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Avon Products (NYSE:AVP)

Q3 2010 Earnings Call

October 28, 2010 9:00 am ET

Executives

Amy Low Chasen -

Charles Cramb - Vice Chairman and Chief Finance & Strategy Officer

Andrea Jung - Chairman of the Board and Chief Executive Officer

Analysts

Dara Mohsenian - Morgan Stanley

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

Ali Dibadj - Bernstein Research

William Schmitz - Deutsche Bank AG

Douglas Lane - Jefferies & Company, Inc.

Wendy Nicholson - Citigroup Inc

Zeke Kramer

Linda Weiser - Caris & Company

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Operator

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

Amy Low Chasen

Thank you, and good morning. Thank you for joining us to discuss Avon's third quarter results. With me on this call are Andrea Jung, Avon's Chairman and CEO; and Chuck Cramb, Vice Chairman and CFO.

I refer you to the cautionary statement in today's earnings release, as well as our non-GAAP reconciliation in the appendix to today's slides and also available on the Investor Relations section of our website. Today in the call, we'll focus only on adjusted non-GAAP financial measures, as we always do.

With that, I'll turn the call over to Andrea to get her perspective on the quarter, and then Chuck will take you through the details of the quarter. Then we'll take your questions. Andrea?

Andrea Jung

Thanks, Amy. I just want to begin this morning's call with my own qualitative perspective on Avon's performance during the quarter. And then as Amy said, I'll turn it over to Chuck, and he can provide more detailed outlook at our results, and then we'll take your Q&A.

So after a strong first half sales performance, Avon's overall revenue growth in the third quarter was lower than we expected at 6% in constant dollars, 4% from the core business and 2% from acquisitions. Our beauty sales were up 5% in constant dollars with 1% from units and the remainder from net per unit growth.

Active Representatives were up 4%. Top line growth was impacted by a combination of weaker skincare results and some tougher color comparisons versus a year ago, as well as some tactical challenges in Brazil and Russia that tempered sales in the quarter.

Despite this, we maintained our commitment to strategic investments in our key geographies. We always plan higher spending levels in this particular quarter, especially in terms of the flow of advertising expense in the year, as the timing of these investments impacted operating margins this quarter.

Specifically in terms of the revenue growth, just a couple of comments on my key takeaways. In Latin America, we're still pleased with overall sales growth of 13% in constant dollars, as very healthy increases in Mexico and Venezuela balanced Brazil's 7% growth in the quarter. While Brazil has consistently experienced double-digit constant dollar growth, we had average order challenges in this market in the third quarter. Our Active Representative growth was very healthy. However, results were pressured by weaker performance in skincare and color versus year-ago record launches. To a lesser extent, service disruption that was unique to Brazil also contributed to loss sales in the quarter, and there may be some lingering impacts from these issues in the fourth quarter.

In Central and Eastern Europe, we had indicated to you in July that third quarter would continue to be single-digit growth. Average order was impacted even more than we thought by weaker demand in both skincare and color. Active Representative growth is comparing against record additions in last year's second half, particularly in Russia. And we're also facing some macro challenges in Ukraine and Romania, were a result of being affected by economic weakness and new tax legislation in those two markets.

In North America, results in the quarter remained pressured. The field continued to be challenged as we lapse last year's record recruiting drive. From a macro perspective, the overall beauty industry has declined year-to-date in this market, which added headwind to the quarter's performance. In terms of the overall turnaround plan for this region, we are on track to deliberately reshape the portfolio to Beauty and to achieve our cost savings target. However, our key objective to improve representative productivity remains the largest challenge, and this is proving tougher and taking longer. The team is aggressively focused on this critical pillar of the turnaround, as we work to stabilize the North American business and deliver respectable margins in the longer term.

In terms of the operating margin in the quarter, third quarter was always planned to be a heavy investment quarter, although the lower-than-expected revenues added further pressure. Advertising was up 36% in this quarter, a $31 million incremental against key fragrance launches, as well as new category opportunities, including haircare in the Acne segment. The results of these investments were all strong. We also continue to invest at significant levels in the representative value proposition, spending an incremental $27 million in the quarter, largely against longer-term channel innovation.

For the full year, we continue to expect sales growth of at least mid single-digits in constant dollar, and now expect adjusted operating margin to be roughly flat. This is after absorbing significant FCPA costs, as well as the cost of the Venezuela devaluation, which exceed 100 basis points. So excluding these items, the company is making progress improving our underlying profitability, while continuing to make the requisite investments for the longer term.

So despite quarterly variations in performance, we continue to have our eye on the long term of the business. We've got a carefully crafted strategy to gain market and channel share, and that remains our consistent strategic road map. Nothing changes in terms of our commitment to the achievement of our corporate financial objective, which includes at least mid single-digit constant dollar revenue growth and mid-teens operating margin by 2013.

So with that, I'll just turn it over to Chuck, who's going to give you more details about the quarter.

Charles Cramb

Thank you, Andrea. I'm going to talk right into our regional results, starting with Latin America. As Andrea said, we had strong revenue. We had growth of 13% in constant dollars, and it was well balanced, which mean Active Rep growth of 8% and average order size of about 5%. When we think about the countries, in Brazil, we were up 7% in constant dollars. That was dampened somewhat in terms of the comps. New product launches in skin and color in 2009 were very, very strong. And then, as Andrea mentioned, we did -- this quarter have some short-term service issues unique to the Brazilian market.

In the case of Mexico, very strong performance, 14% growth in constant dollars. But I think great evidence of our turnaround has worked and one of the drivers in terms of the Mexican performances in the growth and expansion of our leadership brands. Remember, there are a lot of field fundamental issues we are addressing, really believe those are well behind us. And then Venezuela, great market for us. We've got strong rep growth. We're gaining share. We're all benefiting some from pricing, and net revenue then was up over 50% constant dollar terms.

Not only that we look at it from a rep and average order basis, but also when we look at pricing mix versus volume, well balanced, 7% on the price mix and 6% on the volume. Our policy that you're going to hear throughout this morning, when we do the regions, is board manufacturing costs, as manufacturing productivity has been a key element in terms of our overall performance, and the improvement in gross margin that occurs in Latin America is due to lower manufacturing costs. However, the adjusted operating margin is about 160 basis points lower than it was a year ago. Significant here are significantly higher investments, primarily in Brazil, both on rep value proposition investments and advertising. In addition, in Latin America, we had some high distribution costs. These are some labor agreements that we had, the labor cost increases in Latin America, higher than most of the parts of the world. And it did impact us, particularly in the overall distribution area.

Moving onto North America. And these numbers exclude Silpada, although for external purposes, we included -- we're trying to give you a view of the business with and without Silpada. There's an overall revenue decline in North America of 10%. It does reflect what's really been another challenging quarter in the U.S., and a part of it is due to headwinds. Beauty market, by our numbers in research, is down about 2% year-to-date. In addition, our field numbers are struggling in terms of comparing to last year, where we, at this time, had a very high record recruiting drive. Overall, then, the Beauty sales were down about 6%. Non-Beauty down about 15%, and that's in line with our overall strategy to emphasize or de-emphasize, I should say, non-Beauty in favor of Beauty business. And our mix for the quarter was roughly 60-40, Beauty versus non-Beauty, showing how that is evolving and working. From a margin point of view, the operating margin is 110 basis points less than it was last year.

With that kind of a sales reduction, obviously, there'll be an impact, as we have the deleveraging impact from lower sales. We've also maintained and actually increased our advertising investment. And these have been partly offset by continued cost reduction activities, although you can't really see it or feel it because of the reduction in sales, but we're well on track to the commitments the Chairman had shared with you in terms of $400 million overall objective.

When we put Silpada in, and this chart just quickly shows the Silpada impact, it really impacts the revenue growth by about seven points. So that minus 10 becomes only minus three. And it also impacts the adjusted operating margin by full 100 basis points. And I say in here, despite amortization, because I want to make sure that people understand that part of the purchase acquisition price, above $175 million of it, are intangibles that will be amortized over 10 years. So roughly, we have about $1.5 million of amortization each month, as we work through the overall PMLs. That's a non-cash charge of the business.

Central and Eastern Europe, we had sales growth of 2% in constant dollars. We did have a reduction in the average order size here. And one of the key elements of this is weaker-than-expected product launches, particularly in the Skincare business.

We also, as in Latin American, had tough comps against color, where we had very strong growth from new color launches this quarter last year. Russia, as a country, revenues were above 4% in constant dollars. In terms of Active Reps, we did have growth of about 3%. Our field fundamentals remain strong in the region. And the adjusted operating margin is actually 60 basis points higher than it was one year ago. And as I said, common theme, we've got manufacturing productivity gains, strong benefits from SSI, really helping us on the margin. And this is only partially offset by advertising, which is up 85% quarter-on-quarter. And remember, we talked about facing where second quarter was light, third quarter was going to be heavy in terms of the overall advertising flows.

Moving to Western Europe, Middle East and Africa, very strong revenue growth. We're up 16% in constant dollars, and it is driven by the Active Rep growth, which is up 14%. On a country-by-country basis key areas, these have been growth drivers for us throughout the year. Turkey revenues, up 15%. South Africa, up over 60%. In the U.K., which arguably had some of the same economic challenges that the U.S. last has, again, we're showing revenue growth of 1%. That excludes the Liz Earle growth. Liz Earle, in terms of the total region, did contribute about four points to the region's growth So the 16% growth, 12% core business, 4% due to Liz Earle.

The adjusted operating margin is up 430 basis points from a year ago at this time. We're benefiting from the high sales growth. We're leveraging that in terms of the margin. But again, improved manufacturing productivity, including SSI, key elements at driving gross margin in this region.

Asia-Pacific, it really looks pretty much like what we've shown throughout the year. For the quarter, revenues were down slightly. We have growth in the Philippines, offset by continued weakness in Japan. The operating margin, the adjusted operating margin is 190 basis points lower than a year ago, and that's that primarily due to increased investments in RVP.

In China, we continue to see revenue decline, that's reflecting our transition. Moving away from the hybrid model to one that focuses on direct selling. In terms of where we are in that transition, we have how now launched the new sales model in 16 cities. Remember, last quarter, we reported three pilots. We've added 13 more cities at the end of third quarter, beginning of fourth quarter. And early feedback, and it really still is still very early, but the early feedback, both from Beauty boutiques and our representatives, continues to be favorable. In terms of that performance, it generated an adjusted operating loss of small, a los of about $3 million, which reflects the sales reduction. Moving now to the income statement. $2.7 billion of revenue in the quarter, that's up 6% in constant dollars, up 4% in reported dollars. We also have acquisitions of 2% impacting those numbers.

As we look now to gross margin, we see 62.8% expands to 64.7% or 190 basis points. Here, we're seeing that the currency does help us. We've had favorable transaction gains in the quarter offsetting some minor translation losses. Price mix is about neutral, but again, we are getting pricing. So pricing is favorable, while mix is unfavorable, but the two are netting out to about 10 basis points. But the real story is in manufacturing productivity, the 110 basis points improvement from a year ago.

We are continuing to invest in both our brand and our channel. I think that's a key element of this quarter's P&L. Think about advertising, it's up $31 million in the quarter. Net spending is in our key markets, Brazil, Russia and the U.S., total spending of $115 million, a 36% increase. RVP, the rep value proposition, increased investment in RVP ahead of what we would expect with the sales growth of $27 million. It's focusing on investments in sales leadership, as well as our web enablement tools and the service model transformation initiative that we've started to discuss with you last quarter.

In terms of our overheads, our overall overhead, that's the $2.6 billion or so that we tend to find as overhead. That is up in the quarter about $25 million, the $2.6 billion, by the way, is for the total year. That's $25 million, almost all of it is tied up in the higher investigation cost related to FCPA and then the impact of higher labor costs in Latin America. By the way, in that number, I've excluded the overheads for Silpada and Liz Earle because those would be added on with any comparable days in the prior year. Those overheads would have been about $23 million.

What that does then, if we put it all together, is it shows us with an adjusted operating margin that declines 110 basis points year-on-year from 11.4% to 10.3%. Through our currency, overall transaction is significant, both in terms of what happened to gross margin plus some benefits in the operating expenses. Translation is somewhat unfavorable. But the real measure in terms of how we're operating is the 200 basis point reduction. And when you think about that 200 basis point reduction, our investments in the business, investments that are not just for today, but they tend to be the longer-term as well, between advertising and the rep value proposition, are in excess of 200 basis points. In addition to that, there's about 60 basis points for the FCPA incremental costs. And then distribution is about 50 basis point increase, heavily in Latin America, there's the labor cost increases. But those elements alone are about well over 300 basis points, and that's been offset by the productivity improvements that we're making at gross margin, which is 120 basis points overall. So strong, strong investment period, which is key element in terms of the margin declines for the quarter.

Just a quick snapshot, because we've shared it with you in the past, in terms of what's happening on transaction exchange because of what's happening in Venezuela with the freeze out in dollars. We actually haven't had a significant cost element coming through the P&L. Overall, we now look to, believe we're going to finish the year with about $35 million, $36 million of favorable transactions, if exchange rates hold where they are today.

And then to break to you GAAP versus adjusted EPS. The GAAP EPS of $0.36 last year, $0.38 this year, an increase of $0.02. However, last year was dampened by restructuring of $0.06. This year, only $0.01. And then the special items in Venezuela are about $0.02, giving us the adjusted EPS movement, which is basically flat, down $0.01 year-on-year.

Moving on to the balance sheet and cash flow, starting with receivables. They continue well below 38 outstanding, that is our business model. We're not expecting that to change any. In terms of inventories, we've had an increase in the quarter of about six days, and it's actually benefiting from some currency, and its narrowed 12, 13 days operationally, barely handicapped, I think, by the weaker sales than we expected. And as we think about that, two things. Number one, we can't see this is creating an [indiscernible] issue. The products we've got the inventory build are still scheduled for flowing in future catalogs. So I don't think there's any concern there. The second thing is, however, that with the significant operational increase at the end of the third quarter, while we're looking for substantial improvement against that by the end of the fourth quarter, it does mean that we will not get our inventory objectives this year and will be somewhat above last year's, and in some ways, probably three, maybe four days up.

On accounts payable, strong performance here. It's an increase of 15 days from a year ago. We're up to about 85 days now. And I want to just remind people, this is not because we're just not paying people. This is really process change. We've changed our terms of trade. We've done benchmarking exercises. Something we started at the middle of last year. It's now embedded in the SSI process, which is not only about the vendor selection, skill selection, pricing, but also incorporates payment terms. And we're seeing real, real benefits here.

Capital expenditures, our run rate right now is about $45 million higher with last year at this time, significant investments in supply chain infrastructure, as well as web enablement tools. And right now, we think probably, it's somewhere between $300 million, $325 million for the full year, that's down a little bit from what I've shared with you last quarter. We said between $300 million and $350 million. 2009, I think we did around $300 million in CapEx.

Moving into the operating cash flow, shows an improvement of almost $100 million. And it really looks like it's all coming from adjusted net income, which is your net income, add to that the non-cash items of favorable $100 million. Within that, we didn't see inventories are up, but they're being offset by the accounts payable improvements overall. However, what doesn't show, which is also, I think, a good achievement coming through these numbers, is two other things. One is you know we've always had a mismatch between restructuring expenses and the cash related to the restructuring programs. That mismatch is close to $100 million unfavorable year-to-date. However, it's being fully offset by the flow of the collection and recoveries on Brazil BHT. If you remember, our refunds or rebates are being hung up with the government with some process changes on the government side. We expect it to get somewhere between $80 million and $100 million improvement in cash flow from that this year, and we're actually marketing a little bit ahead of those objectives. So what is happening is the Brazil BHT collections are occurring, and they're offsetting the restructuring mismatch.

So thinking about the rest of the year. We are on track to deliver at least the mid single-digit comps in dollar revenue growth that we've discussed. And despite having softer sales where you expect it, we are maintaining our commitment to our strategic growth investments. Those are investments that don't deliver any sales this year, but are investments for longer-term sustainable sales growth. In terms of the operating margin on an adjusted basis for the full year, we expect it to be roughly flat, after offsetting the cost for Venezuela, the special items devaluation and FCPA costs. So roughly flat on the adjusted operating margin. And our commitment is still long term to be the company to generate sustainable, profitable growth. And with that, I'd like to turn it back to the operator to open this up for question and answer.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Lauren Lieberman.

Lauren Lieberman - Barclays Capital

It's Barclays Capital. So I guess when you went through the spots of revenue disappointment versus your expectations, what stands out to me as the notable is really Brazil. I think in North America, it's a matter of it's still not good. I think we all knew that. It's just ever quarter, it's fingers crossed that might change. But Brazil is the one that stands out. So I guess just more information on exactly what are these service disruptions, why the intended and planned very significant step-up in spending? And if the service disruptions were temporary, why would it be lingering into the fourth quarter? And I guess, finally, just an add-on, because you mentioned labor cost inflation as well. Does that stick with us? You talked about higher distribution cost. It's not really clear if that's a one-quarter issue or something, and you could be thinking about longer term.

Andrea Jung

Lauren, I'll just talk first in term -- I'll let Chuck feel what the system disruptions and challenges, services disruption. But let me just tell you about the quarter as it's related to some of the comps that we had and some of the weaker skincare launches, as well as the continued commitment to spending. So again, I think we've had some tough -- we've had particularly tough comps in color. Same actually was true of Russia's level, we're up 35% in color a year ago in 3Q and 35%, just to give you an idea, in the fourth quarter. But we had restaged and relaunched the entire color line in our color brand across the whole company, and we don't do that very often, probably once in every four-some years. And so we had some good launches of some products. I would stick on Haircare, but certainly, against the whole thing, we didn't do as good a job lapping colors. In terms of skincare, in Brazil in particular, our mid-tier line. Not so much our new line, but our mid-tier line solutions was down significantly versus some of the products they had a year ago. So that was really, from a category point of view, the -- as the retro was good, continues to be very good in Brazil, activity continues to be never good, so it's really the average order cycle, special cycle to categories.

So that was really more of the line share of the issue, and then we did have the service challenge, which Chuck will talk to. But just on the spending, I mean, I think it's fair to say that, obviously, key markets for the category. I mean, Brazil continues to be projected to be one of the fastest growing Beauty market. We love being in direct sales in Brazil, but we know we've got a lot of competition, retail investment, as well as direct selling investment. And the investments that we're making, both in terms of the brand, as well as the channel innovation, are really critical long-term defense share investments that we feel are very, very important.

Lauren Lieberman - Barclays Capital

I just want to follow up, Andrea, because the comp issues are just -- what strikes me is that, that would have been known, right? At least internally, right, that you were comping against a 35% color increase? So I'm still not quite clear on why was there -- what is it that didn't work? Because the comps were a known issue for you guys going in.

Andrea Jung

I just think we didn't do as good a job in some of our offset to our product launches, which we called brand restages. And we thought that they would do better. They did nicely, but not as much as I thought we would do. So clearly, they fell short.

Charles Cramb

But in terms of the systems, I think, as everyone's aware, that the government has required us to go, us and everyone else, go to e-invoicing systems, and that's really to give the government feasibility for how each of our individual representatives operates, gives them the ability to track their revenue, their income. While we were successful in implementing e-invoicing, it did have some impacts, knock-on impacts, in terms of our older legacy systems. And there is, I would call it a maze of legacy systems down in Brazil. Net result was, as it impacted some of those legacy systems, we did suffer from some delays in processing. We had some unfulfilled orders. We had orders that fulfilled late and then got returned because they were late. So it became an issue of how the interfaces between e-invoicing and the legacy systems operated.

We think most of those technology issues are behind us or certainly, are significantly reduced. But I think when you start to talk about legacy systems, you have to be cautious in terms of is it really behind us, or are there going to be some minor hiccups right now. But our feeling is we're going into November, I guess, is that pretty much most of the problems are largely behind us.

Operator

Your next question comes from Chris Ferrara.

Christopher Ferrara - BofA Merrill Lynch

Its Bank of America Merrill Lynch. Guys, I guess the turnaround markets, two of them that you guys have been talking about, the U.S. and China. And it feels like both of them are kind of pacing worse than you thought. And I get that there was 2% Beauty headwind in the category in the U.S. But you still don't seem to be showing very much progress in either front. China actually decelerated. And then, I guess, broadly, you're seeing a continued ramp-up in RVP, yet it looks like, globally, you're losing shares. I mean, I guess, broadly, do you feel like there's something executionally that's not going on that should be going on across the company? Or do you just kind of feel like it's a perfect storm in a number of different market? And sorry for the long drawn-out question, but just trying to understand just how broad base this is relative to the amount of spending you guys are putting to the system.

Andrea Jung

I mean, I guess I'll answer your question, Chris, at the end, and then go back specifically to the U.S. and China. I think there are a confluence of issues, some macro and some in terms of tactical issues that while, certainly, don't like them, I don't think there's a structural thing in terms of the strategies. I believe the strategies are right, and that's obviously why we continue these investments. I mean, obviously, investment levels are flexible. So if I don't think that they were the right thing for the medium to long term, that would be an ability to relook, but just taking the U.S. and China. So just hopefully, that answers your question as it relates to the investments that we're making in brand, in RVPs for the Corporation.

U.S., I think it is tougher and it's taking longer. But the two things that are challenging that, obviously, are field productivity and getting growth in a declining market. When we talked about timing for, I'll just call it stabilized sales, the assumptions were at least a tiny bit of growth in the Beauty market in the United States, a couple of points we never were looking for nor they was there projected to be significant North American industry growth. But the decline year-to-date is a little bit more challenging, I think, for us as, I'm sure, for others, just then we had thought. And that's part of the macros of the US.S., but just getting growth as we move more towards Beauty and deliberately get out of non-Beauty, you know what I'm saying? Because mathematically, it does challenge the stabilization on the top line. The field productivity, obviously, is the biggest challenge, and that's one thing that all efforts are being focused on in terms of aggressive approaches to get that productivity out. So that's the U.S. And certainly, the macros don't help.

China, I think, again, we said it's going to be 18 months before the model is expected to take hold in 2012. I don't think you can look at this thing quarter-to-quarter. We did have some spend last year that got us some skincare sales, and we don't -- we're not lapping that launch. But that's really not your main, as much as it is -- I don't think you can look at it quarter-to-quarter. I think we're doing the right thing. We've got that new model that you just rolled out at the end of the quarter and 13 new zones, and really, it's about the feedback and how our Beauty boutiques we think and believe will participate in this new model, our feeling, and that's generally positive. I feel very good about our new General Manager there. I think he's off to a very good start. And that whole management team is just 100% focused on direct selling fundamentals, which we know how to do. And so despite the current negative impacts as we transition away from retail, I think that we think we've got the right structural model in place.

Operator

Your next question comes from Wendy Nicholson.

Wendy Nicholson - Citigroup Inc

With Citigroup. My first question is on advertising. Was the advertising in RVP investments shifted towards late in the quarter? Or why do you think all that investment spending just didn't have more of an immediate impact, if you will, on helping out some of the sales growth issues? But the second question and the bigger picture is, I think, ever since you guys entered into the last restructuring in 2005, 2006, it seems like every year, there is something the prevents you from getting any margin expansion. And I know, Chuck, you've been out talking to a lot of investors over the last six weeks. And in every meeting, you've said, "Hey, we feel really good about the long-term margin target." You said it again in the press release. And I just struggle to understand what gives you that confidence when it just seems, other than FCPA, eventually, hopefully, going away. Why are you going to turn into a margin expansion story when you just haven't delivered it in a long time?

Charles Cramb

Let me try to -- I think the real question you're asking is when is it coming, how is it coming? And I think we're starting to see, when I look at the margin performance, we're starting to see supply chain margin improvement, and that's coming through in your gross margin. And as we look to the future, with mid single-digit growth, with significant gross margin improvement, it's going to come from productivity through the supply chain. And remember, we haven't even started to close those two factories we have that we talked about, the German factory and the U.S. factory. When we think about the pricing opportunities that we've had, and we continue to get pricing right now, your mix has been running on favorable and offsetting it somewhat, and that's the skincare softness relative to the rest of the line.

But also, in terms of the pricing dynamics we have with discounting, we think pricing can continue, and then we see the health change in terms of that overall mix. I think we're going to see some sizable improvements in gross margin. I think as I run through the rest of the direction on it, advertising and RVP, they will continue to grow somewhat ahead of sales, not step changes, but somewhat ahead of sales. And on the overhead line, and I don't want to point to a quarter, but if you just look at this quarter in terms of performance, overall, not bad, if that's reflective of extended period of time. We are getting positive leverage from containing our expenses. We are seeing the restructuring benefits flow through. There are still more to come in terms of both of the programs. And so I continue to believe we're going to get the leverage there. The other thing that's going to happen is, as we think about margin improvement, that the assumption is that the U.S. and China will be performing at different levels than they are now as part of the turnaround for the U.S. and also, China, with a big, or not big, but not small loss this year. They will be a larger part of our business, and it will become profitable by the time period.

So I'm still confident that we are going to see that kind of margin recovery. And I still think that we have the right guidance out there, which is the mid-teens margin by 2013.

Wendy Nicholson - Citigroup Inc

Just one follow-up on that, Chuck. I think you gave us that guidance just about a year ago at your last Analyst Day. And I think most of us would have expected that we would have seen sort of ratable margin expansion, in other words, a little bit in 2010 to help get you through that target. Is there anything that we should be thinking about in terms of 2011? Is 2011 going to be a year where margins are up?

Charles Cramb

It should be. We don't give guidance. I'm not going to quantify it, but yes, this is not going to happen at the very end of the plan period. We need to start making progress against it.

Andrea Jung

Just a quick one. I know it wasn't the main part of your question, Wendy, but on advertising and that incremental $31 million, it really was driven by fragrance, which was heavy against our launch of the main fragrance that we launched with Fergie, Fergie Fragrance. And fragrance was up 12%. So again, we had challenges in some other categories, but what we advertise, a big piece of it was in fragrance and another big piece of it was against Lotus Shield, which is really an important haircare entry, where, again, the Haircare segment for us is smaller, but I think you probably heard me talk about just sort of catalyst that business and get it going. But you're not going to see the total absolute dollars because it's smaller, but Haircare was up significantly and it was one of the largest haircare actual SKU we've had, but again, a smaller percent, up 17%. Haircare was up 17%. So a lot of money went against that, Fergie and Haircare in the U.S., to give you an example. And then when I look at the rest, we launched Acne within Skincare, and there's a lot of Acne advertising going on. It's a pretty competitive segment and it grows segment, and that was up significantly as well.

So again, it's sort of new adjacent categories in Fragrance. So those did well. And then just a comment that it's really about timing and flow. The advertising is up significantly this in quarter. And having nothing to do with relative sales now, we had always planned the fourth quarter flat to down. But when you understand timing, it's when you have that unusual impact, if you would, in 3Q, okay, that's the way we planned and the way the product launch is timed out.

In terms of RVP, it is an incremental $27 million. A lot of that is on -- we've just launched technology enhancements and improvements in some of our major markets, the e-tools, whether it's intelligent ordering, leadership managerial tools, e-brochure, as well as we've talked a little bit about the service model, which really gets us looking at things like turnaround time, improving returns, things like that, for our representatives, which are the absolute right things to do for the business. So again, weighted heavily, probably weighted most heavily in this quarter on both of those two fronts.

Operator

Your next question comes from Doug Lane.

Douglas Lane - Jefferies & Company, Inc.

Jefferies & Company. Yes, I wanted to follow on the same thread in the marketing front. I mean, if you're accelerating your investment spending and your sales are decelerating, then something's going to give. So I think what might help us, just for some examples, some insights throughout whatever geographic region you want to go through, where some marketing messages are getting good traction and that you might be able to replicate elsewhere and where some marketing messages may not be getting traction and need to be corrected in the upcoming quarters.

Andrea Jung

Yes, I mean, I'll just make an overarching comment because I think it probably was inflicted in sort of what Chuck talked about. But the future spend rate for a 5% sales growth versus an 8% sales growth, we spend differently. And so there's some flexibility, obviously, and we're going to make one quarter, as efficiently. I don't think we have a structural marketing issue. And I think there are some top comps and some tactical issues, particularly in Brazil, obviously, and as well as in Central and Eastern Europe, we're structurally sound, but slower growth, which we're starting to see last quarter and talk about. And there's a confluence of things that affected that.

But I still believe that the category growth opportunities, the investments we're making to improve the channel was very much directly on what we identified and said were important for medium to long-term. But just to the level of spend, obviously, as we said, our sales were weaker than we thought they would be, so we weren't thinking we would have 4% core, if you would, constant dollar sales. And we would -- if you look over the 2011 to 2013 period, that spending is different. It would be different had we have the flexibility to adjust.

Charles Cramb

Yes, I mean, I'm thinking right now in terms of it does post as big numbers in the quarter. If I think about RVP and we think about the investments we're making and service model, and that will be a long-term investment program, investments we're making in web enablement, you're not going to see the impact of those, well, service model for quite a while, revenue, which is really putting those tools in place. So there is a mismatch between when you invest and when you get it out. And as Andrea said, we are investing. Our portfolio investments has a very long-term focus to it in terms of returns, just a sustainable growth.

In addition, let me take a look at some of the variable expenses in advertising. We always said that it's just the facing between second, third and fourth quarters. This was going to be a large quarter, particularly in Russia, where we were soft in the second quarter, probably a bit softer than we should have been. And within that, I think Andrea's spot on in terms of what are you spending against, and there are what we would call white space. White space, these categories that we haven't been engaged and involved in, whether it's acne, whether it's haircare, which were significant increments, but those are categories that we are definitely long-term interested in, so we're building or starting to build those businesses now.

I don't know if that helps or not, but that's kind of how we're thinking about it. It isn't all to deliver revenue growth in the quarter or even in the year. It really is a combination of matching up to product launches, matching up to marketing plans and also, sustainable longer-term growth.

Operator

Your next question comes from Nik Modi.

Nik Modi - UBS Investment Bank

Yes, UBS. Andrea, if you can just give us some perspective on skincare. It seems like you can't really get the good trend going in that business. It's either solutions is having issues or Anew has tough comparison. So just wanted to get your perspective globally on how you're thinking about the skincare business. I mean, it is very important for your margins. And how you think about that over the next 12, 18 months?

Andrea Jung

Yes, I mean, just kind of looking at what the struggle was and then where we're going, just China and Japan alone, probably pressure to category, four points there, because they are large skincare markets. Such as from a geographic mix, Nik, it's four points in the skincare there, skincare growth. Anew, again, I think it's still is a flagship brand for us. I think the next year, major investment in some, I call it extended segments, suncare, looking at men's, because there's a lot of intensive investments and innovation given, again, this is really our flagship, anti-aging brand and a lot of competitive activity.

So it's really the mid-tier brand solutions, which we did not invest against, I mean, I'm not going to say -- it didn't make sense because we're not restaging it. There's a major restage in 2011, mid-2011, but this was down 20%, just to give you an idea. And we didn't invest against it. It wouldn't have been right, and we're not going advertise against something that we're restaging, and I think that that is just been a harder brand in terms of brand positioning, so there's a major relaunch coming in 2011. But this was particularly impactful in terms of comparison revenues in both the EE and Latin America.

Okay, so it's a mid-tier brand launch 2011, extension of Anew in 2011 and just in terms of other categories and spend against good innovation. And then obviously, we want that, particularly the China business and the China resumption of growth does have a big impact on skincare for the company, outside because of' the percent of [indiscernible] at skin.

Operator

Your next question comes from Bill Schmitz.

William Schmitz - Deutsche Bank AG

It's Deutsche Bank. So I do want to pile on on the sort of margin restructuring commentary. But I think it's $1 billion restructuring cost. Since it was announced in 2006, when you look at operating margins, and they're at a 13-year low. So what am I missing? Like, I thought this was supposed to be the big inflection year on cost savings, at least versus the plan issues in 2005. So is it just been extended forward and we'll still see these savings? Or is it just that maybe you have to reinvest a lot more than you originally thought? And then second turn to that, do you think there might be a need for another restructuring program going forward?

Charles Cramb

Let me, William, answer the last one first, which is no on other restructuring program. Will there always be restructuring in terms of activities by the program? No. In terms of the margin walk, if I think about what I had expected way back in 2005 coming into 2006, Bill, you're right. These are kind of the inflection periods. And let's not kid ourselves, we lost 200 basis points in 2009 because of currency movements. We've [indiscernible] ourselves in terms of the global economic difficulties that we have, which depressed the sales base that we're operating on. FCPA, a significant cost that we never anticipated that we've been able to offset. Venezuela, significant cost in terms of the impact of devaluation that we weren't able to impact. But those are things that happened. So I have to go back to the roots and say, are we doing what we said we're doing? And in terms of the initiatives of the restructuring, number one, the 2005 program, 2009 program, we're pretty much on the mark in those programs. I think 2009 program, we did fall a little bit short. It looked like we're going to fall a little bit short this year, but more than made up with gains in strategic sourcing.

So I think those benefit streams are coming through. And we also did what we said we did in terms of we're going to invest a lot of the benefit stream into the business. Remember, this company had advertising of $130 million in 2005, and it's going to be $400 million plus this year. RVP is up substantially. Investments not only for the current business, but very importantly, for the long-term business.

So yes, we're not quite where I thought we'd be four years ago, no question about it. But if I look to the things that we've been able to offset, as I look to the pressures we've had, and as I look to how we feel about the sales revenue growth, ability to continue to gain on the gross margin line, the ability to continue with the mentality we've had on overhead expenses, I think, directionally, the guidance we're giving above mid-teens margin, operating margin in 2013 is still appropriate.

William Schmitz - Deutsche Bank AG

Is there a chance that maybe direct signs of a respond to advertising? I mean, because you're kind of the only direct sellers who's decided that this is going to be a big focus. And I know the macro is not great, but there's still 8% or 9% growth in some of these emerging markets and your business is clearly still very emerging markets-heavy. So I know you have a big analytics framework. But would you ever think of maybe there's not really a big payout in advertising?

Charles Cramb

Our analytics still show the list that we expected. If I had Mike Schwartz with us, he would take you through chapter and verse on this. But we don't just do an estimate. We also do what I call close auditing to look back and say, "Hey, are we delivering the kind of lift we expected? Are we getting the product performance or category performance base don where we're advertising? Are we getting the rep recruiting that we expected, given the advertising we've done in terms of the opportunity?" And we still think it's an appropriate place to invest money, and we are getting those kind of returns.

William Schmitz - Deutsche Bank AG

It seems like you resolved some Brazilian tax matters. Is there going to be a big release of reserves going forward or was that reserved for?

Charles Cramb

No, those are not reserved for. Those are just contingent liabilities, Bill. But you're right, we are very, very pleased that we're getting a lot of those behind us now.

Operator

Your next question comes from your Dara Mohsenain.

Dara Mohsenian - Morgan Stanley

It's Morgan Stanley. Can you discuss your comfort on the balance between pricing and volume in the quarter? I mean, you guys are clearly relying on pricing as driver getting sales growth, which causing the question of sustainability of that growth going forward. So I'm just looking for a commentary on your level of comfort with that mix in the quarter and what you'd expect going forward?

Andrea Jung

Yes, I mean, again, just sort of the thought here is balanced growth between volume and price mix. And that is so -- by just then looking at the core here, the 4% core, 1% in terms of volume, 3% in terms of price mix. It's heavy on, a little heavier on price. I feel good about the pricing that we're taking. We've taken over $200 million in the last two years. In terms of strategic pricing, very analytical, and there's nothing that I'm seeing that's showing that the strategic pricing that we've taken is our challenge, as it relates to any kind of weakness versus what we thought. It's not because of taking strategic pricing, and as you all know, we really work very hard to improve brand image, R&D, everything else. And I think this ability to take pricing is something that we haven't had over the last decade.

So I feel good about strategic pricing, and we'll continue to take it. And I think it's -- I do think and believe that we're going to have sort of balanced growth between units, and that's the units as we go forward. And that's really the goal here. I don't think we're far off it, obviously, in terms of seeing unit volumes, but really, the whole core business to be able to drop in at 4%, that was the disappointment.

Dara Mohsenian - Morgan Stanley

And Chuck, on an organic basis, just when you ship out the acquisitions, what was the volume pricing in the quarter on an organic basis?

Charles Cramb

It really doesn't change the metrics that we've shown you. At least very small and in the case of either acquisition, none of them would show up in the pricing column.

Operator

Your next question comes from Ali Dibadj.

Ali Dibadj - Bernstein Research

From Sanford Bernstein. Just a few questions. One is, Chuck, you gave an explanation on the Brazilian BHT being helpful to free cash flows, and that's helpful. But again, if you look at this quarter, free cash flow to net income was actually quite poor, 12% free cash flow productivity, and prepaid still goes up even more than sales. I'm trying to kind of reconcile those two things. So any help there would be helpful.

Charles Cramb

The only thing I would say there is it's really, to me, the big nemesis in the quarter from a cash flow point view, is the inventory movement. And those inventories went up substantially with the softer sales. And we normally have inventory build, by the way, in the third quarter leading into Q4. But what we experienced -- and by the way, where we experienced it was where the sales are softest, U.S. and Central, Eastern Europe. And that, to me, is the one big negative in terms of cash flow in this period.

Ali Dibadj - Bernstein Research

But I mean, it's a consistent theme, as you know, for the other few quarters of the tier, as well, where inventory is a little bit more benign to you. So I'm just trying to understand what, as you know, going on there with disconnect?

Charles Cramb

I'm not sure what is the disconnect, the prepaids have to do with things like when we're buying paper for brochures, how that brochure flow works, does nothing on towards in there. It really is all about assets that are still continue to have value. And to me, the important thing in this quarter was that we now have measurable returns on that Brazilian BHT, which is pretty much government-controlled, and there always a concern that they make it held up again. But I think we've been pleased that the money is flowing. I think the other thing that has happened and always happens, so I think cash flow, by the way, I mean, we're on a year-to-date basis, done anything else because of some swings around us. But the other thing that is big in the year is the mismatch between restructuring expense and restructuring cash, and that's in the high $80 million range.

Ali Dibadj - Bernstein Research

You mentioned the retail growth in Brazil and other places as being something you have to struggle with. It sounds like you have this retail growth that's also affecting every other one of the CPG manufacturers that we hear about are folks on the emerging markets and with a particular pension towards your categories. So are you seeing -- not much within the direct sellers we're also spending more back. How much of that, actually, other CPG companies had an influence on how much you have to spend and the return on that spend? And is that, as you look forward, a true long-term kind of secular pressure you're going to feel in your core emerging markets?

Andrea Jung

Well, just a slight clarification. And this was second quarter year-to-date. Direct sales had gained significant share and retail had lost here in the category. So we, as well as other direct sellers, had gained market share two quarters today. I don't have the numbers yet on 3Q. But I'll just say, I was talking much about retail. I've been talking about retail, I mean, I think everybody is investing to your point, whether you're in direct sales and/or in retail in the market. But we feel very good about our share, and we're not looking -- we do believe that Brazil will continue, for example, to be very a profitable market after investment. We're going to get you to invest, it's not about just because there's retail competition coming in, but we've got, obviously, strong direct selling market there. And it's a big business, which I think is important, but still very profitable opportunities even after investments in both the channel and the brand.

Operator

Your next question comes from Alice Longley. [Buckingham Research]

Alice Longley - Buckingham Research Group, Inc.

A couple of questions about Brazil as well. The first is on the cost side. I think you explained why this incremental cost for tracking reps in a different way. But why was distribution up as a percentage of sales by 50 basis points? You have new distribution facilities in the U.S. and more importantly now in Brazil. Was that increase because of that cost of tracking reps?

Charles Cramb

No.

Alice Longley - Buckingham Research Group, Inc.

Or where does the labor -- what was the increase in labor cost? When does distribution start contributing to margin expansion as it was supposed to with the new facilities?

Charles Cramb

And each of those is a different question by geography. It also has to do with when your inventory size goes down because you're shipping boxes, then you end up, unfortunately, having what I would call deleveraging cost per value of that order to ship those up. But what we're referring to specifically in terms of distribution cost increases was pretty much labor, double-digit labor cost increases in Latin America, in general. And for instance in Venezuela, very, very significantly up, and that's because of some union contracts that gets settled this year with substantial increases. So it really is the labor component. Now...

Alice Longley - Buckingham Research Group, Inc.

Is that peculiar to you, or is that widespread, in your view?

Charles Cramb

Each of us negotiates at our own time frame with the unions. I believe it's not uncommon. I believe it's, we're not unique at all. I think where we are unique is in terms of the number of packages that we shipped, the number of cartons, the number of boxes we shipped to our representatives. And they have a relatively fixed freight cost that's in distribution. And as freight costs, as a percent of sales, the average order is under pressure will come down, that you need to us.

I think the other question you've asked, though, is something that we do have to be a little bit of aware of, and that is as we transition out of one distribution center or distribution configuration into another, there are some duplicated cost or costs, as we run two distribution centers, closing down one, opening another. That does not have an impact yet in Latin America. But coming out of the end of this year and through next year, you will be hearing about some pressure on distribution cost, as we move into the large Brazilian Adamos [ph] facility.

Alice Longley - Buckingham Research Group, Inc.

So the labor costs have just gone up, so we have to anniversary those for the next, that big hike for the next four quarters.

Charles Cramb

Well, that labor cost is now embedded in our numbers, yes. But it's labor cost, and it's going be, in terms of ratios, it's also, when you have the average order pressures, then your percent, just ratio of expense as a percent of sales will go up.

Alice Longley - Buckingham Research Group, Inc.

So just to come back to this, over the next four quarters, I'm going to have labor costs up year-over-year because of those union agreements? And also, I'm going to have the incremental cost of transitioning to this new distribution facility in Brazil, is that right?

Charles Cramb

Yes.

Alice Longley - Buckingham Research Group, Inc.

So the distribution may increase as it drag on margins from that 50 basis points?

Charles Cramb

For a short period of time, yes.

Alice Longley - Buckingham Research Group, Inc.

For, like, the next four quarters?

Charles Cramb

Yes, I think that's -- the next four to five quarters. For almost next year, I think, which obviously, our objective is to make that transition as quickly, but as smoothly as possible as well, so we don't disrupt the relationship with the representatives.

Lauren Lieberman - Barclays Capital

And then my other question about Brazil is you had all the strong innovation in skin, I guess, a year ago, which is why you're talking about the tough comps and then color as well. What were you thinking up to this year? I mean, why wasn't there a lot of strong innovation this year? It sounds like you've got something for next year, but that's not for a few more quarters before that even gets launched. So what did you try to do anyway this year to generate more sales growth in Brazil? It doesn't sound like there's much.

Andrea Jung

Yes, we had a new launch. We had a new launch with a product called Luminosity. We had a lineup of new color, not restaging the entire brand, but the lipstick and mascara launches that we would do in every year. And again, they were not as strong as they need it to be, so I think I made that clear earlier, to go up against what we thought. So we always knew we had tough comps. So I think we understood that. But even against that, we had some disappointments in terms of product launches. But again, I don't think that that's something that carries into 2011.

Alice Longley - Buckingham Research Group, Inc.

And I guess the last -- your restage of Anew, that's your biggest thing for next year in Brazil. It sounds like the focus is on men's and suncare, which is kind of those are secondary subcategories of skin. Isn't there some big...

Andrea Jung

We have very intensive innovation in the core Anew brand for women in 2011 as well.

Alice Longley - Buckingham Research Group, Inc.

That would be, like, in the June quarter?

Andrea Jung

I think that it's -- I mean, I think it's across the year, but it's more -- it's not in the first quarter.

Operator

Your next question comes from Linda Bolton Weiser.

Linda Weiser - Caris & Company

Caris & Company. Chuck, when you first came into the company, you kind of instituted the idea of Zog. I think we were all impressed with that and felt it was a good thing for Avon. And here, we have really not a huge miss on the sales line. Your sales results were actually very much in line with our estimate and consensus. So 4% organic sales growth is not way up, unless you're expecting 9%. But you've been talking about mid single-digit, in which case, 4% is within that range of expectation. So it seems to me that on the Zog, if you still have lightening up on that concept. You're allowing overhead to rise, but less than sales growth, and that is giving you less cushion or insurance when a small glitch happens on the sales line in a particular quarter. So can you just talk about that whole concept? There's a lot of leverage in your operating model, and it seems to me that, that type of leverage and the sales glitches that we sometimes see should make you really embrace Zog even more, not lessen up on that. Can you just talk about that?

Charles Cramb

Sure. I mean, it's one of my favorite topics. And I can tell you that Zog is alive and well in this company in terms of approach to expense, in terms of assessing and evaluating when to invest money. In terms of trying to take lower value-added costs out, or you need a replacement with higher value-added investments, or don't spend any money at all. So I'm not at all concerned about the approach to cost. I think, I mean, this is one quarter that you talked about. If you go back to the charts that I've showed, remember, they had the little circles on the left. Our overhead expenses, exclude the overhead that you add in for Silpada and Liz Earle, because there's no comparison in the prior year. But the overhead that we had was, I think it was $24 million, $25 million incremental, of which $17 million was the FCPA increment.

So from an overall cost point of view, despite inflation that you have, we really held our cost pretty much flat in terms of what we reported. And what we have done is we are intentionally investing now because we feel good about the base we have, we are investing incrementally in initiatives that are not generating sales now, but that will, for the longer term, and that's most of the other difference. So in one quarter, we shouldn't look at, but since you brought up in terms of the margin in this quarter, I think we are still delivering against what we said we deliver on the overhead side. And I think, if you really want to look at the business in terms of the margin movements versus maybe some other people's expectations, that margin movement is heavily influenced by the over 200 basis points that we put into RVP and into advertising. Those were the real drivers of the margin reduction in the quarter. And we talked about those face. In the quarter, there may be heavier than others. Remember, in Q2, in central and Eastern Europe, we went light on advertising, probably a little lighter than we should have. But we had a very heavy up plans for Q3, and that is what we invested in.

So I hope that helps you a little. Zog is never meant to be a mathematical number, except when you start the initiative. Zog is really all about attitudes, about getting people to focus and concentrate, making sure that people do the right analysis, they look for process changes as opposed to constantly just adding costs, the sales are going up. And that, very clearly, I think is working here in this company. So in Zog, I'm excited about, and I do get excited because I do think our team has done pretty well on it.

Linda Weiser - Caris & Company

I don't think you really explained exactly what the service disruption is? Why it's in Brazil? And if you had this before, and usually, it only impact sales for one quarter. So why would the effects last into the fourth quarter in terms of the service disruption?

Charles Cramb

Well, because, number one, we were fixing it coming out of the third quarter and into the fourth quarter. We're almost a month into it right now. So that's a piece of the lingering impact. And the second one is I think you have to be cautious when you touch a series of, a significant number of interfaces between old legacy systems. What happened is we put in a new e-invoicing system. It met the government requirements. It worked well. But in terms of data transfers, in terms of the processing time that was required, as you work back to those other interfaces, we did some things that caused disruption in the flow of information. Those are the things that we think we pretty much felt behind us as we end October, going to November. But when you talk about legacy systems, there's always something else that kind of creeps up. We feel that we've done the right things now, but we're a little bit cautious. And we do have still one more month of, which is the month of October, of some difficulties.

Operator

Your next question comes from Mark Astrachan.

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Yes, Stifel Nicolaus. A few housekeeping questions. Just in terms of thinking about the operating margin. I know you don't give the guidance for it. But there's obviously the FCPA cost in there, there's Venezuela and et cetera. So you put it all together, it seems like it's more than 100 basis points in terms of detriment this year versus what potentially flows through next year. So I wanted to get a sense of whether that is correct in thinking about it. Also, talking about your sales growth for the year of at least mid single-digit in constant dollars. I'm assuming that's exclusive of acquisitions. And then on China, I just wanted to get a sense of what your sales per representative is, and then your kiosk sales business as well.

Charles Cramb

Number one, the sales growth guidance that we give, yes, some companies call it core, that excludes the acquisitions. Secondly, in terms of the 120, 110, 120 basis point drag that you talked about in terms of the Venezuela devaluation items and the FCPA cost, that's an increment versus 2009. I can't talk about FCPA moving into the future. What I will say, though, is that the drag that came from the component that was Venezuela should not be, I'm going to say, should not be severe next year. But again, it all depends upon what happens down there, what shipments might do, where exchange rates might go, but we would not anticipate a further drag because of Venezuela. And I can't remember what your other question was.

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

It's on China, sales per representative and then the kiosk business in terms of the growth.

Andrea Jung

Because we're now sort of just looking at the whole business as it blend this hybrid model and not dividing it out, Beauty boutique versus sales promoter. But your retial business, or your Beauty boutique business is down significantly, obviously, because that's the transition away from retail into direct sales.

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

I'm trying to get a sense on per representative basis, whether things are actually getting better as you're switching over to the different business model.

Charles Cramb

It's really too early right now.

Andrea Jung

We'll follow up on that, I think, when we have a little bit more visibility. But I think it would be important to look at that, as we kind of fully implement the model and give it some time to see. But right now, the weight, the inventory has been so much from the Beauty boutiques, and they're transitioning out and have significant declines.

Charles Cramb

Just significantly less. But again, we pilot the three cities in the third quarter. We only just went into the other 13 areas, cities. So it's way, way too early to get any kind of a quantitative brief.

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

And just lastly, it's in the press, realized you probably don't want to comment on it, but this L'Oréal rumor doesn't seem to be going way. Is there anything that you can or want to add there?

Andrea Jung

I'm not going to comment in on rumors or speculations, sorry.

Operator

Your final question comes from Connie Maneaty.

Zeke Kramer

It's actually Zeke Kramer for Connie Maneaty of BMO. Most of our questions have been answered, but I was just wondering if you could help us understand a little bit more why there's incremental FCPA costs?

Charles Cramb

We cannot comment other than...

Andrea Jung

You mean, why the incremental this year versus last year?

Zeke Kramer

Right. You said it would be incremental going forward, why that would be the case?

Charles Cramb

No, we did not say anything.

Andrea Jung

[indiscernible] I thought it was about incremental versus '09, it's what we've talked about. The only thing we've quantified is the incrementality over 2009.

I think that was the last question, operator. So appreciate it. If there are any follow-up questions, again, Amy will be here all day. Thanks, everyone.

Operator

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

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