the fiscal differences and everything else. I would just say the following. I’ll come back to Central and Eastern Europe for a moment, but in Latin America we feel very good obviously about our continued ability on a local currency basis to have very good growth on a strong base. I just reiterate what Chuck said about Mexico and talk about it for a second because that is a large market. It’s not just a successful turnaround. That is a large market.

And the double-digit growth in local currency in the fourth quarter I would say that it’s a risk mitigant to the region as well as the company’s as long as we can achieve sustainable growth in the long term. And I feel very good that it will be a large contributing factor over the next several years to the corporation now that it is back on track.

I think that the shift that we saw in terms of the consumer contraction in Central and Eastern Europe was more dramatic for sure in Central and Eastern Europe, in Russia, but I still think it’s a great direct selling market. Nothing in my thesis changes there. And I think that the strategy to really trade up which was really very important after a decade; we wanted to make sure that we defended very large shares in CEE and I think strategically I feel very good about what we were doing.

Obviously the great news is we can shift. We can reset, and not walk away from some great progress we made in terms of taking price. But we know how to do units. We know how to do door openers and get representatives and the rep numbers are good certainly in Eastern Europe. So to me it’s just about making sure that we take advantage of the direct selling model which I still think will be very good empowerment through Central and Eastern Europe in the future.

Operator

Your next question comes from Chris Ferrara – Bank of America/Merrill Lynch.

Chris Ferrara - Bank of America/Merrill Lynch

I just wanted to dig a little more into the incremental gross margin initiatives. Chuck, I guess so you’re clearly saying obviously that the transactional impact on gross margin is going to get worse and we definitely get that. But this quarter you felt I guess you cited 190 basis points of operating improvement in gross margin and a lot of that was for your incremental productivity gains. I guess can you just talk a little bit about are you making a call for that to improve? I guess to accelerate those incremental gains in order to offset the transactional impact?

Charles W. Cramb

Yes, I think what you saw in the fourth quarter was a precursor for what we’ll see as we go through 2009. I think the important thing however is that it’s not so much on the benefit side. I think those programs are well in place. It’s that the impact you saw and what we’re calling transaction was really relatively small in Q4. It’s really next year that it comes to hit us. And that’s just because of the fact that we had to carry three months of inventory. So I don’t expect to see significant uplifts in the margin. In fact, we should see some minor deterioration in the margin because that transaction cost is going to be so significant.

Chris Ferrara - Bank of America/Merrill Lynch

I’m sorry. I’m not asking the question well. I guess what I’m trying to say is the fact that for ’09 you’re saying you could offset that, at least a reasonable portion of the FX transaction issue would sort of imply that you’re going to be able to get incremental savings on top of that gross margin line. I guess even more than what we saw in Q4. And I guess can you talk a little bit about just generally where that’s coming from because it really seems you’ve had, I guess pedal to the metal on efficiency savings in the last couple of years and put up a lot of gains.

Charles W. Cramb

Sure. And I think if you want to look at the pieces of it you have to look at your Strategic Sourcing Initiative. That is as we said ahead of where we thought we’d be at this point in time. And I expect that to continue through 2009. And in terms of the mix of the business there’s going to be some benefit from Product Line Simplification. In terms of the pricing that we took throughout 2008, that gets annualized into 2009.

So I think we have a lot of good pieces working in our favor that by themselves would have been incrementally increasing the margin. And then the drag is going to be the costs that come through transactions.

Operator

Your next question comes from Alec Patterson - RCM Investment Management.

Alec Patterson - RCM Investment Management

Chuck, I want to get a better sense of the timeline here on the commodity front. Because of the transactional hit I believe it has a potential offset as the commodity trends play out. And so A, correct me on that and B, covering sort of the broad spectrum of commodities particularly those that flow through SG&A as well, could you talk about the timeline on where the year-over-year impacts may start to reflect what we’re seeing in the broad commodity markets?

Charles W. Cramb

Yes, I think it would be wrong to expect much that’s material until probably the second quarter of the year in building through. And that’s pretty much because we’re working off the fourth quarter inventory build. And in terms of overall pricing that’s still subject to lots of negotiation because we need to take advantage of that softening environment as well. But in general think of it in terms of from a product cost side it takes about three to four months before we get to see it plus there are contract timelines as well to make it a little bit longer.

In the SG&A it comes up a bit more quickly, but even there there are two pieces to it. One is how it impacts our overhead expense, that would be the non-labor piece of it. That could come relatively quickly. A little bit more slowly in terms of things like distribution costs. And that’s only a little bit more slowly because it’s not just the price of oil but it’s what’s the length of the contracts we have outstanding.

The good news is that most of our contracts were relatively short in terms. As we saw commodity costs going up, we actually stayed a little bit short on contract length expecting volatility. And I think that will pay off well for us. But net net, first quarter rough, second quarter better.

Alec Patterson - RCM Investment Management

And the transactional side of it?

Charles W. Cramb

The transactional side since we carried three months of inventory, it’s really going to start to hit in the second half of the first quarter and then go right through the year.

Alec Patterson - RCM Investment Management

You mean the transactional impact diminishes as the lower commodity costs flow through?

Charles W. Cramb

Yes. They would work at an offset to each other.

Operator

Your next question comes from Alice Longley - Buckingham Research.

Alice Longley - Buckingham Research

My question is about pricing in Latin America. Historically, often pricing accelerates in Latin America as at least a partial offset to devaluation so with a lag. And here though you’re saying that you may have a downward shift in mix to lower priced product. So should we not expect an accelerating pricing in Latin America to ’09 or can we?

Andrea Jung

I think you can’t. I mean, what we’re saying is again we’re early in the year, but if these currency rates structurally hold there will be inflation and we will – I don’t want to look at this quarter by quarter, and there will be some lag. But certainly we are very mindful and watchful in terms of competitive pricing, etc. But again we would start to price and take price obviously as one of the things we’ve always done in those markets. Independent of a reaction to inflation from currencies.

I was just saying as a company, and Latin America I think did a very good job balancing pricing and units. In some of the areas and I wasn’t really specifically referring to Latin America, so it is a difference region by region, and some of the other regions where we had some negative pressures on volumes that our focus would be on Smart Value and Beauty products where I would see some acceleration. Latin America did a very nice job balancing units and pricing in this past quarter. They did a great job all year.

Charles W. Cramb

But as Andrea said the pricing momentum that might come through inflation we might be a little bit behind from a time point of view. Number one, its part of our business model in terms of what it takes to build the marketing plan or the catalog plan and then deliver and execute it. And number two, history has shown that that is a good return to us because it helps us build market share on that lag basis.

And then when we take the price we’re doing it on a higher volume of business. Net net it works out favorably.

Andrea Jung

One example and it’s not Latin America, but just how something in the Ukraine where we obviously have seen a very significant devaluation, our Evangeline business is very robust in that market. We’ve already adjusted prices up obviously to begin to recover from this. So those have already been set and printed in our books.

Alice Longley - Buckingham Research

And just on Mexico specifically, with Beauty being I guess Fragrance, Color, Skin was up more than 25% in Mexico. That was local currency, so I guess if you could confirm that. And what percentage of Mexico is Beauty?

Andrea Jung

I haven’t got that number in front of me but I’m going to say that 60-something percent. And yes those were local currency numbers.

Operator

Your next question comes from William Schmitz - Deutsche Bank Securities.

William Schmitz - Deutsche Bank Securities

Hey, can you just talk about the disconnect between the sort of balance sheet changes and the cash flow statement? Because the way I look at it, it looks like accounts receivable was actually down on the balance sheet but it’s a big use of cash in the cash flow statement.

Charles W. Cramb

Bill, it has to do with U.S. GAAP accounting unfortunately and to tell you, you had to take the exchange out of the balance sheet and cash flow. And so you have a big exchange adjustment. It would take a half-an-hour of lessons to take me through it even sometimes, leave alone people who don’t live with it day-to-day. The whole disconnect is really the elements of the move in the currency.

William Schmitz - Deutsche Bank Securities

And that also explains the big uptake in other long term assets?

Charles W. Cramb

No, the – in terms of the other long term assets there’s really some things that are pushing that up. And interest rate swaps is a big one. When you have an interest rate swap and you have a gain on it that goes into other assets, and that’s one big piece. And then there’s some tax accounting that also figures in there, and it has to do with tax credits – deferred tax credits that are long term in nature. So when you look at that other asset line, those are real things that are happening.

William Schmitz - Deutsche Bank Securities

Just looking at the U.S. operating margins, I mean and I’m not asking for guidance here, but it’s sort of mid-single digit type operating margin numbers. Is that the new reality or is it just due to the softness we’ve sent the last couple of quarters?

Charles W. Cramb

That’s not the new reality. That’s – go ahead.

Andrea Jung

The key is growth in this market. I think we have to look past this recessionary period and look past 2009. But first of all I’m pleased that we held Beauty share. I think over 2008 in this type of market its negative pressure obviously of consumer contraction on the non-beauty categories is obviously pressuring North America markets on the negative de-leverage.

William Schmitz - Deutsche Bank Securities

Is that where a lot of the sort of non-strategic overhead savings are going to come from in North America because of the slowdown?

Andrea Jung

I think that we’re focusing on the top line on Beauty and our higher margin products and categories, very tight inventory controls in ’09 particularly on the non-beauty areas, and further aggressive cost outs.

William Schmitz - Deutsche Bank Securities

Have you revisited even Beauty and non-beauty over the long term? Because it seems like if it works it’s a problem because it’s out of stock, and if it doesn’t work then you have an inventory issue and you have negative volume absorption.

Andrea Jung

We’re in serious evaluation obviously of the profitability of the category, and not just the category but there’s like a lot of sub-segments within that. And also its role which is important in some cases to representative earnings and the halo impact it has on Beauty. So we just to make sure is that we don’t lose the representatives who would give up Beauty sales just because we take out on a single one look at one profitability of one SKU. So we’re looking at that very carefully but there’s definitely an opportunity in terms of re-looking at the mix.

William Schmitz - Deutsche Bank Securities

Just on Latin America, does it trouble you that Latin America’s almost 50% of total company operating profit now? Or is that just a quarterly anomaly because that business has stayed decent and the rest of the world kind of crumbled?

Charles W. Cramb

We love Latin American business. We love the fundamentals of it. We love the direction it’s heading in. We love the growth prospects there. Would I like to see the rest of the business – the rest of our geography perform better? Absolutely. I think you’re right that there are macroeconomic issues and currency issues. But all in all, we’re not unhappy at all with the great business called Latin America.

Operator

Your next question comes from Ali Dibadj - Sanford C. Bernstein.

Ali Dibadj - Sanford C. Bernstein

I want to go back to the balance sheet a little bit here, because I think you explained at least one of my conundrums which was the sequential change in some of the cash fund balance sheet items. What I don’t understand is how if you go year-on-year, it looks like you’re restating your prepaid expenses and your accounts receivable then in fact you’re taking accounts receivable to the tune of $45 million and putting it into prepaid, or prepaid and other. And to be fair I’m no accounting Ph.D. but it feels like a Gestalt move to just kind of move that into there. So I’d like to understand that a little bit.

Charles W. Cramb

That’s a tough question to answer the way you asked it. What I will tell you is there’s movement in the prepaid expenses. And that movement from an upside is due to three major things. I think you’ve asked this question before, so I’ve got them set kind of listed out for you. And the first one is, remember they changed the rules in Brazil regarding VAT, and we effectively had to prepay VAT? That was one big element in the first quarter. That has started to work its way down as we’ve utilized that payment, but year-on-year it’s still $35 or $40 million.

Second one is a real prepayment. It’s on paper related to brochures and it’s really due to the commodity cost increases. That’s another $20, $25 million. And then we have some prepaid taxes. And they always float in and out of that thing. So those are the three big movements in terms of prepaids. From an accounting point of view, and I can’t remember the term you used on it, there’s very little movement from accounting changes.

Ali Dibadj - Sanford C. Bernstein

But you restated if I’m not incorrect your accounts receivable from last year. So it’s really helpful detail in the prepaid for this quarter. Same quarter last year you moved $45 million from accounts receivable to prepaid. I just don’t understand how that happens?

Andrea Jung

Ali, we reclassified a piece down there so that the accounts receivable you see today is solely representative of accounts receivable. That has to do with the rebates due back to us from volume purchases and vendors. So that you can now look at accounts receivable and figure out our days of sale that are in there and due to us from our representatives.

Ali Dibadj - Sanford C. Bernstein

So we should expect restatements kind of from that point on to the most recent quarter as well. Is that right?

Andrea Jung

This will be the way we present it going forward, yes.

Ali Dibadj - Sanford C. Bernstein

Sticking to the cash flow balance sheet, inventory levels at least from a days outstanding on cogs perspective looks like it did go up about eight days here. While obsolescence was quite low, going forward how confident are you still that there isn’t going to be any obsolescence charges as you kind of focus into 2009?

Charles W. Cramb

This business will always have obsolescence charges in it. It’s kind of the nature of the business. I think one of the things that we feel good about is if you look at kind of what I call historic averages, the product line simplification program actually one of the benefits coming out of that, it’s not one of the large benefits it’s one of the smaller ones, but still one of the benefits is less SKUs with better planning around the SKUs you do feature with them having longer life. We will have lower obsolescence.

If you’re thinking in terms of gee whiz we had to take significant write-offs on sample amounts of product line simplification, I would expect nothing like that in the future. Just normal operating obsolescence.

Ali Dibadj - Sanford C. Bernstein

My last question is just around foreign exchange. I know you’ve been asked about it a few different angles. I guess what I’m trying to understand is we think about more longer term your sustainable growth rate and [inaudible], no pad or operating profit growth rate. Is this what we’ve been calling a multiplier between the foreign exchange impact on our top line and foreign exchange impact on the bottom line, it looks like it’s about 4x if you just look at the table you put in here.

Is that what you benefited from in a sense when foreign exchange was going in your favor? And now it’s a flip? Or is very different dynamics when foreign exchange is in your favor versus when it’s against you here?

Charles W. Cramb

I think the numbers that you use are – I can’t relate to them. But foreign exchange does benefit us when it’s strengthening. And it hurts us when it’s weakening in terms of the mix of our business. And that’s the size of international which has a higher operating margin than our U.S. dollar based businesses, say both the U.S. market and corporate expenses. In terms of looking at the metrics through 2008, as we were enjoying some of those currency gains we did invest some of that money back into the RDP. No question about it.

So you didn’t get the full benefit in 2008 in the first three quarters of the exchange gains because we never anticipated or expected the world to go the way it did in the fourth quarter with currency. So we reinvested some of that back to the business.

Ali Dibadj - Sanford C. Bernstein

I guess just on that, the numbers I was referring to as in this really helpful table called Regional Results, if you just take the difference between Revenue Local Currency and Total Revenue Change it’s about negative 11% for the quarter, which is what you said. And on Operating Profit it’s about negative 40%. So that’s where I got kind of the 4x. And I guess your answer clarified a little bit of it. I’m trying to understand is that 4x translational only? Is there then on top of that transactional? How should we think about it going forward?

Charles W. Cramb

It’s translational primarily.

Ali Dibadj - Sanford C. Bernstein

And then there’s transaction on top of this 4x.

Charles W. Cramb

There’s transaction on top.

Operator

Your next question comes from Linda Weiser - Caris & Company.

Linda Weiser - Caris & Company

Maybe you said this already but did you clarify how you intend to work down the inventory in North America? That’s the first thing. And then the second question is on Mexico you had very nice performance there. Can you just remind us again exactly the things that are feeding into the turnaround in Mexico and if those things will be sustainable despite the developing economic weakness in that market that we’ve heard about from other companies?

Charles W. Cramb

Okay, I’ll take the first one and I’ll let Andrea take the second one. On the first one we’re going to sell it, simple as that on the inventory. And really what it did is forced us to look at significantly at our future plans in terms of when we’re bringing in new products, when we’re bringing in particularly on the what we call purchase finished goods or the non-beauty products side. And we feel it’s an opportunity to maintain or continue for a longer period than we normally would have some of the existing inventories.

So we will sell it throughout the year. We’re not going to write it off. And in terms of Mexico?

Andrea Jung

In terms of Mexico I would say I feel very good about the sustainability based on the fundamentals that have been rebuilt over the last three years in Mexico. I mean the success of this turnaround, I think as I said if I go back to a lot of quarters in ’06 and ’07 we didn’t get here in one quarter and we’re not going to get out in one quarter. But when we do the business will be a foundationally healthier business and that is what I think we’re looking at right now.

If you go back, it really was about field fundamentals and now it’s paying off. But we started from everything from performance management, we had been losing reps three years ago to some of the direct selling competitors. Our representative value proposition was not as competitive and it was in everything across the board from incentives and were they strong enough and competitive enough to our lack at that time of having a sales leadership or multi-level program.

So all of the things that we have done across the enterprise, but particularly in Mexico are now paying off. And this is where you see strong [recros] that I think I’ve talked to you about for quarter after quarter, now we’ve said hey sales sometimes lag in Beauty, now the Beauty growth which is important. And I think we’re taking back share in the categories as well as in the channels. We needed to rebuild the fundamentals in the field first and I feel great that we have. So I feel very good about forgetting about currency impacts, I think on a local currency basis Mexico is something I think we should all feel very good about.

Operator

Your next question comes from Connie Maneaty - BMO Capital Markets.

Connie Maneaty - BMO Capital Markets

I need some clarification on a couple of line items. Would you explain what is it in the other expense net line in the P&L and if there are things in there that we should expect to continue in 2009? And then also minority interest was positive I think for the first time in a very long time. Does that also continue?

Charles W. Cramb

I think the big item this is down below operating profit on the other, and the biggest piece of that that’s the accountants’ term for true transaction exchange. That is the settlement gain or loss that you made. So if I bill you $100 and you are in the UK you would translate that into pounds. Let’s say it was when the rate was two to one, so it’d be 50 pounds. If by the time you settle it your currency is devalued it costs you more pounds to settle the account. So that is the true settlement exchange that’s going in there. That’s the biggest piece of it. So it’s all currency built.

In terms of the minority interest it’s not a big number. It’s a little plus here, a little minus there. I really wouldn’t want to give guidance that it’s going to be consistently up or down.

Connie Maneaty - BMO Capital Markets

So back on this other expense net, given that we’re only in the first quarter as the devaluations everywhere, we should expect I don’t know exactly what level, but we should expect then to see this going forward in through most of 2009. Is that right?

Charles W. Cramb

Yes, but remember it’s exchange rate movements that create it. So if exchange rates settle down and we don’t see negative volatility then that number as well will settle down. There will always be some, but not a lot.

Connie Maneaty - BMO Capital Markets

On the balance sheet there was about a 50 or a 60% increase in your liability for employee benefits. Does that suggest a contribution to your pension plan and increased pension expense?

Charles W. Cramb

You’re looking at my accrued – I just have to pull a balance sheet and make sure –

Connie Maneaty - BMO Capital Markets

There’s a separate line called Employee Benefit Plan.

Charles W. Cramb

Sure. That liability is – the easiest way to think about that liability is the loss that we have on pension assets.

Connie Maneaty - BMO Capital Markets

The loss on pension assets.

Charles W. Cramb

Right. So everybody suffered tremendous pension assets in 2008, so what happens is that creates a liability.

Connie Maneaty - BMO Capital Markets

So what is the order of magnitude of contribution to the plan in 2009?

Charles W. Cramb

We haven’t settled that yet. I think there’s a long ways to go in terms of what’s going to come out of Congress in terms of how we should approach funding pensions. I think however as we’re thinking about it now, it’ll be higher than it probably was this year. It’ll be under $100 million but we haven’t settled yet on exactly what the funding will be.

Connie Maneaty - BMO Capital Markets

Should we also expect there then to be an increase in pension expense in 2009?

Charles W. Cramb

Yes, there will be some pension expense increase. It’s driven by A – it’s all valued at

December 31 and it’ll be all in the U.S. because we have the lower pension assets and we have a discount rate which also lowered, so that the pension liability that we have in terms of the expense will be higher. What’s interesting is when you look at international, where we do have some pensions, we’ll also have lower pension assets. That will be a negative. But the discount rates actually went up a little bit year-on-year. So they’re kind of in a watch situation.

So what will happen is it will all come through in the U.S. It’s probably a penny to a penny-and-a-half in terms of incremental costs.

Connie Maneaty - BMO Capital Markets

What is the most important indicator to you that suggests that it’s safe to start buying back shares again?

Charles W. Cramb

I don’t have a single indicator. I would like to see continued sustained I’m going to call it steadiness in the credit markets. I would like to see more credit become available. And I’m not talking about the ability to take on another debt note or debt issuance. I’m really talking about the commercial paper side of it. And I’m not really talking about companies that are rated like I am, because I don’t think we’re a good barometer of what could be volatility. I’d like to see more commercial paper, more liquidity for some of the lower rated companies. And then I think we’d have some confidence.

Operator

Your next question comes from Andrew Sawyer - Goldman Sachs.

Andrew Sawyer - Goldman Sachs

I just had a quick one on some of the margin outlook for 2009 that you can control. And you alluded to A&P spending potentially being I assume flat or down as a percent of sales. And what kind of budgeting are you allocating at this point for RVP looking into ’09?

Andrea Jung

In line with sales.

Andrew Sawyer - Goldman Sachs

Quickly turning to Latin America you have pretty strong local currency sales growth. A lot more in terms of the dollars per rep and a bit less in terms of rep growth. Can you just in light of your investments against recruiting can you just talk to how that balance will look into ’09 and maybe why it looked that way in the fourth quarter?

Andrea Jung

Yes. I would just say I wouldn’t look at the one quarter. I mean Brazil and Mexico were up mid-single digits and higher. So I think the engines are strong and the focus which is worldwide on recruiting and driving for activity would be healthy in Latin America in 2009.

Andrew Sawyer - Goldman Sachs

So there’s just some quarterly noise around some of the smaller markets in the fourth quarter?

Andrea Jung

Yes, I mean you’ve got – in your big engines I think have a healthy machine there on active reps.

Andrew Sawyer - Goldman Sachs

Thank you very much guys.

Andrea Jung

I think at this point we’ll end the Q&A. It’s about ten past ten and if anybody has any questions obviously they can call IR and we appreciate everybody’s support this morning. I would just say the following and I’ll close it out. I mean I think you know this is going to be an interesting year but we are going to manage what we can manage. I think we’re structurally advantaged. We love to push versus to pull. I mean we’ve always loved it, but this would be a year where certainly it will be something that the whole management team is focused on.

And so we are ready and able to encounter an interesting ’09 and we’ll do whatever we can. So thank you everyone and we will talk to you soon.

Operator

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

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