Avon Products Inc. Presents at DbAccess 10th Annual Global Consumer Conference, Jun-12-2013 02:00 PM

Jun.12.13 | About: Avon Products, (AVP)

Avon Products, Inc. (NYSE:AVP)

June 12, 2013 8:00 am ET


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

John P. Higson - President of EMEA and Senior Vice President Global Commercial Operations


William Schmitz - Deutsche Bank AG, Research Division

William Schmitz - Deutsche Bank AG, Research Division

To welcome Avon back to the conference after, I think, a 5-year hiatus. So obviously, we very much appreciate that, everyone at Deutsche Bank. With us today is John Higson, who runs the EMEA business for Avon; and then Kimberly, the CFO, is going to start the presentation. Thanks, Kimberly.

Kimberly A. Ross

So good afternoon, it's great to be here. I've lived in New York for 10 years until I joined Avon a little over 1 year ago, so it's great to be back over here. It's been a really interesting time at Avon, and 2012 clearly was a challenging year, no doubt. But we've seen some early signs of stabilization, but we still have a lot of work ahead.

And so, first, before I begin, I'd like to refer you to the cautionary statements in the appendix of today's slide. So now that we have that behind us, what I'm going to cover today is talk about our strategic priorities as we've laid them out, and I'm going to spend most of my time talking about the growth platform.

Avon has really special characteristics. It's an iconic brand with great global awareness. We compete in a very attractive market and very attractive Beauty category, which is a growing category. We have the strong geographic footprint, primarily in the developing markets, and we have 6 million plus representatives around the world who love Avon and who sell our products. And we have quality products at a very good price, and we have a very powerful legacy of empowering women around the globe.

The Beauty market is $400 billion, and it's projected to continue to grow at about 7%. And as you can see on this slide, developing markets is expected to grow 12%, and this is for the time period through 2017. So definitely where Avon has 75% of their revenue coming from developed markets -- developing markets, we're well positioned for growth. And direct sales have also continued to grow. Here you can see 14% growth from 2009 to 2011 and expected to continue to grow.

If we look at our geographic footprint, Latin America is our largest region, with approximately 50% of sales, and the second-largest region is EMEA, which is Europe, Middle East and Africa with almost 30% of the business, and again 75% of our business is in the developing markets.

And if we look at our category mix, you can see we have a diverse portfolio. But in general, our share had been down in most of the categories. And we need to strengthen our category proposition, and we're going to be focusing on 4 main categories, being Fashion and Home, Fragrance, Color and Skincare.

So if we look at what's taking place in the marketplace, consumer shopping behaviors are changing, and there's a complex dynamic between retail, direct sales and online. People are getting and looking for information and products in different places today. We also have the impact of mobile and how consumers are using that, as well as how people are using it to sell products. But one thing continues to be true, word-of-mouth is still the most trusted source. And Avon, having 6 million plus representatives, bodes very well in the market, because we have that embedded social network with our representatives.

So let's take a look at the current -- at the Avon situation. We had a new CEO came in, Sheri McCoy, in April 2012, and this is essentially what was -- what she found: The business had been underperforming for years; the financial health of the company had eroded; and we had disappointed stakeholders. The problems that we encountered didn't happen overnight, and there's not a single fix, and it'll take time to fix. But with that said, she, as well as the rest of us that are relatively new to Avon, feel very confident that the issues are fixable.

And if we look at where we are right now, we have a very clear sense of urgency to turn things around. We need to tackle the near-term issues quickly, identify some of the longer-term challenges and address the plan to fix those and really focus the team on priority activities. It's as much about what we need to be doing as what we need to stop doing. And really drive accountability and results within the organization. And we really have a relentless focus on putting the consumer and the representative back in the center of everything we do every day. And we've made some progress since last year.

We've upgraded some of the senior talent, about 2/3 of the way along where we want to be with regards to some of the changes in personnel. But with that said, making sure that we keep a balance of those that have been in direct sales for a significant amount of time, with some of those that come in with a fresh perspective on things. We've implemented a stabilization plan for each of our key markets. We've prioritized our product categories and where we're going to focus. And we're putting on fast track our mobile and social media. We have begun to reduce the cost base, and I'll talk a bit about that in a minute. And we've improved our focus, overall, on cash management, and we've improved the overall capital structure and capital position of the organization.

Now moving forward. Last year, we announced our goals, which by 2016, we said we'll achieve constant-dollar revenue growth of mid single-digit, adjusted operating profit margin in low double-digit, cost savings of $400 million and a working capital improvement of $100 million, which we consider these targets to be aggressive, but also to be reasonable.

We then looked at how are we going to achieve that. We set out our strategic priorities that are comprised of 3 platforms: one, execute growth platforms; two, drive simplification and efficiency; and three, improve organizational effectiveness. And again, putting our consumers and our representatives at the heart of everything we do.

Today, we're going to spend most of our time talking about executing growth platforms. And if we look at that, we essentially have 3 legs under that strategic priority. One, which is innovate the consumer proposition and product offering. The second is transforming the representative experience and optimizing our geographies.

So if we start first looking at innovate the consumer proposition, it is very important that we innovate the consumer proposition because this is key to how we think about the brand and how we make sure that we improve the earnings proposition for our representatives at the end of the day. So it's not just having the right products. What we need to do is we need to sharpen our consumer insight and really deliver relevant products in the market to the local positioning.

I think, in Avon, there was an effort, in order to get more synergies across the organization, that we centralize quite a bit of the functions. But in doing that, there was a loss of relevancy, in some cases, to the local market. And what we're doing now is trying to find the middle spot to make sure that -- where our products are relevant. But with that said, it's not just about having relevant products, we need to make sure that we have the right rhythm of innovation. Sheri has said that one of the things she doesn't necessarily worry about is our ability to do R&D. We have good R&D, but we need to make sure that we have the right rhythm, the right positioning and that we have the right pricing by tier. We also need to make sure that we create a global consistent brand and brand image that drives the brand health, and health, at the end of the day, support the initiatives with the right products and making sure that the representative has the right -- the ability to sell more because people recognize the brand and recognize the product.

So in order to do that, we've hired a new head of marketing, and we're looking at making sure that we get the right mix of media, and that we also leverage the power of the brochure. We print over 1 billion brochures a year around the globe. And so that in itself is a tool that we can use, both the representatives, but as well as the company as media. And we need to significantly increase the use of digital and use e-commerce as appropriate.

Who -- if we then look at the consumer, because we've said we want to put them at the center of what we're doing, who is Avon's consumer? She's multicultural, lower income, and she's across all life stages. She thinks about beauty in a very holistic way, not only from the neck up. So we also need to be thinking about beauty in a holistic way, not just from the neck up. And therefore, the 4 key priorities that we'll be focusing on in our category need to work together to bring a world of beauty to our women at home. And the 4 priorities -- the 4 categories, as I said, are Color, Fragrance, Skincare and Fashion and Home.

We've developed strategies for each of these categories. And if we look at each of them starting with Color, Color really is the entry point for Avon. And it's critical that we continue to deliver a competitive offering across all tiers in the Color offering, and we need to continually be refreshing the product offering.

If we then look at Fragrance, Fragrance is really critical, and it's our largest CFT category at Avon. And within that priority, it really is making sure that we win in our top 3 markets, being U.S., Brazil and Russia. And Fragrance also really impacts the overall brand imagery for the company. So it's one that we really need to get right.

And then if we look at Skincare, it's a very critical category, and I'll spend a bit more time doing a deep dive into that category in a minute.

And then Fashion and Home. Fashion and Home is a huge market, and it truly is a differentiator for Avon. And it gives an additional earnings proposition for our representatives. But we must stay very focused and really stay close to what we call Beauty as a big B, meaning products that truly are about Beauty and not moving into other categories that aren't necessarily related to the Beauty category.

So now let's turn to Skincare. So Skincare is a very attractive category, and Avon has some strengths in this market. First of all, Beauty is the #1 category -- I mean, Skincare is the #1 category in Beauty. And the sales are approximately $100 billion around the globe, and it's expected to grow 6% to 7%.

The Skincare consumer is very important, and it's also a very loyal consumer. Once they start with a product, they tend to stay, continue with the brand. And in Avon, our ANEW brand, which is skincare and anti-aging is the #3 brand globally and very well known. We have great technology in this market. Avon has been known to be in the forefront of technology in skincare over the years.

We've been struggling. So we've been losing share in this area, and our current portfolio approach and innovation are not necessarily driving sales. And what sales they are driving are not necessarily incremental. And we're underdeveloped in the mass moisturizers and cleansers. And our representative participation is very low in this category. At one point, ANEW was the #1 brand around the globe on anti-aging, this is as recent as 2006. And we really see an opportunity to regain this positioning over time.

So what are some of the areas that need to be addressed? Our offering is very complex. It needs to be easy for the consumer to be able to figure out how to buy and how to use these products and important also for the representatives to be able to explain the category.

As I said, we've seen declines in our anti-aging segment, and we need to improve our mass and value, and particularly in the age -- in the area of cleansers, as well as moisturizers. And as I mentioned, innovation has not necessarily been incremental despite the fact that we've had great new products and innovation coming out. And the representative participation is extremely low.

So our Skincare strategies are to restore anti-aging leadership, develop competitive mass proposition, recalibrate the innovation model and optimize the offering that we have for the representative and the consumer.

And we have some areas that we've laid out here in order to address this. Being, first of all, simplifying and make very clear what the brand architecture is and communicate that in a clear and concise manner. We also need to implement guardrails. We've been very uneven in how we price and how we roll out new products around the globe. So in some markets, it may come out discounted, in other markets, it's not. And so we've been very uneven with how we price our product.

And we need to support some of our larger launches on a more consistent basis. Some folks have called it launch and abandon, that we put new products in the market and then we don't really put the support behind those products to make sure that we get the traction and that we build the recognition for the product. We need to ensure incrementality, and we need to improve the representative training and the tools that we give her in order to enable her to be able to sell skincare products.

So it's going to be a journey back to growth on Skincare. What we've done so far is we've appointed a new Chief Marketing Officer and a new Head of Skincare. We've announced a new marketing structure that makes it very clear who does what within the organization, and we've developed a new strategy for Skincare that we're rolling out to all the regions.

Some of the next steps is with the new -- is to improve the communication around Skincare and the architecture going forward. And as I mentioned, support our launches in a more consistent basis around the globe, and also deploy the new selling tools and making it easier for women to be able to understand the category.

So now, what I'm going to do is I'm going to hand this over to John to talk about transforming the representative experience, which is our next growth platform. John is, as was stated, is from our EMEA region, and they're doing some very interesting things in the area of modernizing our channel and our representative experience. John?

John P. Higson

Thanks, Kimberly. Just by way of an introduction, let me give a little context on my history at Avon in relation to the comments that I'm going to make for you today. I joined Avon in the U.K. in the sales management team 27 years ago. I've spent most of the last 20 years living and working in Central Europe. During that time, I've done 2 periods as Head of Global Sales in New York.

So just in terms of where we are as a company and understanding the needs of our representative and making it easier for her to join the company to be successful and to earn, a lot of the work that we've done, and those of you who are familiar with the Avon story will know the story around our Sales Leadership journey. We are the only company in direct selling who started as a single-level, home direct seller, who is trying to make the journey into an advanced leadership system whereby representatives can recruit and develop representatives of their own in order to make an income.

The way we characterize this journey is typically there -- from the traditional model where 40% of our markets, the likes of Brazil, are still in the original traditional model. The other 60% of markets, over the course of the last 15 years, have set off to migrate towards the advanced leadership model. Around half of them have completed that journey, countries like Russia and a lot of Central Europe are through that journey and into advanced leadership. I would characterize advanced leadership as when the vast majority of your sales are coming from representatives recruited by other representatives.

What you've got in the other half of the countries who were on this journey is what we characterize as a hybrid market, where you still got salaried zone managers appointing and training representatives, alongside sales leaders appointing and training representatives. You end up with a double value chain, and you end up with complexity and contradictions in the model, where they're competing with each other. Markets like the U.S. and the U.K. are still in that hybrid state.

It tends to come about because everybody has a different starting point. And the way out of it will be different by market. But I think as we've gone on this journey in the last 15 years, we understand far more about the path that each country is going to need to take to get all the way over to using the leadership model to drive coverage.

Now I'm going to talk to you about a few examples from the EMEA region. I came back to EMEA in April of last year, and there's a few areas of the business where we had opportunities to improve our model based on the work that I've been doing in my last global role in New York. And areas where, I would say, EMEA is probably ahead of some of the other regions in Avon. So in terms of our transformation of the representative experience, these would be examples where EMEA is leading the way and the other regions are following.

First thing that we did when we put the 2 regions that we had, Central and Eastern Europe and Western Europe, Middle East and Africa, together in April of last year as one region, we put them into 7 consumer-aligned cluster groupings around our major markets of Russia, the U.K., Turkey and South Africa, so that we could focus more on improved customer relevance, eliminate some of the inefficiencies that were in the model working with 2 regions, get to faster decision-making and to better leverage the talent that we had in the region against the opportunities.

The very first thing that we looked at was getting back to fundamentals and back to basics. Direct selling is basically a coverage model. If you are growing your points of distribution, so growing your active representatives, you have a healthy model, we'd lost sight of that as a business. And equally, if you're driving unit growth for the sellers, the sellers are likely to be more successful and likely to stay with you longer, which actually benefits your value chain. So it was really a focus back on those basic facts. Grow the number of distribution points you've got, and make sure those distribution points are selling more units.

But then we had 2 big areas of opportunity where our journey to more of an online support mechanism for our sellers was the service fulfillment of those sellers was not keeping up with the services that we were providing online for representatives to connect with their customers. So one, in the area of the representative service model, how do we actually supply their orders after they place their orders; and two, in the line of the digital support that they get, how do we make it easier for representatives and their customers to interact online.

Kimberly said we've got the original social network at Avon, and the people are dealing with people that they know. Today, people deal with each other on their Facebook site, online, giving them tools to be able to take their Avon business there with an obvious win for us.

If I start first with a service model example. As recently as 5 years ago, the way that we supplied orders to our representatives hadn't changed much from the middle '80s when I joined the company. The -- each campaign lasts 3 weeks, 15 working days, depending on where you live. You had a mail plan, which was the day you were allowed to submit orders in each cycle. Those orders were processed over the next 7 days and delivered free to your home. The whole operation was paper-based.

What we've moved to over that 5-year period, at different pace in different countries, but anywhere, anytime, anyhow. We introduced premium services. So you could have 24-hour delivery for your order as a representative for a fee that was competitive with other online service models. You could go to the local post office, and in a lot of our rural areas, the local post office is very convenient. You don't have to arrange for somebody to be at home to take delivery. And in Poland, in particular, the parcel machines, that you see pictured here, a company called InPost that we partnered with last year, have over 2,000 of these sites located around the country. And we offered representatives the chance of 48-hour collection from these parcel machines. They submit their order online, they receive a text message when their order is at the parcel machine, with -- the text message contains a code, they come and open the box and take it. It takes cost out of our model because we're delivering to less individual points.

If you look at what's happened in Poland over the course of the 3 years of this journey at the start of the journey, something like 85% of all orders were free to the representative's home on a 1-week turnaround. The minute we started offering them a faster turnaround, even where there was a fee attached, they valued convenience over the standard model. So they self-selected into express home delivery. About 20% of representatives today are on express home. As we opened up a post office options, around 30% of them have moved into post office collection. Around 30% are currently in the pickup points, those parcel machines.

So you've gone from a distribution system that was very inflexible and really organized for the benefit of Avon to something that is designed now for the benefit of the representative, and she's willing to pay for premium services. So this whole journey has been cost neutral for Avon. It doesn't add any cost, and it provides far better convenience for the representative.

As I said, we set out, as well, to remove the paper ordering. We, as far back as 5 years ago, started the journey in Central and Eastern Europe to get 100% of representatives' orders online. We achieved that within 3 years of starting. In Western Europe, we're not all the way there yet, we're still in the high 90s. So we still have a small percentage of representatives who prefer to send in their order on paper. With the introduction of now mobile, so a representative can enter on her mobile phone while she's with her customer the order and collect it on her desktop at home and then consolidate the order to send in. We envisage we will complete the journey to 100% online in EMEA sometime this year or next.

And from a representative's selling point of view, in the past, her interaction with her consumer was entirely with a paper brochure. You've now got, in addition to the paper brochure, and Kimberly said we print over 1 billion of those worldwide in a year, you've got an omnichannel experience where there's an electronic version of the brochure that the customer can send to her Facebook site and share with all of her friends on Facebook. So she can order from that electronic version, the order goes back to her representative for fulfillment.

And in Russia, what we've added, just in the last 4 weeks, is the additional option. Because previously, the electronic brochure was forwarded to customers by the representative. We've now linked up that a customer coming online gets that same experience. She can complete her order and send it to a representative even if she doesn't have a representative today, the addition of the Google maps feature allows her to easily select a representative close by who is willing to service new customers. And we're getting that additional tie-in of providing a much more convenient online service.

It's no good providing all the tools online if you don't get consumer-relevant marketing. One of the things about opening the Moscow marketing center last year was we've started focusing on product for the Russian consumer. The ingredient stories in skincare are very important in Russia. Natural ingredients is a huge selling point.

So just in the last 4 weeks, we've seen the launch of natural botanicals, a local creative developed by the Moscow creative team. That product is selling over 200% of our launch estimates since we opened it at the beginning of June.

If you also look -- we talked in our first quarter earnings call about the success of the Luxe brand in Russia. This is a premium Color brand that we launched, about 20% to 30% premium priced, to our flagship Avon Color range. We launched it in the fourth quarter, got very good initial engagement from consumers, particularly in lip color and eye. In order to broaden their experience into the brand, we've done more merchandising with the Russian group to get them into foundations and press powders. This particular merchandise offer from the first quarter again sold over 200% of what we expected. So getting the right product, getting the right creative execution online and getting the right merchandising techniques is really paying off for us in the journey to a more omnichannel experience.

So in summary, where I would say we are as a region in EMEA is we've got now a roadmap for each of the markets. I think we understand the levers for growth, and we're seeing positive signs as we execute against those. By combining 2 regions into 1, we're able to better leverage our fixed costs. And together with targeted efficiencies that we've been going after on the SG&A reduction program, we are starting to restore our operating margins.

But one word of caution I say, and Sheri has said it many times, is this is not linear. It's country by country, everybody's got a different starting point. But knowing where they're starting from, we are making progress everywhere. It will be a long journey till every market is hitting on full power.

And with that, I'm going to turn it back over to Kimberly.

Kimberly A. Ross

Thank you, John. Now I'm going to talk about the growth platform of optimizing geographies. So it's really important for us to make sure that we're putting the right resources and energy against the critically important markets in our portfolio.

In order to do that, we've been evaluating, exiting some underperforming markets, and we have announced, so far, that we've -- are exiting 3 markets. But I think also it's important to know that it's not a one-size solution. Our markets are in different places. As John just said, our starting points are different and the solutions for different markets is different. And once we work through the optimization of the geographies, we will work towards investing in new markets with a clear strategic focus.

So how are we going to do the analysis? This is just to give you a little bit of a feel of how we've been looking at the market. If you look on the left-hand side, you can see that we have analyzed the external attractiveness, and this is essentially taking into account the projected growth of the CFT market, as well as direct sales over the next few years. And then on the bottom axis, we have looked at the internal performance of the business of Avon. So looking at our growth history, the size of our business, the profitability of our business.

And combined, we then put the markets into one of these quadrants being: To incubate and grow a market. Those that are -- markets where we want to continue to drive growth and invest to be bigger, those markets where we want to restructure exit or those that we need to leverage and maintain, and then we have some in the middle, which are markets that we need to fix.

To give you some examples of countries and where we prioritize this, you can see on the left top corner, we have China, where we have and invest as a rising star, as well as Turkey and India. Then moving to the center, you can see where we have the big guns or the big markets that we need to fix, are essentially U.S. and the U.K. And when we talk about fix essentially what we'd like to do is take those markets from the center down to the bottom-right quadrant, which then are markets that we would leverage. So I -- we don't necessarily consider those markets to be high-growth areas in the future, but markets that we can leverage. And you can see in the lower-left quadrant where we have South Korea, Vietnam and Ireland, which are the markets that we have announced exiting.

So that is essentially our 3 growth priorities that I've now walked you through. And next, what I'd like to do is talk about our priority of drive simplification and efficiency. Within that, we have reduced our short-term costs, simplify the longer-term business, increase discipline and improve the processes and modernize IT and leverage digital.

So why is simplification important? One point is that SG&A, as a percentage of sales in the company, has grown significantly since 2009. Not only is it SG&A, but within all buckets of SG&A, we have seen increases with the exception of marketing where there was a strategic decision to invest more in the field of sales and less in marketing. And what we've said is that we really need to have the right balance between what we invest in selling and marketing. But you can see that we've also had increases in distribution, as well as overall administrative.

But it's not just SG&A. We've also seen that gross margin has been impacted, and we need to look for additional opportunities in this area. While we have taken some inflationary pricing overall, what we've seen is that our pricing capabilities are not necessarily where they need to be, and they have not always kept up with inflation or price increases. And part of that also is impacted by price mix. And we also have inflation has taken place in direct labor and materials. So when we talk about our cost savings initiative, while the primary focus is around the buckets of SG&A, we will also be looking for opportunities in the gross margin cost structure in order to improve in that area.

So what have we done so far in this area? We've been really driving a mindset of cost savings throughout the organization. So going after every penny, as well as every dollar, as well as all of the big items that we can identify. We've closed 3 markets. We've -- we're restructuring some smaller markets to improve profitability of those markets. We've announced the closure of 2 distribution facilities in the U.S. And so far, we have announced that we'd have a headcount reduction of approximately 1,900 individuals.

And those are some of the short-term actions, but we also need to tackle some of the longer-term, more-complex items. And examples here are 2 buckets in the customer/representative area, as well as in the administrative side. So if we look at some of the embedded practices that we have, campaign cycle is one. We were in different campaign cycles in different parts of the organization in different countries. And in some cases, we have an incredible amount of complexity because of the frequency of campaign cycles the we have, which then also requires to keep prior campaigns open in order to meet customer needs. That's an area we'll be looking at.

Sales model simplification, John talked about that. Incentive complexity. Sometimes, we will run 9, 10 incentives in a single campaign. And quite frankly, the representatives -- and certainly, I know when I sat in and listened to some of these incentive presentations, they're extremely complex and many times people just don't understand them. So they aren't necessarily driving the right behavior that we want. And also looking at size of line. And this isn't just size of line of finished products, but also size of line of the component tree that goes into our products. So if we're doing the same products in Mexico that we are in the U.S., why does the hose in the Fragrance need to be slightly shorter in one country than it does in the other? We can standardize some of these areas.

And in the administrative side, looking at the financial reporting, going through one standardized general ledger system, getting standardized processes into shared service centers is an example. System simplification, we do have a lot of legacy systems because each country kind of developed their own along the way. So we have a significant amount of legacy systems that are not necessarily consistent across the globe.

And innovation process. Again, I mentioned that innovation is one of the things that we're very good at, and we have a lot of innovation, but it's not necessarily the right rhythm. I mean, also, the process can be quite cumbersome. In some cases, we have to price and gate items 3 times currently, and we think there's opportunity to simplify there. And I talked about some of the standardization of componentry.

So then if we look at the spend, because I talked a little bit about the systems and some of the things that we have there in the legacy system. We announced, when we announced the goals, that we would be spending approximately $150 million to $200 million incremental CapEx through the years by 2016. And that is -- essentially 50% of that will be spent on legacy system improvement and simplification, and another 50% will go towards the rep experience and customer engagement. Digital really isn't a huge cost associated with it, but it's front and center and important in the overall IP strategy and more importantly, the marketing strategy.

And so one of the things that we're doing also, along those lines, with regards to improving the representative experience is we're test piloting system that we call SMT, Service Model Transformation. It's being piloted in Canada. It's an SAP system. And we'll make a determination based on that, how it goes. But that system changes a lot of the way we do things. It simplifies the way we do things and it also provides the better tool to the representative. Because at the end of the day, we need to make it easier for her to do business with us.

Then, look at working capital. I mentioned that we've targeted an improvement of $100 million by 2016. I truly believe working capital is one of those things that you always need to be focusing on. It's not just a onetime initiative. We see opportunity in inventory, also in accounts payable and prepaid. We carry quite meaningful-sized balances in prepaid because we prepay for the brochures, we prepay for many of the promotional items for our representative, as well as some taxes, so opportunities in there, as well as accounts receivable.

We've made some fairly good progress over the last 12 months. We have incorporated this. The cash generation is part of our incentive target for our management team. So we started that last year. It was about 25% of compensation. This year, we've increased it to 1/3 of compensation. So improving working capital is something that we'll continue to focus on in order to drive improvements.

So then if we look at our third strategic priority, being, improve organizational effectiveness. And we have 3 buckets there. Set the tone at the top, upgrade the talent in key priority areas and implement a One Team Avon approach.

And so if you look at setting the tone at the top, one of Sheri's first observations is that direct sales really is a management-intensive business, and therefore, being more hands on for management is important. So one of the first changes she made is that now the regions report directly into Sheri. And she and I have monthly review meetings with the businesses, as well as we spend time in markets. Actually just last week, we were in India and China, visiting the markets, understanding what is taking place and what we need to move forward. So really taking a more hands-on approach. And upgrading some of the talent in key positions, not only at the senior management level, but throughout. And then developing a pipeline, a robust pipeline of talent for the future.

So I think we've made some progress in the senior management. I know, for example, in my area, we've made some progress with regards to the talent in finance around the organization, and we're working on some programs to be able to improve the development of talent going forward.

And then also this One Team, One Avon approach. So we really need to be working as a team and as a group. And one of the changes that has been made in -- with regards to incentive is that now our compensation is based on the overall performance of the organization, not just based on the individual business where one resides.

So I think good progress being made in this area, but we're not where we need to be. And at the end of the day, people are who're going to drive the results. We need to provide associates with a very clear focus and priority. So one of the reasons for laying out our strategic goals by 2016 is to make it clear to the people within the organization what it is we're striving for, what it is we're driving for. And making sure that we have clear matrix. We now a scorecard that we use internally, and it goes all the way up to the board, where we not only look at financial performance, but we also look at field health performance, we look at how we're advancing on some of our key projects that we're working on, as well as looking at how we're doing on the people and talent part of it.

We're rolling at a new talent management processes, as well as a new evaluation system for everybody. And we're also building our sales competency with regards to direct sales. So I think we became a little bit de-standardized with regards to the level of skills that we have in different parts of the organization. So emphasis is now being put in on direct sales training because it is different.

And we're rebuilding our Avon associates pride in product of I use Avon. At the end of the day, we need to have advocacy. Our associates need to be advocates of our products. We have great products. We need to be using them, and we need our representatives to be using them, and we need to be talking about our great products without -- within the organization and outside of the organization.

So if I then look at 2013 and the outlook, we have said that, for the year, we'll be managing to a conservative level of sales growth with a focus on sustainability. We're expecting modest margin recovery. We're continuing to focus on identifying and implementing cost savings, and we did see some early signs of some cost savings coming through quarter 4 and quarter 1. And we'll continue to really focus on driving improvement and sustainability of working capital.

Now work still to be done here to make sure that this is sustainable, especially on our forecasting side with regards to demand forecasting, but I think we're making progress. We also said that we'd have CapEx spend of approximately $300 million. And with that said, this is what we're working towards throughout the year. Obviously, there's some bumps along the road with regards to the macro economy, and you always have things happening, whether it be floods in Europe or currently in Brazil, where we are seeing some impact on the consumer and some consumer weakness taking place there. But we're watching it very carefully and taking the necessary actions, and we'll continue to update you as we go.

So I think with that said, we have a lot of work to do yet, and we don't want to get ahead of ourselves as to where we are yet. There will be bumps along the road. We had an improved quarter 4 and quarter 1, but 2 data points do not make a trend yet. This is a turnaround, and as we've said -- in my experience at least, turnarounds don't necessarily mean that you're going to have linear performance all the time. But we're also very confident that the issues at hand are fixable, and we're confident that we can restore Avon to its rightful position.

So with that, I would like to thank you very much for your participation and for listening to our story today. Thank you.

William Schmitz - Deutsche Bank AG, Research Division

Kimberly, can I follow-up with one question, we've got time for it.

Kimberly A. Ross


Kimberly A. Ross

Yes. Can you just elaborate on Brazil? I mean, I know everyone's kind of commented and assumed like it seemed this week that there's clearly softness emerging in Brazil. I mean, how bad is it in terms of category growth not specific to Avon?

Kimberly A. Ross

Yes, well, in general -- okay, I think in general, there are some signs that there has been an impact overall in the Beauty category. I think it is some early signs that we're seeing at this point in time that the consumer has been impacted. As you've probably read in the media and heard from others, there's been significant amount of food inflation, there's significant amount of wage inflation and the consumer has gone into more and more individual debt in that market. So again, I think, this is something we're monitoring very closely to track the consumer behavior and make sure we're well positioned.

William Schmitz - Deutsche Bank AG, Research Division

Got you. Great. And then it used to be at Avon that you sort of need a 4% organic top-line growth to leverage the fixed cost. Is there like a new number, given some of these stuff you guys have done already or the stuff you're doing to sort of take cost out of the system? I guess the question is, I think, where is it now and what number would you be comfortable with to leverage, the cost to actually drive margins once you get over a certain sales level?

Kimberly A. Ross

Yes. So right now the only numbers we really put out there is what we're striving for by 2016, which is a mid single-digit, top-line growth and the double-digit margin, lower -- low end on the margin. But with that said, we very much look at it, and we've presented in the past more detail with regards to our cost structure. About 50% of the SG&A is fixed and about 50% is variable. So obviously, as we're looking at cost savings were very much looking at that fixed component, but we're also looking to make sure that we get a good return from the variable component at the end of the day. So looking at both of those in order to ensure that we can achieve and sustain our targets.

William Schmitz - Deutsche Bank AG, Research Division

Great. Well, thank you very much, Avon.

Kimberly A. Ross

Thank you.

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