Avon Products (AVP) Sheri McCoy on Q2 2016 Results - Earnings Call Transcript

| About: Avon Products, (AVP)

Avon Products, Inc. (NYSE:AVP)

Q2 2016 Earnings Call

August 02, 2016 9:30 am ET

Executives

Gina Grant - Director Corporate Finance, Pension & Investments at Avon Products, Avon Products, Inc.

Sheri McCoy - Chief Executive Officer & Director

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

Analysts

Stephanie Schiller Wissink - Piper Jaffray & Co. (Broker)

Lauren Rae Lieberman - Barclays Capital, Inc.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Bill Schmitz - Deutsche Bank Securities, Inc.

Stephen R. Powers - UBS Securities LLC

Linda Bolton Weiser - B. Riley & Co. LLC

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 Second Quarter 2016 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.

I'll now turn the conference over to Gina Grant, Capital Markets Treasurer. Ms. Grant, you may begin your conference.

Gina Grant - Director Corporate Finance, Pension & Investments at Avon Products, Avon Products, Inc.

Thank you, Holly. Good morning and thank you for joining us to review Avon's second quarter 2016 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 progress on our Transformation Plan. Jim will then take you through second quarter results. We will then have our usual Q&A session.

During our call today, we will reference certain non-GAAP financial measures which we believe to be useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. A reconciliation of these non-GAAP financial measures to their comparable GAAP measures is included in our earnings release located on the Investor Relations section of our website.

Our call will also contain forward-looking statements that concern our business and financial strategies including our Transformation Plan, cost actions and savings, as well as outlook, 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 will now hand the call over to Sheri.

Sheri McCoy - Chief Executive Officer & Director

Thank you, Gina. Good morning and welcome to Avon's second quarter 2016 earnings call. I will start by sharing my perspective on our second quarter, including top market and category performance. I'll follow with a brief update on progress against our Transformation Plan. I will then hand the call over to Jim who will provide details for the quarter by reportable segments and provide more specifics on the Transformation Plan, including the debt refinancing we announced yesterday. And, lastly, we will open the call to Q&A.

Our second quarter results came in slightly above our expectation, driven by operating performance that was better than anticipated. We also saw some modest easing and foreign currency pressure. Importantly, our performance improvements were broad-based with 9 of our top 10 markets growing in local currency. We also increased the rate of year-over-year improvement in several key metrics, including local currency sales growth, Active Representatives and operating margin.

I'm encouraged that we are making steady progress on a number of fronts, including pricing, driving additional cost side of the business and continuing to build the Avon brand and enhance the representative experience. The changes we've made to the operating model are settling in, giving us greater connectivity between corporate and the critical market.

In addition, the North American business, which is now run independently from Avon Products, is in good hands. While we recognize that it's still early in our transformation and much effort and work lies ahead, I remain confident Avon is on a path to sustainable, profitable growth.

I'll turn now to our results. As a reminder, in order to provide better insight and clarity on the underlying performance of the business, we now have four reportable business segments, the total of which I'll be referring to in my remarks.

Second quarter revenue was $1.4 billion, up 5% in constant currency. Active Representatives, which is a reflection of orders placed, was up 1%, in line with our expectations. Ending Representatives which reflects the number of representatives with the ability to place an order was up 2%. I continue to be encouraged by the trends we are seeing in Ending Representatives as this is the sixth consecutive quarter where we are seeing positive growth and our teams remain focused on driving improved activity.

Average order was up 4%, driven by a 7% increase in price mix. We're taking a disciplined approach to pricing, pricing translation, strategically pricing in key markets and driving price through innovation in mix.

For total Avon, not simply the reportable segments, adjusted operating margin increased 100 basis points on a year-over-year basis to 7.3% in spite of FX headwinds of approximately 350 basis points. This improvement was largely driven by pricing actions, favorable mix and early benefits of our cost savings program.

From a geographic perspective, when you look at our portfolio, many of our top markets have challenging and, in some cases, volatile economic, and political environments. I attribute Avon's ability to succeed in these markets to three factors. First, our business model is resilient. Even in a tough economic environment, women need an income to care for their families. So we continue to see strong interest in the Avon opportunity.

Second, our local market teams are experienced and executing well. This is the payoff for the work we began in 2014 on improving core processes of sales management and commercial marketing. And third, everyone is working with a very high level of focus and intensity.

Our top 10 markets are collectively outpacing the growth of the rest of the company, driven by momentum in both Ending and Active Representative trends. Also, the increase in average order is a positive sign as this reflects improved earnings for our representatives, consistent with our strategic intent of more women earning more.

From a segment perspective, we delivered good growth in constant currency in EMEA, South Latin America and North Latin America. Asia Pacific is not yet meeting our expectations despite strong performance in the Philippines.

Jim will speak to our reportable segment performance in detail but I thought it would be helpful to provide my perspective on our five largest markets: Brazil, Mexico, Russia, the Philippines and the UK. Let's start with Brazil. Revenue was up 2% in local currency, slightly above our expectations. This includes a 6 point negative impact from IPI and the VAT-like state taxes we've mentioned in the past.

I was in Brazil last month and was very encouraged by the progress the team is making. All in all, even with the political and economic issues that continue and competition for both representatives and consumers, we are executing very well and have been gaining market share.

We are growing average order based on pricing actions and mix with new innovative products and strong marketing, particularly behind our True Matte Lipstick and Anew Ultimate Supreme. The Brazil team is working hard to maintain the representative base and is experiencing a slight decline in Active Representatives while growing Ending Representatives. This is the result of strong and consistent recruiting programs and onboarding of new representatives.

The activity level of our representatives in Brazil continues to be a focus given the current depressed consumer spending. As you might expect in this environment, women tend to be purchasing less frequently. In order to drive consistent and higher activity levels, we have been strategic with our pricing actions, particularly on our high-unit movers, which drive activity. And in light of the economic environment, we continue taking a balanced, risk-based approach to bring in and onboard new representatives.

We have a strong team in Brazil, and I am confident in their ability to build on the underlying strength of the business and keep representatives engaged. During my recent visit, we reviewed detailed plans behind reinforcing our brand and supporting our high-quality competitive products through our Beauty for a Purpose positioning. And we reviewed programs that continue to enhance representative engagement and experience. Even with the negative impact of the taxes, we expect Brazil to grow in local currency in the second half and to be relatively flat for the year.

Mexico delivered a strong quarter with 7% revenue growth in local currency, driven by an increase in Active Representatives and solid average order growth. The team has strong merchandising and marketing programs behind their key launches in Color and Skin Care. Over the last several months, they have improved the field process with better onboarding and a stronger sales leadership program. The team has successfully executed these changes, and we're very pleased with the outcome, growth in both Active and Ending Representatives. We continue to expect Mexico to deliver solid performance for the year.

Turning to Russia. The team posted another strong quarter with 15% revenue growth in local currency, driven by an increase in Active Representatives as well as an increase in average order driven by pricing actions. Based on our momentum in Russia, we expect the Russia team to continue strong revenue growth in local currency for the full year, although we expect growth to moderate in the second half as we anniversary the strong comparables from the prior year.

The Philippines performed in line with our expectations and delivered 6% revenue growth in local currency. This was driven by strong average order offset by a decline in Active Representatives due to a campaign cycle change. Ending Representatives grew in the quarter and we expect the Philippines to deliver solid performance for the remainder of the year.

Finally, the UK. UK revenue was flat for the quarter in local currency. We did deliver strong growth in average order and this was offset by an anticipated decline in Active Representatives. The UK team is in the midst of making changes that are designed to strengthen the field in the area of sales leadership. Steady progress is being made on the journey which we expect will result is consistent and sustainable performance in the near future.

Let me now touch on our perspective on the UK's decision to withdraw from the European Union or Brexit. First, to frame Avon's exposure. Euros and British pound only account for about 10% of Avon's overall revenue. So our exposure is minimal. Jim will provide additional detail on this in his remarks.

Second, while it's too early to predict what, if any, significant long-term impact Brexit will have on our UK business. Most experts believe there will be some level of consumer anxiety potentially resulting in economic disruption. We have our eyes open and I'm confident that the UK team will be able to manage through the current environment. We continue to expect the UK to deliver flat to slightly positive revenue growth by yearend, recognizing that they will have some additional pressure from currency headwinds.

From a category perspective, let me first say that I'm both encouraged by our growth plans and very excited about our innovation pipeline both long term and for the remainder of the year. For the second quarter, we delivered constant dollar growth across all categories. Beauty was up 5% overall, we posted 5% growth in Fragrance, 6% growth in Color and 4% growth in Skincare.

Of note, in the second quarter, we saw continued strong performance from True Matte Lipstick and solid results from the launch of Anew Ultimate Supreme across a number of key markets, and Fashion & Home was 5% versus the prior year. All-in-all, good performance in the second quarter.

I'll now give you an update on a few key aspects of our Transformation Plan, where Cerberus continues to be a great partner. First, as it relates to driving out cost. We are on track to execute the full $70 million cost savings that we committed to for 2016. A significant portion of the savings is coming from the changes we're making to our operating model which, as I noted earlier, is going well.

We recently gathered our senior management team about 100 people from around the world in Lisbon. Our leaders are motivated and committed to deliver the plan and understand the importance of personal accountability. And as I said earlier, really working with a high degree of focus and intensity. And importantly, they are working together as a team and sharing best practices across markets.

Also, as it relates to cost savings, we've identified the actions necessary to address the stranded cost that resulted from the separation of North America of approximately $20 million.

Next, let me provide an update on the transition of the corporate headquarters from New York to the UK, which remains on track. By the first quarter of 2017, we plan to have the new headquarters operational in the UK and have our remaining U.S. based associates working from our facilities in Suffern and Rye, New York. As part of this move, I will be relocating my office to the UK in January. Some members of the executive team will be located in the UK, others, including Jim, will split time between the UK and New York.

Turning to financial resilience. We continue to make progress on strengthening our balance sheet. As you saw yesterday, we launched an important capital market transaction with the goal of resetting our capital structure in support of our long-term growth strategy. And Jim will speak to this in more detail.

Finally, on the important pillar of investing in growth. As we discussed at Investor Day in January, the initial focus of the Transformation Plan is on driving our cost and improving our financial resilience in order to fund the investment behind our key growth initiatives. The key areas targeted for investment remain, first, investing in the Avon brand. As we move through the second half of this year, we will be investing incrementally behind our brand in a couple of key markets to build on the momentum we've established in the second quarter.

Second, improving representative engagement through better onboarding, segmentation and execution of an improved service model. On all fronts, this work is progressing nicely. And third, our work on social selling, which is also on track.

We still have a lot of work ahead; however, I'm pleased with our Q2 results and the progress the team is making on the Transformation Plan. Based on where we are today, we expect to deliver improved year-on-year performance for the second half of 2016. And based on the strength of our trends, particularly in our tough markets, we remain on track to deliver 1% to 2% growth in Active Representatives.

I'll now hand it over to Jim to take you through a detailed review of the quarter. Jim?

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

Thank you, Sheri, and thanks again to all of you for joining the call today. As you heard from Sheri, our second quarter results were slightly better than our expectations, reflecting solid business performance driven by our business initiatives which are gaining traction and continued progress on key aspects of our Transformation Plan.

In addition, we began to experience some easing of currency in Q2 versus what we had originally expected. We believe our first half performance, along with the continued execution of our Transformation Plan, puts us on course to achieve long-term profitable growth in our long-term targets.

For today's call, I'm going to start with a review of our second quarter results. I will give you my top line observations for the quarter, as well as some brief commentary on each geographic segment. I will also provide an update on the progress of our Transformation Plan.

Before I begin, as a reminder, in the first quarter we announced several reporting and disclosure changes. A summary of these changes including the changes to segment reporting and the deconsolidation of Venezuela is included in the reporting and disclosure section of the Q2 press release.

We've also included a subtotal titled "Total from reportable segments," which we believe is a clear reflection of the ongoing business. As you saw yesterday, we launched a new secured bond issuance along with a tender offer. These financing transactions will reduce our leverage as previously committed, extend our maturity profile, and continue to strengthen our balance sheet.

Turning to our second quarter results. Please note, that my comments will primarily focus on adjusted results for the second quarter. GAAP results along with the reconciliation tables are included in our press release issued earlier today and posted on the Investor Relations section of our website.

Reported total revenue declined 8% due to the negative impact of foreign currency, but increased 4% in constant dollars, and excluding Liz Earle, our constant dollar revenue rose 5%. This will be the last quarter we call out the impact of the Liz Earle business given that with anniversaried its sale last month.

Total revenue from the reportable segments declined 7% to the negative impact of foreign currency, but was 5% in local currency.

Active Representatives within reportable segments improved 1% as growth in EMEA and North Latin America was partially offset by declines in Asia Pacific.

Average order grew by 4% in our reportable segments, and price mix rose 7% as we continue to benefit from disciplined pricing and product innovation.

Ending Representatives within reportable segments increased 2% driven by growth in EMEA and South Latin America partially offset by declines in Asia Pacific. Adjusted gross margin declined 70 basis points to 60.6% primarily due to a 290 basis point negative impact from foreign currency transaction cost and translation that we were able to largely offset through pricing and mix, as well as supply chain cost savings.

Adjusted operating profit was $105 million, an increase of $6 million or 6%. In addition, adjusted operating margin improved 100 basis points to 7.3% primarily driven by the favorable impact of price and mix, as well as continued benefits from cost saving initiatives partially offset by 350 basis points from the negative impact of foreign currency both transaction cost and translation.

Moving to tax, the effective tax rate from continuing operations was 50% in the quarter, and in an adjusted basis was 54%. As I mentioned in previous quarters, there is a component of our income tax expense that is somewhat fixed due to withholding taxes and the repatriation of cash back to the United States. In the last few quarters, this, along with our inability to recognize benefits and losses in certain jurisdictions, including the U.S., has caused us to have an unusually high effective tax rate. As our profitability has increased in this quarter relative to recent quarters, the effective tax rate has moved towards a more reasonable rate.

Adjusted EPS was $0.07 per diluted share compared with $0.09 of adjusted earnings per diluted share a year ago. Currency had a significant negative impact on the year-over-year comparison of adjusted EPS of approximately $0.10 per share. In addition, earnings allocated to convertible preferred stock had a negative $0.01 per share impact.

I will now provide more details on the results by reportable segment starting with EMEA. Reported revenue declined 2% while constant dollar revenue rose 7%. EMEA growth in constant currency reflected increases in Active Representatives as the underlying fundamentals remained strong. The average order also increased and contributed to growth. Ending Representatives increased, driven primarily by growth in Russia and South Africa, partially offset by a decline in the UK.

The EMEA segment margin was 16%, up 220 basis points. The results benefited from supply chain cost savings, revenue leverage and pricing actions primarily driven by Russia. These benefits more than offset the negative impact of foreign currency transaction costs of approximately 200 basis points.

In Russia, local currency revenue rose 15%, driven by growth in Active Representatives, which continued to benefit from sustained momentum in recruiting and retention, and by higher average order and the benefits of pricing. Local currency revenue in the UK was relatively unchanged with a decrease in Active Representatives offset by higher average order.

In South Africa, local currency revenue grew 27%, once again driven by increases in both Active Representatives and average order. This is the seventh consecutive quarter that Active Representatives and average order have both grown, demonstrating the sustainability of revenue growth in this market.

Moving to South Latin America. Reported revenue declined 12%, while in constant dollars, revenue increased 5%. Constant dollar growth was adversely impacted by an estimated 2 points due to additional state taxes implemented in late 2015 known as MVA, and approximately 1 point due to the Brazilian IPI tax. The MVA taxes went into effect in Q4 2015 so we will see this impact through the third quarter.

We anniversary the IPI tax in May, so the Q2 comparison to prior year only includes a one-month impact. Constant dollar revenue benefited from higher average order, including a benefit from Argentina where results were impacted by the inflationary impact on pricing. Active Representatives for this segment were essentially flat to prior year.

Ending Representatives increased primarily driven by Brazil, and the South Latin America segment margin was 11.4%, flat to a year ago. The favorable impact of pricing, revenue leverage and lower supply chain costs were primarily offset by an estimated 400 basis point negative impact from foreign currency transaction costs.

Turning to Brazil. Local currency revenue increased 2%. MVA taxes negatively impacted local currency growth by an estimated 4 points. In addition, the IPI tax negatively impacted local currency revenue growth by approximately 2 points.

As noted earlier, we anniversary the IPI tax in May, so the Q2 comparison to prior year only includes a one-month impact. Revenue growth was driven by higher average order, which was partially offset by a slight decline in Active Representatives. Of note, the trend in Ending Representatives is positive.

Moving to North Latin America. Reported revenue declined 5% while constant dollar revenue grew 6%. This growth was driven by an increase in Active Representatives and higher average order. Ending Representatives were flat to the prior year. In North Latin America, segment margin was 14.3%, up 90 basis points, driven by improved gross margin which benefited from favorable impact of pricing and mix and lower supply chain costs, partially offset by a 150-basis-point negative impact from foreign currency transaction costs.

In Mexico, revenue grew 7% in local currency, driven by higher average order which benefited primarily from pricing as well as an increase in Active Representatives. Active Representatives increased as a result of a new onboarding program and strong recruitment campaigns.

Moving to Asia Pacific. As expected, reported revenue and constant dollar revenue declined in the Asia Pacific region. While the geography is small for us today, we continue to believe we have strong potential in the region and are focused on developing the right strategy to position Avon for growth in this important region. Specifically, reported revenue declined 10% while constant dollar revenue was down 5% as growth in the Philippines was not enough to offset declines in other markets. The segment's Active Representatives declined 8%, partially offset by higher average order. Ending Representatives decreased, driven by declines in most markets partially offset by growth in the Philippines.

In the Philippines, local currency revenue increased 6% and was positively impacted by the timing of the Easter holiday. Higher average order was partially offset by a decline in Active Representatives that reflected a decrease in the number of sales campaigns in the quarter.

The Asia Pacific segment margin was 10.4%, flat to last year. Lower supply chain costs and lower fixed expenses were offset primarily by unfavorable price mix, revenue deleverage, and by the 60 basis points negative impact from foreign currency transaction costs.

Moving on to cash flow. Operating activities from continuing operations during the first six months of 2016 used $130 million compared with $107 million during the first six months of 2015. The year-over-year comparison benefited as last year's results included a $67 million payment to the SEC in connection with the FCPA settlement that did not recur this year. Cash flow used by operating activities increased primarily due to lower cash-related earnings which were negatively impacted by foreign currency and a contribution to the pension plan for corporate U.S. based associates.

In the second quarter, working capital improved three days operationally compared with the year ago. Accounts payable improved six days operationally as we continue to benefit from our focus on renegotiating payment terms with our vendors. However, inventories was two days worse operationally, primarily driven by actions to protect service levels in North Latin America, as well as additional purchases to support growth in EMEA.

Now, turning to the financial and operational aspects of our Transformation Plan. We continue to make progress on our Transformation Plan. As outlined during Investor Day, the Transformation Plan was designed to generate cost savings beginning in 2016 in order to fund investments through growth in media, social selling and IT initiatives. As a reminder, we have targeted cost reductions of $350 million, $150 million related to changes in our operating model and $200 million in savings related to our sourcing and supply chain.

The operating model savings are driven by eliminating redundant regional layers, further reducing the corporate center shifting cost out of the U.S., and establishing partnerships to lower and variabilize costs. Within supply chain, our goal is to reduce overall cost by $200 million by focusing and optimizing our sourcing spend and rationalizing our manufacturing and distribution networks.

We've made solid progress on our cost savings initiatives and remain focused on significantly reducing and aligning our cost structure. As Sheri mentioned, we are on track to realize the full $70 million of savings that we committed to in 2016. In addition, we have identified the actions necessary to address the stranded cost of approximately $20 million that resulted from the separation of our North America business. Through the first half of 2016, we have already realized a meaningful amount of savings related to both the operating model and sourcing initiatives.

As it relates to financial resilience, as I mentioned earlier, yesterday we launched a new $400 million secured bond issuance along with $650 million tender offer for a net reduction of debt of $250 million. We anticipate an August closing and we'll keep you posted.

We will continue to focus on executing key priorities previously shared with you. As a reminder, our 2016 priorities are: Continue to drive improved overall performance in our top 10 markets, which you have seen this quarter; deliver 1% to 2% Active Representative growth in reportable segments as well as continue to improve the Ending Representative trend and we are on track; Invest in the brand with Avon's Beauty for a Purpose positioning, and this has been fully integrated into the market's plans at a local level; enhance pricing discipline within our top 10 markets. We saw the effects of pricing flow through this quarter in average order; communicate a resolution for our China business. As we said last quarter, we continue on the path to build the business in China while evaluating strategic alternatives; evolve our service model, this is on track; transition our IT infrastructure to HPE for all Avon markets, this also is on track; and Complete the sale and separation of our North American business, which closed on March 1; deliver $70 million in cost savings in 2016. As I mentioned, all this has been identified; and lastly, continue to improve our balance sheet, including the repayment of $250 million of debt, improved working capital and lay out tax planning strategy and evaluate opportunities to hedge currency exposure.

Related to our tax plan strategy and opportunities to hedge currency exposure, we have a number of significant initiatives underway, including the changes to our operating model and transition of our headquarters to the UK by year-end that position us to advance these two goals.

As it relates to the operating model, these changes include not only reduction, but also relocation of some key functions into key markets. An example would be finance where we are transitioning some roles to the UK, Warsaw and Buenos Aires. These moves not only levers key talent in those markets, but also align our cost base to our revenue base which helps to mitigate some FX. We anticipate that this will be beneficial from a tax standpoint, and we will have less need to repatriate U.S. dollars.

As it relates to Brexit, the UK team is working to assess what impact, if any, there will be on the UK operations. Avon operates in many markets around the world with diverse political and economic systems, and our business model is able to adapt to local circumstances.

Although EMEA makes up 35% to 40% of our business, it is important to note that this region includes large markets such as Russia, Turkey, South Africa and Poland. So, only 30% of our EMEA business has pound or euro exposure. Therefore, when you look at our total worldwide business, approximately 10% have exposure to these currencies. In addition, a 1% movement in our top 10 currencies has an approximate $10 million impact on EBITDA. In , (32:38) our basket of currencies is relatively flat post-Brexit even with the depreciation of the pound largely due to the strengthening of the real.

As we look forward, we expect to make additional progress while continuing to direct our resources to grow Active Representatives, drive our top line and improve operating profit. We continue to expect solid year-over-year growth in revenue and operating profit in the second half as a result of leverage, pricing actions and benefits from expense initiatives.

As a reminder, Q3 tends to have a lower operating margin than Q2, given the rhythm of the business. We expect this to be the case this year with investments, including incremental advertising Sheri mentioned to support our important fourth quarter season.

In addition, we have updated our expectation for free cash flow levels from flat to an increase in the range of $50 million to $75 million as a result of performance above expectations, a favorable outcome received in May related to the injunction on cash deposits for IPI taxes and easing of foreign currency. Above all, we remain committed to driving high quality, sustainable earnings growth which we expect to deliver through executing our Transformation Plan.

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 Instruction] Your first question comes from Steph Wissink. Please state your affiliation, then pose your question.

Stephanie Schiller Wissink - Piper Jaffray & Co. (Broker)

Hi. Good morning, Piper Jaffray. Jim, just a really quick clarification question for you on the $400 million debt line. Can you just give us some insight into the covenants that you're looking at in that tranche versus the prior and any changes in the bank-adjusted add backs that we should be thinking about to EBITDA?

And then, Sheri, a question for you. You talked through the category performance pretty quickly, and I think, I caught most of it. All categories were positive in the quarter led by Color. Can you just talk about the innovation that you've realized year-to-date in some of your product initiatives versus what's still on deck for the back half of the year? Thank you.

Sheri McCoy - Chief Executive Officer & Director

Okay. Maybe I'll start with the innovation piece of it. Color was the lead. We grew 6% in the quarter. One of the great products that we have is called True Matte Lipstick. It's very competitive with department store brands and we've had some really strong claims and markets like the UK. We've also been investing in advertising in places like Mexico and Brazil. And so, that's one of the key components to driving Color. We also have some really strong new mascara products.

The other thing I would add is in Skin Care, we've been very focused on expanding our Anew line with our Anew Ultimate Supreme, again, very strong claims across the board. So, we're quite pleased with our overall innovation performance. And as I said, as we look at the long term, we have a lot of things coming in the second half and into 2017 and 2018, and we're very excited about the portfolio.

With that, I will turn to Jim to answer your first question.

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

So, just to make sure I understand your question, I think you were asking about the difference in the covenant package related to the $400 million bond yield that we announced last night relative to the revolving credit facility. So, if that is the question, the distinction is that the deal that we announced last night is a high-yield bond offering that will have a six-year maturity, and it will have a covenant package that is commensurate with high-yield offering. The bank deal has covenants which are related to a senior secured bank deal. They will be different covenant packages. I would point you to – there's going to be a description of the notes in the offering memorandum that has an outline of the covenant package and the calculation. And I would point you that that was released either last night or this morning.

Stephanie Schiller Wissink - Piper Jaffray & Co. (Broker)

Okay. Thank you.

Operator

Your next question comes from Lauren Lieberman. Please state your affiliation then pose your question.

Lauren Rae Lieberman - Barclays Capital, Inc.

Great. Thanks. It's Barclays. First thing is I just needed to clarify, the $20 million of identified savings related to stranded overhead. I didn't know if that was new or just with newer that identified? So that was one piece of it.

Then, the second thing was around, again, actually innovation. So, in Skin Care, I think it's at Skin Care, Sheri, was up 4% or 5%, maybe 4%. But even 4% would strike me as, perhaps that was market share growth globally. So love your perspective on that. And then, a reminder how R&D and innovation is happening, being shared and funded, I guess, with the North America business. I wasn't actually sure how that was happening going forward? Thanks.

Sheri McCoy - Chief Executive Officer & Director

Sure, Lauren. So, as it relates to your first question about the stranded cost for North America, we did identify that at Investor Day that we would have some additional stranded cost. I'm not sure we actually gave a specific number at that point. I believe we gave it in Q1. So, it's about $20 million. We've identified how we will absorb that. Most of that is coming through sourcing. So, we're well in the track. So that's the $20 million in addition to the $70 million that we committed to for the year. So, the total that we are focused on is the $90 million.

As it relates to innovation, we are very pleased with our performance in Skin Care. The organization is very dedicated to executing against that and focused on claims. We're using our Beauty for a Purpose positioning to reinforce the Skin Care benefit. Overall, we don't have total market share for the company. What we do look at is our top 10 markets where we purchase Nielsen Household Panel data. And what I will say is that as we look at it for Color, Skin Care and Fragrance, we do see improvement in our share overall, particularly in markets like Brazil, South Africa, et cetera. So, we're very pleased with our performance. This is something that we will continue to track longer term.

As it relates to the innovation piece relative to North America, we have a service agreement with them that we have for the next 24 to 36 months where they have an opportunity to source our innovations and pay us a fee. Obviously, they also have the opportunity to look at things that they may want to bring in, and we have the opportunity to share that across both groups. So, we work very closely with them, but we are supporting them for some of their innovations for North America.

Lauren Rae Lieberman - Barclays Capital, Inc.

Thanks so much.

Operator

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

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Hey, guys. From Bernstein. So, two questions. One is, we've been hearing a lot from your competitors about pretty heavy competitive investments, particularly by you guys, in Latin America. Can you kind of characterize those and how do you think about lapping those as you go forward? And some of them are saying they're going to start to react quite aggressively to them. So, want to get a sense of how you're thinking about that going forward.

In that context as well, in Latin America, I know Natura in particular is opening up their own stores. I want to understand how that figures into that competitive math as well. I have a follow-up. Thanks.

Sheri McCoy - Chief Executive Officer & Director

Yeah. We continue to ensure that we are investing behind our product innovation. As I said, in Mexico and Brazil this quarter, we are focused on that. And as I said in my prepared remarks, we intend to invest in second half, particularly behind some of new product innovations. We're very pleased with the outcome that we see there and we're gaining share in Brazil relative to our competitors.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

And sorry, so a couple. One is just around the stores that you can add there. And I do want to follow up their own retail stores and whether you think you have to go in that direction. I do want to follow up just on that point because, look, 5% organic sales growth, very much in line with what your long-term target was, but all of it, again, price. All of it, again, or a lot of it driven by inflationary places: Russia, Brazil, Argentina clearly. And Latin America in particular, given that you're going to invest more, given that it sound like the competitors are going to invest even more, how do you think you hold on to the ability to push pricing the way you have now?

And if you don't, are you going to get enough of an offset from volume actually picking up. So again, you go back to the store piece that they are building, and we have to do that, and then this kind of dynamic of price versus volume in a, sounds like, even more competitive environment going forward? Thanks.

Sheri McCoy - Chief Executive Officer & Director

Sure. Let me take the last question first. As it relates to the overall performance of the company, the way we look at it is we take the 5% constant dollar revenue growth. It's important for us to make sure that we're always growing Active Representatives and that's why we have said it's going to be 1% to 2% and we're assuming average order in the range of 3%.

Pricing is important, but pricing, we need to look at that from a balanced perspective to make sure we have the right value equation both for our representatives and our consumers. We are seeing some benefit of pricing with inflation but I will also add that we're taking strategic pricing in markets like Mexico, Brazil.

We did see some decline in units this quarter. If you look at it and you get underneath it, a lot of that was driven disproportionately by Fashion & Home. We were focused on ensuring that we price to maintain margin. And we're seeing a little bit of impact in Beauty in some areas where we are taking strategic pricing. This will moderate over time but it's important for us to do that, particularly as we build the brand and invest behind the brand.

So, as we look at it, we feel very good about what we're seeing. It's critically important. All of our teams are focused on their Active Representative growth piece. Looking at average order goes through making sure we're pricing with inflation, but more importantly looking at strategic pricing and innovation to allow us to continue to do that. And it's important that we invest behind our strong innovation.

As it relates specifically to your first question about the stores of Natura, we are obviously monitoring those. We think it's critically important in the environment that we're in to support our representatives. We have been very much investing behind them, helping them build their business, making sure we're giving them the tools to reach out to consumers. And we have a group of about 1.6 million representatives in Brazil that are very, very active. We have a higher end product line, Korres, that we are testing at retail, but it's a very different proposition, and we'll continue to learn from that. But it's important to us to make sure that our representatives know that we are supporting them during this difficult economic and political environment. Thank you, Ali.

Operator

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

Bill Schmitz - Deutsche Bank Securities, Inc.

Hi. It's Deutsche Bank. Good morning, guys. Hey, can you just tell us how far along you think we are on the pricing journey? Because if my math is right, you have $6 billion of sales and that's, I think, 2.7 billion units. So it sounds like the average price per unit is like $2.22. So, I guess the question is, is that the right number? And if that is, do you have like a target to see where that can go? Because if it is $2.22, my guess is that the price opportunity, the mix opportunity, is up into the right.

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

So, Bill, It's Jim. I would say that I think we feel like we're early in the pricing game. I think, as Sheri said, I think the important thing that we're focused on is the discipline, not only in pricing to inflation but also the strategic pricing. We have key positions in key markets and we're also making sure we get paid for innovation and pricing innovation.

So, I think those three areas, I think there's a level of discipline and rigor. And I think people have mentioned that we're managing that as well as we go through that. It's just isn't pushing price, it's about making sure we get paid for the product and it's the balance with the unit and making sure that we maintain Active Representatives. So, it's a fine – we looked at thread but I think we found the rhythm and I think we will continue to as we go forward.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. If that math's right, It's about for $2.22 a unit. I pulled it right out of your presentation deck. I don't know if there's some anomaly in the 2.7 billion units, but it seems like $2.22 is a pretty darn low number.

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

Yeah. I'm not sure what you're pointing to, but it doesn't surprise me if it's – it will be close to that but we can look at where you're pulling and confirm that.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. All right. And just a follow up on the tax and the currency stuff. What percentage of your sales are sourced from Suffern now? And can that change over time? And is there anything else that you can do to sort of mitigate that inherent cross currency pressure you have from a manufacturing in perspective? And then, any help you can give us on trying to model like the fixed nut of the cash taxes? And then, how should we think about the incremental tax rate beyond that fixed nut?

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

Wow. So, in terms of sourcing R&D, Bill, is in Suffern. So, we don't source out of Suffern. So, we source out of nine manufacturing plants globally, 80% of the Beauty business. So, we do see an opportunity in the transaction side to help manage a little bit in some markets like EMEA, and as we move forward and look at headquarters to the UK and look how we structure that business we have some opportunity to manage of the transaction exposure. But it's primarily related to EMEA, the transaction exposure, and also Brazil for Fashion & Home purchases in U.S. dollars.

As it relates to this, the cash tax piece what we've said is historically if you look at the provision, that was a good indicator of what we've thought the going forward provision would be. I'd say if you were to look at that number, I would say about 25% of it historically was related to the fixed component related to withholdings for the repatriating U.S. cash.

And if you think about going forward, I think I mentioned in my comments that we're more normalized at 50%, obviously, to the extent that earnings increased and get to leverage that fixed portion, we'll see a more normalized rate. I think that's something that we would update for 2017 through the remainder of this year. I think, we would tell people that it will probably be consistent with Q2.

Operator

And your next question will come from the line of Steven Powers. Please state your affiliation, then pose your question.

Stephen R. Powers - UBS Securities LLC

Great. It's UBS. So, focusing on your top 10 markets, of the 9 that's local currency growth, can you talk about what portion might have grown volumes or growing unit volumes in the quarter? And then, thinking through that progressing over time, do you expect unit volumes to improve sequentially from here, both in the top 10 markets as well as the across the total company?

Sheri McCoy - Chief Executive Officer & Director

We don't actually break out units. What I will say is that, 9 of the top 10 did grow average order. As we look at the unit component, again, I want to emphasize, a lot it was disproportionate in Fashion & Home, which again, it's important for us to make sure that we are, at least, maintaining our margin and we're sourcing that in U.S. dollar. So, we did take price in that area. And then, in the area where I would say, Latin America where you can see, we did see a more significant impact on unit, we did take significant pricing, both strategic and inflationary. We expect this to moderate over time, but we thought we needed to do that from a brand perspective. And there are couple of codes that we're going to go back and revisit over time to make sure that we may want to moderate pricing in a couple of areas. But as we look at it, we're making sure we get that balance right. It is about ensuring that we have the right value equation for both representatives and consumers and at the same time, deliver on our profit goals.

Stephen R. Powers - UBS Securities LLC

Okay. Okay. Fair enough. Is there any color you could offer about where you are in terms of implementing some of the planned technology improvements that you've spoken about again in those top 10 markets, specifically related to order management and other customer representative-phasing solutions? Thanks.

Sheri McCoy - Chief Executive Officer & Director

Sure. So as I said on my prepared remarks, we are on track relative to our service model evolution. There are two components to that. One is the back order, the back office type order management systems we're making progress in a number of our key markets, more investment to come over time. And we've made a lot of progress on the front end, which is really offering a suite of digital tools for our representatives and consumers. We have significant work underway in Brazil, as we speak, for the second half of this year and we'll update you as we go. But it is about a two to three year journey as we do all of the markets. We're taking a staged approach, which is important, to ensure that we are bringing our representatives along with us and we feel good about where we are.

Stephen R. Powers - UBS Securities LLC

Thank you.

Operator

Thanks. Your next question comes from Linda Bolton Weiser. Please state your affiliation, then pose your question.

Linda Bolton Weiser - B. Riley & Co. LLC

Hi. B. Riley. So from your Analyst Day presentation, it seems that your cost savings initiatives would be mostly reinvested back into the business with your different initiatives including the IT and improving the e-commerce and social media and all that. But in today's comments, you seem to indicate that the cost savings were an offset to the negative FX impacts. So are you this year expecting to actually see a good amount of the cost savings fall to the bottom line or, again, is it reinvestment or can you just comment on that? Thank you.

James S. Scully - Executive Vice President, Chief Operating Officer & Chief Financial Officer

Sure. As we outlined at Investor Day, we kind of outlined the timeline with the three pillars which was to drive out costs, financial resilience, and also invest in growth. And what we said was the focus for 2016 would be focused on the cost reduction. And I think, we will see that flow through to the bottom line more in the back half, obviously, as actions taken in the front half come through in the back half.

And then, what we indicated was, we would be – after we were successful in driving our cost, we would invest in growth, really starting in the back half of this year into 2017 in order to drive sustainable growth for 2017 and 2018.

Linda Bolton Weiser - B. Riley & Co. LLC

Thank you. And then, can I just ask on Brazil? So, it sounds like starting in the fourth quarter, you'll sort of anniversary these negative IPI and MVA tax impacts fully. How do you think about future actions by the government there to impose taxes and how do you think about your business planning when you have that question mark? So, do you expect there to be more taxes imposed or is that it? Once we get to the fourth quarter, and then, you have this easier comparisons or how do you think about that?

Sheri McCoy - Chief Executive Officer & Director

Yeah. Good question. We'd like to believe that there are no more taxes coming. I would say on the state level, we see taxes from most states. So, there's probably one or two left that we haven't. So, I think we feel pretty confident about where we are. As we look at the planning process, we take a very conservative approach relative to where we think currency is going to land, et cetera because it's important to make sure that we are doing the right things to drive our business, but ensuring that we are also delivering on the profit margins.

So, the team is very focused on that. The good news is we have local people working with the industry, understanding what's happening in the market and working with regulations. I think the team has been – and I would say this generally across many of our markets, the teams that live in this local markets are very familiar with what happens, they are very resilient. And they continue to make sure they're planning for a rainy day. And still with the optimism to continue to drive the business. So, I'm very proud of the work that our teams do around the world.

Operator

And our final question today comes from the line of (53:36). Please state your affiliation and pose your question.

Unknown Speaker

(53:41-53:55)

Operator

And that question has been withdrawn. I'll turn the conference call over to management for their closing comments.

Sheri McCoy - Chief Executive Officer & Director

Thank you very much. I appreciate you joining us today.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!