Avon Products' (AVP) CEO Sheri McCoy on Q4 2015 Results - Earnings Call Transcript

| About: Avon Products, (AVP)

Avon Products, Inc. (NYSE:AVP)

Q4 2015 Earnings Conference Call

February 11, 2016, 09:00 PM ET

Executives

Adam Zerfass - Director of Investor Relations

Sheri McCoy - Chief Executive Officer

James S. Scully - Executive Vice President and Chief Financial Officer

Analysts

Lauren Rae Lieberman - Barclays Capital, Inc.

Ali Dibadj - Sanford C. Bernstein & Co.

Bill Schmitz - Deutsche Bank

Javier Escalante - Consumer Edge Research LLC

Lauren Migliori Wolff - Piper Jaffray & Co

Steve Powers - UBS

Operator

Good morning. My name is Holly and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Fourth Quarter and Full-Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]

I'll now turn the conference over to Adam Zerfass, Director, Investor Relations. Mr. Zerfass, you may begin your conference.

Adam Zerfass

Thank you, Holly. Good morning and thank you for joining us to review Avon's fourth quarter and full-year 2015 results. I’m here with Sheri McCoy, Avon's CEO; and Jim Scully, Executive Vice President, COO and CFO. Sheri will make some opening remarks, including her perspective on our overall performance and milestones for 2016. Jim will then take you through our fourth quarter and full-year results, as well as some 2016 priorities. Then, we will have our usual Q&A session.

With that I refer you to our non-GAAP reconciliations, which are available in our release, located in the Investor Relations section of our website. As usual on the call, we will focus on these adjusted non-GAAP financial measures.

Our call will also contain Forward-Looking Statements that concern our business and financial strategies, including our transformation plans, cost actions and savings, performance trends and the impact of foreign currency, taxes and tax rates. These statements involve risks and uncertainties, which are detailed in the Cautionary Statement available on our Investor Relations website and in our SEC filings.

I'll now hand the call over to Sheri.

Sheri McCoy

Thanks, Adam. Good morning and thank you for joining the call today. There are three topics I will cover this morning. First, I will provide my high level perspective on Avon's 2015 fourth quarter and full-year results which were in line with our previously shared outlook. Second, I will highlight some of our key areas from our recent Investor Day. And third, I'll cover seven specific milestones from our transformation plans for you to track over the course of 2016. Jim will then take you through the financials results in more detail.

Before we get started, I want to remind you that we announced the deal with Service Capital Management on December 17. A key component of this transaction is the separation of the North American business from Avon Products Inc. North America will become a privately held entity majority owned and managed by servers. Because of this the North American business is reported as discontinued operations and is not reflected in the revenue and operating profit we now report.

As a result of this reporting method change, the portion of global expenses that were allocated to North America now remain in global. As a result, there was a small negative impact on Avon Products’ 2015 reported operating margin. I will note however that on an overall basis if we were to include North America Avon's results for the year were in line with our expectations and we are pleased that the North American business met our goal of being profitable for the year.

Let me start with my perspective on the fourth quarter. Please note that these results exclude North America. Our operational performance was consistent with expectations. Fourth quarter revenue was $1.6 billion up 3% in constant dollar excluding Liz Earle. Revenue would have grown 6% when also excluding Brazilian IPI tax and VAT credit. I was pleased that Active representatives trends continue to improve growing 2% in the fourth quarter.

On the other hand our operating margin continues to suffer, primarily due to FX. The adjusted operating margin was 6% down 420 basis points year-on-year. Jim will provide some additional details, but I want to note that we did see some minor easing, while we did see some minor easing of currency pressure the trend reversed in the fourth quarter.

From a geographic perspective, Latin America came in about as expected with flat constant dollar revenue performance year-on-year. Brazil had a more challenging quarter than anticipated. However, I was pleased with Mexico's performance delivering 6% growth on a constant currency basis driven by strong average order growth.

To the Latin American vision excluding VAT credits in 2014 and IPI tax in 2015, constant dollar revenue would have grown approximately 6% to an equal part to inflationary pricing and underlying operating performance. Active representatives declined slightly due to Venezuela and Argentina.

Specific to Brazil, despite the weak economy the challenging political environment and reduced consumer consumption the team is doing a good job of maintaining underlying health of the business. Excluding IPI and VAT tax impact, constant dollar revenue was down 2%. What we see in Brazil is that Active representatives are growing. However, average orders declining as women are tightening their wallet in the current economic environment.

Turning to EMEA, I'm pleased with the overall performance of the region driven by strong results in Russia and South Africa, across the region the teams delivered strong Active Representative growth of 8%.

UK was down for the quarter but we are seeing modest improvement as the team focuses on growing average order and increasing the number of sales leaders. We expect this improvement to continue moving forward. In Asia Pacific the Philippines had another strong quarter, however this was not enough to offset declines in other markets, mainly China.

Now turning to the full-year 2015. I'm pleased that our key local markets drove steady improvement in overall performance. One of our priorities for the year was to improve Active Representative growth in our top market. We made significant progress in this area, the majority of our top markets are growing at constant currency and are profitable. We have strong management teams in place locally and they're performing well. Some of them in extremely challenging environment, I'm very proud of these teams.

From a financial perspective, our full-year revenue was $6.2 billion an increase of 3% in constant dollars excluding the divestiture of Liz Earle. Revenue would have grown 5% when also excluding that IPI Brazilian tax item. Again, these results exclude North America. Importantly, we improved year on year Active Representative trends with full-year growth of 1% and ending represented trend is favorable to prior year.

From a category perspective in constant dollar, Beauty grew 3% for the full-year with 7% growth in fragrance, flat performance in skincare and 1% growth in Color. Fashion & Home grew 5% year-on-year and we were pleased with our innovation and new product execution with strong performers across all three beauty categories, including standout performance by our attraction fragrance and ANEW ULTIMATE serum and Big & False Mascara.

Our adjusted operating margin for the year was 5.7%. results were negatively impacted by Brazilian VAT credits in 2014 and IPI tax in 2015 of approximately 180 basis points and unfavorable impact from foreign currency of approximately 480 basis points.

Also important in 2015, we introduced Avon's new brand positioning Beauty for a Purpose in all markets across the globe. This has been exceptionally well received by consumers and representatives and we look forward to building upon this in 2015. We significantly increased our social media and digital capabilities and we began to rolling out our upgraded IT systems in some key markets, which was critical for the implementation of improved service models and a more contemporary social selling model.

On the other hand the FX pressure we faced over the course of the year was extreme, while we continue to take out cost it wasn't enough to offset the FX which had nearly a $0.5 billion impact on adjusted operating profit in 2015 alone. Over the course of 2015, we also strengthened our balance sheet including restructuring our working capital facility, divesting referral and addressing our 2016 maturities.

And our most important accomplishment of 2015 is setting a new path forward for Avon. This includes our strategic partnership of service which provides the solution for Avon North America and provide funds, focus and resources for our international market. Overall, while we face significant macro issues, we made solid operation progress in 2015 and we executed a transaction that was a catalyst to position the company to sustainable profitable growth.

Turning now to the plans we shared with you in Investor Day. First, I want to thank all of you who attended. I would like to reiterate the key elements of our three-year transformation plan to drive shareholder value. As we execute the plan, we will balance aggressive cost take out with investing in growth and assure that we have the financial flexibility to both the short and long-term. At a high level, the three components of the plan are investing growth, take out cost and improve financial resilience.

Let me briefly comment on the three areas, first growth. In the area of branding and products, we will be investing in our new Beauty for a Purpose positioning in our key market. We'll also have detailed pricing guideline in place and we'll be monitoring these in our top-ten markets. Work is underway to build our top-40 brands and we will continue to introduce and support innovative new Beauty products.

In the area of representative engagement we have instituted improved on-boarding program and our top-ten markets are executing or preparing to implement representative segmentation. In the area of service model evolution, we have a three-year implementation plan. Our market are started from different places, we have newer Avon market such as Poland and Turkey leading the path and legacy marketplace at UK fully underway set at earlier stages. In EMEA the digital tool are live in many markets across the region and the first phase of our [OMF] (Ph) implementation will be complete in our major markets over the next year.

As is relates to service model evolution in Brazil, I know this received attention at Investor Day, so let me take a step back and provide some additional perspective, on what is included in the service model evolution. There are essentially two broad component, first there is the order management system, which is the back of its component we discus in January. And second a key to digital tools that allow the representative and sales manager to better managed her business and improve consumer access.

From our experience in Canada, we know that implementation of both needs to be placed strategically to drive productivity rather than create disruption. In Brazil, we already have digital capabilities in place and this year we will be taking another big step forward with the launch of a comprehensive set of representative tools, the full mobile capability. This will significantly improve many aspects of the representative experience, including how she places an order, tracks her earnings and builds her business.

We are also pilot testing pickup points and planning for on-demand deliver for our top sellers. And from there, we will systematically works through the remainder of the service model evolution plan at a pace that that supports the business.

Ultimately, we do need the new OMF to deliver the full potential of social selling and the new OMF system provides increased flexibility, speed and cost savings. However, we are not constrained today from making significant improvement through the representative experience and operation efficiency. Our IT roadmap for Brazil fully supports our growth plans, it is strategic and well paced starting with the representative facing areas and then moving to the back-end in OMS.

And the second area cost take out, we committed to cutting $350 million over a three-year period. We have specific plans in place and are already executing on the changes to the operating model and we have significant work underway that enables us to address the supply chain cost and under utilization.

And our third area of improving financial resilience, we will strengthen our balance with a service investment, the suspension of the dividend, repayment of debt and improved operational performance. As we reviewed at Investor Day, our long-term growths are to deliver mid-single digit constant revenue growth and low double-digit operating margin.

Before I hand it over to Jim for a more detailed financial discussion, I wanted to share some perspective feel on what you can expect from us in 2016. To begin, we are on track to close the service transaction over the next couple months. We have already begun executing our transformation plan and there are a lot of moving parts and I thought it would be helpful to share with you seven key milestones for the year.

First, we will deliver 1% to 2% active representative growth for the company and continue to improve the ending representative trends. Second, from a geographic perspective, we will continue to drive improved overall performance in our top-10 markets. We anticipate that Brazil of continue to be a challenging environment, we expect our Brazilian team to maintain the underlying health of the business while keeping our representatives engaged.

For the year, we expect Brazil to be relatively flat with some ups and downs over the course of the year. We expect Russia to continue to grow, Mexico will continue to deliver solid performance and we anticipate that the UK will continue on its current trend of improvement and deliver flat to slightly positive growth by year-end. We will also have a resolution for our China business.

Third we will be pricing with inflation and monitoring this close in our top-10 markets, and we will continue to invest in the brand with Avon’s from Beauty for a Purpose positioning to drive consumer and representative engagement. Fourth we will execute more cost take outs, $70 million in 2016. This will be driven largely by the changes in our operating model and enterprise efficiencies in supply chain.

Fifth in the area of our service model evolution, we will continue to make significant progress in advancing our EMEA market and will be well underway in Brazil. Sixth, as it relates to our IT agenda, we expect to have completed the full IT infrastructure transition to HPE by year-end for all Avon markets. This transition will improve enterprise efficiency and provide better operational flexibility, importantly it also allows our own technology resources to focus on a service model evolution. And seventh, we will continue to improve our balance sheet with the service investment and optimistic debt repayment.

Before I hand it over to Jim, I want to close by saying, I'm confident that the actions we have taken in the past year position us to accelerate the pace of change, transform our business and improve our competitiveness. Jim.

James S. Scully

Thank you, Sheri and thanks again to all of you for joining the call today. In terms of my prepared remarks today, I will start with review of our fourth quarter performance, I will then provide an overview of our full-year 2015 results and finally I will ramp up with a summary of the key priorities for 2016.

Before getting into the results, I would like to provide two reminders. First, as Sheri mentioned given that we entered into a separation agreement to sell 80.1% of the North America business, it is now been reported as a continued operation. This means, North America results are no longer in our revenue or operating profit from continued operation for all period presented.

However, global expense amounts that were previously allocated to North America remain in the SG&A of continuing operations as unallocated global expenses. We have included a supplemental schedule to our press release that shows what our full-year revenue and adjusted operating margins would have been had North American remained in continuing operations.

And second, similar to last quarter, in order to provide a better understanding of the underlying performance we have once again added a supplemental schedule to our press release. This schedule calls out the impact of the divestiture of Liz Earle and certain Brazil tax items specifically the new IPI tax on cosmetics in Brazil that began in May 1, 2015 and the recognition of Brazilian VAT credits in 2014 associated with previous periods that did not reoccur in 2015.

Turning to our fourth quarter performance, reported revenue declined 20% due to the negative impact of foreign exchange. Excluding Liz Earle from the prior year, constant dollar revenue would have grown 3%. In addition, the combined impact from the Brazilian IPI tax in 2015 in the Brazilian VAT credits in 2014 adversely impacted our fourth quarter constant dollar revenue growth by an estimated three points.

Excluding the impacts of Liz Earle in these Brazil tax items, revenue would have grown in constant dollars by approximately 6%. Our high inflation market Venezuela and Argentina contributed a combined three points to this growth. Active representatives were up 2% despite the negative impact from the Latin American market experiencing high inflation.

Average order declined by 1%, this metric was negatively impacted by the Brazilian VAT credits recognized in 2014, the IPI tax in 2015 in the divestiture of Liz Earle. These negative impacts were partially offset by pricing actions in all regions as price mix grew 3%.

Adjusted gross margin declined 270 basis points to 58.8%. The Brazilian VAT credits in 2014 and IPI tax in 2015 adversely impacted the year-over-year comparison of adjusted gross margin by approximately 70 basis points. Excluding these impacts, adjusted gross margin would have decreased 200 basis points. A favorable net impact of pricing and mix as well as lower supply chain costs were not enough to offset the approximate 350 basis point negative impact of foreign currency.

Adjusted operating margin declined 420 basis points to 6%. The Brazilian VAT credits in 2014 and IPI tax in 2015 negatively impacted the year-over-year comparison of adjusted operating margin by approximately 210 basis points. Excluding the impact of these items, adjusted operating margin would have increased approximately 210 basis points. This decrease was primarily driven by foreign currency, which negatively impacted our results by approximate 530 basis points. These unfavorable impacts were partially offset by the favorable net impact of price mix as well as benefits from continued cost savings initiatives.

Moving to tax, the adjusted effective tax rate was negatively impacted by the country mix of earnings and the inability to recognize additional deferred tax assets in various jurisdictions related to our current year operating results. The year-over-year difference in the adjusted effective tax rate caused an estimated $0.06 per share negative impact on adjusted earnings per share. The adjusted effective tax rate is expected to be volatile on a quarterly basis due to the country mix of earnings.

As a reminder, there are four key factors, which drive the majority of the volatility in our tax rate. First, the country mix of our earnings. Second, the inability to recognize tax benefit in some countries where we have current period losses as a result of being in position where we are recording valuation allowances on these countries deferred tax assets. Third, we are recording the cost of withholding taxes on cash repatriations required to service corporate needs and finally the absolute level of pre-tax earnings.

Fourth quarter adjusted EPS from continued operations was $0.00 per diluted share compared with $0.021 of adjusted earnings per share a year ago. Two items had a significant impact on this year-over-year change. First, a negative impact of foreign currency from an estimated $0.16 per share decline and second as previously mentioned the year-over-year change in the adjusted EBITDA effective tax rate reduce EPS by an estimated $0.06 per share.

I will now provide more details on our fourth quarter results by region starting with Latin America. Fourth quarter reported revenues declined 26% while in constant dollars revenue was relatively unchanged. Constant dollar growth was adversely impacted by approximately two points due to the Brazilian VAT credits recognized in 2014 and approximately four points due to Brazilian IPI tax in 2015. Excluding impact of these items constant dollar revenue would have grown approximately 6% driven by pricing. Active representatives were down 1%, negatively impacted by continued decline in Venezuela and Argentina while average quarter increased 1%.

Latin America adjusted operating margin was 6.3% down 250 basis points from the year ago. The Brazilian VAT and IPI tax items negatively impacted adjusted operating margin by approximately 410 basis points. If we were to exclude the impact of these items adjusted operating margin would have increased approximately 160 basis points. The favorable impact of pricing and mix as well as cost reduction more than offset the approximate 510 basis point adverse impact from foreign currency.

Turning to Brazil, constant dollar revenue declined 14%, the VAT credits in 2014 and IPI tax in 2015 negatively impacted constant dollar revenue growth by approximately 12 points. Excluding the impact of these items, constant dollar revenue declined approximately 2% driven by lower average order. These negative average order impacts were partially offset by a solid growth in active representatives which benefited from a successful third quarter recruiting crusade.

In Mexico revenue grew 6% in constant dollars the growth was driven by an increase in average order which more than offset a modest decrease in active representatives. Mexico’s Beauty business continue to grow in the fourth quarter and their Fashion & Home business, which is an important part of our Mexican business returned to growth.

Moving to fourth quarter results for EMEA. Reported revenue declined 13% while constant dollar revenue increased 6%. The divestiture of Liz Earle negatively impacted constant dollar revenue growth by approximately four points. Excluding the impact of this item, constant dollar revenue would have grown approximately 10% driven by active representatives due to strength in Russia, South Africa and Turkey. The underlying business in operational fundamentals remains strong in this region.

EMEA’s adjusted operating margin was 12.5% down 140 basis points, as significant adverse foreign currency negatively impacted the results by an approximate 540 basis points. This negative impact was partially offset by the benefit from revenue leverage, cost savings and increased pricing.

Turning to Russia. Constant dollar revenues rose 29% driven by a balanced growth from active representatives and average orders as the team maintained momentum in recruiting and retention and continue to increase price. Constant dollar revenue in the UK declined 7% driven by a decline in active representatives while average order was flat compared with the prior year.

Moving to Asia Pacific, reported revenue declined 16% while constant dollar revenue declined 8%. Average order declined 8% and active representatives were flat year-over-year. The Philippines continue to grow increasing 5% in constant dollars driven by an increase in active representatives. However, it was not enough to offset declines in other markets most significantly China which declined 41% in constant dollars.

Asia Pacific adjusted operating margin was 5.6% down 60 basis points compared with the year. This was primarily driven by unfavorable price mix, which was partially offset by lower fixed expenses as we continue to benefit from cost reduction actions.

Please see our press release for a further discussion of the six adjustments we made to our GAAP results in the quarter, which were cost implement restructuring, Venezuela special items, pension settlement charges, non-cash impairment charge related to the company’s Egypt business. Transaction related cost associated with the planned separation of North America that were included in continuing operations and income tax benefits recognized as a result of the implementation of foreign cash planning strategies.

I will now provide an overview of our full-year results. Reported revenue declined 19% due to the negative impact of foreign exchange. Excluding Liz Earle from both years, constant dollar revenue would have grown 2%. In addition, the combined impacts of the Brazilian VAT credit in 2014 and the IPI tax in 2015 adversely impacted our constant dollar revenue growth by an estimated two points. Excluding the impacts of Liz Earle and these Brazilian tax items, revenue would have grown in constant dollars by approximately 5%. Venezuela and Argentina contributed a combined three pints to this growth.

Growth in constant dollar revenue for 2015 was driven by both an increase in active representatives and higher average order. In fact, despite a continued decline in active representatives in Venezuela and Argentina active representatives grew 1%. And as I just mentioned average order grew as well.

This metric was up 1% despite being adversely impacted by the Brazilian VAT credit recognized in 2014and the IPI tax in 2015 as well as the divestiture for Liz Earle. Rounding up the discussion on 2015 revenue drivers and is worth noting that price mix grew 4% due to our focus on selectively increasing prices and shift in mix throughout 2015.

Lets now move to our 2015 adjusted operating margin results. Year-over-year adjusted operating margins declined 316 basis points to 5.7%. the year-over-year comparison was adversely impacted by approximately 180 basis points due to the Brazilian VAT credits in 2014 and the IPI tax in 2015 that I discussed previously.

Excluding the impacts of these items, adjusted operating margin would have decreased 180 basis points. The decline was primarily driven by approximately 480 basis points of adverse foreign exchange of which roughly 280 basis points of the decline was transaction and 200 basis points was translation.

While we were able to offset the unfavorable impacts of transaction foreign exchange through the combination of pricing actions, revenue leverage and continued benefit from our cost savings initiatives, it was not enough to mitigate the negative impact of foreign currency translation. For full-year 2015, adjusted EPS from continuing operations was $0.01 per share, compared with $0.74 per share in the prior year.

Two items had a significant impact on this year-over-year change. First, the negative impact of foreign currency drove a $0.68 per share reduction and second the year-over-year change in the effective tax rate reduced EPS by $0.22 per share.

Moving on to cash flow. Cash from operating activities during 2015 provided $91 million compared with $289 million during 2014. The year-over-year reduction was primarily due to lower cash related earnings which as I previously described were negatively impacted by its foreign currency translation. These items were partially offset by the lower net payments associated with operating taxes and lower payments for employee incentive compensation.

Working capital was one day worse operationally compared with a year ago, accounts payable improved eight days operationally, as we continue to benefit from our focus on renegotiating payment terms with our vendors. However, inventory was eight days worse operationally, primarily related to the impact of unfavorable transaction in FX on the cost of inventory as well as additional inventory to support EMEA.

As we evaluate the state of the business and look to the future, taking into account some of the one-off items as well as recognizing the impact of Venezuela and Argentina on our metrics, I believe overall the underlying top line is healthy and its supported by metrics trending in the right direction.

That said, it is clear that our profitability has suffered significantly given our footprint and the strength of the U.S. dollar. Consistent with what we shared at our most recent Investor Day, we are not assuming the currency issue will reverse in the near-term and we have launched our transformation plan, which includes three pillars, investing in growth, driving out cost and improving our financial resilience to enable high quality sustainable earnings growth.

Turning to the highlights of our transformation plan. Invest in growth, we will invest $350 million into the business over the next three years, %150 million in media and social selling and $200 million related to the service model evolution in IT to improve the overall representative experience.

Second, drive out cost, we plan to take $350 million of cost out of the business over the next three years, $150 million from changes to our operating model and better alignment of our expenses with our geographic footprint. And $200 million from optimizing our supply chain network. In 2016, we expect to achieve 40% of the $350 million on a run-rate basis, if you assume a accurate convention, we expect to realize $70 million of these benefits in 2016.

Lastly improve financial resilience, it is well underway as we are moving with a sense of urgency. In 2015 we refinanced our working capital facility, divested Liz Earle, paid down our 2016 maturities and made the decision to suspend our annual dividend. And in 2016, you can expect us to close the deal with servers, continue rigorous pricing discipline, opportunistically repay debt, evaluate hedging key currency exposures, make strides to improve working capital and layout our tax planning strategy. This comprehensive transformation plan puts us on the path to achieve our long-term goals of mid single-digit constant dollar revenue growth and low double-digit operating margins.

While we are not providing detailed financial guidance for 2016, I want to highlight that we expect the profit comparisons to be weaker in the first half of the year due to the significant foreign currency deterioration we had experienced. While we plan to continue our rigorous pricing discipline, it is a lag between the realizations of the pricing as compared to the inflation caused by the currency issues. Additionally, we expect to begin some realize our 2016 cost savings targets in the second half of the year.

In addition to the milestone Sherri mentioned, I would like to provide some additional details regarding our priorities for 2016. We expect 1% to 2% active representatives growth, to complete and close the service transaction, to execute key operating model changes, to opportunistically repay debt, to hedge fee currencies and to finalize our tax planning strategies.

I would also like to communicate a couple of additional points. In the first quarter of 2016, we will begin to report against our new segments, which will be Europe, Middle East and Africa, North Latin America, South America and Asia Pacific. We also plan to evaluate the metrics we may provide to allow you to gain insight into the business performance and transformation plan.

And I would just like to wrap up by saying thank you again for your time. I hope this gives you a better sense of the current state of the business, our near-term priorities and our long-term expectations. With that we will turn it back to the operator to begin the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Lauren Lieberman. Please state your affiliation, then pose your question.

Lauren Rae Lieberman

Great, thanks. It's Barclays. So first I wanted to ask about the North America expenses that are being retained in global expenses. Should we think about that as kind of like - the run-rate of around $10 million a quarter kind of the good run-rate and are there plan to elevate some of that trended overhead or kind of the dis-synergy from separating North America?

James S. Scully

So it's Jim. So that’s a good, so you will see in the 10-K when we file it given how we've done continued operations and discontinued operations, as I mentioned we did take some global allocations that were previously at North America back to continue operations and that was that $40 million approximately you were referencing. Going forward however, there is going to be a combination of things that happen, once we close the transaction this year including transferring some expenses and TSAs going both way. So when I think about the restrained cost perspective after deal close restrained cost would be in the $20 million to $25 million range and we have plans on the expense side to offset those restrained cost.

Lauren Rae Lieberman

Okay and are those plans Jim in addition to the $70 million that's part of the global plan or just I think about that as net we get $50 million to work with this year?

James S. Scully

The plans offset restrained cost are incremental to the $70 million that I mentioned.

Lauren Rae Lieberman

Okay, great. Thank you.

Operator

Your next question comes from Ali Dibadj. Please state your affiliation, then pose your question.

Ali Dibadj

Hey, guys, I'm from Bernstein. I want to focus a little bit on the cash discussion, I mean you spent a lot of time in the prepared remarks on that. It came in quite below your expectations set not too long ago actually for this year on a free cash basis, so $50 million even including North America actually lower without it. Can you give a sense on what really drove that expectation, it didn’t feel like it's all currencies, feel like there is other stuff going on there, I just want to hear your thought about it?

And then how do you think about free cash flow for the coming year, and are there implication to that on a credit liquidity situation that you have right now? And last piece on cash is, can you give us a sense of where the cash actually is, like if 10% in Argentina like the last discloser, is that all expectable? How should we think about the ability to get that cash right now? So just to full focus on cash type of questions.

James S. Scully

So it's Jim, so let's go back to the expectation in terms that we set on cash, I think the expectation that we have set did changed throughout the year, the last guidance we gave was less than $100 million but positive. If you look at where we came in, we came in essentially flat to that number excluding North America. if you look at the cash statements as it relates to some of the ins and outs of discontinue operations, it would have been maybe an incremental of $29 positive, $15 to $20 positive. So it's a little bit lower than our expectations but not by much, I would say largely driven by a lot of the currency activity that occurred in the fourth quarter despite the biggest driver to related at least to our expectations.

In terms of cash for next year, essentially we are not giving detailed of guidance for next year. I want to be careful that we don’t give guidance on cash, which is really the result of all the other assumptions that we are not giving. So what I would like to say about cash in 2016 is that I think I would personally be disappointed if we were not equal or better than we it landed in free cash flow in 2015, even absorbing the cash cost related to the savings plans in 2016. And then as it relate to kind of [indiscernible] we do have trapped cash in some countries. We haven't broken out before in either amount, it's not a significant amount and we are seeing some movement even in Argentina where we have some recent changes that we have been able to get some of the cash back out. But it is not a significant amount that you see in the balance sheet.

Ali Dibadj

Okay that’s helpful. And the and when you guys talk about IPI tax and VAT impacting your number when you say excluding those. I'm trying to get a better sense of a net impact on the top line from IPI tax and VAT credit. So are you including any pricing mitigation that you perhaps taking to offset those in those marketplaces, or is there none? And I guess that the real underlying thing I'm trying to figure out is once you lap those things, should we expect that 3% to 4% rebound in your top line to come? Or is it not going to be that great of a rebound because again you are mitigating something is already with pricing? Does that question make sense?

James S. Scully

It does make sense. I think I would say it's a ladder, the impact that we are stating does include action we are taking to offset that include pricing, so when you see as anniversary you would not necessary see the rebound that you are expecting it would just be in the base of the business going forward. And at the same time, we could stop talking about the 2014 VAT as well because we wouldn’t be up against that from an anniversary perspective.

Operator

Your next question comes from Bill Schmitz. Please state your affiliation, then pose your question.

Bill Schmitz

It's Deutsche Bank. Hey, I have a question on pricing, if you look at your peers with seller regional exposure just look at the regions, where they compete. Your pricing is way below a lot of the other guys and it's probably the more exaggerated because Argentina and I'm sure Venezuela is a piece there. So why aren’t you taking a lot more pricing to offset the currency hit, because obviously the currency that you are seeing is light years worse than anybody else. And so what's the risk of taking pricing even higher, because if you are going to drive volume, but it's unprofitable or very low profits, I'm not sure that does anything for the business over the long term.

Sheri McCoy

So we are taking pricing, as we are looking at that, one of the thing is that what we are doing in our top-10 market is ensuring that everyone is very clearly on what the inflationary pricing is and making sure we are taking that inflationary pricing. Where we have been focused is making sure we understand that impact particularly on what I would call sort of the high unit movers to make sure that we are keeping the representatives engaged in the process. But we have taken significant price in Russia, we are taking in Brazil, obviously in the inflation market we have been consistently doing that. But we are doing that across our top-10 markets and making sure we are also coupling that with advertising and other thing to support the representative and the consumer. It’s something that historically has been a little bit slow on, we have this year the last quarter been very focus on that. And as we've built our plan 2016 we have significant price in the plan.

Bill Schmitz

Okay, but it's still not working, because the margins are getting absolutely demolished relative to anybody, even if I just look at other people sort of Latin America exposures, so I'm curious what is the risk of taking pricing too high? Do you know what I mean, because it's not like that growth is through the roof right now, do you mind saying like why not just try it?

Sheri McCoy

Yes. I mean we are taking price, what we're doing is on a campaign-by-campaign basis I think some of the things that you are seeing in our numbers particularly if you look at Brazil which is a big portion of it is that we are also dealing with the IPI tax component of it. But we have taken significant price and we will continue to do that moving forward.

Bill Schmitz

Okay, alright. That's helpful. And then just on makeup, it seems like there is just kind of makeup resonance going on with all these Beauty bloggers and advisors and yet your makeup business is flat. So what is the opportunity and what do you think you guys are missing relative to the category and some of the competitors?

Sheri McCoy

Yes I think overall we've been very competitive in Color, one of the things that when you look at our numbers that when I report on our category basis, we have the IPI and the VAT comparison index where that changes the numbers. So we actually are performing better, so if you look at it on a market-by-market basis we are very focused on Color. The important thing and you saw this I think at the Investor Day is using Beauty for a Purpose and going out from a digital standpoint to make sure that were actually getting bloggers excited about our brand. We've put a lot of energy and effort behind that and we will continue to do that that's going to be critically important as we continue to move forward?

Bill Schmitz

Great, thank you guys so much.

Operator

Your next questions comes from Javier Escalante. Please state your affiliation, then pose your question.

Javier Escalante

Consumer Edge Research. Good morning, everyone. My questions has to do with primarily two countries Brazil and Russia and I'm trying to reconcile to a statements made in the call one that the metrics, the full metrics were trended in the right direction. And then you basically said that even though Brazil is going to anniversary some of these comparative issues the VAT and IPI taxes it won’t rebound. So if you can help us to explain why is it that it won’t rebound, if you are breaking out the impact in the last couple of quarters actually I think what a onetime item so wisely that is full metrics are getting better there is no rebound and then I have a follow-up.

Sheri McCoy

Sure, thanks Javier. As it relates to Brazil one of the things that were seeing is that we have been able to recruit and retain representatives, we are very pleased with our efforts there, the results that were seeing now are impacted - the average orders impacted by as you pointed out the IPI and the VAT piece. The other piece that we are cautious about and we are watching closely is very challenging environment, if we look at the consumer consumption across all categories, we look at where and the GDP is. We are being cautious relative to that we do expect overtime that things will come back, but we also hesitant relative to the volatility in the market versus our own situation.

Because what we know is consumer will tend to hold back and particularly in areas like they facial skin care, because so trade off and leave that for other things. So because I talked about that it was less about the comparison of IPI and VAT as it was about uncertainty in the market and were continuing to stay very, very close to that to make sure that were doing a right things to keep representatives engaged. Certainly Brazil is a very important market for us, we continue to be very bullish for the long-term and we think that Beauty is going to be something that will continue to be an important category especially as we look at 2016 realistically we are just uncertain relative to the macro issues.

Javier Escalante

And the follow-up also has to do with Brazil. If you can comment on competitive issues. Natura is going into these stores, which is the departure from their traditional direct selling model. Is this a benefit or the determent to you, to that extent the facts that they are opening the stores is something that it's going to hurt them in terms of recruiting, because we are creating a channel conflict or vice versa it's having a competitive advantage vis-à-vis to you. So if you can explain the competitive dynamics in terms of how your largest competitor is changing their strategy and how that reflects up on your results. Thank you.

Sheri McCoy

Sure. Well certainly Brazil as I said very important large Beauty market, very competitive environment. I think what is important is to continue to build the brand in Brazil and as we look at it from an Avon standpoint the good news is we touched a broad based middle-class and we are able to build - we see this as our core execution and totally where we up scale. We also compete at the lower price gears and that's something we will continue to do.

As we look at it from a branding standpoint we are looking at how we can do things from a digital standpoint, we also are testing some things and we will continue to test that. I think it's really important in these markets to support the representatives, my point of view is that particularly in a volatile macro situation we need to be doing everything in support of her and that we will continue to do that. I can't really speak for the competitors, what their plans are there, we do know it’s a very competitive environment and we are very close watching all of our competitors in the market.

Operator

Your next question comes from Stephanie Wissink. Please state your affiliation, then pose your question.

Lauren Migliori Wolff

Hi. This is actually Lauren Wolff calling in for Stephanie Wissink from Piper Jaffray. Just a quick question for you. I would like to drill down deeper in key performing specifically in China. What is the recent assumption in the region of price mix, rep counts or floor conversion or broader market weakness and then how long do you expect pressure there to persist and what types of actions from a cost perspective do you anticipate take to minimize the impact?

Sheri McCoy

So our specific challenge in China has been our business model. We operate Beauty boutiques but we don’t have the more traditional Avon model and that’s been under pressure for some time now. As I said during Investor Day, we are looking at strategic partnerships or opportunities for China to figure out how we better serve the customer. We have a very strong brand, good products, a lot of good assets, but we haven't been able to crack the business model and so we are looking at different alternative to that business.

Operator

Your next question comes from Steve Powers. Please state your affiliation, then pose your question.

Steve Powers

Hi, it's UBS. So I know that you don’t want to give guidance for 2016 and I think that’s fully understandable giving all the moving parts, but just directionally you got the underlying improvement initiatives that you talked about on cost saving side, incremental pricing. But then clearly you have got FX challenges given where we are today. So should w think about Op margins being up or down materially versus the 5.7% that you showed pro forma in 2015 or roughly that 5% to 6% range right, for next year in terms of thinking about it? And then looking beyond that just your long-term objectives of basically the top line growth, double-digit margins, how much improvement in the underlying macro environment do you need to see to achieve that within your three year plan? Because I'm assuming you need some, that would be helpful. And then just as a cleanup accounting wise Jim, can you confirm or clarify how you will be accounting for the preferred once that service deal closure as it flows through EPS? Thanks.

James S. Scully

Okay, so when we hit by the first and say Steve, as much as I would like to give more clarity around margins next year. We have so much going on, it is an important year in the transformation. And our key focus at this point is really around closing the transaction, focusing on cost, realigning our expense base and all of those have significant impact on the overall margin structure like going forward. So I think for us right now, we've got accomplished some of those thing before we have visibility to come back and then give a better view to you. And I understand it’s difficult not to have better visibility.

As it relates to the micro environment, we are building our plans based upon the continuation of the forwards curves and where things are and we are pressure testing our models to make sure that we can withstand and improving get to through the hurdles that we outline in the targets, assuming that those forwards come to fruition. To get extent that they improve obviously that will benefit us to the extent that they - the spots go through the forwards, obviously will put pressure on us. But we are not expecting anything other than the forward rates in foreign currency and with the inflation estimates are for those markets. And then finally, for how we are going to come through the preferred, the coupon will be a reduction from income in order to calculate EPS and we can spend some time offline if you wanted to go through the puts and takes that that’s how it’s going to line up from a spending perspective.

Steve Powers

Okay thank you. Just given where the forward curves are and given where inflation rates are, I mean given on your earlier commentary Sheri, it's sounds like we should expect some material sequential acceleration in your constant currency price over the next couple of quarters as you catch up from where we are. Because I just look at the pricing you achieved in Latin America in the quarter and in the year versus where inflation is in those markets and in real terms, it doesn’t look like you grew. So is that fair read that we are going to see material sequential acceleration in price mix?

Sheri McCoy

Yes you will. I mean we are continuing to focus on that and all of the markets have plans in places that we are taking place. So you will see that.

Steve Powers

Okay. Great thank you very much.

Operator

And now, I would like to turn the conference call back over to management for closing remarks.

Sheri McCoy

Thank you. And I would like to thank all of you for joining the call.

Operator

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

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