Good morning. My name is Holly, and I will be your conference operator. At this time, I would like to welcome everyone to Avon's First Quarter 2012 Earnings Conference Call. [Operator Instructions] I'll now turn the conference over to Amy Chasen, Group Vice President, Investor Relations. Ms. Chasen, you may begin your conference.
Amy Low Chasen
Thank you. Good morning, and thank you for joining us to review our first quarter results. I know you'll join me in welcoming our new CEO, Sheri McCoy, to the call. Also with me today is our Executive Vice President and CFO, Kimberly Ross. Sheri will make some opening remarks and then we'll hand the call over to Kimberly. And as always, we'll be happy to answer your questions in the Q&A session later.
With that, I refer you to the cautionary statement in today's earnings release, as well as to our non-GAAP reconciliation, which is available on the Investor Relations section of our website. As usual on the call, we'll focus on these adjusted non-GAAP financial measures.
I'll now hand the call over to Sheri.
Sherilyn S. McCoy
Thank you, Amy. Good morning, and thank you for joining us. First, let me say that I am thrilled to be here. Avon is an iconic company with a rich legacy, a unique business model and a powerful global brand. Most of all, Avon has passionate people who are committed to making a difference by empowering women across the world. I've been here for all of 7 days, so it will be premature to make any declarations about our specific path forward. But as I begin this new role, I am both realistic and confident about our opportunities.
Avon has a strong foundation, incredibly strong brand awareness. Over 6 million Active Representatives are a tremendous asset to give us both global reach and the closest possible connection with our customers. Our employees are mission-focused. They care about what they do and about empowering women's ability to earn and build their businesses. We are a formidable competitor and a global leader in direct selling. We have great strength in emerging markets where millions of new consumers are rapidly joining the middle class. Our products offer great quality at a good value.
Yet as you well know, Avon also faces significant challenges. It has lost market share and missed expectations. It has had problems executing. It has faced operational and strategic issues. The rate of growth has declined, and cost structure and cash generation need to be improved. And externally, the world is changing. We face new competitors in both mature and emerging markets. Consumer expectations are changing and people are shopping in different ways. Product life cycles are shorter, and we need to keep our representatives motivated and well compensated at a time when they, too, have more choices than ever before.
I am taking a fresh look at every aspect of the business. And stabilizing the business is my first and most urgent objective. During these early days, most of my focus will be internal, as I work to assess the skills and capabilities of the organization, and make sure we have what we need to take us into a future of consistent and sustained growth.
Between now and mid-June, I will visit some of our key markets, including U.S., Brazil, China, Mexico and Russia, to assess the strengths and weaknesses of our business and to meet with regional leadership, our management teams and our representatives. I'll be assessing the landscape of competitors, commodity cost issues, changing demographics and technologies that give customers and representatives more choices. I will review our product portfolio, as well as the representative earning opportunity and our customer connectivity.
I will also be reviewing the operating model. This will include an emphasis on short-term business performance including financial metrics, as well as operational issues both globally and in priority markets. A lot of good diagnostic work has already been done in these areas. I've begun to review this analysis and will build on it with my own observations.
In my experience, turning around the business requires clear priorities, realistic expectations and strict accountability. My approach is disciplined. I will understand and realistically frame the situation, develop a shortlist of 5 or 6 key priorities on which we're going to focus, put in place clear metrics and accountability, be clear about expectations and deliverables and importantly, get the organization working together toward achieving these priorities. Our people need to be focused and motivated. And for our investors, we need to be very clear about our priorities and then hit our targets. This is the only way to build confidence and trust going forward.
I will lead with the highest of standards. I will expect the best from myself and from all of our people. We will always ask, are we solving the problem? Are we setting our standards high enough? Are we making our company better? Are we asking the questions that challenge the status quo and allow for new thinking? I am confident that Avon's future can be as meaningful and successful as its past, and I'm honored to be the CEO. I look forward to meeting and working with all of you. And I also want to take this opportunity in closing, to thank Andrea for the great support she is giving me during this transition. She has been an invaluable resource, and I appreciate her commitment to the company and to me. And now, I'll hand over the call to Kimberly Ross, Chief Financial Officer of Avon.
Kimberly A. Ross
Thank you, Sheri. Good morning. I want to start by saying how excited we all are to have Sheri on board at this crucial time for the company. Before I begin my review of the first quarter, I'd like to offer a qualitative perspective on the business. The numbers this quarter are tough and worse than we anticipated, particularly in regards to operating margin. The business remains under pressure. In fact, we are likely to see revenue deceleration and continued margin pressure in the second quarter. In particular, Brazil and the U.S. are likely to weaken, and we plan to maintain high levels of investment.
I knew when I joined Avon that addressing the company's strategic and tactical challenges would take time, and that's what we're seeing. As we said on our last call, 2012 is a year of transition. The whole team is working with urgency and focus to address the issues at hand. I'll speak more specifically about the actions we're taking in a moment.
Let me just say, I'm confident that our challenges are fixable. With that perspective, let me talk in more depth about the first quarter numbers. The 1% constant dollar increase in revenue reflects a price mix increase of 2%, offset by a 1% decline in units. Active Representatives were down 2%. Driven by growth in all 4 Beauty categories, constant dollar Beauty growth of 2% was partially offset by a decline in Fashion & Home.
Gross margin was down 310 basis points, impacted by commodity cost and wage inflation that was not fully offset with pricing. Foreign exchange and product mix were also factors. Adjusted operating margin was down 610 basis points to 3.8% in the quarter. As we expected, we had higher investments in RVP this quarter, as we continued the transition to One Simple Sales Model in the U.S., and we increased investment in Representative engagement in Brazil. We also had higher compensation cost, primarily due to the release of an accrual in Q1 2011 that did not repeat this year.
In terms of key areas that we -- were worse than we expected, we had higher bad debt provisions in South Africa, and product mix was more negative. We also had a $27 million in cost associated with restructuring in the quarter. I'll come back to this point a bit later.
Moving to the performance of our markets in quarter 1. Latin America. Sales rose 5% in constant dollars, driven by continued strength in Mexico and Venezuela, partially offset by a decline in Colombia, which continues to face competitive pressure. While Argentina continued to grow, it slowed as import restrictions on raw materials and finished goods started to have an impact on sales. We are switching to local sourcing where possible, but we will likely continue to be impacted for a period of time. Our largest market, Brazil, was up 2% in constant dollars, driven by a 6% growth in Beauty, which was partially offset by a double-digit decline in Fashion & Home.
In Brazil, our new General Manager and his team have been focused on understanding the drivers of recent performance and identifying the required steps to win competitively, while delivering profitable growth. I will provide you 3 examples.
First, while system implementation issues have stabilized and service has improved sequentially, it remains at lower levels than a year ago. We need to reduce complexity to drive simplification and continue to improve perceived and actual service in the broadest sense, including, but not limited to billing issues, shorts and late deliveries. These issues continue to impact Representative satisfaction and cost.
Second, competition continues to increase, and it is pressuring Avon's result and brand positioning. While Avon's brand equity remains strong, we need to improve local consumer relevance through more Brazilian-centric product offerings and advertising campaigns. We are also looking at our Beauty product positioning across price tiers and categories.
Third, price increases had negatively impacted unit volumes and Representative earnings in Fashion & Home. We are recalibrating pricing to be more competitive. The team in Brazil is working on the actions to address these issues, but they are not quick fixes. As a result, we expect sales to decline in quarter 2. In addition, we had pre-sales of approximately 4% ahead of the ERP implementation in the second quarter of last year.
Operating margin in Latin America was down due to weaker gross margin, which was impacted by commodity cost pressure, overhead and foreign exchange. Operating margin was further impacted by the planned increase in RVP to enhance Representative engagement in Brazil. Increased competition in Colombia and the importing restrictions were also factors, all of which are likely to remain factors in the second quarter.
North America sales were down 4%. The U.S. core business, excluding Silpada, was down 2%, as benefits from product portfolio enhancements of Smart Value and giftables were offset by a decline in Active Representatives. This was a result of the planned redistricting in our Western region. The redistricting is proceeding and we are seeing positive signs amongst the leadership ranks and top sellers. The most encouraging sign is that leadership up-line is now responsible for nearly all of our appointments, consistent with our strategy. We are also introducing healthy growth amongst our top sellers. Growth in Honor Society and above was 31% in the last cycle, and growth in President's Club was 13%.
These early signs give us the confidence that this remains the right strategy over time. But as can be expected with such a large change, there has been some impact on activity, particularly among lower-tier representatives. We are addressing this with outreach programs, communication and rep engagement initiatives. Nonetheless, we expect quarter 2 to be impacted, both by the residual effect of the rollout in the West and by the likely disruption from the rollout we are currently undertaking in the East. As a result, quarter 2 sales could be worse than quarter 1.
Given the learnings from the first quarter, the U.S. teams have plans in place to mitigate the disruption. These include stronger and earlier communication with the representatives and district managers; the hosting of recognition events for top-selling representatives in May and in June; and the launching of the summer version of our Home for the Holidays program that was so successful around the Christmas season.
In sum, our associates have put in endless hours working on this transition and we are pleased with the progress thus far. We are moving forward with the implementation of our U.S. strategy. And while painful in the short term, the early changes in our representatives' action give us the confidence that these are the right changes to stabilize the business.
The operating margin in North America was due to lower gross margin, which was impacted by a negative mix, commodity costs and transportation. In addition, as we indicated on the last call, we made investments in RVP in support of the One Simple Sales Model initiative. And we expect these investments to continue into the second quarter.
CEE. Sales were essentially flat, as sales in Russia were up 1% in constant dollars due to an increase in Active Representative. The region remains challenging, but we are encouraged by the forward progress we made in the first quarter. Operating margin in CEE was down largely due to lower gross margin stemming from commodity cost pressures, as well as investments in the brochure.
Constant dollar sales in EMEA were up 1%. Developed markets continued to be affected by the macroeconomic environment, which has negative impacts on Fashion & Home sales. Operating margin was down due to higher bad debt provisions in South Africa and foreign exchange.
Asia-Pacific. Constant dollar sales were down 4%. We are making steady progress in the Philippines, but the region was negatively impacted by weakness in China. In China, our transition to a direct-selling model is facing greater-than-expected challenges. Defining Avon China's long-term strategy will be a critical priority. Operating margin in Asia-Pacific was down due to lower volume leverage and higher bad debt expense.
Moving to cash flow. Operating activities used $33 million of cash during the first quarter compared with a use of $32 million in the first quarter of 2011, which included a pension contribution and a higher management incentive plan payout. During the quarter, we made progress on inventory with a 3-day improvement in operational days. I would note that internally, we are driving a stepped-up focus and accountability on working capital. And we are looking at additional process changes to further reduce inventory in the future. Additionally, we have directly tied a portion of the 2012 annual bonus plan to cash generation.
Net cash used in the quarter was $30 million, which compares with $165 million used in last year's first quarter due to lower debt repayments and a $44 million benefit related to the termination of 2 of our interest rate swap agreements.
So now, let me give you some more color on what we have been doing to improve since we last spoke to you in February. As I said on the call, our business review is focused in 3 key areas: Revenue, cost structure and cash generation. Additionally, we have been evaluating tactical organizational changes to increase decision-making speed and relevance, enhance accountability and eliminate duplication.
In quarter 1, we reduced headcount by approximately 100 positions resulting in a $21.8 million restructuring charge. We anticipate further headcount reductions and associated charges in Q2, as we extend the focus of our organizational review from corporate functions to regions.
Let me give you 3 examples of organizational changes we made in quarter 1. First, we are downsizing corporate functions and moving consumer-facing decisions closer to market in marketing, sales and analytics. In parallel, we are retaining lean corporate centers of excellence to sustain the functional capabilities we have built through the global matrix. For example, in global sales, we have moved all sales incentive development in market while maintaining a small compensation center of excellence, which we will use to leverage across the company.
Second, in Europe, we are consolidating our CEE and WEMEA divisions into one region. This should reduce cost, simplify operations and standardize processes. It should also improve effectiveness, as we move to 6 market-based clusters, each with their own campaign-planning capabilities to address specific consumer preferences. John Hixson, an Avon direct-sale veteran of 28 years, will lead Europe. As a result of these changes, in Q2, we will begin to report Europe as one segment.
Third. In supply chain, regional leaders who oversee supply planning, distribution and logistics will now report into regional leaders instead of the corporate center. This move enhances commercial accountability to service and inventory management, while we maintain functional excellence and global standards through a corporate center of excellence. Going forward, we will continue to evaluate process improvement opportunities to drive more agility into our end-to-end supply chain.
Moving to the finance organization, let me give you some examples of some important changes to the finance organization to improve accountability, enhance planning processes and upgrade talent development. First, we have moved the reporting line of regional finance directors to me. Second, supply chain finance will now report into finance, where as it had previously reported to the supply chain organization. Third, we have established a dedicated financial planning and analysis function to enhance our financial forecasting capabilities and business insights. SG&A and controller functions will be headed by separate individuals. And this structure will be replicated in regions and major markets.
In closing, we continue to face challenges as a company, and it will take time to fix. But we have made progress in identifying root causes and actions to be taken to stabilize the business, and we have started to act in some areas. It is worth remembering at this juncture that our brand is strong. The direct sales model continues to be strong and our issues are fixable. I am pleased with the urgency with which we are addressing these issues, the level of engagement of our associates and the ongoing commitment and enthusiasm of our representatives. All of that, coupled with Sheri's leadership, gives me confidence in our future.
Now, I will turn it over to the operator for Q&A.
[Operator Instructions] Your first question comes from Lauren Lieberman, Barclays Capital.
Lauren R. Lieberman - Barclays Capital, Research Division
Barclays Capital. So I just first wanted to ask about commodity cost actually. I just can't really recall a time that commodity cost was called out so dramatically in a release, in the Q and was such a big number. So if you can just elaborate on kind of what changed, what happened. And what's concerning about that is, that's not choiceful, right? The investments in SG&A and so on can be expected and have to do stabilizing the top line. The gross margin is what's sort of throwing a lot of questions in my mind right now.
Kimberly A. Ross
Yes, what I can say with regards to commodity cost is obviously, we have longer-term fixed-contract cost in place, so we still have some lag coming through from last year's commodity increases in today's numbers.
Your next question comes from the line of Bill Schmitz.
William Schmitz - Deutsche Bank AG, Research Division
Can you shed a little bit more color on the Latin America margin structure? And I know you said that results for the second quarter on the top line were probably going to be a little bit worse. But should we expect that same kind of massive margin compression? Like is this a new base to work from? Or was this quarter a little bit of an anomaly?
Kimberly A. Ross
Well, I think I've said pretty much all I'm going to say with regards to quarter 2. I mean, we're not in a position today to give you the longer-term with regards to where is the natural margin for the business. With that said, as I said, we will have a couple items that will be impacting the Latin America margin, particularly in Brazil going forward in quarter 2. So -- but at this point in time, I'm not going to provide a specific number with regards to quarter 2 or the other quarters.
Your next question comes from the line of Chris Ferrara.
Christopher Ferrara - BofA Merrill Lynch, Research Division
It's Bank of America. I guess the question is on margin again. Obviously, it was a pretty poor margin performance as you guys called out. Can you talk at all or at least provide a little color around what the short-term impact of stabilizing the business might be on this? In other words, are you throwing money at a number of short-term problems? I mean, you had a lot of management transition, a lot of external publicity that was bad. I'm sure there are a lot of fires burning in the business. I mean, can you at least try to characterize qualitatively, what -- whether there are costs or whether there are money – there's money being thrown at that stuff in the near term, that isn't necessarily a sustainable expense?
Kimberly A. Ross
Yes, well, let me kind of walk through the margin a little bit for what we had in the quarter. So as I said, there were some expected items and some items that we were not expecting. So on the expected side, we expected some foreign exchange impact. The increased RVP investments both in Brazil as well as in the U.S., and those are investments that we expect to continue, and we're engaging the Representatives in Brazil, and also as we're going through the redistricting that's taking place in the U.S. So that continues. We had wage inflation, particularly in Latin America where we've seen double-digit inflation taking place there. And then also, we had the cost with regards to commodity and while not always predicable, we did expect to have some increases there. Not expected was the lower gross margins due to the product mix. While we were focusing on increasing Smart Value, we had more Smart Value than we expected. And we also were impacted from flowing excess inventory, particularly in WEMEA. And we will, obviously, continue to focus on improving our overall inventory levels. But finding that right balance there with regards to the impact it has on margin and the impact it has on sales and the impact we have on overall working capital, is something we need to make sure we're getting the balance right there. And what we did not expect was to have the higher bad debt provision in South Africa. So hopefully, that gives you a little bit more color, as to what the items were in this quarter. And obviously from there, you should be able to get a feel for which ones repeat or not. Yet to your question, are we throwing money at issues? I wouldn't necessarily qualify it that way. I would say obviously, we're having to put money into rep satisfaction, particularly in Brazil.
Your next question comes from the line of Dara Mohsenian, Morgan Stanley.
Dara W. Mohsenian - Morgan Stanley, Research Division
Kimberly, can you give us your updated thoughts on the dividend level here? It clearly doesn't look like cash flow will cover the dividend this year. And also Q1 came in worse than you expected, and it sounds like Q2 will see some weakness also. So can you talk about your commitments to the dividend level here and if you're rethinking that?
Kimberly A. Ross
Yes. As I said before, and I really believe this, that in principle, the dividend should be funded with the P&L, not with the balance sheet. The decision was made earlier this year to maintain the dividend for 2012. And going forward, Sheri and I'll be reviewing the dividend in combination with the business strategy. And for right now, that -- I don't have any additional update. As I said, the decision was made earlier in the year to maintain the dividend for 2012.
Your next question comes from the line of Wendy Nicholson, Citi Research.
Wendy Nicholson - Citigroup Inc, Research Division
Just I think a follow-up to Bill's question on Brazil. But can you say -- I think you said the competitive environment was intensifying there. Is that bricks and mortar? Or is it other direct sellers? And then just housekeeping. Can you break out the impact of currency on the Western European EBIT margin, so we can figure out how big a drag that was? But then lastly, and I apologize. My question regarding the decision to collapse Western Europe and Eastern Europe, it strikes me -- I mean, admirable from a cost-savings perspective because maybe you can eliminate a few heads, but from the vein of wanting to be more transparent, those are such different regions and such different growth rates. I question whether that makes a lot of sense.
Kimberly A. Ross
Okay. Maybe if I'll start with your last question. On the collapse of Western Europe, I think a couple things. First of all, as we look at supply chain, we are already running supply chain as a region. And so, it was actually creating a lot of complexity in the fact that they were having to deal with 2 different regions in Europe. Also what we've done here is actually, we -- while we combine it into one but we're putting these 6 clusters, which allows us to get then closer to the different markets and allows us to be able to group the markets in – that are more similar, together, which should allow us to better service the representatives there and the ultimate consumer by providing a more relevant product offering. So I think on the cost side of this, yes, we eliminate some heads, but we also are able to get to more standardized processes, which takes complexity out of the business at the end of the day. And I would say that this is in line with what some of our other competitors do overall. And we'll continue to give you some color on some of the bigger points or bigger highlights of the quarter and the individual markets. With regards to margin FX breakout, I'm going to allow Amy to get back to you on that one.
Amy Low Chasen
It's actually a 70-basis-point impact on the WEMEA margin.
Kimberly A. Ross
And then with regards to Brazil and the competition, I would say it's a bit of both. We do have some entrants there that are expanding on the direct sales. But obviously, bricks and mortar continue to expand there, too. But with that said, I want to be very clear. Direct sales remains very strong business model in Brazil.
Your next question comes from the line of Mark Astrachan, Stifel, Nicolaus.
Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division
Couple of housekeeping questions. So Venezuela, 19% of EBIT in the quarter. How much was that on a non-GAAP basis? And then could you explain a bit more about how you revised the definition of RVP in terms of how to think about that number versus other puts and takes in SG&A going forward?
Kimberly A. Ross
Yes. Let me start with the RVP question. In the past, I think the main difference in the definition is that now, we'll no longer include some of the investments, primarily the large-system investment that we're doing in S&P. And the reason we changed this definition is to be able to align it more with how we manage the business at the end of the day. And it just takes out some confusion, I think internally, and it also makes it easier to be able to track this number back. I don't have the other number particularly, specifically on Venezuela, but I will make sure that we'll get back to you on that one.
Your next question comes from the line of Ali Dibadj, Bernstein.
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
How much independent due diligence were you really able to do before taking this job? And how did you conduct it? Because you -- look, you specifically mentioned some secular changes to the competitive environment, to consumers, to the brand, and which will lead to us, for its worth seem like secular challenges, especially with how you engage with the consumer and the representative and the competition? And one thing you didn't mention, but you certainly must have thought of are FCPA and the free cash flow issues in Venezuela and some of the other control issues. So I really wanted to get an understanding of your process before taking the job.
Sherilyn S. McCoy
Well, certainly, I had the opportunity to meet with a number of the directors, as well as spent time with Andrea and also had a lot of access to all public information. What I will say is certainly, as I get into the space and with my background in consumer, one of the things that's most critically important is to be out with the customer and be in the markets and continue to make sure that I'm engaged with that, looking at the total value proposition. That's really where I will be spending my time. Obviously, I'll be traveling to all of the different markets and being able to better understand the challenges ahead. One of the things that was very apparent when I got here, which really pleased me, was the passionate outreach that I had from the employees. I had dozens and dozens of e-mails from around the globe where people really were talking about the model, how much they care about Avon and the company. And also, very clear about some of the challenges. And so I recognize that we have challenges. I'm very realistic about what we need to do moving forward, as it relates to stabilizing the business. But I'm confident that we have a strong foundation on which to build. And that came through early in my days and continues to weigh in and gets even stronger, as I spend more days with the employee base of Avon.
Your next question comes from the line of Nik Modi, UBS.
Nik Modi - UBS Investment Bank, Research Division
Just a quick question on human capital, and you think about the fact that you, Sheri and Kimberly, are new to the direct-selling model. Just curious what you're doing in terms of retention to keep some of the institutional knowledge, if you could just help address that question?
Kimberly A. Ross
Yes. We did put a retention program in place earlier this year for key associates. So that is something that we put in place. And obviously, trying to engage them. And I think now with Sheri here also, it'll be helpful in that she'll be able to spend some time with the different regions and set the strategy, which is always helpful to employee engagement and retention at the end of the day.
Nik Modi - UBS Investment Bank, Research Division
And then just one quick follow-up for you, Sheri. I know it's early. You've only been there 7 days, but I mean, as you look at Avon today, are there any learnings from J&J that you can see are automatically applicable, as you look at the Avon situation?
Sherilyn S. McCoy
Well, certainly, I've been involved with very complex businesses in the past and areas where we've had to either refocus the business or restructure. And I also know from a consumer background, it is about getting the value proposition right, as it relates to the consumers and the representatives. But certainly, what I think is most critical is that we, as an organization, take a disciplined approach and put a plan in place where we really are focusing on the 4 or 5 key priorities, making sure we have the right people in the right roles to drive the business, and then really holding people accountable and measuring our performance. And regardless of the different areas that I've worked in, it's always about aligning the team toward those goals. And that's really where I'll be focusing. It also goes to your point about retention. It's really about making sure that we have everyone focused and motivated. And to me, it's really the power of the people in the organization that will be critically important moving forward.
Your next question comes from the line of Connie Maneaty, BMO Capital Markets.
Constance Marie Maneaty - BMO Capital Markets U.S.
Could you discuss a little bit about the increase in RVP in Brazil? I think it was mentioned that you were working to increase rep satisfaction. But I don't know exactly what that means. Is there a change in compensation? What's changing down there for the increase in RVP and what does it mean?
Kimberly A. Ross
Yes. It just -- what we've been is obviously, as we had these service issues coming out of the change in systems and the movement to a different distribution center last year, we needed to put additional incentives and initiatives in place in order to reengage the representative. So what we do is we're spending on, whether it be different events or different incentives in order to get the representatives back involved. Now obviously, that in itself -- on itself, is not the answer. It's also about bringing the excitement into the portfolio and getting our pricing right so they have a value proposition. One of the things, just to give you a bit more color, I mentioned that our pricing in Fashion & Home in Brazil became rather uncompetitive. And so, therefore, it impacted the earnings proposition of the representatives there. So that, coupled with some of the service issues, obviously means that we have some work to do to bring the representative back. And that is where we will apply some RVP dollars, as well as enhancing the portfolio and the service in order to reengage the representative.
Your next question comes from the line of Javier Escalante, Consumer Edge.
Javier Escalante - Consumer Edge Research, LLC
Sheri and Kimberly, you both made a statement about conviction that Avon is fixable. And this implies to things that basically, you're going to come up with the right strategies, but more importantly, that you're going to have the financial flexibility to fix it. And when you have, in North America basically, operating margins running at 1%, and the overall company with operating margins in – they're 3%, 4%, do you really think that -- it doesn't seem that you're going to have that financial flexibility. So how is it that you feel that is -- you express confidence that Avon situation is fixable?
Kimberly A. Ross
Yes, and as we've said, Javier, 2012 is a year of transition for the company. I think there are tactical, as well as strategic issues that we need to address. Some of these things aren't necessarily a requirement of investment. It's just operational execution. Other things are simplifying what we do, getting speed to market. So I was saying that there are many things that we can address in order to fix some of the issues we're facing. That said, we also need to continue to focus on getting cost down, and we need to evaluate, in line with the strategy, what investments we need to make, whether it be in systems or in other initiatives in order to get the company back to a position of growth. So that's something we will be looking at, obviously now, with Sheri on board, as she gets her feet on the ground, and evaluating as we go forward.
Javier Escalante - Consumer Edge Research, LLC
As a follow-up on the financial flexibility, I welcome Kimberly, distinction between RVP spending that is essentially system IP spending versus compensation. There had been a lingering question for many years with regards to how big this line item is. We only know that the company has spent $550 million in incremental RVP, which came on top of whatever was prior 2005. Could you let us at least know, in terms of trying to value the company and assess that flexibility, how much is the total RVP spending, as it stands right now?
Kimberly A. Ross
We'll take your comment on board, but that's not something that we're going to disclose at this point in time. As you can imagine, that's quite a competitively sensitive number.
Your next question comes from the line of Alice Longley, Buckingham Research.
Alice Beebe Longley - The Buckingham Research Group Incorporated
Sheri, my question's a broader question for you in response to a couple of things you've said. Avon has done study after discipline study for years to determine what consumers want and what reps want for Avon. What can you do differently to do better at that? And the other question is, looking at Avon so far, do you think Avon's sort of stuck structurally, selling a low-priced product line and yet reps want higher and higher compensation that maybe the product line can't finance? Can you comment on that, too?
Sherilyn S. McCoy
Well, Alice, obviously, it's early days for me coming in. I think one of the things that's critically important is that I take a fresh look at all aspects of the business and really challenge what we've been doing and making sure I fully understand. Are we fully understanding the value proposition, which involves what is the appropriate portfolio, what is the appropriate way to incentivize our representatives? And continue to look at that, making sure that they have the tools that make them successful. So at this point, it's hard for me to give you more color on that until I get out in the markets in the next several weeks. Through June, I'll be traveling all over to meet with people and spend time. And also, I'll be going through some of the diagnostics that are already in place and making sure I have a better appreciation for that, and then determine what are the appropriate next steps.
Your next question comes from the line of Linda Bolton-Weiser, Caris.
Linda Bolton-Weiser - Caris & Company, Inc., Research Division
It's Caris & Company. Kimberly, can you tell us, you had said that there would be $100 million favorable swing on operating cash flow for the year to do various things. Can you say how much of that swing favorable, if any, came in the first quarter? Because, obviously, it was offset by lower earnings so the cash flow therefore wasn't better. But can you quantify how much of the $100 million, if any, came in the first quarter? And then secondly, I think investors have been concerned with Avon's cash flow and the idea that the earnings level is not more equal to the cash flow level and that there needs to be some kind of resetting of the earnings level. Can you give us some qualitative comments about how much of the bad earnings we're seeing now is truly investment to kind of stabilize the business versus a resetting in some way of earnings level due to whatever you may be finding? I mean, if you could just kind of qualitatively discuss that, I think that would be very helpful.
Kimberly A. Ross
Yes. Firstly, with regards to looking at the cash flow, so what I said is that last year, we had $100 million that would not repeat this year, and most of that is in quarter 1. So it was pretty much for the full amount there. I understand the need and the desire to have a feeling for rebasing, and where is the base. But what I can tell you at this point is we are in a year of transition. And so at this point in time, are there some investments that we are making that will not repeat themselves? Yes, that's probably the case but there are probably some other investments that we will want to make going forward that at this point in time, I just can't give you feel for until we sit down and we work through what the strategy is going to be going forward. With regards to -- I think I provided my comments on the dividend. Obviously, cash is something that's very important to us. As I said, we're tying even a portion of our bonus incentive to cash this year, and we're working on improving the working capital for information [ph]. So as we work through fixing some of the items, we will then get a better feel, coupled with the strategy, as to where the new base is going to be. So I hear your need for it, but I just, at this point in time, I couldn't – or I'm not going to give the current view on what the rebase would be, if any.
Your next question comes from the line of Leigh Ferst, Wellington Shield.
Leigh Ferst - Wellington Shields & Co., LLC, Research Division
My question is about the management's changing, clearly having 2 top leaders in new positions can be disruptive; it's obviously also an opportunity for a culture change. And you've mentioned some of the things that you're thinking about. I'm wondering if you considered anything like amnesty for people who come forward to help you investigate and resolve some of your problems like corruption, because it can help resolve the issue and also be a tool in leading to culture change.
Sherilyn S. McCoy
Well, I think certainly as we look at building for the future, one of the most important things is to have engagement of our employees, and making sure that, as a management team that we are approachable, that we are asking the right questions, that we are staying focused on doing what's right. I think I mentioned in my opening comments that I am holding myself to very high standards, and I will hold every employee to high standards. What that means to me is being clear about what's happening. If people have questions about what they should or shouldn't do, they should feel very free coming to me or any member of the executive committee. We need to be out and be visible and be approachable, particularly as we're driving change. I think it's very, very important for us as leaders to make sure that we are accessible and helping people be part of the solution. Because it is about aligning as a team, and making sure that we can continue to be very proud of what we do each and every day. And I'm confident, based on my early reads of the organization and the great notes that I've had with people from personal stories about what's working, what's not working, what they'd like to see me fix, and I think that's something -- a culture that we need continue to drive throughout the organization.
Leigh Ferst - Wellington Shields & Co., LLC, Research Division
And as a follow-up, can you give us some idea when you might be ready to give a strategic update?
Sherilyn S. McCoy
Well, certainly, and I know you're anxious and I certainly appreciate that. But I also want to make sure that I have time to listen and hear what's happening in the markets, to make sure that I understand what we've done, what we haven't done, and be very clear about what are the 5 or 6 things that we think are critically important. And at the same time, be equally clear about what we're not going to do. And so, certainly, I will be able to give you more perspective on where I am in the process on our next call. And as soon as we're ready to give you more, I would be there because I think it is important that we have ongoing transparency and dialogue about how we're thinking about the business.
Your next question comes from the line of Victoria Collin, Atlantic Equities.
Victoria Collin - Atlantic Equities LLP
My question relates to the Active Rep growth in North America. I noted that you said that the top reps were performing well and you were getting an increased average order. But can you comment a little bit on the underlying trend given the rep declines despite your increased RVP support and spending? And actually, secondly, I've got a question on China. Given this is a transition year, are the issues in China related to sort of rebasing and rightsizing the platform? Or is there something else, either operational or structural that's going on in that market?
Kimberly A. Ross
Okay, let me start with the U.S. As I said in my speech, we are seeing some positive indications taking place, especially in the top tier of the Representative. But we have seen some disruption in the lower base of the Representative. And I think part of this is because there has been obviously a significant change taking place here and the communication and some of the emphasis has been more on the top-tier Representative versus those in the lower tier. So that is the lesson learned that we will be taking as we go from the Western redistricting into the Eastern redistricting. And some things even for example that our operational folks have said that they've learned is that, for the district folks, they should have given them a new map earlier to see where their new region are. So there are lessons learned that are being taken to the East in order to get that energy there and make sure that any confusion that's lying in this whole redistricting that's taking place is at least mitigated. As you can imagine with such a large change taking place, it's difficult to really give you a feel for -- this isn't a change that's taking place in a linear form, so it would be difficult right now to really say that we have a trend per se. I think that's something for a later day as we go through it. What I will say though, is I'm very encouraged with the first signs we're seeing coming out of the strategy. The team in the U.S. have really done a great job laying out the project management of this strategy change. And they have spent endless hours on the execution, including just this last weekend, they took the systems down in order to make all the adjustments for the Eastern part of the redistricting. And I'm proud to say that the system came out actually earlier than we anticipated with all the changes in place. So a lot of effort taking there, and I think a really good job. But with that said, we don't have a trend as of yet. If we then look at China, I'll remind you that while China's not a large contributor to our business today, it is an important market for us. And if you see our results, we clearly need a fresh lens on the business. We have new management there on the ground, and they're looking at the underlying issues. And also, Sheri will be visiting soon in China. I was there recently. So I think, looking at this with a fresh lens and looking at what has been working and what clearly has not been working, is important to figure out the path forward on China. So more to come on that one.
Your final question comes from the line of Jason Gere, RBS Capital Markets.
Jason Gere - RBC Capital Markets, LLC, Research Division
It's RBC. Sheri, I just, I guess I have 2 kind of questions, just kind of picking your brain a little bit. One, coming from a consumer background where advertising was the lifeblood, just thinking about coming to a company where you've seen a shift downward, I mean, more to RVP, less to advertising. Are you comfortable kind of with the levels that they are today, or do you think that this is a business that should need more advertising going forward? And then the second question, also thinking about Avon, as a company that's been in constant restructuring for the last 7 years, what's your view on a larger scale, broader-based restructuring, as a way to kind of get -- reenergize the company and kind of make the right investments?
Sherilyn S. McCoy
First of all, on the advertising question, it's really too premature for me to have a perspective on that. As I've worked across different businesses throughout my career whether it was devices, pharmaceuticals or consumer, the most important thing is trying to understand the drivers of the business. And so what I will be doing is spending time understanding the RVP equation, as well as the advertising, and be able to give more perspective at a later date. As it relates to restructuring, the most important thing is to really get out and understand the operating model and understand where people are, the teams, the regional teams, and then come back with a better perspective on what makes sense to be able to drive for the future. Obviously, the organization has undergone some significant changes. And so I think what we need to be focused on is how do we stabilize, making sure that people are clear around their accountabilities. I'm not sure that an overall restructuring makes sense. It may be just a better alignment of how we're going about driving the business. And that's something that I will take a fresh look at as I'm out in the regions and spending time with the global teams throughout the organization. And in closing, I'm delighted to be here, and look forward to connecting with you in the very near future.
Kimberly A. Ross
Yes. I just wanted to add one more comment, on -- just on the restructuring. We had obviously, in quarter 1, we took a restructuring, and it's not a restructuring program like we've taken in the past. And you'll see size and magnitude was small relative to what we've seen in the past. So obviously continuing to look at where we can get cost out. And if there are costs associated with that, then we should take that as long as the payback is there. So we'll see a bit more of that going into quarter 2, as I said earlier, as we work into the regions. And just one other thing before closing, I wanted to come back to a question, I think it was Bill that asked it at the beginning with regards to Latin America, and I felt like maybe I didn't give you a strong enough answer. So I just want to come back to that to give you a little bit more color. You had asked about the overall, what was happening in Latin America. And so I just want to talk about some of the drivers there. If we look at Venezuela and Mexico, we had growth rates that were a bit lower than in Q4. And Mexico is lapping a very strong 2011, but it's still in a really good position. Venezuela, obviously, continues to have quite a bit of inflation, and it is a challenging market. But with that said, so far, we've only had price controls on about 10% of the products that we have there. Just on Colombia, we continue to face some competition there that has been quite intense and that has been impacting our orders. And as a result of that, we began with a lower-than-expected rep base. Argentina, one of the things we're facing there is that we've had some government import restrictions. And at first, this impacted us quite a bit, because it was both on finished goods, as well as on some of the components. And this caused a high level of shorts, and which obviously impacted our units in the quarter. We have moved to more local sourcing, so things should be improving there. But as I said in my notes that we expect to continue to have some impact there. And then also we might have, since the Fashion & Home items are items that we cannot import, we're having to move to a local sourcing there. So we don't expect that it'll have a major impact going forward, but we still have to prove that out since we are changing what we're doing there. So hopefully, that gives you a little bit more color on what is going on in Latin America.
So with that said, I would like to thank everybody. Really excited to have Sheri here, and we look forward to talking to you more in the future.
This concludes today's conference call. You may now disconnect.
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