Avon Products Inc. Presents at 2013 Consumer Analyst Group of New York Conference, Feb-21-2013 12:30 PM

| About: Avon Products, (AVP)

Avon Products, Inc. (NYSE:AVP)

February 21, 2013 12:30 pm ET

Executives

Sherilyn S. McCoy - Chief Executive Officer and Director

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

Analysts

Sally Dessloch

Sally Dessloch

Let's extend a warm welcome to Avon's new senior management team as they make their CAGNY debut. With us today are Sheri McCoy, Chief Executive Officer; and Kimberly Ross, Executive Vice President and Chief Financial Officer. They are joined by Amy Chasen, Group Vice President of Investor Relations.

Avon is the world's largest direct seller of beauty products, and it has an attractive footprint in emerging markets. The new management team was brought on board after several years of disappointing results. The team is making early progress in stabilizing the business as evidenced by their fourth quarter earnings. While we recognize the recovery may not be a straight-line, we look forward to hearing more about what lies ahead for Avon. Sheri, let me turn the podium over to you.

Sherilyn S. McCoy

Thank you, Sally. It's great to be here and have the opportunity to talk to you about how we're moving Avon forward and give you a vision of our future. Obviously, it's an interesting time for Avon. 2012 was a very challenging year. I will say that we are seeing early signs of stabilization, and we're very focused on our key priorities and confident that we going to restore health to the Avon business.

Before I begin, what I'd like to do is just ask you to refer to the cautionary statement in the appendix of today's slides. We look at the agenda. What I will spend most of my time talking about is growth. We'll go through our 3 strategic priorities: Our growth and how we'll drive those, we'll talk about simplification and efficiency, and we'll talk about improving our organizational effectiveness.

Let's start with our vision. It's about returning Avon to its rightful place as an iconic beauty brand, and importantly, reinforcing our global leadership in direct selling and fulfilling our mission of empowering women. Certainly, Avon has many special characteristics and special elements. It's an iconic brand with high global awareness, and we compete in very attractive beauty categories, strong geographic footprint, very heavily indexed in developing markets. We have over 6 million representatives globally who love the brand and love Avon. We have quality products at a good price, and we have a powerful legacy of empowering women.

We look at the macro view. Certainly the categories we compete in, the Beauty category is growing, is large and is very competitive. Direct selling is large and growing and the channel continues to evolve. We see that consumers are shopping in new ways and looking for information in new ways, and multichannel and multi-approach is becoming the norm. And certainly we're dealing with a number of global macroeconomic issues as we look at some of the challenges in places like Western Europe and we see some slowing growth in places like China.

If you look at the Beauty category, it's a $300 billion category projected to grow 6% in the next 5 years. If you look at developing markets, they're projected to grow 12%. For perspective, if you look at Avon's portfolio today, 75% of our business is in developing markets, so we're well-positioned for growth. If you look at the global -- the direct selling industry has had healthy trends and we project that they'll be healthy moving forward.

If we talk about our consumers, we see a complex dynamic today between retail, direct selling and online where people getting information and looking for information in all different places, as well as purchasing in all different places. We see that mobile is really revolutionizing how people think and how people shop. But what we do know is that word-of-mouth and advice from friends is the key driver in terms of purchase intent. And if you think about our 6 million plus representatives globally, that bodes well for Avon.

Let's talk about our current situation. Avon has been underperforming for years. Our financial health has eroded, and unfortunately we've disappointed stakeholders. Our problems didn't develop overnight, and they're going to take time to fix and it's not a single solution. With that said, we have a clear sense of urgency. We have a clear path forward to restore Avon to health. We have a relentless focus on putting the representative and the consumer at the center of our business in terms of how we're making decisions. We're focused on our priority activities, and we're holding people accountable for results.

We've made progress in the last 9 months. Focusing on talent, critically important to get the right talent and the right people the right job. We've set expectations in terms of accountability and driving more discipline in the organization. We're focusing on what matters most which are our priority geographies and our priority categories. We're fast tracking social media and digital where we've been behind. And we've begun to reduce the cost base, and we're very focused on cost and cash management and improving our capital structure.

So let's talk about moving forward. As we look at our strategic roadmap, we've been clear that by 2012, we will deliver revenue growth, mid-single digit; operating margins, low-double digit; and cost savings of $400 million. Aggressive goals, but reasonable.

We have 3 strategic priorities: executing our growth platform; driving simplification and efficiency to get cost out, as well as to be more effective; and improving our organizational effectiveness in terms of capability and talent capability. I'm going to spend most of my time today on growth. And as we look at 3 areas that I'll talk to, it's about innovating the consumer proposition, it's transforming the representative experience and it's optimizing our geographic footprint.

I'm starting with, innovating the consumer proposition because this is really critical in terms of how we think about the brand. It's also important as we look at the earnings opportunity for our representatives, she needs to have the right product portfolio. And when I'm out talking with representatives, what they say to me is they want to make sure that we're investing in the brand and that we're doing the right things from a product portfolio so that she has the opportunity to earn.

So as we look at the consumer proposition, what do we need to do? We need to sure that our -- we sharpen our consumer insights and that we are testing and evaluating how people think about our products in our critical markets. We need to make sure that our positioning is relevant to the local market. We also need to make sure that our category strategies are clear, and I mentioned we have 4 key categories that we're going to focus against. It's not just about having the right products, but it's making sure that we have the right rhythm of innovation, that we have the right positioning for the particular market, and that we have the appropriate pricing by tier and that we put parameters around what that looks like.

The other component of strengthening the consumer proposition is to really make sure that our brand strategy is consistent so that we are making sure our brand is top of mind, that we're improving its health and that we are improving access. And this involves making sure we have the right mix of media and understanding that at a local level, understanding what makes sense from a share of voice perspective, what is the competitive set and really putting parameters around that. The other thing that I think that we have a real opportunity to use moving forward and think about in a different way is the power of our brochure. We put out over 1 billion brochures a year, and we have 6 million plus representatives globally. We really should be thinking about how they can continue to be ambassadors for the brand and make it easy for them to do business but also to talk about our brand and thinking about them in this entire media mix. We are significantly increasing our use of digital, we've already done that. We will continue to accelerate that area. And we will continue to evaluate e-commerce in the context of our overall business model. Again, that's really important in terms of driving the overall brand and the brand health.

We have a great history of innovation. One of the things that I was delighted to see when I joined Avon was our R&D capabilities. Very strong innovation capabilities both from a science standpoint and technology standpoint. And if you look at the cadence of what we've done over the years, we have some great new technologies. Where we've fallen short is really the cadence of innovation in terms of have we made the breakthrough ideas big enough? Have we appropriately marketed them and merchandised them? And have we put the appropriate pricing in so that we are getting the price that we need and making sure the representatives get the earnings? So as we move forward, it's not about the science and technology, it's about making sure that we have the consumer proposition tied with the science and technology in the appropriate way.

So who is Avon's consumer? She's multicultural. She is lower income for the most part. She crosses all life stages. She thinks about beauty in a holistic way, not just from the neck up. And we think about beauty in a holistic way, not just from the neck up. We have 4 priority categories: Color, Fragrance, Skincare and Fashion and Home, and they all need to work in concert together to bring a world of beauty home to women.

If we take a look at our category mix, what you see is that we have a very diverse portfolio. We compete in some very large and attractive categories. Unfortunately, in a number of them we've been losing share, most notable is in facial skin care, and I'll talk about what we're going to do to correct that.

But I want to start with Color. Color is really the entry point for Avon, where consumers come in and representatives come in. It's a very large category and projected to grow 6% moving forward. If we look at our strategies in Color, it's about growing penetration in upper mass in our top 5 markets, it's continuing to update and relaunch our flagship Avon Color brand to strengthen its leadership position and we have an opportunity to capture younger consumers into the franchise with a more contemporary offering.

So as we look at our tiered approach and we look at where our volume -- the sales volume is today, what you can see is we have a very strong middle with our Avon Color, which is our flagship brand. We have 5% in upper mass. If you look at how we compared our competitors, our competitors would typically have about 15% in upper mass. So we have an opportunity to introduce more upper mass products and also make sure we're promoting them in the appropriate way. An example of that is our Luxe line. Luxe line was developed for Russia, recently launched, again it's a more premium line. We're now rolling it out in Central and Eastern Europe. And what we see there is just by introducing that, it was able to pull the growth of the total Color up in Russia, and we'll be continuing to look at this opportunity in other markets around the globe. Avon Color is, again, our flagship brand, and we are in the process of updating that and restaging that. So we will be offering richer colors, a broader color palette, new packaging and a whole new approach to talking to women about how to use make up.

In the area of younger consumers, we took our Color Trend line, and here's an example in Brazil, where we took it and we updated the packaging, we've improved the formulas and we've begun positioning it to younger consumers. And if you see the results that we got in Brazil, we launched it in third quarter last year, what we saw is fourth quarter growth and as we look at in January, February, still seeing the growth to continue. So very strong performance and we're starting to roll that out in other markets around the world.

So as I summarize Color, it is about continuing to support the core, the leadership brand in the core there, but also looking for opportunities at upper mass and making sure we're continuing to get the value consumer and a younger consumer.

Now let's switch to Fragrance. Fragrance is our largest CFT category, and it's actually the category on which the company was founded. If we look at our strategy here, we have to win in our top 3 critical markets in Brazil, U.S. and Russia. And particularly what's important about Fragrance is it does play in to the overall perception of the Avon brand, particularly in places like Brazil. So getting that right is very important for us.

What we're doing there is to make sure we strengthen the base. So we have a weaker base in Fragrance, we need to get the right local insights, get the right celebrities to talk about our brands and represent our brands. We need to make sure that we are upgrading the juice and packaging and doing that allows us to also focus on the mass level and make sure we get -- we have the right balance between global and local. And after we fix the base, then we will upgrade and trade up to the higher end mass-fees type products.

So if we look at the Fragrance opportunity, at the bottom there, you see the value. And this is an area where we really have to focus and upgrade, and I'll give you a specific example of that. In Brazil, we took a product that was introduced in 1996. We improved the packaging. We came out with a more relative positioning with one of the local celebrities there, Luiza Brunet, put her in a very relevant setting and as a result of that we were able to increase price, 30%. And what we get from consumers is that product is much better. We need to continue making sure that we're evaluating these so that people will see that Avon Fragrance is high-quality and they'd be willing to try a mass or a higher level -- higher tier Fragrance product.

As we look at our global franchises, we have a number of them. Far Away is, by far, our biggest. It's the #1 selling product for Avon. We sell about $200 million worth of Far Away a year. But we need to make sure that we continue to make it contemporary. An example of what we're doing here is really looking at how we can improve the packaging. You can see the difference in packaging already just from this shot. We're looking at how we position it. But more importantly, making sure that we continue to improve the juice, so it's long-lasting. And has better olfactory, more in line with what people expect today. And also to make sure that we continue to improve the overall commercial offering and get samples out. And so really thinking about how are going to take those global franchise brand and continue to upgrade those so that we strengthen our overall fragrance portfolio. The other comment I would make is we're also very focused on doing testing in our top markets to make sure we understand how the global products work in those markets. And that's something that we're doing a lot more today than we did in prior years. So we think it's important to make sure that it's locally relevant at the same time.

I mentioned the importance of equity and the contribution that Fragrance gives to our overall Avon equity. And what you see, here's an example in Brazil, where Skincare and Color add positively to the Avon equity, Fragrance detracts from the Avon equity. So it's important for us to fix the overall component so that we actually are improving the overall brand health.

So in summary, as we think about the opportunity in Fragrance, it's very important that we fix the base, we continue to innovate in mass and then, particularly in some markets, to make sure that we have the appropriate mass-feeds brands. But again our opportunity today is in that lower -- the lower half of this chart.

Skincare. A huge market and projected to grow 6%. Really, we have great innovation in this space, and frankly, we should be doing much better. So our focus is really getting back to making sure that we restore Avon to the leadership antiaging -- sorry, ANEW to the leading antiaging brand, that we grow representative participation in the category; and that we capture our fair share of mass and value.

So as we look at this pyramid here, that you can see that on upper mass, we over indexed. So we have a good portion of our business in upper mass. And that's really ANEW. If you look at ANEW though, it's not growing to the extent that we would like. Again, I said we had great innovation. We've been launching products, but if we're not clear on the brand architecture and how we segment, what we're doing in many cases is confusing consumers and confusing our representatives, and we're not getting incremental sales from that. So what we need to be very clear about is how we position each sub-brand and make sure that we're putting the right focus against the technology and being very clear with our representatives how they can actually sell that. At the same time, we have opportunity to continue to look at opportunities in value and mass.

So ANEW. As I said, we do have great innovation. We launched a product called AF-33. It's an antiaging product with breakthrough technology. Here's an example in the U.K., where it was actually the largest launch ever, and they did a whole surround sound marketing approach, where they were online, they used social media, they had PR, they had TV advertising, and they actually engaged the representatives in the whole process. And as a result of that, they had terrific results. This is important, not just for ANEW, but really in terms of as we move forward, how we continue to use what they learn from that approach, more broadly across skincare, but importantly more broadly across all our categories.

Representative participation in Skincare. What we see today is only 30% of our representatives sell ANEW. That compares to 85% who sell our Color products. So if you think about that, just getting a few more percentage of people selling ANEW, we can drive growth. What we need to do is make sure, again, we simplify our benefits and are clear about the technology and innovation and what product is right for what type of consumer. We need to give our representatives training, and we're doing that online, but we can do a lot more of that. And we need to make sure that we're very clear in terms of our positioning for the sublines. And again by just focusing on that specific thing, we believe we can drive growth for the ANEW business.

So in closing on the Skincare piece, we are very focused on ANEW. We are starting to see inroads of some of the value tiers particularly in places like Brazil where we're using Avon Care which has come in more as a body brand but also starting to build penetration in facial skincare, which is Brazil typically much lower facial skincare penetration in developed markets. So we see that as an opportunity to continue to do that and leverage some of our innovation in that area as well.

Fashion and Home. Fashion and Home, very large category, important to Avon because it represents incremental sales for our representatives. But we need to make sure that Fashion and Home is really tied to the overall beauty strategy and this is an area where we have the opportunity to be much more strategic about how we're managing Fashion and Home. We have a new team on board here and they've been very focused on that and doing a nice job. A lot of work ahead but it's important that we put into the context of total beauty.

So as we look at our strategies: It is about extending the Beauty positioning. It's focusing on products that really deepen the relationship between the representative and her consumer: So it's something where, she's going to find it. She's got to have it, it's on trend. It's something exciting, that she's going to find at Avon, she's not going to find someplace else. We also need to make sure that we continue to strengthen our capabilities in merchandising and managing inventory, et cetera. And as I said, we're starting to do that. We have a good team in place who will be very focused on that moving forward.

This chart just gives you perspective on why Fashion and Home is important. You can see there's very -- an incremental purchase. And you can also see that the net per unit on Fashion and Home is higher than that in traditional Beauty, which is the CFT category. So very important from a representative earnings opportunity. In Fashion and Home, what we've prioritized is to focus on accessories, to focus on jewelry, intimate apparel and things that are relevant from a holiday perspective. So those are the areas of focus. Obviously, we're in different places in different parts of the world but as we move forward, those are the areas that we'll be prioritizing.

So as we look at our category strategies, they all come together under Beauty. Color's role is really an entry point into Avon for representatives and consumers; Fragrance, critically important in a number of our top markets to ensure that we are continuing to build our brand equity; Skincare really is the innovator, and we should be in a much stronger position to own antiaging; and Fashion and Home is an opportunity for incremental earnings, but they all come together to bring beauty home to women. So these are the 4 categories that are critically important. These categories also help ladder up, help us continue to build our brand equity and refresh our brand equity.

So some of the things that we've been very focused on: We recently brought in a new CMO and just really looking at how we refresh our brand. And it's about making sure that we are taking -- we're bringing back the focus on the connection of women, inspiring women, making sure that we have the right and the consistent global brand image and look, globally. And making sure that we are supporting the brand with the right media mix. And this is not just TV advertising and that in some places that they may not even make sense for us. But it's making sure that we look at all the vehicles that we have available to us. And remember that we do have the brochure and we have our representative also that represents the brand. And so it's bringing that all together in another area of focus for as we look at innovating the consumer proposition.

Now let's talk about our second growth platform. That's transforming the representative experience. We've really put the representative back at the heart of the company and I thought you'd like to hear from a few of our representatives. This is a clip from a CNN video in South Africa. So let's take a look.

[Presentation]

Sherilyn S. McCoy

So while that specific spot was from South Africa. When I travel around the world to all of our top markets and I meet all kinds of different representatives, the thing that's very consistent that I hear is that they love Avon. They certainly, in many cases, want to build their businesses, and in other cases, they appreciate the additional part-time money but they are very committed to making a difference, and they love the fact that Avon is there for them.

So if we talk about the representative -- transforming the representative experience, it's really making it easier for her to do business with us. We have to understand who she is and then make it easy for her to do business. And we also need to continue to evolve our Avon's Sales Leadership model. If we do this, we'll improve retention, we'll improve recruiting and ultimately strengthen our own business.

So who's our representative? First of all, I would say that our representative mirrors our consumer, but she's our competitive advantage. She is the social connection between the brand and the consumer. She's a trusted partner. She drives the campaign energy. And she really is an ambassador for our products and for our brand. If you look at the segmentation of our representatives, they all genuinely come in because they like the product, they tried the product and they want a discount. And some of them go on and start selling to friends. Others go on and go all the way up from a part-time earning opportunity to a full-time earning opportunity. So what you see on this chart is a progression of how we look at our representatives today. If we look at top sellers up through the top leadership roles on the right-hand side, that typically represents about 10% of our representative population.

What I will say though is regardless of where someone falls on that continuum, what representatives want and what's critical to them is that they earn commensurate with the amount of effort that they put into the business. And what we need to continue to do is make sure that the effort that they put in is in full alignment with their earnings opportunity. And if we do that, it will link to higher retention and ultimately lifetime value.

When I talk to representatives, it's pretty clear they all say, when I asked them how they got into the business and what are their considerations, "Can I do it?" and "Is it worth it?" And ideally, we want the answers to be yes to both of those questions. So can I do it? And we've learned this a lot from talking to representatives but also from a number of our representative satisfaction surveys is: They want service, they want it easy to order, they want -- most of them want to order online. Today we're about 90% of our representatives are ordering online. Some markets it's up to 100% digital ordering. But they want it easy, and from that standpoint. They want to make sure they get the product and know when they're going to get the product. They want enablement tools. And so they -- as I said earlier, we're starting to roll out digital and digital apps. They are just eating it up and taking it and making Facebook pages, et cetera. They want us to help them do that. We need to continue figuring out how to make sure that we're giving them the tools they need, and they want training. In the area of is it worth it? Again, reward, making it easier for them to progress, making it clear on how they're going to progress and certainly continuing to look at how we get more money in their pocket, which is the right product portfolio, the right business model. And we know that when she wins, we win.

So here's an example of some of the digital tools that we're providing. We're taking the paper-based brochure and actually transforming that to multimedia so she can tap in, in a number of different ways. We're rolling out mobile applications this year in a number of our markets, where we have a tremendous opportunity to broaden our reach through that -- this vehicle.

Now just to give you an example in the case of Russia, where we're integrating the consumer proposition with the representative experience. This team has done a very nice job. It's about our fourth-largest market. It's got a new team and they've just been very focused on looking at the consumer and the representative and taking a much more digital approach to the business. So what they've done is they took the brochure and they've looked at a whole 360 approach. So they can see the brochure online in multiple vehicles. So they're really looking at getting to consumers and to representatives through a number of vehicles. They've launched digital and social media, so they have Facebook pages for representatives to share with their consumers. They've got Google Maps, so you can easily find a representative. They are doing some creative things and some gaming online. And then they've taken an approach where they're actually synergizing the recruitment efforts with the product outreach. And so I'll give you a quick example in one of the TV shots from Russia to get a sense of how they're talking about the product, as well as the opportunity. So let's take a look.

[Presentation]

Sherilyn S. McCoy

And then they're bringing the entire earnings model together so that representatives have the opportunity to earn. So they actually put together a new approach where they have a -- it's a simple a communication, more progression, easier to advance, and so the representative feels confident as they go up in terms of their earnings opportunity. So this is an area where they've taken a wholly integrated approach to actually get consumers and representatives excited about the proposition of Avon in Russia.

What we would be doing is taking and sharing some of this learning in some of the other markets. Some of them are already adapting that and taking pieces of that, but we need to continue to look at how we refresh our-go-to-market model in a number of our markets.

Now let's take a look at our Sales Leadership models across geographies. So we have on the right-hand side here the advanced leadership and what I was talking about Russia, Russia would fall into the category of advanced leadership. We have sales leaders and sales leadership pretty advanced, and that's really the focus of that model. On the other side, we have traditional Avon, which is a broader coverage approach. It's more managed by Avon employees. So in the field, we have more Avon employees managing that from a district manager perspective. And then in the middle we have hybrid. And these are markets that we're moving from traditional Avon over to a more advanced leadership to have more opportunities for earnings. Some of them get stuck in the middle, and we call those hybrid. And our opportunity is really to advance the hybrid and get them over to advanced leadership because where they are today, they have conflicts between the 2 models: of a traditional model, which is more tied to the traditional Avon with district sales managers which are Avon employees, versus the Sales Leadership model where we can actually build opportunities for representatives to earn more. So our focus on this globally is to quickly move or accelerate the hybrid markets into advanced leadership and then to continue in each of the markets to make sure that we're competitive, and we have the right earnings opportunity. It's not a one-size-fits-all depending on the competitive situation and where the market is and we need to be thoughtful in doing this. But this is something that's very important as we advance and move forward.

Our third growth platform is optimizing our geographies. If we look at our geographies, it's really, really important for us to make sure that we're putting the right resources and energy against the critically important markets. We need to exit underperforming markets, and we also need to recognize that our businesses and our geographies are in different places, and it's not a one-size-fits-all approach. Brazil, U.S. and China, I'll speak to in a little bit more detail to give you a sense of why I'm saying markets are in different places. And importantly, we have the opportunity to invest in new markets with a clear strategic focus once we stabilize our existing business.

As a reminder, our geographic footprint looks like this, 50% of the business in Latin America; our second-largest region is EMEA with almost 30% of the business. If we look at how we're thinking about our markets, you have -- we're looking at it through external lens, as well as an internal lens. We have the external attractiveness on the y-axis, and that's -- we're really looking at projected growth of CFT markets for the next 5 years. On the right-hand side -- on the bottom side there, the x-axis, what we're looking at is our internal performance, which is a combination of looking at our sales growth historically, our projected sales growth moving forward, the size of the business and importantly, the profitability of the business and where we think it can go. So we've actually looked at our markets with that construct and they -- we've -- I'll give you an example of how some of the markets fit into the different boxes.

So if you look at the upper right, driving growth, Russia and Brazil would fall into that category. If you look at the upper left, these are countries that we want to incubate. We see opportunity to drive growth. So China, Turkey and India are examples there. In the lower left, these are areas where low external and low internal performance, and we will exit those markets. So South Korea and Vietnam fall into those categories. And in the lower right are ones that we refer to as maintain and leverage. So examples would be Australia and Italy. What you see in the middle is what we call fix. Which is U.S. and U.K., and really, the focus there is to get the U.S. and the U.K. to the bottom right. So it's really trying to get them over to the other side and make sure that we are stemming the decline, so that they are not a drag on the business and we can invest in the top of the chart. That's how we're thinking about managing our geographies.

I'm going to take you through the 3 geographies -- the 3 markets, Brazil, U.S. and China, and give you some perspective on those. First of all, Brazil. It's the #3 beauty market in the world. It's a driver of Avon growth, a very competitive market but a very attractive market. We have a strong foothold with over 10% share, and we've had our own challenges. What I will say is getting the consumer proposition right and getting the representative earnings opportunity right, I am confident that we will gain -- regain share and continue to drive that business. There's a lot of work to do in this area but certainly, as we look at the opportunity, we think it's very attractive.

What we've done has been very focused on stabilization. We've strengthened our management team, and they're very focused on the consumer and representative and execution. They're very operationally disciplined and connecting the dots and making sure they have an integrated approach. They've begun focus on getting the right product, so locally relevant products. They've invested in recruiting and starting to see strong -- some strong results in that area, and they are gaining traction on some of the service issues that we've been dealing with. And they've strengthened their inventory and cash management processes.

What we need to do is invest to win, and that means we've got to continue to build our internal capabilities and execute, execute, execute. We have to continue to improve our local relevance, particularly in the area of fragrance. Continue to improve the ease of doing business, and the team has done a very nice job where they have dashboards and they pulse representatives on an ongoing basis, so they are very close to the field and what's happening there. And they are very committed to energizing their representatives to make sure that we have the right earnings opportunity for them and that we have the right and the differentiated product portfolio. And they will continue to invest in the brand and the opportunity moving forward.

Now let's talk about the U.S. There's a lot of energy around the U.S. Certainly, it's a big market, is an important market, and it's important for Avon. This is an area where we've taken some actions. We've taken a fresh look at the business to understand what we need to fix, and it's clear it's not a single solution. We've continued to work through redistricting in the sales force, and we've begun to put more effort behind recruiting to get people back into the franchise, and we've made headway in improving the cost base and the cost situation. With that said, that's not enough. We have a lot more work ahead.

What we need to do is to strengthen the brand and continue to improve access so that the brand is top of mind. We need to significantly improve our marketing and merchandising and make it easier to shop with Avon and do business with Avon. We need to continue to rebalance the earnings opportunity and the product portfolio, continue to focus on the field, and importantly, to continue to look at how we are going to simplify the model and reduce cost. So as we focus on the U.S., again, it's an important market, we have a lot of work ahead. We're making strides, but we have a lot more to do.

China. China is a big market and clearly, we are underperforming. We lost time in China, frankly, and we need to stabilize it and then invest to grow. So what happened in China? Over the last 15 years, the Chinese business model switched back and forth between direct selling and retail or beauty boutiques. And this has confused the market and confused the people in the market. We've also had some issues with lack of focus and not paying attention to the Avon brand. And so the brand health has deteriorated and our business has stalled.

What we've done to this point is we've clarified the situation. It's clear to us that our best approach for stabilizing the business and succeeding in China is to take what we have in terms of the retail business and support the retail business and build upon that. We've implemented a stabilization plan around that, so we're reallocating internal resources from direct selling to retail, and most of the business today is retail. And when I say retail, I'm referring to the beauty boutique owners who've put in place their own shops and they're selling Avon. And we've begun to rebuild in Tier 3, 4 and 5 cities.

What we need to continue focus on is getting the right product pipeline and getting the right pricing strategy. For a number of years, we were discounting heavily and that certainly doesn't help build the brand, the brand image, and we have an opportunity to get the pricing strategy right as well as the new products. The good news is we have capabilities in the market in terms of R&D and manufacturing, so we can do that, but we have to have the right focus there.

We need to continue to support the beauty boutique owners and build back their trust, making sure that they have the resources to help drive their business, and we need to make sure that we're working with the consumers, we're working with media, we're working with all of our key stakeholders to build trust in the brand, and we're putting effort through social media and a number of things to continue -- to start and then continue doing that. And once our business is stabilized, then we will invest for the long term to accelerate growth.

To give you a sense of what we're doing when I refer to beauty boutiques, we have about 3,300 beauty boutiques today that we've already upgraded, and this is just around signage and lighting and some simple things. What we're looking at though is as the beauty boutique owners build their business, is to invest with them in their business and help them put new facings in the store and help them continue to build their business. And so that's really the model that we're working against and we'll keep you posted on that as we go.

And ultimately we would love to enter a number of new markets and there are a number that, I think, are quite attractive relative to the CFT market and where we see growth coming. Right now, we are focused on stabilizing our core businesses and our core markets, but we will come back and continue to evaluate that as we stabilize our business.

So that was the priority around executing growth platforms. It was really around innovating the consumer proposition, transforming the representative experience and optimizing our geographies. We also know that we need to drive simplification efficiency and get cost out of our business, so we are focusing on some short-term cost initiatives. We have some things that are longer term and are more ingrained in the business model that will take us a while to get to. And then -- but we know we need to continue to look at those now and execute those as quickly as we can. And we're looking at how we modernize IT and leverage digital connections. We're spending a lot of money against that, we're going to continue to focus on this and this is something that's very important for us moving forward.

Kimberly is going to take you through a lot more detail on that as we go forward, but I -- the thing I want to say is we are making progress with our $400 million cost target. We are going to continue to look at the business model simplification, and we're going to continue to focus on IT, which is a critical enabler in terms of the consumer and the representative experience, as well as our own internal capabilities from a disciplined and decision-making perspective.

Our third strategic priority is organizational effectiveness. And this is really critically important, is that we take a hands-on approach, and we set the tone at the top in terms of accountability. We set goals, and we deliver on those goals, and it starts at the top of the house. We are continuing to upgrade our talent, really, really important, it's a management-intensive business, and we need to get the right people in the right jobs in our critical markets. And it's very evident to me that we've made good progress in this area. We have more work to do. We also have gone and talked a lot to our employee population about one team, one Avon, and winning together, and so we've linked the leadership behaviors, and we're clear on what those leadership behaviors are, with our performance management and with our compensation. So we will be rewarded together in terms of how we win as one Avon.

We also know that people drive results, and I'm a firm believer that everyone needs to be on the same page in Avon. So we've been very clear with our associates about what our objectives are and what our metrics are for success. We've rolled out a new talent management process so that we're building internal capabilities as we're bringing in external capabilities and getting that balance right, but continuing to make sure that we have direct selling capabilities. And we've begun getting people excited about Avon again within the company. And so we've launched a whole new program called I Use Avon, and certainly I use lots of Avon products every day and I know you're going to be getting goody bags, so I hope that you'll use Avon and if you have any feedback for us, we'll be happy to take that but it's really about getting our employees engaged in the turnaround and the mission moving forward to take Avon to where it needs to be.

So I'm going to turn over to Kimberly now and she'll come back and talk about the simplification and take you through SG&A and some other things and then I'll wrap up at the end. So with that, I'll turn it to Kimberly.

Kimberly A. Ross

Thank you, Sheri. Good to be here today. So I'm going to walk you through our financial goals. Some of the simplification and efficiency as Sheri said, and a little bit of an update on working capital and capital structure. And then just a brief moment on our 2013 outlook.

So starting with our financial goals, as we've stated at the end of quarter 3, our financial goals are to achieve mid-single digit revenue growth, low-double digit adjusted operating margins, at least $400 million in net cost savings and $100 million-plus in lower working capital. And it must all be sustainable. So Sheri talked a bit about the mid-single -- or quite a bit about the mid-single digit revenue growth and what's going to help us in achieving that goal, and of course, much of that flows into the low-double digit adjusted operating margins, but then I'll talk about the other 2 items.

Starting with cost and simplification and efficiency. So if we look back from 2009, we can see that our SG&A has been going up each year. That has impacted our operating profit, which has been coming down, and consequently, it also has been impacting our cash from operations. If we look at the impact of SG&A, you can see here that from 2009 to 2012, in constant dollars, we have gone from $5.4 billion of SG&A to $6.1 billion or 300 basis points increase since 2009. Now one of the questions that many of you have asked is what is in your SG&A? What is in RVP? We get this question a lot. So we -- I can assure you, we have spent a lot of time digging in and really understanding what is in each of these categories, and this is how we are looking at it now.

So if you look at our selling expenses, which includes things like our sales leader-related expenses of incentives and recognitions and tools and fees for example, in there, it's approximately 35% of the spend in SG&A. If you then look at our marketing, it's approximately 15%. That includes things like our advertising, our brochures cost and fees as well some of the rep tools that we provide. Looking at distribution, approximately 25% there. This has freight in it, obviously, to get the product to our representatives, as well as it has some other costs like our customer care included in there. And then our administrative bucket is about 25%, $1.4 billion, and that includes the usual suspects of IT, finance, legal, HR, and those type of categories.

So in total, we have $6.1 billion of spend, approximately 54% of that is variable and approximately 46% is fixed. So these are the buckets we are focusing on in order to go in and deep dive to look for the initiatives to achieve our targets. And as you can see, we've had increases in almost all buckets. Now, earlier, the company made a decision -- a strategic decision, to spend more in the field in selling and less in marketing. We want to make sure that we have the flexibility to be able to move both tactically and strategically between selling and marketing expenses. The key thing for us in this area is how do we improve the return on what we get. And I would say we're in different places in different parts of the organization with regards to our understanding and the return of what we get with regards to the expenses that we have in these 2 areas.

As Sheri mentioned earlier, we have a new head of marketing. I'm really excited about her joining. I'm already seeing a lot of great ideas that she is bringing to the table and she is very focused on how do we make sure we get the right return for our spend.

We then have the distribution expenses that have gone up, about 130 basis points. This has been impacted by inflation in Latin America, where we do have some inflationary countries there, but also we've had things such as dual distribution costs and other items that have been impacting that number. And then administrative, we can see that we've gone of about 110 basis points, $208 million, about half of that is from legal expenses and then there are other admin areas where the costs have been going up. So in total, 350 basis points of increase.

So this is the area that we're going to be focusing on, and this is how we're going to be talking to our SG&A going forward. Now we won't necessarily be giving you all this breakdown all the time but what we will be doing this talking a little bit in shades of color as to what's going on in each of these buckets in the areas we're focusing on.

With that said, gross margin has also been impacted. So Sheri talked a little bit about some of the initiatives around pricing and things that are impacting pricing and discounting. So while we've had price increases, we've also had discounting taking place, we've had change in mix and quite frankly, the capabilities are not where they need to be to make sure that we proactively always understand exactly how we are going to come out with regards to our pricing and our mix to ensure that we have the right outcome at the end of the day on gross margin. So that scenario that we will be focusing on throughout the business, again, our new head of marketing is already working on this, and we talked about the level of discounting that we have, as well as ensuring that we get the right prices in the right markets for the right products.

Also we've been impacted by direct labor and overhead and materials and logistics. So when we set out the target, we said that we'd be primarily looking at SG&A, but also we're going to be looking to get some cost out with regards to overall gross margins --line items that impact gross margins.

Then looking at our strategic priorities. So Sheri had this box in her 3 strategic priorities, the drive, simplification and efficiency. Reducing short-term costs, simplifying the longer-term business model; increasing the discipline and process. If there's one observation I had and I think many of those that are new to Avon is that process is not something that we're as good of. Innovation, Avon is great at, process is where we sometimes tend to break down, and we need to modernize IT and leverage the digital connection.

So what have we done so far? First and foremost, is driving a mindset of cost savings throughout the organization. So this is something that I've spent a lot of time on talking about this year, that we need to make sure that not only every penny counts, but also that the bigger initiatives are in place and that we are all responsible for cost at Avon at the end of the day. I do think we made some progress in this area last year and we started to see some benefits coming through at the end of quarter 4. We've also looked at the closure, and we announced the closure of South Korea and Vietnam. These markets were markets where we either had a very small market share or the level of complexity and the amount of investment that was going to be required to go into that really did not justify the amount of return that we thought we would get back from it. So it also removes complexity at the end of the day, taking out some of these small markets that are not really profitable for us and would require significant amount of investment. We announced the closure of 2 distribution facilities in the U.S., again, that will remove complexity from our organization and cost. And we've announced a 1,500 headcount reduction.

So if we then look at what are some of the tactical -- what I call tactical, more shorter-term opportunities that we have. So essentially 3 buckets. First, indirect savings initiative. I talked to you about this before earlier in the year, we had our first phase of this. We've put together a team. We did get some outside assistance of folks that are really experts in indirect sourcing to help train our people up on how to go through this. And we went to the first wave of it in the second -- in the third and fourth quarter of last year. We're now going into a second wave of that, and we're looking at everything.

So professional fees, including fees such as legal fees, travel and meeting expenses, as well as brochures cost, paper, print, everything is under review across the organization. And really also making sure that we leverage our size because what we found is in many times, we had different people negotiating with the same party or using different suppliers and not really getting the leverage of the size of Avon. So that work is underway. We have a great team on there, and I'm really pleased to see that our capabilities are developing in this area. We had done quite a bit of work in direct sourcing in the past, more work to be done there, but the indirect was an area that we hadn't really tackled before.

If we then look at supply chain and manufacturing efficiencies. I talked to you before about project agility, which is where we're tracing the life of a SKU through the organization and really trying to figure out how can we get fewer inventories online because we'll be able to have more speed to be able to meet the needs of the business. This helps us reduce the amount of warehouse space we have. It helps us reduce the amount of inventories we have and all -- at the end of the day reduce costs. Then we're looking at the driving manufacturing productivity, lean principles, airfreight reductions. We got into with some of the service issues where we're doing a lot of the airfreight, so we're reducing that down and making sure that we're only using it when we have absolutely need to. And looking at the other areas, the geographic portfolio which Sheri talked to you before.

We then talk about longer-term embedded business complexity. We have the customer representative side, we have initiatives taking place there such as the campaign cycle. Looking at that, can we streamline it down? These are long embedded practices in the company. We have to change consumer behaviors, we have to change representative behaviors, we have to change systems. So these are things that we'll be analyzing fully and coming back to you with where we end up at the end of the day. Sales model simplification. Incentives. The complexity around our incentives that sometimes even our representatives don't realize that they've earned a prize because it's too complex.

Size of line is another one, and I know in the past there's been some reviews on size of line. Here, what we're going to be looking at, is even in our product innovation for example, 20% of the products that we sell are approximately 80% of the -- 20% of the products we innovate are about 80% of the sales. So we have a lot of innovation that's not necessarily bring anything to the sales line.

Administrative. Financial reporting, going to standard general ledgers and single systems will allow us to simplify and go into shared service centers and overall simplifying some of the systems we have. The innovation process is one that we've talked to before but in some cases, we're gating things 3x before we actually get to the end product. And standardized components and materials. An example of this is in Latin America, we have approximately 60 different types of spray nozzles in Latin America alone. Do we really need that many?

So these are some of the buckets, it's not all-inclusive, I'm giving you some ideas here of what we're looking at. If I then look at investing in IT and CapEx, we said it's about $150 million to $200 million that we'll be spending. We'll be looking at improving our infrastructure. Retiring some of the legacy systems, not uncommon for a company the age of Avon to have many legacy systems that then have many interfaces. So we'll be looking to streamline that down. We're going to look at further simplification in supply chain and the effectiveness, as well as the systems there, as well as the GL feeding into some of the supply chain and ERP systems.

We're going to look at improving the representative experience. Sheri talked a bit about this. So the online experience, making it easier for the representative to be able to do business with Avon. We have the service model transformation system. The company's talked about this before. We will be piloting that this year in Canada. And then boosting the end customer engagement. So improve and further rollout our digital tools and our mobile and connect. About 50% of the spend is our estimate today and will be spent on improving infrastructure and simplifying, and the other 50% is on improving the representative experience and boosting the customer engagement.

If I then look at an update on working capital, many of you know I'm a really big fan of cash. I like cash a lot. We've put a lot of focus on that this year and -- 2012, I should say, and approximately 25% -- or 25% of the bonus, the financial component of the bonus, was tied to working capital improvement last year. This year, we're actually going to increase that. It's going to be about 1/3 this year. So we're going to have equal between driving top line, operating profit and cash. So we made some improvement here, 12 days working capital overall. The key is to make sure we make it sustainable.

And looking at how we're going to do that in some of the opportunity areas, we talked about the accountability of inventory. I think we made strides there this year and that was partially what helped us with regard to clear accountability for all inventory. We need to improve the demand forecasting. This is one of the key things to improving overall working capital, and it also impacts us throughout the business chain. So forecasting of what the demand is going to be is more difficult in direct selling, but with that said, our processes are not as robust as they need to be, and we need to improve in this area in order to make real progress.

I talked to some of the agility already, and accounts payable, we're improving vendor payment terms. We made progress in 2012 on that, more to be done. The prepaid, we're paying ahead of time for brochure costs, as well as some of the promotional materials. And also the utilization -- quicker utilization of some of our tax assets, really diving into some of those balance sheet lines. And then on accounts receivable, we need to improve the balance between sales and credit and implement the best practices for collections across the group.

Then going to capital structure, just very quickly, the steps we've taken so far. We've amended the revolver covenant and the $1 billion credit facility, giving us the flexibility we need in order to make the changes the we need to do in the company to drive the stabilization, but also giving us the headroom for things like devaluation of Venezuela and the Silpada impairments that we had in quarter 4. The private placement, we'll be buying that out by the end of March, is when the payment is going to be due. We took the noncash tax charge, enabling us to repatriate cash from abroad. And we are in advanced negotiations with the banks to refinance our credit facility and upcoming debt maturity. So more to come on that in the near future.

Then just quickly looking at the 2013 outlook. As I said in the last earnings call, we'll be managing 2013 to a conservative level of sales growth with a focus on sustainability. That is the key. We're expecting some modest margin recovery. But that said, we did say that we do expect to see some deceleration taking place in quarter 1, particularly Latin America will be impacted by Easter, continuing to focus on identifying and implementing cost savings and driving the improvement in working capital. We're expecting CapEx spend to be approximately $300 million. Planning on CapEx spend can always move a little bit but that's more or less where we're at. And we will be focusing on refinancing the upcoming debt maturities.

And I just want to remind you, we have said, and I've been through turnarounds before, they don't tend to be linear. So we will have some volatility going through this process, but with that said, our ultimate objective is to get sustainability and to have less volatility in the future.

So with that, I'm going to pass it back over to Sheri.

Sherilyn S. McCoy

Thanks. So before we close, what I thought would just do is sum up what we look at in terms of success in 2013. So as we look at the financial goals, as Kimberly said, it's about modest improvement in our financial performance, improving our capital structure. On the executing growth platforms, we will measure our performance by year-on-year performance in CFT category. We will be defining new metrics for representative satisfaction and how we look at field health. We'll also be measuring focus on geographies and looking at year-on-year performance for Brazil and Russia. We will be expecting to stem the decline in the U.S. and the U.K. and we'll continue to exit markets as appropriate.

In the area of simplification, the key measure there, and Kimberly walked you through how we're looking at SG&A, is really to reduce SG&A and continue to focus on our IT plan and importantly, retire the IT legacy systems. And in the area of improving organizational effectiveness, it's about strengthening the leadership across the key markets and continuing to make progress on our litigation matters. And so as we sum it up, that's how we're looking at 2013 in terms of key deliverables.

Certainly, that's on the journey to the bigger version, which is really to restore Avon to its rightful place as an iconic beauty brand that consumers love and demand and to reinforce our global leadership position in direct selling and to continue to build on our legacy of empowering women. So thank you for your attention today.

Sally Dessloch

Great. I'd like to thank Sheri and Kimberly for their presentation. We're going to move directly to the breakout room now for Q&A as we've reached the end of our session. Thank you very much.

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