Avon Products' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.27.11 | About: Avon Products, (AVP)

Avon Products (NYSE:AVP)

Q3 2011 Earnings Call

October 27, 2011 10:00 am ET

Executives

Amy Low Chasen -

Andrea Jung - Chairman of the Board and Chief Executive Officer

Charles W. Cramb - Vice Chairman of Developed Market Group

Analysts

Christopher Ferrara - BofA Merrill Lynch, Research Division

Nik Modi - UBS Investment Bank, Research Division

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

Dara W. Mohsenian - Morgan Stanley, Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Alice Beebe Longley - Buckingham Research Group, Inc.

Wendy Nicholson - Citigroup Inc, Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Unknown Analyst -

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

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Amy Chasen, Group Vice President, Investor Relations. Ms. Chasen, you begin your conference.

Amy Low Chasen

Thank you. Good morning. Thank you for joining us to discuss Avon's third 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 to today's slides. These slides are available on the Investor Relations section of our website and also include details of our third quarter regional and P&L results. As usual, on the call, we will focus on adjusted non-GAAP financial measures. With that, I'll hand the call over to Andrea.

Andrea Jung

Thanks, Amy. Thanks for joining us this morning. We've got a lot to discuss this morning, so let me just jump right in. As you read this morning, obviously we're disappointed with our third quarter results and the slower-than-expected pace of recovery. We had a challenging Brazil ERP implementation, which caused greater disruption than we had anticipated, and that was the significant impact on Avon's top and bottom-line.

We have an increased macroeconomic volatility, which further pressured our third quarter revenue results. Though it's not yet reflected in our financial results, we are making some tangible strategic progress, most notably in North America, and I'll talk about that. But given the current operating environment, we no longer expect to achieve mid-single-digit sales growth and 50 to 70 basis points of operating margin expansion in 2011. We're fully assessing our long-range business plan and targeting an operational and financial update to investors in the first quarter of 2012.

Recognizing the underlying strength of the business model, we're committed to improving performance and better positioning Avon in this changing landscape. You've read the results this morning. I'm not going to go into great detail about the quarter, but just sort of to hit the headlines.

Revenues, in constant dollars, were up 1.4%. Beauty grew slightly faster than that, at 3% in constant dollars, driven by the fragrance and color category. Active Representative growth was flat. Our adjusted gross margin was down 60 basis points as significant commodity cost pressures offset some positive pricing and favorable FX. The adjusted operating margin declined 20 basis points, primarily due to decreases in Brazil and, to a lesser extent, North America.

Our adjusted earnings per share from continuing operations was $0.38, as you read. Inventory days were operationally up 5 days in the third quarter. We've got a lot more progress to go, but this did progress from being up 14 days as we closed the second quarter.

Cash flow from operations in the quarter was up $67 million. That was driven by some of these early inventory improvements. Year-to-date cash flow from operations was down $77 million due to the increased pension funding that we made earlier in the year.

When I look at the lion's share of the top-line mix, it was in Latin America, and that mix was driven by Brazil. Latin America growth fell below double digits for the first time in over 10 quarters. Latin America growth in constant dollars was 6% in this third quarter, and that was driven by an unanticipated sales decline in Brazil of negative 3% in constant dollars.

In Brazil, the ERP implementation created greater than anticipated service disruption. Despite extensive pre-implementation testing, we had greater than anticipated implementation challenges in the go-live. Significantly higher business complexity in this market contributed to a greater than expected level of disruption, as I said, when we went to the go-live environment. Brazil, as a reminder, has 2x to 3x more volume in SKUs than the other ERP markets where we've implemented. The market has 2x more interfaces and legacy systems.

We were also concurrently migrating to our state-of-the-art Cabreúva facility. So with the scale and complexity that sort of headlines transition from a highly manual operating environment with intensive workarounds to a systematic, unforgiving ERP system, which is what an E1 is, created unexpected knock-on effects in the quarter.

What were these knock on service impacts? They were really centered in 3 areas. In the cutover, when we went live, late representative orders were not visible in the system, and that caused us to undercount demand and therefore miss production, some of those orders. Secondly, the magnitude of the process changes in receiving challenged the timely arrival of products into the pick and pack line, and that resulted in product shorts and delivery delays. And then the data challenges from going up from the legacy systems to the ERP systems drove higher-than-expected inventory imbalances, and that led to stockouts.

To estimate, the impact of service disruptions drove about an 8 percentage point sales drag in Brazil in the third quarter, 5% of that coming from lost sales due to ERP and service disruption and then about 3% from the representative annoyance factor, which was higher than it was in the second quarter. There's a little bit of a lag on this, and even though she is placing orders, again her units per order are down.

We've got a robust recovery process underway to drive and sustain service improvements. The shorts are down from the double-digit levels that we saw in the early go-live days. They are still above pre-ERP levels, but getting better. In terms of the 3 work streams that we saw challenges in, in terms of demand visibility and the orders that were not visible, those issues were resolved in September. In terms of the receiving line issues that again we saw when we went on live, those have also been resolved. And in terms of the inventory imbalances, we are gaining strong traction on that day by day. A huge effort is going against that. There's still some work to do.

So despite initial signs of improvement, I really don't think we can be satisfied until we see a sustained recovery over the next several campaigns and months.

In the quarter, we also saw a greater impact from competition in Brazil. I know there's a lot of dialogue and discussion about this in the market. As I said, probably about 2/3 to 3/4 of the issue were the service disruptions that I just quantified. But we measure this every quarter, and we did see some increasing impact from, I'll call it the macros, as well as competition. Just firstly on the macros, which is about a point of this, we continue to see the Brazil Beauty market slowing to single digits. This is not something we anticipated as we came into 2011, but the overall market independent of channels, seems to have been slowing and it's not at the double digit rate it was for many, many quarters in a row. And then we are seeing some growing impact from competition. That did pop in this quarter. We measure it every quarter. The greatest impact was from franchise players, largely in fragrance. How much of this is coming from the rep annoyance in feeding -- being fed by our rep annoyance, that's something that we'll continue to try and vet out. But -- and again, net-net, there's some impact from the franchise players, largely in the fragrance category, and to a lesser degree some impact from retail, and that would be centered in the skincare category.

We've got aggressive plans underway to underpin our competitive brand positioning in this market. So obviously, in addition to our focus on service, we're looking at enhancing our innovation pipeline, in addition to the global innovation pipeline, which has been very successful in Brazil over the past few years. We're implementing a more heavily Brazil-centric product focus in fragrance, skincare and color. Longer term, we're also exploring strategies to target diverse regional consumer subsegments within Brazil. Many of you are aware there's different areas of Brazil and they have very specific consumer needs states, so we'll be focusing on that more clearly. And to that end, we're evolving the marketing and R&D structures to enhance local market responsiveness and agility right down there in Sao Paolo.

So in -- as it relates to Brazil, despite these tough near-term challenges, we are taking the right steps for the long term. If you look at the underlying Avon Brazil fundamentals, which we just looked at again, we still have the highest top-of-mind Beauty brand awareness, Beauty advertising awareness, Beauty purchase penetration in the Brazil market. And then I think, importantly, we've got sustained growth and high retention of our Avon representatives -- I guess no small feat in this particularly challenging time, and not just per quarter. I mean, service has been challenging us down there for a while and the retention of our representatives. And importantly, the fact that active representative number is actually growing and high right now, I think speaks to the major focus, obviously, on keeping our representatives engaged and still with us.

Plans are underway, as I mentioned, to reinforce brand positioning amidst clearly growing competition in that market. And then importantly, as painful as this has been, the ERP transition and the new Cabreúva facility are absolutely imperative to delivering sustainable service reliability. They're the answer to sustainable service reliability in this market. And they're the necessary infrastructure we needed to put into Brazil to support our future business growth.

Looking beyond Brazil, the pace of recovery was lower than expected in Europe, exacerbated by greater macro volatility and softer consumer sentiment. Macro volatility contributed to a slower-than-anticipated recovery across both of our European CBUs. If we looked at WEMEA, the growth remains below the historical levels. We had experienced double-digit growth in this segment. And starting in the second quarter, I think we've been in the mid-single-digit growth and in this quarter, in the third quarter, the 6% constant dollar sales growth was largely impacted positively by a VAT settlement. So again, much lower than normal growth as we came into this quarter. There's some acceleration in Central and Eastern Europe as we went from negative, again, to flattish. In Russia, our sales, if you exclude some wholesale returns to Belorussia, we actually went from slightly negative to slightly positive. But the main point here is not enough. The macros really countered, again, the recovery that we were hoping for.

I'll just go to the total company's Playbook in the second half. And, obviously, Europe used this Playbook. Our Playbook was made up of 3 key platforms. Those were stronger product innovations; high-impact offers and pricing; and a global field activation program.

And some of elements of the Playbook are working, but not enough to move the needle against macro volatilities. In terms of the stronger innovation, the early days of the launch of Anew Genics, and then Fergie Outspoken, quite good. We had a very strong Outspoken launch and that really supported the 9% global fragrance growth, so we did well in this category, and the Genics early selling is very much on track. In a minute, I'll talk about even in the U.S. it is particularly successful, and we're really on track with that very important skincare product.

In terms of high-impact offers and pricing, again the results here are mixed from Smart Value. Our Beauty business was up 3% on a global basis, and that's with being handicapped in Brazil. But Beauty was up 3%. In the color category, we really did see the results, the positive results of reinvigorated merchandising and Smart Value and that, that turned around with some volume growth in color. But in the other categories, pricing is pressuring units as the consumer sentiment softened through the quarter. And we're also very watchful of competitive pricing and promotion activity, which is dialing up so we want to be wary of that as we look at our gross margin strategies.

In terms of the Believe field activation, again mixed results by market. Some markets did very well, but overall for the total company with active reps still flat, the incentive was not enough to offset the depressed representative activity as consumers pull back spend.

We're adjusting the Playbook for fourth quarter and beyond, just really understanding if this volatile economic environment and consumer sentiment remains uncertain. Where books and brochures are printed, we're using Internet offers to increase pricing and merchandising flexibility and excitement. In terms of some of the markets where -- again, the Believe incentive was not just in terms of bringing number of reps in, it was -- also had a sales threshold. So given the consumer environment, looking at where we need to reset Believe incentive thresholds to keep some of our top sellers in the game. And we're reevaluating the balance of push and pull, so to speak, to strengthen the consumer proposition, given this new environment. We've got to look at the rebalance and the mix trade-off across channel and pricing levers, just to ensure that we've got the right consumer and representative activity.

Despite a slower-than-anticipated overall recovery, we are starting to see some tangible signs of strategic progress, most notably in the U.S. In the third quarter, we began to implement a bold plan to turn around the top line in the United States business. And we've shared this with you. But just a reminder, they were to really revitalize Smart Value, no different than the company Playbook; to recapture holiday sales, where we really had walked away from this category for our consumers and our representatives over the past couple of years; and then importantly to implement one simple sales model, which is a very, very bold transformation in the field, as you know.

It's early days, but this reinvigorated Playbook is changing the trend lines in the business. If you look at U.S. Beauty average order for January to July, the average order was down in Beauty categories. As we started to implement Smart Value, it started to improve in July and August. And then as we exited the quarter and into October, again when you look at the combined focus of remerchandised brochures with a focus on Smart Value, a very successful Genics launch in this market, and the beginnings of some of the introduction of our holiday Beauty gift program, giftable gift sets, et cetera, again the average order has moved significantly.

When we look at non-Beauty, the revitalized holiday program is also starting to bear fruit. The U.S. non-Beauty average order January through July, down significantly, major double-digits. July, August, still down for the major part of the third quarter because we had not introduced many of the programs until September. So as we exited the quarter in September and into the month of October, again, early days, we are seeing a very significant average quarter change, and that's being driven by this introduction of holiday giftables for the fourth quarter Christmas season.

In the field, we continued the deliberate strategic transition towards one simple sales model. We're continuing to grow the number of upline leaders, building a foundation for the future. On the right you'll see that the -- in the pink, the number of upline leaders has crossed over from a deficit to an advantage and sustained that for several months now. And that is a great foundation for the future.

We implemented the first wave of one simple sales model with no perceptible disruption to the business, which was important -- very, very key for us to measure and monitor. So the recent results are encouraging, but we continue to be cautious because of future variability. I mean, we are having notification to district managers in this quarter and then first quarter as the major redistricting happens. So again, recent results are encouraging but we are aware that there could be some future variability. The right program and we feel that this is absolutely foundational for stabilization of the U.S. business.

So just to sum up: Some tangible signs of an inflection point in the United States business. There are some green shoots, but we need to see a sustained improvement over a longer period. It's premature to call it. These are really, really important months ahead of us, and we like the signs, but we are -- caution ourselves, just given the magnitude of the field plan.

Looking ahead, in light of the shifting dynamics in the portfolio and the growing macroeconomic uncertainty, we're reassessing our outlook for 2011 and beyond. Given our disappointing third quarter results, we no longer expect to achieve our previous outlook of mid-single digit revenue growth and 50 to 70 basis points of margin expansion in 2011. It's difficult to predict our fourth quarter performance because the next few months are so critical to understanding sustainable trends in Brazil and the United States, our 2 largest markets. And that's against the backdrop of volatile macroeconomic outlook, see what happens in Europe and whether or not there's this potential for continued softness in consumer spending across the quarter and beyond.

So in line with this, we've begun a detailed assessment of our long-range business plan. The underlying strength of the business model remains intact. We've got an advantaged category, an advantaged geographic portfolio and direct selling to an advantaged channel. We need to consider the increasingly complex environment and its impact on the pace of the transformation to deliver consistent, sustainable performance in this company.

We're conducting an in-depth operational and financial review, as I said, and that will really be a reassessment of our internal and external inputs: a deep-dive review, market by market, role by role; an operational review focused on executional capabilities; a capital allocation review. All of this is going to drive our outlook for key financial metrics, including revenue growth and operating margin. And we are targeting, as I mentioned, an investor update to you in the first quarter of the year.

So we've got a lot of work ahead of us in the next couple of months. We don't want to prejudge the outputs, but we're taking the necessary steps to improve performance and better position Avon in this changing landscape. And we'll have a lot more to say about that when this review is complete.

Okay. Thanks, operator. I think we can open up now for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Chris Ferrara.

Christopher Ferrara - BofA Merrill Lynch, Research Division

It's Bank of America Merrill Lynch. When does Kimberly Ross start officially? And I guess, what will her role be in this review and obviously the call on what you do with the dividend?

Andrea Jung

Kimberly Ross's first day is the Monday after Thanksgiving, so November 28, I believe. I think she's finishing up at Ahold, transitioning and then just taking Thanksgiving. And starting that week she'll be highly involved, obviously, in this review and the capital allocation review and decisions we make there.

Christopher Ferrara - BofA Merrill Lynch, Research Division

And I guess in Brazil, the landscape -- you're talking about landscape changes. I mean, what's really been different there from a business perspective, if anything? Right? Because obviously, execution's been a bigger deal, and it seems like it's kind of run past you guys. And I guess the market -- obviously, there's been some macro slowing. But you're talking about kind of landscape changes, and it sounds like the market's changed. You guys haven't kept up with it. I was wondering if you could just be a little more specific around that stuff. And then also when do you think Brazil will recover? Like give us a shot at when you think things will get better there.

Andrea Jung

Well, just in terms of the landscape, I think there are 3 parts, obviously. One -- we can talk about sort of Avon, execution Avon internal; and then competition; and then the macros. So let's just take the easiest one first. The easiest one being, Chris -- I mean, the macros, I mean, I think we still view Brazil to be a really good Beauty market going forward. I want to stress test that. In this review, we had assumptions. We used assumptions as we came in, in terms of what the overall Beauty market would be and how much we would grow, times the market. And that number is lower, I think, than many of us would like to see, competition included. The absolute number's in the single digits. And so as we look at competition, retail and direct selling and in this earnings seasons and beyond, just what is the -- I'll call it at least near-term impact of the category growth in Brazil, even though it's still a heated market. And what does that imply and what does that mean? The short term, do people still feel Brazil is going to be one of the top 3 markets of growth in the world for Beauty? I mean, those were some of the premises that we had, independent of Avon, coming into the planning process, right? So that's the macros. Then in terms of competition -- and obviously, we want to tease out and understand, in the landscape, how much has been the annoyance that's fueling competition, and how much is just competitive spending and lots of players. So it's as I think I've said before, eyes wide open, highly competitive market. We continue to look at the impact of competition every quarter and tease it out on our results. We did see more impact this third quarter. Again, how much was the annoyance because, just at this point, our service has been tough for a continued period of time, and that lag impact is big on our representatives. And how much of it is just actual competitive activity subsegment by subsegment, in terms of -- again, we're seeing in franchise it's really a fragrance story. And in retail, although smaller, a lot of spending is being done on anti-aging and skincare. So I guess the answer is to really relook at category strategy, given the competition. And then pricing, it's trying to understand in this environment where competition is in pricing, particularly against where we've been positioned to-date. Okay. So that's -- those would be the first 2. Then in terms of execution, and if I take ERP aside, I mean, I just -- I go back to -- and I didn't want to repeat it today but I think you all know how fast the Brazil business grew. And again, we really doubled our business in size, in terms of just, as you know, units, in terms of numbers of reps. And the infrastructure to accommodate this growth something that is here and now as it relates to particularly the move to this new distribution facility in Cabreúva, as well as a foundational ERP opportunity, which -- we didn't go first in Brazil. We felt it was right -- and I still stand by right, to go in other regions because Brazil is complex. And when you don't know things until you get into a go-live environment, what I feel good about is that the post go-live team has had the experience on each of these issues, albeit they were smaller in impact in other regions when we went live, so they know exactly what to do. And so the ERP, it's a day-by-day thing. I don't want to call it because I need to see sustained recovery. And then how much is the lag impact of representative annoyance? So that's going to be what I have to look at in terms of playing out when those units get put back into her order, although the same number of her, and more, are placing orders with us. So that's the foundational kind of moment we're in -- growing into. With sophisticated systems, they are more unforgiving. They take change management. And it is our largest transactional business in number of reps. But I think it platforms us now for what does allow us to have that sustained service and any other thing that comes down the pipe, which would knock us off if we didn't have this ERP enterprise system. So big things and painful, like I said, but the right thing to do from a -- grow into an infrastructure that readies us for growth. Is that helpful?

Operator

Your next question comes from Lauren Lieberman.

Lauren R. Lieberman - Barclays Capital, Research Division

It's Barclays Capital. So I guess just the first thing would be on the changes coming in North America with redistricting and the district manager downsizing notifications. I mean, can you just refer back to the experience you had in the U.S. with this sort of similar direction? No question, I think it's the right thing to be doing, but similar experience in trying to downsize the district managers, whatever it is now, 7 or 9 years ago, and then also when you redistricted in Mexico. I mean, my memory is that it was extraordinarily disruptive, so I would think it's very early to indicate. And then anything with inflection point in it for North America at this point, even that the holidays sales are boosting results right now.

Andrea Jung

Yes. That was my point, Lauren. I mean, I think that obviously the inflection point we're seeing in the average order, and then the short-term things that we needed to do to fix the portfolio. We were very clear that sort of given the environment, the macro environment, the consumer sentiment and the -- I think the average order and the earnings, especially during the holiday period, which was really missing, from engaging the activity. We feel good about that, and it's clearly significantly changed the average order. But as I said, the caution and the reason that it is too early to call, and therefore really hard to predict the fourth quarter, or even first quarter when we do the redistricting, is that this is variable and very important in terms of -- some of the actual notifications are going on, as we speak. This -- the concept of what we were doing and the number, et cetera, was out there for quite some time. And that in itself, of itself, could've caused disruptions. It didn't. So I feel that the communication was very, very good there. But we have to get through this period. And it is the absolutely right thing to do, to your point. But that's why I'm saying the variability makes it very difficult to forecast and predict.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, and Andrea, just -- do you have anything specific in terms of what that disruption was? Just -- I think Mexico is the most concrete example of something similar happening with the redistricting. Like what was the drag and for how long, on whether -- it's probably not average order, but more rep activity and engagement?

Andrea Jung

Yes. Let me get back to you on that, Lauren, because I just want to give you a correct number. It was different, and so it wasn't exactly the same. One simple sales model is not exactly the same. But again, we can quantify that.

Operator

Your next question comes from Mark Astrachan.

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

It's Stifel, Nicolaus. I guess I'm curious why you didn't at least comment on the now-multiple SEC investigations. Is there anything that you can say at all? And then more broadly -- I struggle with this, but why should investors believe management and the board has any control over the business at this point? And I guess, Andrea, you're Chairman. Given an average board tenure of over 10 years, I believe, how long can the status quo here remain? I mean, I know we're talking about improvements in North America but things in Brazil are still tough. I mean, I just don't know what to say at this point.

Andrea Jung

Okay, well, Mark, let me just address that first. Look, the buck stops with me. We're disappointed, and I at the top of that list. There's a lot of factors that I just discussed. But at the end of the day, we missed the numbers, period, and I get it. I, and sort of everyone connected with the organization, is going to do what's right for the company and shareholders. Right now, our focus is to fully review every aspect of this business market by market and role by role. All of the next steps are going to based on facts and will be done with the view to what's right for the prize, for Avon long term, and that's what we've got to do. I mean, appreciate how much goes into a company beyond a quarter, a year. We have nearly 7 million representatives in over 100 countries, and the relationship aspect's important. It's a huge and highly complex direct selling business. So we won't be reactive, but we will be thoughtful, orderly in our approach to all of these issues and have the discipline to get to the right answer for the company. In terms of your first question as it relates to the SEC, just it's not uncommon to have a formal order in connection with an SEC investigation, as I understand it. I think what it means is that the SEC has a formal order open on 2 matters. It just came in yesterday. We disclosed it. As I understand it, again, they chose to issue a subpoena on Reg FD only. And our internal investigation continues, and we continue to cooperate with the government. That's what I have on that.

Operator

Your next question comes from Bill Schmitz.

William Schmitz - Deutsche Bank AG, Research Division

So we talk about the brand awareness at Avon. But like -- there's high awareness of Chernobyl in the Ukraine. So like how do you monetize that awareness? It seems that over the last 3 or 4 years, there's been almost no success given that how much people know the brand. It hasn't really translated into rep growth. So is there any strategy in place to really refresh the brand itself, or maybe even look at other alternatives to maybe some of the brands in the portfolio?

Andrea Jung

Well, I think that we have continued to improve the image of the brand. I think you can't exactly translate that, in this very moment, to no rep growth. I think there are issues, as I discussed, in terms of some of the behavior as a -- consumer sentiment and its play on activity, et cetera. But having said that, our Beauty sales were up 3%. I think mass Beauty has been more challenged than high-end Beauty, but this is all going to be part of the review, okay? And part of the review will be, again, what we need to do or do differently -- again, either brand spending, brand positioning. We did, as you know, look at something like a Liz Earle, to say perhaps there are other brands within the Avon portfolio, and how do they help us with higher tier. So it will all be part of the review.

William Schmitz - Deutsche Bank AG, Research Division

Okay, and then the 14% operating margin target you have out there. Are those the dividend? Because it seems like it's been a handful of quarters where you've had to actually borrow to pay the dividend. So is the dividend safe? And then are you still comfortable with that margin target?

Andrea Jung

Yes, just on the margin, I don't want to prejudge the outputs. I mean, historically, our assumptions regarding category, channel and geography led us to the outlook, and that's what we're going to be reviewing in the next few months. We're going to undertaking a comprehensive review of it. Inputs and outputs including margin, and I'll say what we have to say when that review is complete.

Charles W. Cramb

Now in terms of the dividend, from a long-term point of view, that too will be part of the overall business review. Certainly, at this point in time, you're right. We have a free cash flow that does not fully cover the dividend, given some of the things we've had from our disappointing cash management but also the one-time cash outlays that are in excess of expenses on restructuring. But net-net, everything is part of the overall business review we talked about.

Operator

Your next question comes from Wendy Nicholson.

Wendy Nicholson - Citigroup Inc, Research Division

With Citigroup. My first question is, are there any more ERP implementations that have to come around the world in big markets or is Brazil the last one? And then my second question goes to this -- whatever update, outlook thing that you're going to have in the first quarter. And I guess my question is, I know you know you guys are probably eager to hold our hands and to give us a message and just set a strategy just so the people have some direction to march towards, if you will, maybe internally as well. But it strikes me that you guys need to do a tremendous amount of work, probably change a bunch of people in management, probably change your capital structure, maybe take another restructuring charge, maybe exit a market like what you did in Japan. But I think took a decade to come to that decision. Maybe you'll come to that decision about some other markets. That strikes me as a humongous amount of work. And unless you're planning on handing this off to the new CFO December 1 and saying, "Hey, you got 6 weeks to figure this out," it strikes me that saying it's a first quarter solution could be really premature. So have you thought about the idea -- go back and hire McKinsey again. Go back and really go to the drawing board. Think about taking the company private.? I mean, it strikes me that you, guys are so totally screwed up in so many ways. The change has to be radical, and I don't know if saying, "Hey, we're going to come out in February with financial targets" is enough. That's it.

Andrea Jung

Okay, well, we haven't set a date yet, and we do want to do it and we do want to do it right. So again, targeting first quarter. But if we're not ready, because we are -- everything is part of this review, including outside help versus, obviously, a strong team of people in the company. But those -- haven't set a date, and we don't want to do it prematurely. You are correct on that. In terms of ERP, it's not the last market. There are other markets in Latin America. But again, we're not pulling one single person out of Brazil until that's fixed. And there aren't really any other markets who have the same depth of the legacy issues and/or the interfaces, but we'll certainly take all the learnings before we go to another market. Okay.

Operator

Your next question comes from Dara Mohsenian.

Dara W. Mohsenian - Morgan Stanley, Research Division

It's Morgan Stanley. So Andrea, the Brazil ERP issues, yet another execution issue in a long line of missteps over the last few years. And rather going -- rather than going through the specifics in Brazil, I'd just be curious for your perspective on how you ensure that you improve execution across the company going forward. And also as you look at the issues over the last few years, do you think they're more related to systems issues at the company? Is it more management execution? Or what are the key areas you think have driven these disappointments?

Andrea Jung

I think that certainly the capabilities, operational capabilities, execution capabilities, is a full part of this review, role by role. So again, it's not just the financial business levers that we're looking at, and we are going to be looking at sort of a fresh look at growth drivers, cost drivers but operational capabilities, what we need to do and enhance. And it's a combination. But certainly, from a very decentralized, very patchwork legacy system environment, which has been sort of Avon for 50-plus years, the move to matrix -- that global centralized organization with a global systems platform from a patchwork has been part of the complexity and really hampered our pace of transformation. But I think they're all the right things to do because we had to ready ourselves from -- again, 100 markets doing $5 billion to more markets doing well over $10 billion, and that's been part of the journey.

Dara W. Mohsenian - Morgan Stanley, Research Division

Okay, and from a systems standpoint, where do you stand in that evolution? Do you think you now have the systems in place that are generally correct across the company and will allow you to execute? Or do you think there's more left to go there?

Andrea Jung

There's more left to go. I mean, I think ERP, which deals, as you know -- obviously the supply chain and financial systems, that is done in North America. It's done in Europe, Brazil. Painful, but it's going to be the absolute right thing, and that is very, very important to Latin America. But we've got Latin America, primarily other major markets in Latin America to go there. And then I think we kind of referred to sort of order management, the representative, what we've called service model transformation. And that is an SAP solution down the road. Okay? But that's the largest sort of -- I'll call it last piece, along with the continued upgrade of the Internet technology -- I mean, technology is changing so fast, but the e-tools which are in place but constantly have to evolve. And so I think one of the things that we've talked about as it relates to the capital allocation of CapEx, I think we are really shifting the mix from what's been probably 70% infrastructure -- manufacturing, distribution facilities to exactly opposite. A lot of that is already in place now, and so now what we're doing is focusing most of the CapEx on the continued systems upgrades to get us in a foundational platform around the world with global systems.

Operator

Your next question comes from Emily Klingbeil.

Unknown Analyst -

This is Andrew in for Emily, Credit Suisse. Andrea, following up, I guess from an earlier question related to brand, it seems -- you seem to suggest that you may not have a brand problem, or you may have a brand problem. I'm trying to get a sense of where you settle out there. And are there brand health indicators that you're looking at that gives you confidence that you don't have a brand problem?

Andrea Jung

I think the brand health indicators have been quite good, particularly in the developing and emerging markets. I mean, I just told you highest Beauty brand awareness, top-of-mind in Brazil, highest advertising brand awareness. So I mean, again, the indicators say that brand perception -- and we've done a tremendous amount of work on product, product quality, product image, et cetera, over the last years. In terms of where do we go from here, if we have to rebalance and what that -- where we are competitively category by category, market by market. Those are things that will be part of the review. But the overall top-of-mind Beauty brand awareness and brand image, particularly in our developing and emerging markets, is quite good.

Unknown Analyst -

Okay, and just a quick follow-up to that. In Brazil, obviously a sort of missteps, again related to execution, so the reps haven't been receiving their orders again for the second time. What gives you confidence that this time, you actually can bring them back to your side and that you won't in fact -- that they won't just jump ship this time around?

Andrea Jung

Well, I think stabilization of the ERP system is the most important thing for a sustainable service proposition. I mean, what ERP does is allow us to have that sustainability. So again, painful in its moment but it is the answer, if you would, when you combine the ERP system, as well as the investment that we made, which was quite large, in a state-of-the-art new distribution facility with state-of-the-art pick and pack, et cetera -- considerably different than what we had in the old facility. Those are the, I'll call it infrastructure, that allows us to have flexibility around growth, to not be, again, so constrained and stretched to the limit, which we were for our systems and our capacity before we made these investments.

Operator

Your next question comes from Ali Dibadj.

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

I'm from Bernstein. I'm a little torn because you guys have been beaten up enough about your results today, which is, I guess, generally my role on these calls. But let me ask a different type of question. And it's not about what you're going to say on -- maybe it is, but it's not necessarily about what you're going to say financially or operationally in the first quarter. But it's -- as you look back over the past several years, I think it's generous to call it a boom-bust on Avon. I'm trying to figure out, do you know why these things happen, whether it's bribery, whether it's no cash being generating in the U.S., whether it's this whole Brazil debacle. I mean, why? It's nice to blame kind of external forces, and I totally understand that. And sometimes that happens. But have you figured out what's going on internally that leads to these cycles?

Andrea Jung

Yes. And I just want make sure, Ali, I'm not blaming external forces totally for -- I talked about some macro conditions in this quarter which made it different. And they are worsening macros since the September quarter began. But having said that, let me just go back to kind of taking a longer look back. I mean, look, I get it. There are a lot of factors. But that doesn't -- what doesn't change, I think, is that the -- as I said, the channel is good. We like the category. We love the Beauty category, and the geographic portfolio confers advantage. But this is huge and highly complex and over the past several years, we have introduced a significant amount of change into the company. Some of it's been very effective, but again a lot of it, some of those results have been contra. And what was difficult to predict was the impact of the increasing complexity, also not helped by the shifting landscape. And we really need to consider the impact of this complexity and the change on the pace of transformation and how we, going forward, assume timing on deliverables as it relates to some of these large-scale transformations. And that is why I think it requires this review of every aspect. And each market is different, so it is going to have the market by market, with a view to what's right for the business. But I think the complexity and the rapidly shifting, a lot of contras that -- it doesn't matter. They're no excuses because they happened. But when you combine that chemistry and alchemy, it obviously made for a very challenging deliverable.

Unknown Analyst -

What do you think your board thinks?

Andrea Jung

I think the board totally supports the thought that we've got to assess this business and really look it market by market. So they fully support the thought that this is the right thing to do, to look at this business and do what's right for the business long-term, manage the business for the long term and make the right decisions on all fronts.

Operator

Your next question comes from Alice Longley.

Alice Beebe Longley - Buckingham Research Group, Inc.

Buckingham. My question is a little bit along the same lines. If -- just looking at the operations in Brazil, where we've had problems for more than a year. If you look back, what would you have done differently to make the operations run smoothly? And I'm looking specifically as to whether you think the systems you've implemented are the wrong systems. Or did you have the wrong people implementing them? Or not enough people implementing them?

Andrea Jung

We've obviously spent a tremendous amount of time looking at the implementation and -- from the testing protocols and significant review back in terms of the teams, system testing. And it was extensive, and it involves thousands of test scripts through multiple cycles. And I think we did it right. What -- did we wait too long to implement it? I mean, Brazil was slightly delayed. The challenges that we had in 2010 actually delayed the implementation of ERP. And yet we had to get -- I still say we have to do it, as painful as this is right now. To have delayed ERP for another year would've been the absolute wrong thing to for the business because it would just -- would have delayed the sustained recovery in service. It was, and is, a very experienced group of people. And because they have known what to do in a post go-live environment, I think that our issues are being handled by a team of people who has a lot of experience. But do I wish that we had done an ERP 10 years ago? Yes. I do, but the facts are that we started our ERP. I think we made the right sequence in terms of the regions. And that catch-up, it hurts now, but it's the absolute right thing to do. Brazil grew faster than we thought it would. We had plans in place for this distribution facility and allocated the capital. We had plans in place for ERP. It did get delayed. So yes, I wish I had done the ERP a couple of years earlier. If we had in ERP 2 years ago, from the e-invoicing issue, et cetera, it would have been a different outcome if it had been in that market, but...

Alice Beebe Longley - Buckingham Research Group, Inc.

What does delaying the implementation have to do with not executing it well?

Andrea Jung

Well, delaying the implementation just put in on top of the movement to Cabreuva. So you've kind of got the simultaneous move into a brand-new facility, training 1,500 people in a brand-new facility as well as a large-scale systems change, a magnitude of which even our outside partners would say there are not a lot of -- Brazil, you can do a lot of ERP implementation but the complexities and number of legacy systems and the volumes, SKUs. It's a different environment. So again, no excuses. But when you put it on top of moving into a new distribution facility and all the change management that came, had to do it, wish we had done it maybe 2, 3 years ago. But it wasn't the right thing to do and we couldn't do it in 2010 when we originally wanted to do it.

Operator

Your next question comes from Nik Modi.

Nik Modi - UBS Investment Bank, Research Division

UBS. Andrea, just big picture-wise, and as you think about this review, it seems like execution has really been a big issue for Avon at least for the last 1.5 years or so. I'm just curious how you think about actually having a COO in the business to help kind of manage all the complexity that you have as part of this direct selling multinational.

Andrea Jung

Yes. Everything is being reviewed in the organization, and every role is being reviewed, and that's one piece of this overall review.

Nik Modi - UBS Investment Bank, Research Division

And then just quickly on Brazil, can you give us a sense of what the demand looked like? I mean, certainly you talked about the out-of-stocks and all that stuff, but how does that demand look like?

Andrea Jung

Well, again without being it a perfect science, from what I gave you, it probably would have been mid-single digits and not high-single digits because of competition, but mid-single digits, right? It was 8 points, about, from the minus 3, it would probably 5%, 6% without this problem, and it wouldn't have been 9 or 10 because competition was impacting us 3 to 4 points. I'll say 5% to 6%, if I had to guess.

Operator

Your next question comes from Connie Maneaty.

Constance Marie Maneaty - BMO Capital Markets U.S.

BMO Capital. I have 2 questions. One is, in direct selling companies, the channel really drives the results, all else being equal. And I'm wondering why in many of the most recent hires, maybe all of the most recent hires, the company has chosen to bring in people with packaged goods experience rather than a top direct-selling manager from a competitor. And I was wondering if you could discuss that a little bit. I'd also like an update of what's going on with Silpada Designs.

Andrea Jung

Okay. Just in terms of -- actually, if I look at the regional management, again, the management in Asia, North America, Western Europe and Central and Eastern Europe, probably an average of 25 years of direct selling experience, so we really are focused on making sure we have direct selling experience in the market, managing the business. As it relates to even -- you don't get visibility to below that, but I think we've been pretty aggressive about recruiting and hiring from direct selling competitors as well as people in the industry as it relates to sales leaders, people running our sales force and including some of our markets, in many of the markets. Obviously, just in terms of Kimberly Ross, when we were looking as it related to what we needed going forward as CFO, it really wasn't about channel experience as much as it was just getting the right person into the company. So I think it is a blend on the senior team. And I hear your point, but we definitely think that on the ground, obviously having direct selling experience is a very good thing. All of our general managers, for instance, in Latin America, very deep and steep direct sales experience, so it is a blend of new capabilities, as well as deep direct selling experience throughout the company. As it relates to Silpada, I'll just turn that over to Chuck.

Charles W. Cramb

Sure. In the case of Silpada, as you know, silver prices have skyrocketed on us. They've come back a bit, but when we bought the business it was $17 an ounce. It actually peaked out, I think, at $48. We're down in the low 30s. As we looked at that business we knew we couldn't get back all of that margin through pricing, so we took a very aggressive stance in terms of changing the catalog and we changed out 2/3 of the SKUs and normally it would be about 1/3. And we change the catalog once a year, by the way, in July, when we have our national sales conference. We also went very aggressively on the remaining 1/3 in terms of overall prices, but feel that going into, really towards the end of the third quarter, but most importantly going into the Christmas season, which for Silpada is November and December, that we have a catalog that will broadly appeal terms of price points and offerings, both at the lower and as well as some of the premium products. In -- it's too early to measure what the impact of that is. What we did do, however, is recognize that in this economy, we were going to have to think more about managing the business overall for the cash flow of it than just generating the revenue, while still keeping enough of the earnings opportunity to the representatives. The only metric I've got in terms of the representative right now is on the home parties that are being conducted, the average home party is up a little bit from a year ago. So it tells me right now that there's nothing dramatic in terms of what was done from a catalog point of view that should impact the business. But it really -- there really is a "hold on and wait and see" for the Christmas holiday gift-giving period in terms of what does happen with that business.

Operator

Your next question comes from Javier Escalante. [ph]

Unknown Analyst -

Consumer Edge Research. A follow-up on Brazil, and then to take into a broader level. I'm not sure if you are aware, but also Natura is decelerating significantly. They grew only 5% in the quarter, and they are also claiming invoicing issues. So to what extent you are getting the right information, that data out of the market, when you provide the impact of retail on other direct sellers or competition in general, in the quarter? And that takes me to another issue. Do you have a sense whether this RVP spending is expanding your sales force, because how can you grow your sales if your sales force is not expanding? And I know that you are presenting this active rep metric, but this active rep metric is certainly not enough. We need to know whether your reinvestment in RVP is creating the incentive for people to enroll in direct selling.

Andrea Jung

Sure. Just in terms of inputs, I mean -- and this will continue to be part of the review, but yes, we do look at when we look at the impact of competition it's by competitor as best we can see. So we would see the impact of our largest competitor versus a new entry, versus retail, and that's something that we continue to study. So again, that's important to us to understand, not just the total impact of competition, but from which channel, and then specifically within channel if it's -- who, if we can discern that. So that's how we're looking at, very closely, the competitive landscape. RVP. I mean obviously, we -- as I said, it's had mixed results. And if we look at the overall RVP, some of it Sales Leadership bonuses in South Africa and Mexico. That seems to be working and driving results. Higher incentives to offset Brazil annoyance was a piece of the RVP investment in the quarter. Again, I hate the sales number in Brazil, but the fact that active reps were up in what is arguably the worst service environment we've ever had in that market -- and we've got a huge sales force and -- with growth on that number of sales force putting in orders, that obviously was important for us to counter the rep annoyance and keep them in the game. So that was an investment that I think is the right one for the long term of the business. And then we invested in the quarter in RVP in the U.S. launch of the one simple sales model. And it, again, that's a bet we're making, but we stand by that bet. We think it's the right thing to do for the business and that had investment cost.

Unknown Analyst -

But Andrea, if I may, this RVP seems to be something very temporary, as opposed to real changes in compensation. So how can you attract and grow your sales force if the compensation remains unattractive and you're just offering some promotional spending here and there, and it's not permanent?

Andrea Jung

Well, Javier, the RVP I'm talking about, it's not just incentive. That's a piece of it, but the Avon Sales Leadership, that is a foundational multilevel earnings opportunity. That is a compensation modeling change, and the U.S. program of one simple sales model is enhancing earnings not through incentives, but through the leadership construct of the compensation model. So those are captured in that, and those are foundational commission changes or earning opportunity changes that is not about a toaster or a gift. That's in there, but the lion's share of this money increment was on -- I'll call it compensation program changes. Exactly to your point.

Operator

That's all the time we have for our question-and-answer session for today. I hand the program back over to Ms. Jung for any further comments or closing remarks.

Andrea Jung

No. Thank you. Again, we've got a lot of work cut out for us, over the next several months, and we'll do the right level of work on it. And as soon as we feel ready, we will be back to you with a date and look forward to talking to you then. Thank you very much, everybody.

Operator

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

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