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Avon Products (NYSE:AVP)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

Executives

Amy Low Chasen -

Charles Cramb - Vice Chairman of Developed Market Group

Andrea Jung - Chairman of the Board and Chief Executive Officer

Analysts

Javier Escalante - Weeden & Co., LP

Dara Mohsenian - Morgan Stanley

Constance Maneaty - BMO Capital Markets U.S.

Alice Longley - Buckingham Research Group, Inc.

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

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Per Ostlund - Jefferies & Company, Inc.

Emily Klingbeil - Crédit Suisse AG

William Schmitz - Deutsche Bank AG

Wendy Nicholson - Citigroup Inc

Linda Weiser - Caris & Company

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Operator

Good morning. My name is Geree, and I will be your conference operator Today. At this time, I would like to welcome everyone to Avon's Second Quarter 2011 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

Good morning. Thank you for joining us to discuss Avon's second quarter earnings results. With me on this call are Andrea Jung, Avon's Chairman and CEO; and Chuck Cramb, Vice Chairman, Developed Market Group and Interim CFO.

I refer you to the cautionary statement in today's earnings release, as well as our non-GAAP reconciliation in the appendix of today's slides. These slides are available on the Investor Relations section of our website and also include details of our second quarter regional and P&L results.

As usual, on the call, we will focus an adjusted non-GAAP financial measures. With that, I'll hand the call over to Andrea.

Andrea Jung

Thanks, Amy. Good morning, everybody. Thanks for joining us for our second quarter call. Just to summarize the quarter, as you read this morning, our constant-dollar revenues were up 2% driven by continued strength in Latin America. Silpada contributed 1.5 points of growth. In terms of the Beauty category, our Beauty sales grew 1% in constant dollars driven by fragrance and personal care. Active Representatives were flat, that was impacted by China and North America. The adjusted gross margin was down 30 basis points as a continued effect of price management and favorable foreign exchange were offset by commodity cost pressures. Adjusted operating margins declined 30 basis points due to the gross margin that I just explained, and our adjusted earnings per share from continuing operations were $0.49, that's up $0.02 versus a year ago. The year-to-date cash flow from operations, down $144 million. The primary impact of that are higher inventory and pension contributions that we've made in the first 6 months.

As I look at the second quarter, I think our results are somewhat pressured by weakening macros. We continue to aggressively drive our 2011 operating priorities to get the business back on track. I'll talk more about that in a minute. We have had ongoing execution improvements in both Brazil and Russia, but we have seen some slower-than-expected Beauty market growth. We continue to see some weak macros in developed markets, and this quarter reflects the heaviest impact of the United States portfolio shift away from giftables, and we are addressing that starting in September this year, and we'll talk more about that.

But if I take a look at the first 6 months, then in the first half, our results were broadly in line with expectations. Our previously stated expectations for the first half were that core revenue growth would be low to single digits and that adjusted operating margin would be about flat, and again, 6 months to date, the actual are low single digits and exactly flat adjusted operating margins.

Moving to the second half in terms of our outlook, it continues subsidy that we target mid-single digit revenue growth and significant margin expansion. We'll talk a lot about that this morning, but we're going to continue to target mid-single digit growth driven by a resumption of our Active Representatives and unit growth via major field global activation program; a stronger second half innovation pipeline, as we've always planned; and high-impact merchandising, particularly as we continue to see some of the macros stuff out there in some key markets.

We project significant adjusted operating margin expansion in the second half fueled by revenue leverage gross margin gains as pricing and FX offset commodity costs in the second half and continued tight overhead management, and we're going to talk more, and I'll let Chuck talk more later, about our operating margin and our assumptions, but our full year outlook remains unchanged. We continue to target 50 to 70 basis points of operating margin expansion.

Just to remind everybody about the 4 kind of key pillars in the 2011 operating priorities that the team has been driving: first, obviously, to restore growth in the all-important markets of Brazil and Russia; and stabilize our North America business by the year end; reignite skincare; and to deliver meaningful operating margin expansion. Specifically in the second half, the Playbook in the company underpins our mid-single-digit top line outlook. They are a global field activation program that is boldly designed to reignite our Active Representative growth. They are stronger product pipeline of innovation, particularly in color and skincare, which will drive pricing and average order. And importantly, they're very focused on executing high-impact offers to help us to resume our volume growth.

Just to start with reigniting Active Representatives growth for a minute, our Global Believe incentive is designed to do that in the second half. This is a global sales force incentive built around the company's 125th anniversary. It targets second half sales and Active Representative growth with a "you do, you get" payout and bonus opportunity. It was just launched in July in all markets, and this incentive runs through the end of this year. It is the biggest incentive in Avon's history. It is the richest in the sense that it offers 3 to 5x greater earnings potential for our field than previous global incentives. Importantly, it's the most balanced. It targets Active Representative growth and average order growth. And some of the previous incentives have been more focused against recruiting, but sales is an equal component here. It is the broadest incentive, meaning that it -- those who can participate are in Sales Leadership up-line and top sellers, in addition to field managers who are division and district sales managers. And it's the longest incentive. We've had incentives that last for an average of 6 weeks. This lasts 6 months during the most important time as we enter the important holiday season. This global plan is for 2011, but very importantly, plans are underway to make sure that we anniversary this in 2012 and ensure sustainable growth.

In terms of the product pipeline and innovation in the second half to support average order growth, we've got A new Fergie Fragrance, which builds on our record 2010 launch, which was the biggest fragrance in the company's history at $90 million, so we've got a lot of exciting plans for the second Fergie Fragrance as we come out of the third quarter into the fourth. Very important to skincare is a breakthrough skincare innovation. It's a key contributor to our fourth quarter pricing opportunity and our average order for our representative. This is in the ANEW brand. This is called Anew Genics. We have been working on this for several years. It is the first to YouthGen technology. The packaging, the formula is really at the top of what we have developed today, much stronger than year ago, the ANEW launch, and it has, of course, very, very attractive gross margins.

Our renewed holiday gift strategy is important. We'll talk more about that, specifically, as it relates to the United States. But even beyond the United States, if you look at last year's fourth quarter and holiday season, we did not have the kind of holiday giftables in Beauty or otherwise that, I think, our representatives needed for their earnings and gave that consumer excitement. So we have fragrance gift sets and a

separate exciting reintroduction of holiday giftables in the United States.

If I just move to fueling unit growth in the second half. High impact Smart Value merchandising is resident through all our all of our brochures as we exit the third quarter and go into the fourth quarter. And this really focuses on the under $5 products that are giving high-energy, great impulse and helps us resume volume growth.

Color is an important category as well to resuming unit growth. We have 2 very big launches. On the left, you see Colordisiac lipstick. This is going to be the biggest lipstick launch in Brazil this year, and its launch is next month. On the right, you see -- this is the U.K., but it launches throughout Europe, the company's most important mascara for the second half, SuperSHOCK Max, both large unit drivers.

So these global programs as well as innovation pipeline build on the heavy lifting underway in the priority markets that we've talked about. Let me just take you through them for a second.

Let's talk about Brazil. In Brazil, we are making progress on service improvements. The delivery delays are in line with historic norms, and they have been that way for several months now, so we feel good about that. Our order fill rates are still below the historical average but gradually improving. In the quarter, representative annoyance did continue to remain a negative driver of sales, but it has improved significantly versus the last 2 quarters. So the heavy lifting in the short term is driving near-term service improvement. Importantly, though, for the medium term, we are launching ERP as part of the structural service improvement. We're actually launching it Monday. Everyone knows, and we've talked about the fact, that our existing IT systems are now stable. They're stabilized, but for the medium and long-term. They're not sustainable at the current and future volume projections of Brazil. So the implementation of ERP will replace legacy inventory and vendor management systems in this market with a world-class global standard solution. Planning for this has been underway in Brazil for nearly 2 years. As you can imagine, we've had a very careful assessment of the overall service and business readiness environment in this market. And that confirms our comfort with proceeding next week. We've got significant experience and capabilities in the company over the last 4 year gain from prior year ERP installation. We have an amazing team down there that has been working day and night that is ready to launch this on Monday. And again, that project complexity is all the ERP installations do, and there is that temporary risk of disruption that might come with any kind of major system installation, but we've surround sounded this, and we feel as good as we possibly could. We think it's the absolute right thing to do. ERP in Brazil is a very major step forward to ensure service reliability on a sustainable basis in Brazil.

Just to give you an update on where we are in field morale in Brazil, we did a survey again in June. As you know, we've been doing this frequently. We did it in January as we came out of a pretty tough period. But I think the positive news here is that in terms of the number of representatives who say they intend to stay with Avon, a true measure of their continued loyalty, 86% of all representatives in Brazil, 88% of our top Sellers.

There's been a lot of discussion about the Brazil Beauty market. And so as I look at it, Brazil does, in our mind, remain a very key growth market in the category, plus the Beauty industry certainly slowed in the first half of this year. April year-to-date, Beauty market's growth numbers show that it slowed to the high-single digits rate versus, I think, what all of us were expecting as we came in to 2011, the low double digits. These numbers show deceleration in both retail and direct selling growth rate. Retail share is unchanged, despite direct sales slowdown. But just a reminder that retail plays right now predominantly in the daily needs and hair care segments, which are not core direct selling categories. If you exclude Avon, all other direct sales, the direct selling channel x Avon is also down from high-double digit to high-single digits. Franchise channel is one that does remain strong, albeit it's only 8% of the total Beauty market.

So Brazil still a good Beauty market. We're looking for Brazil Beauty market growth still almost twice the global average, but it has slowed from the very strong pace that it had in the last several years.

Given that, though, still we look at Brazil revenue for Avon, and we look at revenue growth continuing to improve in the second half. Our planning assumptions reflect current market conditions, and operationally, we've got very strong second half programs in place to drive this revenue improvement. I just talk you through the global programs but, of course, Brazil being our largest market, participates very strongly in them. They have major plans against the Global Believe channel challenge. For them, obviously, the major color and fragrance innovations are extremely important. And then, of course, specific to Brazil, we look for service to continue to recover.

Turning to Russia for a minute. In Russia, our field programs are working in a weakening macro environment. I think importantly, strengthening field momentum is what we're seeing as our programs take hold. As you know, we rolled out new changes to our Sales Leadership model at the end of January. And in the second quarter, we've seen a 4-point swing in Active Representative growth, taking us from negative into positive territory in the current quarter. Unit leaders and appointments are both growing again, so those are positive signs. However, we are seeing weakening consumer macros that pressure the average order in the quarter, and certainly as we've seen others reporting in this quarter. I think Russia's macro market is weaker than we would like to have seen it. But we have strong programs in place to drive revenue growth in second half. The Global Believe challenge is very, very well planned in activating to mobilize the field on top of the compensation changes we made in this market. We've got Smart Value promotions and beefed up our unit movers to engage consumers as the

macro environment continues to be a little bit weaker than we thought in Russia. And here, in this market, a stronger color and skincare pipeline in execution than a year ago will be very important versus last year.

We're going to spend a few minutes talking about the U.S. I'm going to turn it over to Chuck in a minute to give you far more detail, but let me just give you the headlines here. We are taking bold actions to address the top line in the United States, short and longer term. In the short-term, we're strategically adjusting our portfolio mix to recapture holiday giftable sales. Second quarter would be, kind of, the worst quarter where you see the impact of that remix away from Easter, Mother's Day, Father's Day, et cetera. In the medium term, we're accelerating the scale and the scope of our sales model transformation, and we want to give you more detail on that because it's important. I'm going to turn it over to Chuck.

Charles Cramb

Thank you, Andrea. Well, as Andrea said, we have initiated a bolder plan for the U.S. We spent the last several months really reassessing the U.S. plan that we have shared with you in the past. And basically, we are reaffirming the basic tenets of that plan. They do remain intact. However, we feel it's appropriate to go much more boldly and much more broadly in terms of how we're implementing that program. And now that we've had a chance to communicate it to our field, we can take you through it. I think on the last call, we mentioned some of the elements, but we really couldn't give you too many details until we talked to the field.

First, let's talk about something that's more in near or short term, and that is that we are recalibrating our approach to the mix between Beauty and non-Beauty. Strategically, looking at what we did, the move to more Beauty was poorly timed. If you think about it, we were expecting the mass Beauty market to grow over the period of remixing away from non-Beauty. It did not grow. And in fact, it declined, so we didn't have the ability to substitute Beauty sales for non-Beauty. We also really went too far and too fast taking out the non-Beauty. And that hurt us in terms of the energy in our brochure, as well as the field. And it had a negative impact on the representatives' earnings opportunity. So we made a strategic decision to rapidly adjust that portfolio mix and reintroduce holiday giftables starting at the end of the third quarter. Our original targets were about 65% Beauty. We now believe that was too aggressive. In the near term, we're going to take Beauty down to about 55% of the portfolio and 45% would then be non-Beauty. And then over the longer-term, Beauty should be somewhere between 55% to 60%, a bit less than the original objectives.

And the giftables program really has both our Beauty products, as shown here, as well as our non-Beauty products. In the non-Beauty, particularly in the area of seasonal items, we would have strong volumes as well as great energy through the catalogs.

Moving from the product portfolio to the field transformation. Here's where we're really going to be bolder, and the program will be much more comprehensive than we originally planned. It's a multiyear program, and it's a much more extensive sales model transformation. Fundamentally, if you think about it, it's a restructure in the field to grow through the leadership format. And we're basing a lot of this by incorporating learnings from the successful Mexican field transformation that we went through a few years ago where we did move into a leadership model. And just a reminder, that program in Mexico was led by Jorge Martinez-Quiroga, who is the same person that I have heading up the U.S. business. So we have his experience from that very, very successful transformation. And we also incorporating a very extensive change in the management and communications plan to ensure that our leadership reps are independent reps and our district sales managers are totally engaged and informed every step of the way.

So thinking about what we have today, and we have a structure where we have a district sales manager. She has responsibility for top sellers or top representatives, a significant number of unattached representatives, as well as people within the leadership format. And as you think about those unattached representatives, roughly half, that's right, roughly half of our representatives are not currently covered by leadership, so they only have a relationship to the district sales manager. What that means is each one of those district sales managers has over 250, on average, direct relationships that they have to try to administer and to support with a significant amount of time administering to the unattached representatives.

We're going to move that to a model which allows the district sales manager to really focus and train her top sellers, her top representatives, as well as her leaders in helping them build out their down line organizations. What this means is we're going to take all the previously unattached representatives and attach them into the leadership structure, and thereby allowing leadership to take responsibility for developing her down line and growing the independent representatives that are within that down line. This allows the district sales manager to really focus on nurturing, developing, training and helping both our top sellers and our leadership representatives to grow their business.

Same time we're doing this, we're also going to invest in and simplify our Sales Leadership model in a way that we feel will really fuel the growth and the earnings opportunity. As I said, 100% of the representatives are going to be attached to leadership; that's excluding, obviously, the top sellers, which will continue their current relationship with the district sales manager. We're going to make the qualifications to get into leadership easier to make it more attractive for representatives. Once in leadership, we're going to facilitate faster title advancement by again easing some of the qualifications there. Importantly, we're also going to align the minimum order value for representatives and for leadership. And this is important because it encourages leadership to really work with all of their representatives. As -- now they will earn on all sales for those representatives, where in the past, for smaller sales, they had no earnings opportunity because they were below that for which they would qualify for up-line commissions. And we're going to expand the earnings opportunity to include additional things. For instance, today, demo sales are not included as commissionable sales. In the future, they will be.

In terms of what that means, it means that we should see increased earnings across all levels of leadership. Most significant on the early ranks of leadership are the unit leaders and advance unit leaders, who should see earnings increases of about 50%.

We also want to make the business with Avon easier to conduct. So we're simplifying the fee structure to a single fee on an invoice, a fee that is based upon the size of the order. We're developing stronger training and development by the up-line for the representatives so they will have time and they'll have the incentive to work with their representatives to help them grow their business. This structure will also allow the district sales manager to have more time to focus her time on the high-value-added activities, less time administering those unattached reps, who are now attached to leadership, more time training and developing leaders and nurturing also the relationships with her top sellers.

We launched a pilot in the mid-Atlantic to see if our premises would hold true, and the early results are promising. In terms of order frequency, number of orders from the first generation, it's up about 11%. And recruiting by leadership, and this is important if you go to a leadership model, recruiting by leadership is also up during this time period. So orders are up and recruiting is up.

We also kind of polled our district sales managers

to see what their feelings are, just a couple of the questions here. One is, do you think that sales performance levels will be higher after completion of this program? 60% of the district sales managers felt that this will deliver stronger sales growth, and another 22% were kind of neutral on the question, which means only a small percentage, about 14% disagreed.

The second area would be in terms of, hey, can you manage your way through this transition as a DSM? Can you deliver your KPIs? Here, 70% of the district sales managers agree, and almost 20% were neutral, which means roughly 10%, 12% disagreed in terms of the difficulty of managing their way through the transition. So again, a strong confirmation of DSM behavior during transition. Also just a couple of quotes, and you can read them later, but just pulling off a couple of highlights here. This is: "Avon is giving us a new lease on life. Everyone is excited about the program. It's motivating to my team. I love the changes, look forward to a great fourth quarter." I think that's specific reference to the return to giftables and particularly in the non-Beauty category.

So remember, this is a bold program. It's a multiyear process for implementation. We feel that from the field point of view, the full implementation, the transformation, will be complete by the end of next year, 2012. However, the portfolio changes I described should start to benefit us in the fourth quarter of this year.

So that's it in terms of what we're doing with the transformation of the U.S. business from the field and product category side. Now just a couple of slides in terms of the total company's outlook.

In terms of the second half, we do expect to see significant adjusted operating margin expansion. It should be up significantly due to higher revenue growths with continued tight controls over our overhead expenses. Our gross margin should also expand, and this is going to come from pricing, both strategic and inflationary, to help offset the commodity cost pressures we are experiencing. We see the last half of the year, one of favorable product mix, as well as some country mix, in terms of where the growth is. And then manufacturing productivity continues to be a key element in terms of containing costs, both through our strategic sourcing initiatives and cost reduction programs.

Another big area of improvement is lower dual distribution costs in Latin America. Here's where we have our -- been phasing out old distribution centers in Colombia, in Brazil particularly, and into the new facilities. That has hurt us by about 40 basis points throughout the year. And those dual distribution costs will decline as we go into the end of the year and will be fully behind us by the end of the first quarter of next year. So in terms of that margin expansion, we expect to see it in both quarters, third quarter and fourth quarter. However, more of it in the fourth than the third.

And in terms of what that means for the total year, our total year outlook remains in line with our overall goals. We continue to target 50 to 70 basis points of margin expansion for the full year.

Sure, there are all these assumptions; some of the key ones would be that the revenue growth accelerates as we expect it to over the last half of the year; that the macroeconomic headwinds, which are around the globe do not worsen; the commodities do not worsen, things like oil prices, which impact our transportation cost, our silver; Beauty category does not slow further in our key markets; and that Venezuela remains relatively stable as a country.

Before leaving, I guess I'd like to just mention one other item, and that's inventory and inventory management. Inventory has been disappointing. It is a key priority. We did make some progress against the high year-end 2010 levels, but it really isn't enough, and we're stepping up our aggression against this to reduce the inventory levels as we move throughout the rest of the year. The good news, I think, is the existing inventory and the high levels are -- it's all salable, and we don't see an obsolescence problem. So we're focusing our marketing and brochure efforts on those salable products and increasing the flow of them throughout the second half. In addition, the second half sales growth improvements or increase will also help to reduce the inventory from a planning point of view. And finally, the second half should benefit from the strengthened sales and operational planning process that we have in place. And one that really is a fundamental focus for the process excellence initiative, whereby how we operate, how we communicate, how we simplify processes and how we take responsibility for inventory management is a key feature.

Andrea Jung

Thanks, Chuck. Just a closing thought, then we'll turn it over to Q&A. It's a very, very important second half for the company. We understand that. All of our focus is on accelerating the top line. We are taking the necessary aggressive actions to restore sustainable growth for the short and long term. A lot of heavy lifting has been going on in this company in the first 6 months of this year to get this business back on track. I feel we're making solid progress, though not yet reflected in our revenues, but the foundational changes are in place and the bold plans are also in place for the balance of the year, so we feel that we are on track to achieve our 2011 goals. So with that, let's just open it up, operator, for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Dara Mohsenian.

Dara Mohsenian - Morgan Stanley

You reiterated your back half guidance, but I guess Q2 top line and margin results both came in below the guidance you gave on the call last quarter. So can you just run through some detail in terms of what was worse than you expected in Q2 and why would it bounce back in the back half of the year to allow you to still obtain those second half goals?

Andrea Jung

Yes. I think that from a top line point of view, one contributor was deceleration in North America, and I think we've kind of taken you through what the plans are for the second half, which should be, I think, distinctly different from the first half and the fourth quarter as it relates particularly to average order. I think the second quarter in the United States was probably the worst quarter we would see in terms of average order pressure from the remix and the takeout of the giftables, particularly on holidays like Easter, Mother's Day, et cetera. So that clearly pressured the quarter. I think between some of the positives that we're seeing in the resumption of non-Beauty to a very thoughtful level in the fourth quarter, those are the kind of things that will make second half different than the first half, or the second quarter, in particular, in the U.S. And on the bottom line as it relates to margin, its gross margin is expected to improve as strategic pricing, inflationary pricing and the impact of foreign exchange in the case of the second half versus the second quarter would offset and be stronger than the commodity pressure.

Dara Mohsenian - Morgan Stanley

And then on the U.S., it continues to struggle quarter after quarter here, and you guys have made multiple efforts at revitalizing it, and now you've got the further changes you mentioned. Instead of investing and implementing a lot of time and money here behind the business, do you think at some point you might need to rethink your level of commitment or focus in the U.S. and just get more aggressive at starting to milk the business for cash flow or shifting advertising and RVP spending to other higher growth regions?

Charles Cramb

Let me take that in terms of the U.S. opportunity. And I think the things that we're putting in place for the field transformation, correcting the mismatch, I guess, in terms of the changes, and the product mix, to me, will portray a stronger more healthy business. It does have sustainable growth opportunity, particularly if we get the field transformation piece right. I still think that business has the ability to grow at or somewhat slightly ahead of the Beauty category over the longer term. I think it's a business that, when we get those fundamentals right, can have a low double-digit operating margin, which is not an -- it's a relatively healthy margin. It will be less than the total company, and so we're fully committed to seeing this transformation through. And I believe the excitement that I've seen from the field, the excitement I've seen from my management team who has done it and they've been through it before and in a relatively similar situation in Mexico with Jorge's leadership, I am optimistic that this is the right thing to do for the business at this point in time.

Dara Mohsenian - Morgan Stanley

Okay, and it sounds like the mix changes from a product portfolio perspective should help right away. how long do you think the field transformation will take in order to take hold and drive improving results?

Charles Cramb

Well as we've said, it's really a multiyear program, and the transformation and the restructuring of it goes through the end of next year, so it's 2013 that you would first start to see some results, but even then there's a learning curve involved there. So it's a 2013, 2014 metric.

Operator

Your next question comes from Bill Schmitz.

William Schmitz - Deutsche Bank AG

It's Deutsche Bank. Can we just stay with the North American business for a second? I mean, do you think that the overhead is right there given some of the growth attributes? Because if my math is right, it seems like the U.S. is 40% of assets, 21% of sales and then 13% of profits. So is it really a growth problem or a overhead problem?

Charles Cramb

Well, Bill, you've hit one important point there, and that is, that overhead structure and the scale we have right now. You can't incrementally cut costs when you see revenues drop $100 million to $200 million each year. So to make this business sustainable, yes, we'd have to have the top-line growth. But we also have to have the scale and size right of our overhead structure. And we have laid out in October of '09, I think it was, a plan to cut the overhead structure by about $100 million or total cost structure by about that. $75 million of that's been achieved, the other $25 million comes with some final supply chain initiatives. Factory closure being one of the big ones. I believe that we will have to have some further scale cuts to get the balance right, so that is on the agenda in terms of the overall program for the U.S., making sure that we have the right structure for the size of the business going forward.

Andrea Jung

Bill, that is right and that is what we will continue to do, but to me, it's a growth problem and a growth solution.

William Schmitz - Deutsche Bank AG

Okay. And just a follow-up on that, I mean, is there a right number where sort of like the structural overhead becomes a positive versus a negative in terms of organic growth? And this is broadly for the company. I mean, so is there like an organic growth number where you're going to positively lever fixed costs as opposed to negatively lever them in terms of margin?

Charles Cramb

And by the way, I believe that when you see the Beauty market return to sort of normal, long-term growth rates, which are still in the low to mid single-digit range, I think that's the level at which you would be able to see favorable leverage versus unfavorable.

William Schmitz - Deutsche Bank AG

So like at 3% growth, you can get favorable leverage?

Charles Cramb

I don't know whether it's 3% or 4%, but in that range. Obviously, you've got to think about wage inflation versus price inflation. But if you hold all those constant, those are the kinds of numbers I think, yes.

William Schmitz - Deutsche Bank AG

Okay, then just one quick last one. How big was the Silpada write-down in the quarter?

Charles Cramb

There was no write-down.

William Schmitz - Deutsche Bank AG

I thought you did an impairment test, and it came in like 13% below or something.

Charles Cramb

No, we did an impairment test that showed that at this point in time, we're very close to one component of goodwill valuation, but on the earnings side, we have a lot of headroom, so there was no write-down. So we cleared the impairment test this time.

Operator

Your next question comes from Wendy Nicholson.

Wendy Nicholson - Citigroup Inc

From Citigroup. Just going back to the U.S. stuff. My first question is, the near-term impact of the transition on margins, if we assume Silpada's now anniversary-ed, I think the U.S. is running at like a 3% EBIT margin. Do you think with this transition and the cost of communication and all that, those margins go down further before they go up?

Charles Cramb

I'm not looking for any material margin improvement in the very near term.

Wendy Nicholson - Citigroup Inc

In the U.S.?

Charles Cramb

Yes.

Wendy Nicholson - Citigroup Inc

Okay. In terms in just the, sort of, strategy and attaching all of those unattached reps to the leadership program, is there a risk that, I don't know, 20% of the reps say I don't want to be part of leadership, I want to be an entrepreneur, so, hey, I'm going to go work for Tupperware or somebody else?

Charles Cramb

I guess there's always that risk, but most of the other direct-selling models, virtually all of their representative is in some kind of a leadership position.

Andrea Jung

It doesn't mean, Wendy, that they have to be part of a leadership, I guess, opportunity, and definitively they have their own down line. It just would mean that in case unless you are a top seller, you would be under the lineage of a leadership representative in terms of your direct line as opposed to directly into a district manager, even if you're just a seller.

Wendy Nicholson - Citigroup Inc

But it does mean that those leadership reps who then have those people put underneath them are all of a sudden generating more revenue because they're getting -- whether they interact with that person or not or train them or take them to lunch, they're still getting a piece or a slice of that, whatever commission that they generate, right?

Charles Cramb

Yes, they'll get that incremental piece. Yes.

Wendy Nicholson - Citigroup Inc

Yes, got it. Okay. And then my second question -- just switching gears to Latin America, the 1% unit growth. I would think that at some point with really low level of unit growth there, there ends up being like negative operating leverage and the Latin American volumes would be at risk, so why would I be wrong in assuming that? And then just Mexico specifically, it looks like it's carrying today, kind of, Latin America. What was the unit growth specifically in Mexico?

Andrea Jung

Just first on Mexico, unit growth was 13%. Mexico continues to produce strong results, so reps were up strongly, units were up also strongly. Venezuela was a big driver of this difference between first quarter and second quarter of Latin America units. Venezuela kind of coming from 40% back to 50% in total revenues.

Wendy Nicholson - Citigroup Inc

And then the impact potentially if units...

Andrea Jung

Units were down in Venezuela significantly in Venezuela. I think if you look at the second half of the year total company, and Latin America would be included in this, as we accelerate the business to mid- single digits, I think it's sort of half units, half net per unit, so I think we do get -- we have some volume assumptions that were a presumption [ph] to volume growth for the company inclusive of Latin America acceleration in units.

Operator

Your next question comes from Chris Ferrara.

Christopher Ferrara - BofA Merrill Lynch

It's bank of America Merrill Lynch. I guess I just wanted to talk a little bit about your thought process behind the holiday giftables and the U.S. stuff. I guess the strategy has changed a couple of times over the years, and now you're going back toward giftables, and that's fine. I guess I just want to understand, is that because you'd really like to be out of that business because, again, it's not supply-chain friendly and there's not a lot of differentiation, but you've realized you just can't do it and it's not feasible to do that sort of thing over time? Or are you doing it because you really see more of an opportunity? I guess I'm trying to understand if it's a defensive maneuver. And it kind of strikes me that just as you get past the anniversary of the toughest holidays and the U.S. hits its worst quarter, now you're kind of reversing track and going back to these when we've heard from you so many times in the past that these things aren't really good for the long-term health of the business. So I guess if you could talk a little bit about your rationale behind it and is it a defensive maneuver? Or is it something you can't get away from, so you have to go back to it?

Andrea Jung

Chris, I would say that I think that the strategy for the company, and I'll just come back to the United States, if we had our clean sheet of paper would not be to have a mix as low in Beauty as a percent of sales as we do. And that would not be reflective of the total company average or any kind of new markets that we're moving into. Having said that, I think the strategic thought -- weren't trying to go to 80% Beauty, but to make a significant move to Beauty was strategically right for the long term, but the pace of it and the degree of it and understanding its impact on actually store energy and current top-selling representatives and their earnings was too much too fast. And I think the other thing, as Chuck said, is we're staring down and made the assumption that there would be a 2% or 3% mass Beauty growth rate in the U.S. certainly as we kind of look at this in 2009 and we knew that we were going to have this global -- this recession moment, but that certainly if we looked out to '11, '12, that the Beauty market would kind of go back and hit historic levels in the United States, at least in mass. And it's been unexpectedly depressed for longer than we thought, so were kind of -- have the headwind of a category that's not exactly robust, certainly at mass. And the movement out and the halo impact of that on total rep earnings as well as those representatives who are placing less Beauty because there isn't some of the non-Beauty, certainly right now I think is exacerbating the direct sales energy for the existing representatives. So I feel like it's the right thing to do to calibrate this thoughtfully but strategically back to a level that's still gets, as Chuck said, in the long term, to a little bit less than we were talking about, 60%. But it was too fast in this environment and this Beauty market economy with our current top sellers. It's too important a category for them, and I think we drove energy out of the whole book by not having it at the holiday giftable time.

Charles Cramb

The only thing I'd add to that is, I think when you think about giftables, it's a very selective offering of giftables, and it's seasonal in its nature. What it is not is, I'm going to call it, leveraging the channel or stuffing the channel, which is our catalog with anything we can put in there to try to generate a sale. So the business has a very specific purpose in its nature. We're not going to go deep into odd categories like some of the household stuff that we were in, in the past. We really are focused in our approach.

Andrea Jung

I think the point is giftables, I mean, in terms of using the consumption dollars that you would buy and spend for somebody else. I think what we're not trying to do is really enhance and bring back own self purchase for your home. But if you're going to spend money at Christmas and you're going to spend it on somebody else, the Avon store has to have enough of that opportunity, Beauty and others, so that we garner that share of holiday spending for others in one's disposable income.

Christopher Ferrara - BofA Merrill Lynch

Got it. I guess, Chuck, why is it so hard to get inventory down? I mean, is it hard to locate where the excess inventory is in the system. I guess is it a system issue? Understanding sales haven't been probably quite to where you expected them to be, but why is that so difficult?

Charles Cramb

I think it's a process issue, not a visibility issue. I mean, we know where the inventories are. They're fairly obvious. But it really is making sure that our sales and operational planning process is operating effectively, that we have the right communication between supply chain and the commercial organization, that we have the right level of responsibility. And here, one of the process changes that we have made is general manager is now responsible for the inventories. Where in the past it was kind of -- well, it kind of belongs to the supply chain, and you'd end up with some mismatching in the forecast process. So as I look at it going forward, it's really enhancing the operating processes across the company, tightening the relationship, one step again between supply chain and commercial, giving that ultimate responsibility to the commercial head, that's the general manager. These are the things that I think will help us to improve over time.

Christopher Ferrara - BofA Merrill Lynch

Is it as simple as -- I mean, they're not talking to each other? I mean, you have one -- you have a top-line forecast and the operational guys don't want to slow their plant down? I mean, or they just don't get that message?

Charles Cramb

I don't want to say they're not talking to each other. I think there's an element of, how realistic are the forecasts. When you do, do a forecast, you want to cushion it a little. How do you get the balance right? And what we have to do is just work with facts going forward.

Andrea Jung

One of the things that we established that I think I spoke about on the last call, and so we established at the end of April, is a real focus on 4 processes and improving every aspect of the process and the sales and operations planning process, which really includes and completely enhances the integration from a planning supply process, who talks to whom, not that they're not talking, but exactly when, timing, et cetera, is part of a company-wide focus. So again, I don't think you can see that reflected in a few months after in the inventory levels in 2Q. But all of the work and the additional people and process we put in on this in the company should help us accelerate a very aggressive need to work through this inventory and then have some inventory improvement at the year end.

Operator

[Operator Instructions] Your next question comes from Emily Klingbeil.

Emily Klingbeil - Crédit Suisse AG

Credit Suisse. My first question, actually both of them really, relates to Brazil. Our sense is that your main competitor in Brazil had a very strong performance in April and May followed by a very weak performance in June. I was hoping you could talk to me a little bit about the sequencing of what you saw happened during the second quarter.

Andrea Jung

No. In our case -- I mean, I think our dynamic continues to be the primary, I think, driver of Avon Brazil's depressed rates has been the service environment that we experienced coming out of the back half of last year. And so when I look at the second quarter, again, second quarter was 4% versus the first quarter at 2%. And when I look at it across the quarter, we're just seeing this gradual improvement, though not to the level that they were historically for sure, but it is an improvement versus first quarter.

Emily Klingbeil - Crédit Suisse AG

Okay. So month over month, it kept getting better for you?

Andrea Jung

There was not a major fall off compared to the first half of the quarter, if that what you're asking. Not very much, not at all.

Emily Klingbeil - Crédit Suisse AG

And then my second question was, how are you reacting competitively to Natura's new launch of a color cosmetics line called Una. We understand that they're doing very well. I'm just curious in terms of if it's had any impact on your cosmetics side of the business.

Andrea Jung

Well, cosmetics is a very important category for Brazil. We have huge color share in the market and a very, very big plan for the second half of the year. I think I showed a very important lipstick launch, which is not just about the lipstick but it's an entire field engagement around the color category, which over the last few years has been very, very strong. So we have a lot of competition in a lot of categories in Brazil, color, in addition, but we feel very good about our Avon Color brand, and we've got a lot of innovation against that in the second half of this year.

Operator

Your next question comes from Ali Dibadj.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

I'm from Bernstein. I don't mean to be the perpetual naysayer about Avon, but you did only grow 50 basis points organically. Free cash flow is disappointing again, and you can't even cover your dividends. Free cash flow part [ph] was negative. North America is down 15% with margins still eroding after kind of years of a turnaround. And in response, we hear almost echoes of the past. So innovation is going to be where we're going to drive it. We have aggressive inventory management. We've heard that for years. North America, your new plan kind of sounds like your old plan with the word bold mentioned a couple of times, and plus a more costly impairment structure in the U.S. So I kind of want to go back to the question I asked a few quarters ago before you really felt the pain that you've felt so far. I guess I struggle with understanding what gives you confidence that there actually is an inflection point here, and that you're not just dealing with a structurally disadvantaged company.

Andrea Jung

We have, I think, the absolute right bold plan to reinvigorate the company's active rep growth in the second half. When we look at all the levers that the challenge for the global sales force posts starting in July, we believe that this will resume active rep growth that will be a major driver of the acceleration to mid-single digit growth in the quarter. We have [ph], I should say, and so that's just the largest component of it is the reassumption and the reignition of active rep growth, and that is a company-wide plan in every single market. And on top of that, I think that -- and we had talked about it in the fourth quarter of last year that we had some execution issues in the back half, whether it was depression of normal revenue rates in Brazil because of the service challenge. So we've talked about what those were, and we said that the company was focused intensely, which we have been, on improving that execution, making sure the pipeline is strong and making sure we have the right balance for average orders. So those are the things we're doing. That is the play that we're running, and you've heard well our stated targets are for the second half.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Okay. Let me just expand, if I could, on one part of the question, which is just around strategy. And I guess I'd love to hear if you think you do have a robust strategy. And I say that in the context of a little bit of a longer time frame. So not just North America going from non-Beauty to Beauty and back to non-Beauty. Not just in the past going from lower-priced products to trying to treat [ph] people up, which sounds like a good idea with [indiscernible] et cetera and now going back to Smart Value. But also ZOG, NOG, and we never really hear about ZOG, NOG again. China was our key strength for growth, and now it's kind of tucked into Asia Pacific. Spend on advertising was going to be increased because analytics suggests that spend in advertising is going to work. I don't think we even heard analytics this time around. But this time, we're actually -- forget about the advertising spend, we're putting a lot more into RVP. So it just feels like a guardrail-to-guardrail strategy. And again, perhaps I'm mistaken, but I just -- I don't -- do you feel you have a robust strategy?

Andrea Jung

Well, I disagree with you. I think that the strategy has been consistent and that we have not veered off strategy. The beauty of Avon's portfolio is that we have price points in all tiers. We are a store, not just one brand to fill one niche and that we have the ability to have Smart Value products. We look at over $10 products, $5 to $10 products, under $5 products, and depending on the economy and depending on macros, et cetera, that is how we flow the product. So I don't think that we have a strategy to be solely in Smart Value, and then we're going to flip over next year and be in high price. We have all of that. We need to have all of that. It's the kind of revenue size we are. It's a direct-selling company. There's no larger Beauty direct seller company in the world, and we can't just be in one price tier. So I don't think that's a flip-flop of strategy whatsoever. And I've stated strategies on geography, longer term, whether it be China, whether it's India. Those stay in track. Our advertising is up significantly from when we restructured this business. We made a stated remix in 2011 that we said and told you about that we were going to remix our advertising into RVP for 2011, particularly because in some instances, whether its China sales transformation or anybody else who's got to get service right or field fundamentals right first, we understand, and advertising is efficient and effective at paying back. And we have more advertising than most direct sellers in the world by a long shot. And that stays part of our strategy, and we continue to look at advertising in RVP growing in line with sales as we go forward because they've been an important part of how we've restructured this business and this value chain since 2005. So I respect your point of view, but I disagree with it.

Operator

Your next question comes from Nik Modi.

Nik Modi - UBS Investment Bank

UBS. Just a quick question on skincare, if you can just give us the rundown there. I know there was a relaunch of Avon Solutions in the second quarter. You have the Avon Care launch in the first quarter. I just wanted to get your perspectives on that category given its importance to gross margins.

Andrea Jung

Yes. Skincare was still pressured coming in the quarter. It was flat if you exclude China, which I think, it's about the geography as opposed to the category. In that case, we do look forward to growth in skincare in the second half solutions. Restage was lodged in Europe in the very back half of the second quarter, and it's successfully reversed double digit declines in those markets that launched it. Turkey, U.K., Russia. It is launching in Latin America in 2012, as well as North America, and we've got major I think strength versus a year ago in the new -- particularly in the fourth quarter.

Operator

Your next question comes from Mark Astrachan.

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

Stifel, Nicolaus. I wanted to go back to Ali's question and just follow up a bit on that. I keep hearing about the size of the business in terms of that is a strategic opportunity for Avon. But being the biggest direct-selling company in the world, necessarily the best, and part of what I mean is, you take a look at some of your direct-selling peers, at least the public ones, and they've had pretty substantial amounts of growth in recent years and even more property margin expansion. So I guess when do you get to a point where you potentially reevaluate whether you need to be the size that you are, including if you get to the end of 2012 when you talk about implementing some of the changes in North America if they're not working, is that maybe a time to reassess what's going on there? And then somewhat related to that, Beauty direct-selling category trends are definitely favorable worldwide, but Avon, at least in the near-term here, has underperformed. So thinking about longer-term expectations, is at least mid single-digit sales growth still the right way to think about this business?

Andrea Jung

When you said that I say that the size of our business is a strategic opportunity, I don't think I phrased it exactly that way. I mean our size is our size I think because of the strength over 125 years of the brand. I think it is complex at this size to -- because we have to have for consumers knowing the number of representatives we have and the number of consumers we have, different tiers of price points to offer them in the store. So that is what I've been talking about in terms of size of business. And so again, of course, growth levels are going to be different on a $1 billion company than a $10 billion company. That's true in any sector retail. It's going to be the same thing as direct sales. And so certainly, we attribute the size of our business to enormously sustainable brand and a channel that is obviously strong in terms of numbers of representatives with a lot of changes that we have made on it, which are different. I mean, we didn't grow up a multilevel company from day one. So putting through the changes to evolve to our Sales Leadership framework, as well as the continued evolution of it in certain countries, more complex, but I think the absolute right thing to do because I think sustaining a single-level only company in a business which we clearly have seen over the last few years can continue to grow with another horizon of growth with the multilevel opportunity as what we're evolving to, but we didn't sort of start up this company as small fee, direct sales company that way. So those are the complexities, but I think the opportunities that we face in the size of the business that we're at. And I mean, I guess, your question about the United States business, I think we just explained to you the play we are running. We believe that this will resume again stabilization and then growth in the future in the U.S. If that doesn't work, and we believe it will, that's a different story, but this really have to do with sort of trying to see if we think the portfolio in total should be smaller in terms of running it to be independent.

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

And in terms of the long-term sales growth algorithm?

Charles Cramb

I think that's an appropriate way for us to think about the business. Remember, that's how we plan the business. That's how we cost of [ph] business. It's built upon the expansion of geographies, where you have different growth rates. It's based upon, really, the Beauty category growth rate. It's projected against all those geographies. The strength of our geographic footprint does allow us to take advantage of strong growth markets. Latin America is a great example of that. So I think in terms of thinking about costing against the business, it is the right perspective to be in mid single digits.

Operator

Your next question comes from Alice Longley.

Alice Longley - Buckingham Research Group, Inc.

Alice Longley, Buckingham. I have a couple of questions really about guidance. You said that operating margins adjusted, I guess, should be up in the second half. Will they be up if we look just at the regions alone? And the reason I ask, of course, is that operating margins for the regions alone in the second quarter were down a whole lot more than the operating margins overall because of the big cuts in corporate. So I'm trying to understand if the second half improvement will come off in corporate or whether operating margins from the regions alone might be up as well?

Charles Cramb

Certainly, the improvement that were expecting in the second half of the year has to come from the markets as opposed to an expansion of what you saw globally. And I think what you're referring to is the allocation system that we have. There are 2 parts to it. One is, what are the gross corporate expenses? And those expenses are actually -- that's an area that we really focused on at containing and controlling them. And so the gross expenses are down a bit in the quarter. So that would be the gross number, if you look at the appendix charts we sent out. And then the allocation is based upon a form lift, if you want to call it that. That complies with SEC allocation rules that you set up at the beginning of the year based upon certain parameters that are coming out of the prior year. And yes, based on those initial assumptions, some of the allocations did increase. So we had a corporate benefit that had a double impact. One is allocating EBIT out, but most importantly, is that the overall gross costs were favorable. But the only way we're going to get improved margin is to have improved margin regionally.

Alice Longley - Buckingham Research Group, Inc.

My other question to do with guidance is on inventories. Can you give us a sense of your expectations for when inventories start increasing year-over-year less than sales?

Charles Cramb

I would like to think, and as we've looked at this year and the plans we've put in place for the last half of the year, I'm hopeful we'll have a slight improvement in our coverage -- our days coverage is the way you have to look at it because currency kind of makes those comparisons difficult. And then we're still expecting 3 to 4 to 5 days year improvement going forward based upon the plans and the processes that we're putting in place.

Alice Longley - Buckingham Research Group, Inc.

Do we get improvement in the third quarter?

Charles Cramb

I don't do it by quarter.

Alice Longley - Buckingham Research Group, Inc.

But by the end of the year?

Charles Cramb

By the end of the year, yes.

Alice Longley - Buckingham Research Group, Inc.

Okay. Then just one final thing. What were units in Brazil? Up, down, how much?

Charles Cramb

They're roughly flat.

Andrea Jung

Flattish.

Alice Longley - Buckingham Research Group, Inc.

Flat. So pricing was 4?

Andrea Jung

Yes.

Charles Cramb

Price mix.

Operator

Your next question comes from Connie Maneaty.

Constance Maneaty - BMO Capital Markets U.S.

BMO Capital. Could you talk a little bit about the leave incentive because -- as I'm looking at it, it's going to last quite a bit longer, 6 months versus your normal 6 weeks. And you say that it offers 3 to 5x the earnings potential. How do you know that the growth you might get out of this incentive program this year isn't next year's tough comp? How do you plan to pull it into next year so that, that doesn't happen?

Andrea Jung

Yes. I think I mentioned that we're really planning this not just for one year, but really looking at how we plan the global incentives for 2012, so that this doesn't become next year's comp problem. And we don't want to have that issue, so that we don't have to be discussing this next year. So the team, when they started this, understood that they're working really kind of on a multiple year front in terms of how to really pace and make most efficient and most powerful the field incentive in the company. So we've taken a lot of this funded by what would have potentially been regional or local incentive monies against different incentives. And I think the power of putting it behind this and having kind of one uniform competition and one uniform very, very exciting set of goals and payouts. I think it's going to give it its power, but we are planning to anniversary this next year.

Constance Maneaty - BMO Capital Markets U.S.

But that does mean that this incentive program continues at the same level through the first half or maybe through 2012 to establish activity?

Andrea Jung

Well, I think you end up with -- I mean, obviously part of it is just sales. It's sales driven. The goals are on sales as well as active reps and, obviously, looking to drive a very important staff count, which is an important momentum to the business as you close the year. And that should drive you to the first half and coming into the first half of next year. Again, this first half of 2011 should be an opportunity, if we have the right staff count, driven by this as we go through the year. Then when we look at the second half on the incentive itself, that would probably when we anniversary the second-half incentives. So I wouldn't see the global incentives being for the first half of '12. I would see that based -- the growth there being based on the staff that we bring in during this important quarter from this challenge now.

Constance Maneaty - BMO Capital Markets U.S.

Okay. And then just a separate question if I may. I know that you can't really comment on the FCPA investigation, but we haven't heard about ZOG and NOG, and in the queue it says that you're beefing up compliance and oversight internally. So how much ongoing cost is associated -- I guess, it would all be booked in as SG&A with compliance and oversight as you tighten up whatever programs you had in place?

Charles Cramb

It's not an easy number to say because part of it is what we're doing from an oversight perspective, which is squarely under the auspices of the legal department as they develop the training programs, as they put it in a much stronger structure to address really compliance over the long term. And then you have what happens locally market by market to make sure that we do have a robust internal control process. But we've -- in thinking about it, we felt that, hey, the number is probably $7 million to $10 million, $0.01 to $0.015 a share of incremental cost if we just isolate the cost piece.

Andrea Jung

In SG&A.

Constance Maneaty - BMO Capital Markets U.S.

And that's an annual number?

Charles Cramb

Yes. It's an ongoing process.

Operator

Your next question comes from Per Ostlund.

Per Ostlund - Jefferies & Company, Inc.

Jefferies & Company. I wanted to ask a little bit about the shift from advertising to the RVP side with the Sales Leadership and incentives. Can you talk to any market specifics there? Are you kind of over indexing the incentives in Sales Leadership in certain regions? And if so, is it because they are currently underperforming and you're trying to reaccelerate them, or is it better performing markets that maybe you're trying to keep the momentum in?

Andrea Jung

[indiscernible] I mean the Sales Leadership investments. You've got particular cost in Mexico and South Africa. I think we would both agree that those are good investments, and they are certainly -- Sales Leadership has been a big driver of the Mexican revenues and Mexican rep growth as it has been in South Africa. So you're going to see higher RVP costs, specifically, Sales Leadership cost in markets like that where in the early days of Sales Leadership, it's really driving revenue.

The advertising remix part of it, I'm just -- it's a suspension in China. That was half of the advertising decline in the quarter. And I think that was, strategically, the correct thing to do until we go through the transition. So those are decisions that are done market by market. And it would be different in a different year.

Per Ostlund - Jefferies & Company, Inc.

Maybe just to quickly follow on, on the point with China's advertising having pulled back. I think the mindset there makes sense. Can you kind of update us on the line of sight to stabilization there? Obviously, We've got a handful of quarters of fairly steep declines, and I think that, that was largely expected. But has your outlook in terms of timing on when the transition really takes hold, has that changed at all or gotten pushed out?

Andrea Jung

I think we still feel that 2012 should be the year that China grows and shows profit. We have talked about breakeven in 2011 and looks like we're tracking to that, and obviously we knew that the revenues would continue to be pressured. We're still hoping and looking for that revenue decline to stem and lessen as we come out of this year. But 2012 should be the year where we begin to grow and show profit.

Operator

Your next question comes from Javier Escalante.

Javier Escalante - Weeden & Co., LP

Weeden & Co. Andrea, a quick question actually is more philosophical, I guess is, your sales basically are running flat, up 0.5%. There are steep declines in the U.S. You have increased competition in Brazil. What gives you confidence that the current level of strategic spending is adequate? If I take into -- if I see the increases in RVP versus the decline in advertising, your strategic spending was up only $7 million. So you are basically saying that second half margins are going to accelerate or are going to expand based on accelerated sales. But how that is going to happen if you are not spending enough in a tougher macroeconomic and competitive environment? And I have a clarification on the U.S. later on if you could.

Andrea Jung

I think you have to look at this as more than one year. We have been significantly increasing the investments in both the advertising and RVP, particularly in our key market, ahead of or way ahead of growth. Obviously, that was a margin decision we made since 2005. And we think it was the absolute right thing to do for the medium to long term. So we were growing those 2 investments significantly ahead of sales in some of our markets just for this -- for the reason of making sure that we were structurally a different competitive investment story. We are broadly comfortable with the overall company's level of investment. When you look at advertising and RVP, it is significantly more than it was in 2009. I mean 2010, we did beef it up again. So I think that the level, the absolute level of investment, when you look at advertising in RVP, we're comfortable with it. We think it allows us to compete in the second half effectively and enough flexibility to invest in the priority market that are important where the spending is driving. And if I look out, I'm comfortable with the level of investment growing now in line with sales growth because we stepped it up so much over the last several years.

Javier Escalante - Weeden & Co., LP

And in the U.S., I don't think that you haven't disclosed this for a while, but given that you are making this big change in the field structure, it will be helpful for us to know how much of the current reps are basically consumer reps that have chosen not to be in leadership, right? And number two, whether the proposed structure in any way is similar to Mexico or it has been or it is different to the one that has been put in place in Mexico?

Andrea Jung

It will be fairly similar. It's not exactly the same, but I think it will be structurally more parallel to Mexico. And I think that the strong results on a sustained basis in Mexico didn't happen overnight in Mexico to go back. It took a couple of years to get this thing right in Mexico, but then there has been sustained -- we were looking at rep declines in Mexico, and now we're growing in the teens in terms of reps for multiple quarters in sustained period. So that's been the change that, again, not overnight, but that would be the parallel example.

Javier Escalante - Weeden & Co., LP

These reps in the U.S., because leadership in the U.S. has been for such a long time. And If you could help us understand those who have opted, I would say, intentionally not to be part of leadership, what percentage of the reps are in that category? And it's kind of like trying to understand to be in direct selling in such a fragile ecosystem. The fact of shifting them from into a leadership rep to what extent this is not going to create disruption in the field. I'm just trying to understand that.

Charles Cramb

We don't have hard metrics on who is or who isn't a customer rep. Two things I guess. The first is that what we did was we had a system where we had district managers doing a lot of recruiting. That by its very nature resulted in a lot of reps that they brought in staying, being mentored by the district manager as opposed to moving into a lineage structure. I think the second part of this is, in terms of numbers, I think what you're really getting at is, is there a risk that we're going to have a significant reduction in the number of representatives as we go through this transition. A customer rep is a person whose order has a very low order value to begin with. So from a value point of view, I don't think it's a material risk. Also in terms -- it's interesting in terms of the pilot, its early days on the pilot. But in terms of the pilot looking for gross negatives, as we've gone through the 1st, I think it's 7 -- 6, 7 campaigns of it, what we have found is the number of orders hasn't changed any. Now we haven't got a full alignment and a full transition over for all these reps, but to me, there's nothing right now that would indicate a significant value risk to the business for this transition because of the customer rep grouping.

Javier Escalante - Weeden & Co., LP

But if you don't know the number, can you at least tell us what percentage of the sales, U.S. sales, are generated by this however small sector? What percentage of the sale do they generate, I mean, the consumer rep?

Charles Cramb

Because it's hard to define what a consumer is [ph]. The number I will give you is 2% to 3% of our sales come in at around that very, very low minimum order value. And that's probably the best parameter you have.

Operator

Your last question comes from Linda Weiser.

Linda Weiser - Caris & Company

Caris & Company. Can you -- sorry if you talked more about Mexico, and I missed it. But can you talk about whether the strong growth we saw there both in units and in local currency sales growth is sustainable at this mid-teens level or was there something that artificially -- not artificially but in a onetime way boosted the growth exceptionally in the quarter so that we may see lower growth going forward? Is there any color you can give on that?

Andrea Jung

Well, let me just -- without going forward, let me just take you back. Q3 2010, 14% growth. Q4 2010, 14% growth. Q1 2011, 16% growth. Q2 2011, 18% growth. So I think that we would call that pretty consistent.

Linda Weiser - Caris & Company

Okay. And then can you -- on the leadership transition in the U.S., is this going to result in higher payouts for leadership bonuses? And as that comes out of corporate SG&A, is that going to impact your cost structure at all, or is it relatively immaterial?

Charles Cramb

It's certainly build the enriched earnings for leadership. And, yes, that will come out of or it shows up in our SG&A expenses. But in this whole restructuring, we think that will be funded by reduced cost for the district sales manager piece, which is also in SG&A. So it's a self-funding program.

Linda Weiser - Caris & Company

Just finally in central and Eastern Europe, geez, I guess you said Russia was down 2% and the whole region was down 3%. So some other countries were worse than Russia. Can you just give a little color on some of the other areas or anything that looks bad?

Andrea Jung

Yes. I mean, one market that has been tough, and hopefully will have a better second half, is the Ukraine. Ukraine has had a very, very tough macros, and they were also highly impacted by the social tax changes in that market. And so Ukraine was significantly negative in the quarter. And as I said I think, the macros are tougher than I would like to see [indiscernible] particularly Eastern Europe. And I think all of us are surprised that people reported results in Russia. I am pleased though that the field programs in what we control seems to be working quite nicely. So that hopefully bodes well for the second half. So I think that is it for questions. If you have any follow-ups, Amy will take the calls. And we appreciate everybody's time this morning. Thanks a lot. Take care.

Operator

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

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