Avon Products Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Avon Products, (AVP)

Avon Products (NYSE:AVP)

Q4 2013 Earnings Call

February 13, 2014 9:00 am ET

Executives

Amy Low Chasen

Sherilyn S. McCoy - Chief Executive Officer and Director

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

Analysts

Wendy Nicholson - Citigroup Inc, Research Division

William Schmitz - Deutsche Bank AG, Research Division

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

Lauren R. Lieberman - Barclays Capital, Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

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

Gregory Hessler - BofA Merrill Lynch, Research Division

Javier Escalante - Consumer Edge Research, LLC

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

Constance Marie Maneaty - BMO Capital Markets U.S.

Operator

Good morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to Amy Chasen, Group Vice President, Investor Relations. Ms. Chasen, you may begin your conference.

Amy Low Chasen

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

Sheri will provide her perspective on 2013, and then Kimberly will take you through our results. Then, we will have our usual Q&A session.

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

I'll now hand the call over to Sheri.

Sherilyn S. McCoy

Thanks, Amy. Good morning. As I said in our press release, I'm pleased that we're making headway toward our financial goals and Avon's return to profitable growth. We still face considerable challenges. In some cases, driving improvement has been more challenging and has taken longer than I had anticipated. That being said, we continue to make progress toward building a better, simpler and more stable business.

Before we get started, I want to acknowledge the results we released this morning reflect a continued deterioration of the North American business. I know this is an area of concern for you, as it is for us. Reversing this decline and taking that drag off of our overall performance is at the top of my agenda. Next week at CAGNY, Pablo Munoz, Head of Avon's North America business, will take you through our plans for stabilizing the U.S. market in 2014. I can assure you that it's not business as usual, and that we're taking the necessary actions to get this business back on solid footing.

This morning, I'm going to take a few minutes to share my perspective on 2013, where we saw progress and where we continued to confront challenges. Then Kimberly will review the financial results, and we'll open the line for Q&A.

Looking back at 2013, we certainly had some ups and downs. We went into the year with a solid first half and then experienced a decline in the second half, driven by both execution and macroeconomic factors. Despite the tough back half of the year and a top line deceleration, I'm pleased to say that we finished in line with what we told you to expect for 2013. We had modest improvement in our financial performance, we did well on operating margin and cash; however, we need to do a better job at driving top line growth. We improved our capital structure. We made headway on our cost management work and this is an area we'll continue to focus on in 2014.

We also optimized our geographic portfolio by exiting underperforming markets, and in 2014, we will continue this work. We will also be staying close to the economic trends and currency volatility we see in some of our emerging markets. Emerging markets remain a long-term opportunity for Avon and play a significant role in our strategy to return to profitable growth. What we know from our past experience is that, in times of instability or downward economic pressure, there are some specific levers we need to pull around representative recruitment and price/mix to limit the negative impact.

In 2013, we also made progress in our category strategies, although there is more work to be done, particularly in skincare.

And we strengthened the management team. I feel good about my executive team, which is complete, now that Nilesh Patel has joined us to lead Avon Asia Pacific. We also strengthened the management teams in several of our key markets. In 2014, we'll continue to focus on building our bench strength in our key markets, as well as filling critical capability gaps, particularly in commercial marketing and field management.

When I joined Avon, I committed to making the tough calls to address underlying issues that plagued the company for years. This is crucial to ensuring that we have a sustainable future. In 2013, we tackled some of those tough issues. For instance, we divested Silpada, halted SMT rollout, successfully refinanced our debt and made progress on litigation matters. None of these issues are easy and each of them required attention from management. But we are working to put them behind us now, leaving Avon in better shape to move into the future.

Let me provide some perspective on 2 of these areas: SMT and FCPA. As you saw in our press release, we took a charge related to the termination of our Service Model Transformation rollout. As most of you know, SMT was a project that began in 2009 and was intended to update our order management system and improve how our representatives do business with Avon. We launched SMT pilot in Canada last year and found that the Canadian implementation was very disruptive and resulted in a severe decline in both revenue and Active Representatives. It was clear that SMT came with a sizable price tag, but without a clear return on investment, and that we had better alternatives for improving how our representatives do business with Avon.

All things considered, ending the project was the right thing to do for Avon. We are winding down the SMT team and are terminating or renegotiating related vendor payments.

Moving forward, we will take a focused and more measured approach to upgrading our order management system, one that delivers a clear return on investment, and importantly, does not disrupt the business.

While we are shifting gears on our approach to order management system, we're continuing to work as planned on other aspects of our IT agenda, and we'll continue to make progress on updating our infrastructure.

Turning now to FCPA. As you saw in our press release this morning, we've continued our discussions with the SEC and DOJ and we've made significant progress. Based on the status of our recent discussions, we believe that a reasonable range for settlement with both agencies would be $89 million to $132 million. Our discussions with the government are ongoing and differences remain, but the team is working hard in an effort to bring these matters to a close.

I'm going to hand it over to Kimberly now for her review of our fourth quarter and full year results.

Kimberly?

Kimberly A. Ross

Thank you, Sheri. Before jumping into Q4 results, I just wanted to say a brief word about 2013. Revenue declined 1% in constant dollars, which was below our expectations coming into the year. As I will discuss, we continue to have some challenges driving sustainable sales growth. However, at the same time, we continue to make progress in the area of cost savings and are pleased that our adjusted operating margin was up 130 basis points to 7.9%, ahead of what we expected. Adjusted EPS was $1.02.

Turning to our Q4 results. Constant dollar revenue declined 4%. On a reported basis, revenue was down 10%, negatively impacted by currency. Units declined 10%, with softness in all regions, largely due to a decrease in Active Representatives, as well as pricing actions.

Active Representatives were down 5%, led by the continued declines in North America and Asia Pacific. EMEA and Latin America were both down as well.

Price/mix was up 6% in the quarter, with increases in most regions, led by inflationary pricing in Latin America. Adjusted gross margin was up 140 basis points to 61.2%, largely due to inflationary pricing in Latin America. This was partially offset by the negative impact of currency. Adjusted operating margin was down 100 basis points to 8.2% in the quarter. The decline was primarily due to deleverage given the weaker revenue, partially offset by the higher gross margins.

Our adjusted effective tax rate was 21.6%, compared to 37.1% a year ago. This low rate is because the geographic mix of earnings was different than we anticipated coming into the year, as well as the lower costs to repatriate foreign earnings.

Adjusted EPS was $0.34 per share, compared to $0.36 a year ago.

Turning to the regional discussion. You will hear some familiar themes that are impacting us across some key markets this quarter. As I step back and reflect on the year, including the revenue deceleration we witnessed in the second half, it is clear that we have 2 important processes that are not working consistently across our markets. The first is regarding the field: Representative recruitment, retention and activity. The second, which we have discussed with you in the past, is commercial marketing. This includes pricing, merchandising and brochure execution. Strengthening these processes and ensuring that we execute consistently across our top 10 markets is key for 2014.

Now I'll start with Latin America. Q4 revenue rose 4% in constant dollars, primarily due to strength in average order, which benefited from price increases across the region. Price/mix was up 10%, primarily due to inflationary pricing in Argentina and Venezuela, as well as from price increases in other markets, including Brazil. Active Representatives declined 4%, and units were down 6%.

Brazil constant dollar revenue was up 6%, driven by average order, which continues to benefit from strong Fashion & Home growth.

Constant dollar Beauty sales were up 2% in Brazil, benefiting from strong performance of Christmas gift packs. Personal care also drove the Beauty growth, continuing to benefit from the launch of Encanto, our higher-end hand and body line that was launched in Q3. In addition, fragrances benefited from the launch of Instinct in quarter 4.

Fashion & Home sales were up 17% in constant dollars, benefiting from new products, as well as strong merchandising in housewares, children's products and inner wear.

We also continued to make solid progress in improving our service levels in Brazil, both sequentially as well as compared with a year ago. We are very pleased that service is improving across the Latin America region with the exception of Venezuela.

Turning to Mexico. This market is a good example of what I mentioned earlier, namely, not executing consistently on the 2 key areas of the field and commercial marketing. After strong performance in the last few years, revenue decelerated meaningfully in the back half of 2013. Q4 revenue was down 15% in constant dollars, driven by declines in both Active Representatives and lower average order. While we had expected Mexico to weaken, it is disappointing that we are having these executional challenges. The weaker economy is also having some impact on our results. The management team is focused on reversing this negative trend and ultimately getting this important market back to growth.

Venezuela was up 29% in constant dollars. The growth was driven by an increase in average order, largely due to inflationary pricing. Active Representatives were down, partly due to the macro factors that continue to be disruptive to the business.

Latin America adjusted operating margin was 9.6%, down 120 basis points. Gross margin was up, benefiting from price increases in 2013 and the impact on 2012 margin due to the flowing of excess inventory. This gross margin benefit was offset by increases in representatives and sales leader expenses, as well as higher net brochure costs and increases in bad debt. Unfavorable foreign exchange was also a factor.

As we look forward, Latin America has some challenges and needs to consistently drive Representative recruitment and retention. We also continue to focus on new product innovation and improving our pricing capabilities in order to continue to drive growth in this region. And of course, Venezuela and Argentina have their own challenges. We're continuing to stay close to these businesses and working with the teams to mitigate risks where possible.

Moving to EMEA. Revenue declined 2% in constant dollars. The region was impacted by market pressures and these were exacerbated by merchandising and mix issues, and as a result, units declined 7%. We are working to reverse this trend, but the continued weakening of several key currencies is an added challenge as we look to find the right mix between pricing and unit growth.

Russia revenue declined 3% in constant dollars, due to lower average order and a decrease in Active Representatives. Average order has been hurt by the continuation of the challenges we had last quarter around marketing and merchandising execution. Specifically, the business suffered from not getting the right product mix. At the same time, the economic and competitive backdrop is getting tougher.

Active Representatives were impacted by both lower activity and fewer appointments. This creates a drag into quarter 1, as we ended quarter 4 with lower Representative count. We are working to recover Representative count and to improve brochures, ensuring that we have the right mix of product and pricing in the portfolio. It will take a quarter or so to get this right, but the team is very focused on getting back on track.

U.K. revenue declined 5% in constant dollars. The decline was primarily due to lower Active Representatives. Our team in the U.K. is working to drive improved performance in the business, and we are expecting a gradual recovery in 2014.

Turkey revenue rose 3% in constant dollars due to higher average order, benefiting from a change in pricing strategy to reduce debt [ph] and increased frequency of discounting. In addition, strong Fashion & Home performance helped the price/mix.

In South Africa, constant dollar revenue rose 2%, primarily due to an increase in Active Representatives. Units were down due to price increases we took to help offset the impact of the weakening currency. We continue to work on getting the right balance between pricing and unit growth in this market.

Adjusted operating margin in EMEA was 15.6%, up 110 basis points. This increase was primarily due to higher gross margin, which benefited from supply chain savings from our actions to reduce material and overhead costs. However, note that we now expect pressures on gross margin in this region in 2014. Given that most of our costs are euro-based while most of our revenue is in local currencies, this will likely negatively impact our margins beginning in quarter 1. We will try to mitigate this with pricing actions, but we may not be able to fully offset these currency impacts. Quarter 1 gross margin will also be negatively impacted by the lapping of significant supply chain and currency benefits we realized in quarter 1 2013.

Turning to North America. This region remains very challenging and reported a 20% constant dollar revenue decline. A 17% decline in Active Representatives was the key driver of the sales decline in Q4. Units were down 27% due to fewer Active Representatives and commercial marketing challenges.

Adjusted North American operating loss was $4 million, primarily due to the impact of lower revenue on our fixed costs. This more than offset savings from our cost-reduction actions. In absolute dollars, SG&A was down. However, it was up as a percentage of sales due to the revenue decline.

The stabilization of North America will take time. We have a plan to address all facets of the business, but some of the actions could have a short-term negative impact on the business, even though they are the right long-term decision. We expect Q1 trends to look similar to Q4, and we will update you as we go.

As Sheri said earlier, Pablo will further discuss our plans for North America recovery at CAGNY.

In Asia Pacific, revenue declined 18% on a constant dollar basis, mainly driven by continued weakness in China, as well as weakness in our other Asia markets as a result of declining Active Representatives. We also lost about 1 point of revenue from the exit of Vietnam and South Korea. Active Representatives declined 19%, and units were down 18%.

Philippines revenue declined 4% on a constant dollar basis, due to a decline in Active Representatives. We estimate that about half of the sales decline was from Typhoon Yolanda. While the business was down, it could have been much worse. Under the extreme circumstances, the team did an amazing job getting our sales centers up and running and helping our representatives get reestablished, which mitigated the impact of the typhoon on our overall business.

China constant dollar revenue was down 50%, primarily due to decline in unit sales, resulting largely from a decrease in the number of Beauty boutiques. In addition, revenue continues to be impacted by our actions to reduce inventory levels held by the Beauty boutiques.

Adjusted operating margin was 2.1% in Asia Pacific, down 670 basis points. This was largely due to the impact of lower revenue on our fixed costs and lower gross margin due to unfavorable price/mix, higher obsolescence costs and the impact of lower unit volume.

Asia Pacific, overall, remains challenging, and we expect results to remain soft in the near term. Our new Head of India, Nilesh Patel, is already fully engaged in the business, and we will keep you posted on our progress.

Now I'll take you through 4 adjustments we made to our GAAP results in the quarter. First, in December, we recorded a noncash impairment charge of $117 million, pretax, related to the SMT project.

Second, based on the status of our negotiations with the DOJ and SEC, we recorded an additional accrual for potential FCPA settlement of $77 million. As a result, the aggregate accrual for these matters at year end was $89 million. We believe the aggregate amount of any potential settlement could exceed this accrual by approximately $43 million.

Third, we reported CTI restructuring charges with an operating profit of $37 million pretax. This was mainly due to employee-related costs related to the elimination of approximately 650 positions.

Lastly, similar to the first 9 months of the year, as a result of the Venezuela currency devaluation, we recorded a $5 million charge from using the U.S. historic dollar cost base of nonmonetary assets, such as inventory. In addition, we recorded a valuation allowance for deferred tax assets related to Venezuela of $42 million.

As a result of the CTI and litigation charges taken, including the FCPA accrual, we have now used slightly over half of our $400 million carve-out for cash restructuring and litigation charges related to our financial covenants for our bank revolver and term loan.

Moving on to cash. Cash flow from operations was $540 million for the full year 2013, $4 million lower than in the same period in 2012. Cash from operations was unfavorably impacted by the make-whole premiums of approximately $90 million paid in connection with the prepayment of debt, as well as higher payment for employee incentive compensation. Cash flow from operations was also unfavorably impacted by the $25 million contribution to the U.K. pension plan, as a result of our decision to freeze the plan. Partially offsetting these unfavorable impacts was improved adjusted operating profit.

The overall net cash use for the year was $102 million, compared with net cash use of $36 million for the same period in 2012. This increase is primarily due to debt reduction, which was partially offset by lower dividends paid.

Our net debt at the end of the year was $1.6 billion, which is down $376 million from year-end 2012. We reduced the overall debt balance by $475 million in the year, of which $64 million was reduced in quarter 4. We are pleased with the progress in this area.

In Q4, we also continued to make progress in working capital, which operationally improved 6 days compared with a year ago. Accounts payable improved 12 days operationally, as we continued to focus on renegotiating payment terms with our vendors. However, inventory deteriorated by 6 days operationally. About half of the increase is due to Latin America, partly due to the strategy to shift from having consignment inventory in Fashion & Home to purchasing that inventory outright. Inventory and working capital remain a key area of focus for us as we work to improve cash flow.

Thinking about 2014. Based on where we are in our turnaround, we are not going to be giving a specific target for the year. We expect to continue to make progress towards our 3-year financial goal of mid-single-digit constant dollar sales growth and low double-digit adjusted operating margin. In terms of revenue, the recovery is taking longer than we expected and it will take us some time to reverse the trends that caused the recent deceleration. To that end, we don't expect to resume sales growth until the second half of the year.

Similarly, first half operating margin is likely to be down due to the comparisons to the year ago, which benefited from one-offs. This includes 200 basis points of a combination of one-offs in supply chain and currency benefits we realized in EMEA in quarter 1 2013. In addition, we expect currency to have a negative impact on margin.

We expect to start off the year with a weak quarter 1 relative to last year and then witness gradual improvement throughout the year. In addition, 2014 is not without risk. Clearly, emerging markets and currency volatility are added challenges, and we must make progress in [indiscernible].

As for CapEx, we currently expect to spend between $200 million and $230 million in 2014. As you will remember, we told you last year that we expect to spend an incremental $150 million to $200 million on IT CapEx in 2016. Given that we won't be continuing the rollout of SMT, we no longer plan that incremental spend. Based on what we know today, we expect to spend about $200 million to $250 million a year on CapEx for each of the next few years, including our IT investment. Our primary focus is to take a more targeted approach to addressing pain points, and at the same time, improving the return on every dollar spent.

As always, we will also continue to focus on working capital improvement with a particular emphasis on inventory. And as I've always said and strongly believe, it is critical that we focus on top line, bottom line and cash.

With that said, I'll hand it back to Sheri.

Sherilyn S. McCoy

Thank you, Kimberly. As you heard from Kimberly, our performance in the back half of the year was challenged. Some of these challenges are macroeconomic and outside our control, but in other cases, our performance suffered from missteps in execution. We saw this in Mexico, where our performance was down again in the fourth quarter. In Mexico, the country's economic slowdown was not the only cause of our challenges, but the missteps we made around recruitment and pricing actions were exacerbated by the downward economic pressure. We must get consistently better on our core processes around field management and commercial marketing. But as you might expect, this will take time.

We were able to strengthen these skills in some markets last year, and building capabilities in these crucial areas is at the very top of our talent management agenda for 2014.

Going into 2014, we're also looking closely at how to move our markets through stabilization to growth. Profitable growth will come by strengthening and leveraging our direct sales core and by creating better access to our products and our brands. I will talk more about our growth plans at CAGNY next week, including some perspective on strategic alliances.

As you know, earlier this week, we announced a strategic alliance with KORRES, a premium all-natural product line that we'll be marketing in Latin America. We're very excited to be adding KORRES to our portfolio in Latin America. It provides us with an upper mass product line that will drive incremental growth, as well as increase our Representative's earning opportunity by giving her access to a new consumer base.

In closing, I'll say once again, Avon's challenges didn't develop overnight and they won't be solved quickly. And frankly, some parts of the turnaround have been more challenging than anticipated. It will take time, and we will have some ups and downs along the way.

That being said, I believe that 2013 was a year of overall progress for Avon. We put some significant problems behind us. We're getting the right people in the right jobs, and we're implementing plans that I'm confident will lead us to profitable growth. Avon is headed into 2014 with a stronger organization, fewer distractions and a commitment to deliver.

We'll now open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Wendy Nicholson.

Wendy Nicholson - Citigroup Inc, Research Division

I'm with Citigroup. My question has to do kind of with the -- what you just talked about, Sheri, sort of the health of the organization. You said at the beginning your management team was complete. But then you talked about all these execution issues and it sounds a lot -- like a lot of that is sort of people related, and particularly in Mexico and Russia, 2 huge markets that you've called out as being critical to the long-term health of the business. It sounds like those are largely execution issues. So number one, is this really the right time to be taking on things like strategic partnerships and alliances, when maybe the left hand still doesn't know what the right hand is doing? And how do we have confidence that in another market like Brazil, that you've got the right people in place and that we can't worry or shouldn't worry about a slowdown there, too, because it doesn't feel like, executionally, you guys have made a lot of progress.

Sherilyn S. McCoy

Yes. As we look at the opportunities moving forward, the most important thing for us is to focus on getting our top 10 markets right and that's getting the commercial marketing and the field piece of that consistent. What we've seen as we've actually changed the number of people in the organization. We were looking the other day, we've got about half of the people at the VP level in either new positions or new to the company and so we're still sorting through that. And so as we look at some of the markets we have made changes in, and that's an area that we need to focus. As we look at what's important moving forward, as we think about growth, it is about getting those top 10 markets in line. And I would say 95% of our people and our energy will be against that. With that said, we still see opportunity for access to look at how we bring new consumers into the franchise. We would not put it in a place where we don't feel we have stable management and that they're focusing on execution. Certainly, as we look at Latin America, we've been pleased with their progress. Do we have more work to do? Yes, but we'll be very careful and it will be a limited a group of people that will be focusing on strategic alliances. The majority of the organization needs to be working on the fundamentals.

Operator

Your next question comes from Bill Schmitz.

William Schmitz - Deutsche Bank AG, Research Division

It's Deutsche Bank. I know you don't want to give guidance for the full year, but can you just take a stab at what you think the currency impact is going to be, both in the top line and the bottom line?

Kimberly A. Ross

I'm not really going to speculate on that. I mean, if I could predict currencies, I probably wouldn't be doing this today. So yes, but what I will say is we do expect to have some volatility coming through there. Obviously, Venezuela is also a question mark, as well as some of the other markets. What we're doing is trying to find ways to mitigate the impact where possible, looking at natural hedges. And we expect that we will have some impact along the way.

William Schmitz - Deutsche Bank AG, Research Division

Okay, great. And then I'm going to sort of ask a long-winded question because I know I only get 2, but as far as the FCPA goes, I know you accrued for, I think, in aggregate now, it's like $89 million. Do you think you could pay that over time? Because I've seen some of the recent settlements where the sort of like liquidity and the cash payout has been over 4 or 5 years? And then kind of how you got to that $89 million number, and then sort of like what the 2 scenarios were, it's that or it's a higher number that you talked about? And then the sort of related but unrelated is how the economics work for these partnerships? So how do you -- with like the KORRES partnership, so how you get paid, how they get paid and kind of how many of these you think you could continue to do in the future? Sorry, long-winded things.

Sherilyn S. McCoy

Yes, I'll start with the KORRES agreement and looking at strategic alliances. It's really built around a loyalty factor. That's primarily how we're looking at that. And that's -- as we look at strategic alliances, that's probably where we would start. And so that's how we're thinking about it and I think that's a win-win for both groups. As it relates to FCPA, Kimberly, I don't know if you want to talk to the accrual piece.

Kimberly A. Ross

Yes, I mean, I think you had a few questions all rolled into one. So we're not going to go into all the details of it. Obviously, it's a negotiation. Things are under discussion. What I will say with regards to it is that, as you know, under our covenants, we have this bucket of $400 million that can be used for legal matters, as well as for cash restructuring. And as I said in my notes, that a little bit over half of that has been used. So I think we feel comfortable from a liquidity perspective, as well as from a debt agreement perspective that we have ample liquidity to be able to pay for that. And by the way, when I talk about that number of how much has been used in the bucket, that includes the amount that's been accrued here for FCPA.

Sherilyn S. McCoy

And as it relates to the range, it was really based on our discussions with the government and understanding the low end and the high end.

Operator

Your next question comes from Ali Dibadj.

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

I'm from Bernstein. So of the countries you listed in the release and that you went through kindly today, only Brazil and Venezuela look like -- and you may add some, and I may be wrong, but I think it's only Brazil and Venezuela where you're growing in constant currency. And Brazil is only Fashion & Home, and I guess, Venezuela is Venezuela. And I guess x Venezuela, as best we can tell, Avon's organic sales decline would've been like negative 5 to 6. So if you start with there and you contrast that with what we heard twice now, both at the outset of the press release, at the outset of this conference call, that the company is becoming a more stable business. I'm trying to square those 2. So I'm trying to understand what business-wise steps have been taken to make it more stable because we, I mean, unfortunately, haven't seen in the results yet. And it doesn't feel like it's controlled strategic shrinking of the business, so kind of shrinking to then grow. It feels like it's a little bit out of control. So I'm trying to understand that stability comment first, please.

Sherilyn S. McCoy

As I look at the business, I think what's important and we've set financial goals both for top line, cash and operating margin. I think we're making good progress as it relates to focus on making sure we're getting return on investment in terms of where we're putting money. So I think that's one of the components. That as I look at stability, it's making sure we understand what the issues are and how we're investing in that. I think what we're seeing, we have some markets that are performing better than others, and it's clear, in the markets where we're not performing, what the missteps have been, and what we need to do to address them. So I think that's one of the things that, as I look at the operational aspects of the business, it's clear what we need to do moving forward. Now just as a side note on that, in Brazil, we grew in Beauty as well as in Fashion & Home.

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

In Beauty as well, okay. And I guess, on that a little bit, I'm surprised that you feel comfortable reiterating your 2016 guidance, mid-single digits and low doubles. How in good faith do you feel, given what we've seen, that you can get there at this point?

Sherilyn S. McCoy

Well, certainly, as I said, we've made progress from an operating margin and cash perspective, we're continuing to focus on that. What's critically important for us in the goals is that we get North America to a profitable position in 2015. And that's really where we're working. In the other areas, as it relates to specifically some of the markets where we had challenges in the last couple of quarters, I think we're on track to what we need to do there. What's critically important for us to hit those goals is to get North America to profitability in 2015, and that's what we'll talk a bit about at CAGNY next week.

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

Okay. And one other question that harks back to an earlier one. Should we think about you more, and [indiscernible] is interesting, as a distribution company now going forward or more still as a beauty company?

Sherilyn S. McCoy

I think that we -- certainly, we are a beauty brand and a terrific beauty brand and we have opportunity to leverage that and get more consumers touching our brand. At the same time, we have an incredible channel. And so what's important for us is to make sure we stay with the beauty heritage, but leverage the capability that we have as a brand, as well as tap into the channel where appropriate and in markets where it makes sense.

Operator

Your next question comes from Lauren Lieberman.

Lauren R. Lieberman - Barclays Capital, Research Division

I'm with Barclays. In Mexico, I know you mentioned not executing consistently, et cetera, but is there an outlook as to when the pricing things that you talked about last quarter start to be less of an impact, so you can get back to what had felt like good cadence previously? And same thing, the Russia question where it had been a matter of merchandising mix. We knew what we did wrong and we know how to correct it. I know it takes time for that to filter through the brochures. So when is it reasonable to think that starts to get better in the next quarter or so? Or is it still further out?

Sherilyn S. McCoy

Yes, if I address Mexico, first of all, I think, obviously, the team is focused on this and we expect the return to be gradual. We can more rapidly address the merchandising pricing issues. One of the challenges that we had is really the recruiting engine and so making sure that we have enough people selling. And so we were down relative to the Active Reps and that's where it's taking us a little bit longer. One of the things that the team was focused on, which is a positive, is they were looking at retention, and working on trying to retain representatives. In doing that, I'm not sure they were paying as much attention to recruiting. And so that's an area that we've put back in place to make sure there's focus on that. So that's what's going to take the time to get Mexico back in place. I was just in Russia 2 weeks ago and they are very focused on the merchandising aspect of it. I was with the sales force and they're very energized about what they need to do. But again, making sure they get people in from a recruiting standpoint. So it will take us a quarter or so to get back on track, but I have confidence in the management team that they've got their arms around the challenges there.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And Sheri, I mean, this is just a question for you in terms of the challenges that you face, just the nature of the business you're trying to manage and get your arms around, is that it feels like the explanation for what the challenges in a given market, it changes pretty quickly. You sort of had, well, just for an example, Mexico. Now you're talking a bit more about the recruiting and I'm not questioning that, that is an issue, right? But if in the last quarter, it was thought it was about pricing decisions and now it's more about execution. How is it, as a manager, do you get comfortable that, and I know you've upgraded your management, but the people in the regions that are reporting up to you even really understand what's going on because it feels like their excuses for what happens day-to-day changes pretty regularly, and that maybe is one of the biggest challenges you face is in trying to stabilize this is it's a moving target, and what do we fix first?

Sherilyn S. McCoy

Yes, there are really 2 fundamental processes that we have to get in place for all of our top 10 markets and that's the commercial marketing aspect, which talks about merchandising and pricing, particularly understanding that in a downward environment in emerging markets where we're seeing economic challenges; and the second is the field piece of it. In Mexico, in all honesty, we saw that it was a challenge and we knew that going into Q4 we would continue to have that challenge because we saw that. So I would say, as I've gone around the world and spent time, it's really getting the capabilities and the focus on those 2 critical processes because that's what drives it. And as we've made changes in organization, as we've moved people around or brought new people in, we haven't always got that right. The comfort I take is we know what the issues are and we know what we need to do to focus on that. And so Kimberly and I do spend time once a month with the teams going through this. We're putting even more focus in KPIs, so that we can be more predictive of this recruiting piece and the commercial marketing before it happens. But it's an area that we have to stay close to as we navigate this turnaround. And frankly, we need to have more of our top 10 markets performing well. So if 1 market has an issue, it's not so impactful on the overall organization. And particularly, with North America not being as strong, any blip we have in some of these markets as they're trying to deal with an economic environment and getting the pricing right, we don't have a lot of room to maneuver. So we just have to continue to stay focused. As I said to Wendy earlier, we have to stay focused on the fundamentals and the majority of the organization has to be working there.

Operator

Your next question comes from Olivia Tong.

Olivia Tong - BofA Merrill Lynch, Research Division

It's Bank of America Merrill Lynch. First one, to ask about the Rep declines. You called out a few countries and you also mentioned challenges so far in driving both recruiting and retention concurrently. And you also mentioned sort of a gradual improvement. So based on all these things, how do you build confidence in your expectation to get back to organic growth by second half of 2014? And then just one quick housekeeping, what tax rate are you expecting for 2014?

Kimberly A. Ross

Yes, just with regards to tax rate, we're looking at low- to mid-30s. And again, that's excluding any discrete items or any one-offs that we would have in there.

Sherilyn S. McCoy

So as it relates to growth in the second half, we're really looking at some of the markets that were more challenged, as it relates to Russia and Mexico coming back in the second half, based on the efforts that we're putting in place for Active Representatives. The area of the U.S., that's a separate issue that we'll talk to and there the focus -- it's less about 100% seeing a great improvement in Active Representatives. We want to see measured improvement, but it's really about profitability. So it varies a little bit by market. But the growth in the second half really comes from those markets that I referred to, Mexico and Russia.

Olivia Tong - BofA Merrill Lynch, Research Division

And then if I could follow up. You had mentioned Encanto and then the addition of KORRES. Can you keep trading -- can your Rep trade up-market? I mean, have your Reps been looking for something more premium focused? Or can they handle a broader line of product?

Sherilyn S. McCoy

So we've -- on KORRES, I'm not going to get into a lot of detail on that, because you can imagine that Latin America is a very competitive market and we want to be careful of what we say relative to a competitive environment. With that said, we have done some work in-market with consumers and understand how the propositions went over, obviously, very favorably, as well as understanding price points and what that would look like relative to our existing lineup. But we do know that there is a consumer appeal for the products that KORRES has, both from a positioning standpoint and price point, and we'll be working through how we best execute that.

Operator

Your next question comes from Mark Astrachan

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

Yes, it's Stifel. One clarification. Could you quantify the sales impact in North America from SMT? And then, just more broadly, the gap between volume and price has widened in recent quarters. I guess it just doesn't seem sustainable. And if you agree with that, how do you think about the right long-term split between those 2 metrics?

Kimberly A. Ross

I'll take the SMT question. So we did continue to have an impact in quarter 4 from SMT from the disruption that we had from the implementation. It was about the same as what we saw in quarter 4 -- I mean, quarter 3, sorry. So we don't break out exactly numbers. It's about a couple -- 200 basis points on the North America number.

Sherilyn S. McCoy

And then as it relates to price volume, which I think was the question in terms of how do we manage this. I mean, certainly, as we look at it, we look at it from a couple of different angles. I think it's important for us, as we take the example of Encanto, this was an area where we had the opportunity to price innovation and got the price/mix right. We've had other products in Latin America, and particularly, in Fragrance, where we haven't been able to take that price/mix right. What we do know, though, in a place like Mexico, is very sensitive. And if we go across some magic price points, it has impacted us. So we have to sort through that. At the same time, we know -- if we look at Venezuela or Argentina, we do need to price with inflation and we're willing to take the hit, in some cases, like in Venezuela, on units and volume because it's the right thing to do, given sort of where the market is. So we have to look at it in totality. If I look at what I believe we need to do for the long term, it's looking how we get -- move people up the curve as the middle class increases for price/mix based on innovation and that's where we've had the most success.

Operator

Your next question comes from Greg Hessler.

Gregory Hessler - BofA Merrill Lynch, Research Division

The first question I had was just around FCPA and with the accrual. I appreciate the comments there. Can you just remind us, on your cash balance, you have access to all of that cash in the event that, that's the way that you'd like to pay that fine?

Kimberly A. Ross

Yes, that's correct. So if you look at our cash balances, about $150 million of it, give or take, is trapped in Venezuela. And then we've said in the past that we need about $300 million to run the business. But with regards to the rest of it being that we de-designated foreign earnings and we continue this year not to designate the current year of earnings abroad, so we can bring those cash balances back at any point in time to be able to fund settlements.

Gregory Hessler - BofA Merrill Lynch, Research Division

Okay. And just in terms of -- I know you guys would sort of prefer to have the investment grade credit rating. Just in terms of over -- I know you're not giving guidance for 2014, but just in terms of overall cash generation in 2014, how should we think about uses of that cash, how you might allocate it from a capital allocation standpoint?

Kimberly A. Ross

Clearly, one of our top priorities is continuing to focus on generating cash. So we made improvements during the year to take out kind of the one-off things like make-whole provisions that we had. So continuing to generate cash is important. We would like to maintain our investment grade rating. We committed with the rating agencies and the Street when we did our debt issuance last year to focus on debt reduction, and I'm really pleased that we did have debt reduction there. So we, obviously, gave information with regards to our dividend this morning on where that is. At the end of the day, we want to make sure that we have the financial flexibility to be able to execute the turnaround of the business, and I would say that's our #1 priority, while at the same time making sure that we have the right capital structure for the organization.

Operator

Your next question comes from Javier Escalante.

Javier Escalante - Consumer Edge Research, LLC

Consumer Edge Research. I have a question with regards to the comment about direct selling being an incredible channel. And you kind of like know what needs to be done. But at the same time, this is the worst quarter in terms of Rep activity and sales in 18 years. So how can you have confidence that in this environment, you really know what needs to be done, and therefore, you can restore growth in the second half and expand margins in 2014?

Sherilyn S. McCoy

Yes. Well, certainly, I just came back from the Philippines, and really it was clear to me where you can see the direct selling channel working where Typhoon Yolanda took out a whole portion of the island. And because we have Active Representatives, we can go in and touch people and make a difference quite rapidly. What we've seen -- and we've seen in that market we hold #1 positions in 4 of the 5 beauty categories relative to retail. So it's really clear to me that we have an opportunity. If I go to Brazil, I see that. Even in -- and even where we're challenged, in Mexico and Russia, I can see the opportunity and the potential for how we're going to continue to grow that business. So while we are having some missteps, as I look at the channel itself, there's a lot of opportunity for us to continue to do that and make sure we're reaching out to people in different ways. One of the areas that we're continuing to look at, as well, is to supplement our representatives with e-commerce and online, so that they have more access, so that we continue to evolve the direct selling channel. But I see that opportunity as a way to reach out to people, particularly in Beauty, where we have an opportunity where the Representative is the ambassador and really talks about the importance of beauty and skincare. Have we executed that all perfectly? No, but I still see a lot of value in the channel and that's why I'm confident that we'll continue to grow the business.

Javier Escalante - Consumer Edge Research, LLC

But Sheri, Rep activity is down 5% and this is the precursor of sales. So essentially, you are losing your sales force. It's kind of like shutting down stores. So how's it that you're going to grow?

Sherilyn S. McCoy

And that's where I said the fundamentals for our top 10 markets and where we're really focused on 2 key processes: one is field, which is recruitment, retention and activity. And the second is around making sure that we get the proposition right, so that she wants to come in and sell products, which is really the merchandising and pricing aspect of it. And so that's the area -- our top 10 markets which represent about 80% of our sales, that's our focus in 2014 to really make sure that we have the capabilities, that we're doing the training of the organization, and that we're continuing to be focused on that.

Operator

Your next question comes from the line of Linda Bolton-Weiser.

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

I'm with B. Riley. I just had a question again on North America. The operating loss in the quarter was actually quite a bit not as bad as it was in the third quarter. And yet you say, as you fix it, there's going to be some things that are going to be detrimental to the business. So I'm just kind of wondering if you could give a little color on how the profitability will flow? In other words, can we expect another dip in profitability as you take actions? Or is this actually representative of some improvement, maybe because you've been doing some cost reductions or other things to stem the losses in the region?

Sherilyn S. McCoy

So as I said in the past with turnarounds, I don't necessarily expect this to be linear as we go. So what we will be doing is really focusing on making sure that we're taking the right actions for the long-term sustainability of that business, taking into account the urgency to turn this business around. So I don't think I necessarily used the word detrimental to the business, but we will have some things that could have some impact in the short term. So we'll be focusing on cost savings, both for short term, as well as more the structural items that help us in the long term in that business, and at the same time, very much focused on the field. And I think next week, you'll get a better feel for what we're doing when Pablo presents at CAGNY.

Operator

Your next question comes from the line of Connie Maneaty.

Constance Marie Maneaty - BMO Capital Markets U.S.

It's BMO Capital. I have 2 questions, one's geographic, the other is product line. I have found your disclosure on FX in the past to be really, really solid and transparent. So I guess I'm a little bit surprised that, given the devaluations that have already occurred in Argentina and Venezuela, that you haven't quantified an impact there. And secondly, can you tell us what's going on in France? Because we read that you're exiting, we read that it's going into receivership. So if you could help on that, and then I have a follow-up.

Kimberly A. Ross

So I'll take the question on foreign exchange. So obviously, embedded in our numbers in quarter 4, we do have foreign exchange impacts from Argentina and Venezuela. Venezuela has not actually had a devaluation. So the official rate still remains the same, so it's still at 6.3. So there's not an official devaluation there. Now in our disclosure, what we do provide is some sensitivity testing around Venezuela. So we put in there is a hypothetical that if there was devaluation of, say, 50%. And just to give you a feel for that, and these are approximate numbers, the impact would be for a 50% devaluation in Venezuela about 200 basis points on the top line and about 300 basis points on the op profit. And that's assuming that there would be no actions to offset that, which has not been our experience in the past because, obviously, we do pass on some of these costs. And then on top of that, then you have the one-offs like we saw this year with regards to adjustment to the nonmonetary assets being carried at historical rates. I'll remind you that Venezuela is a bit different because it is a hyperinflationary market, so therefore, we do have some additional disclosures that we provide there, but clearly, keeping a close eye on Argentina also as it starts taking some pages out of Venezuela's book.

Sherilyn S. McCoy

And as it relates to France, obviously, we're very mindful of the labor laws in France. Avon France did file a petition for the suspension of payment, which is part of the legal process in France for reaching resolution on an unprofitable business. So on January 30, the French court announced its judgment to appoint a receiver to Avon France to facilitate this matter. And Avon France is engaged directly with the French government to sort through this and we cannot comment any further at this point. I hope you appreciate that, Connie.

Operator

We will now turn the call back over to Sheri McCoy.

Sherilyn S. McCoy

Thank you, all, for joining the call this morning. Before we sign off, as I said earlier, I know that for many of you the health of our U.S. business is your top concern. And I want to be clear that it's at the top of my agenda. Pablo will take you through our U.S. plans when we're at CAGNY next week.

It's also important to keep in mind the health of our other key markets and how we plan to move them through stabilization to growth. At CAGNY, I'll share our growth strategies, so you'll get a sense of where we see growth, both organic and incremental, over the next several years. So we'll pick up this discussion with you next week in Florida. Thank you.

Operator

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

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Avon Products, Inc. (AVP): Q4 EPS of $0.34 Revenue of $2.67B (-11.0% Y/Y) misses by $80M.