Avon Products Inc. Q4 2005 Earnings Conference Call Transcript (AVP)

Feb. 8.06 | About: Avon Products, (AVP)

Avon Products Inc (NYSE:AVP)

Q4, 2005 Earnings Conference Call

February 2nd 2006, 9:00 AM.

Executives:

Andrea Jung, Chairman, Chief Executive Officer

Renee Johansen, Vice-President of Investor Relations.

Susan Kropf, President, Chief Operating Officer

Charles W Cramb, Executive Vice President of Finance and Technology

Analysts:

Wendy Nicholson, Citigroup

Bill Schmitz, Deutsche Bank

Bill Pecoriello, Morgan Stanley

Chris Ferrara, Merrill Lynch

Amy Chasen, Goldman Sachs

Constance Maneaty, Prudential

Sandy Beebee, HSBC

Linda Bolton Weiser, Oppenheimer

Alex Longley Ph, Buckingham

Laura Lieberman, Lehman Brothers

Operator

Good morning ladies and gentlemen, and welcome to the Avon Fourth Quarter Earnings Conference Call. Operator Instructions. It is now my pleasure to turn the floor over to your host Andrea Jung, Ma’am, the floor is yours.

Andrea Jung, Chairman and Chief Executive Officer, Chairman

Thank you, good morning everyone. Thanks for joining us to discuss Avon’s fourth quarter and 2005 results. And some of my remarks are forward-looking statement; we refer you to the cautionary statement in today’s press release. With me on this call are Susan Kropf, our President and Chief Operating Officer; Charles Cramb, Executive Vice President of Finance and Technology; and Renee Johansen, our Vice-President of Investor Relations.

I just want to begin my comments today by taking you back to where we left off at our meeting on November 15th. At that time we shared with you a complete diagnostic on the state of our business, the causes of our performance deterioration, and the turnaround plan that will drive our return to sustainable growth to the Company. I stated that, 2006 would be a transition year, as we embark on a major restructuring program to radically transform our cost base and elevate our organizational effectiveness, critical pillar of the turnaround plan. And since then, we moved pretty aggressively on both these fronts.

You have seen some our recent 8K filings, and you read this morning that the fourth quarter was impacted by some $56 million in cost to implement the restructuring. These costs were primarily severance driven, but also included other restructuring initiatives including the closure of our operations in Indonesia, which we announced yesterday in that market. With revenues of under a $20 million, Indonesia has not been a significant part of our portfolio, and we have been loosing some money there for a number of years.

The fourth quarter charge also included an allowance for the establishment of a European Finance Shared Service Centre as part of a worldwide strategy to dramatically reduce transactional cost. The lion’s share of the restructuring charge was salary and benefit related, and here we’re aggressively attacking our high fixed cost base. In recent years, our growth has significantly outpaced our capabilities, to compensate we added people and layers to get the work done. This in turned slowed information flow in decision making. Since we spoke to you last week, we moved very aggressively to redesign and streamline our organizational structure, so that we can couple our growing size with increased nimbleness and speed, bringing senior management closer to the market and market closer to their representatives and consumers.

I think you all saw the press release that we issued in December, outlining the framework for our new operating structure, but if I want to give you a little context this morning, again, we continue to be a highly entrepreneurial Company, but as we’ve have grown from $5 billion to a $8 billion plus business, the operating complexity has increased and has been clear to us for some time that our operating model, which has served us very well as a smaller Company, needed to evolve with our growing scale.

Avon has unique strength, has got a world renowned global brand, but also as well as a high-tech’s commercial channel. And as competitive intensity requires us to develop world class focus on both the brand and commercial aspects of the model, our new structure better allows us to divide and conquer, placing equal focus on both to restore and maintain the advantage that we’ve historically held. So inline with this, as you read, we have created eight new business units, representing both our priority geographies and our brand and supply chain function. All with equivalent shared with possibilities for the Company’s performance.

We increased the number of operating business units, which remain our primary financial reporting units from four to six and have named them Commercial Business Units or CBUs. Under the new structure, both China, and Central and Eastern Europe become their own CBU’s, reflecting the critical growth potential of these two important geographies for the Company. The other CBU’s are North America, Latin America, Asia-Pacific, and Western Europe, Middle East and Africa. The name change from Operating Business Units to Commercial Business Units also makes the statement about the role we intend for these business units to play going forward.

The Commercial Business Units own the moments of truth with our customers and our representatives. They will be 100% dedicated to delivering direct selling and merchandising excellence, nearly driving share gains on the ground. Executives in this role will be monitored and measured specifically against these capabilities. Under the new model, these six commercial business units will work in partnership with two other equally empowered Global Business Units, brand marketing and global supply chain, which will now become integrated worldwide function, staffed by experts with enterprise accountability for brand performance. In a major restructuring last month, we realigned all regional marketing and supply chain teams to now report directly to these new GBU leaders. And together as end-to-end Global Business Units, they have a shared mission to deliver world-class products at world-class cost, and deliver against the promise of Avon’s iconic brand. So with this new organizational structure of Commercial and Global Business Units, we will properly align to achieve our brand internal excellence and restore the competitive advantage which can be ours.

Another significant enhancement to our operating model going forward is the establishment of a formalized global direct selling function to protect our competitive advantage as the world leader in direct selling. This function will set strategy, ensure that we have the best direct selling talent all around the world, and very critically oversee the accelerated implementation of sales leadership around the world. So we feel very good about the new structure, and the new team put in place, but we are still in early days in terms of improving our organizational effectiveness.

Avon has many more layers of management than other peer companies against whom we have benched ourselves. And as part of our commitment to elevate organizational effectiveness, we are in the process of streamlining and flattening the organization, actually cutting the number of management layers virtually in halve. I think, Russia for example, under the old structure; the General Manger of Russia was five layer down from the top reporting to among others, the Head of Central and Eastern Europe cluster, the Operating Business Unit leader for Europe, and Executive Vice President of International. Under the new flatted structure, which we announced in the internal organizations just yesterday, the General Manager of Russia reports directly to the Commercial Business Unit leader who reports to the top of the house. So you know, you have six leaders now, flattened to three layers, and that’s the concept that we will be applying across the enterprise. And as this example makes clear, organizational effectiveness is not only about a cost stakeout, but it’s also way for us to get closer to the market, speed information flow, and enable better factors within. By the time the effort is completed, we anticipate that we have reduced our management staff between 20% and 30%.

As important, we’re using this moment of structural redesign as an opportunity to make some changes in the leadership in a number of our key market staffs. For example the highly entrepreneurial General Manager, with decades of Avon experience who drove the extraordinary early growth in Russia, now assumes leadership for the Company’s next exciting opportunity, India. With this move, we put a terrific new General Manager at the helm in Russia, to handle the next phase in this market’s evolution. He was formerly Russia’s very successful head of sales and most recently delivered outstanding results as General Manager of Ukraine.

We’ve also made a leadership change in Mexico, which I believe, we may have mentioned to you late last year. Our new General Manager there, recently announced, who has formerly headed up our Avon’s Andean cluster came to us, about a year and half ago with top experience at Clorox and Proctor and Gamble. And finally yesterday, we also announced new leadership in Japan, where we’ve placed another one of our most capable and experienced, developed, market General Managers to help steer this market through the challenging period.

There is one other upcoming management change, I wanted to mention to you, which is that Amilcar Melendez, the Commercial Business Unit leader for Latin America will be retiring from Avon at the end of the first quarter after nearly forty years, I think, an incredible 37 years of outstanding service to this Company and we hope to announce Amilcar’s successor next month.

So that’s a brief summary of some early significant actions, we have in place to elevate organizational effectiveness, it’s about designing and more efficient, most streamlined operating structure by reducing management layers, ensuring we’ve got the right talent against the right priorities, and it also about attacking our high fixed cost base. In regards to the cost base, just to remind you that organizational effectiveness is only one part of our overall restructuring effort, which will continue over a multi-year period and will touch virtually every aspect of this business.

As we’ve said, other restructuring initiatives would include the implementation of a global manufacturing strategy to facilities realignments; securing additional supply chain efficiencies in the area of procurement and distribution; and streamlining transactional and other services to outsourcing; and move to low cost countries. As we execute these restructuring initiatives, you can certainly expect to see implementation cost in nearly every quarter and nearly every region. You know, to prepare the organization for this upcoming major change, since 2nd of January, Susan and I have traveled around the world to speak personally to the management teams in each region, touching hundreds of management level of associates, so we are also implementing a very comprehensive internal communications program to talk not only about, obviously the major cost out initiative, but also how we will be reinvesting in the business to restore sustainable growth.

So our investment strategy is the other critical leg of our turnaround plan in restoring the competitiveness of our world-class Beauty brands, it is perhaps our most important priority in this regard. We were encouraged by recent data from our global tracking study, which measures brand perceptions and brand health. We commissioned the same study each year for the past ten years in each of our top market. The data shows that despite the challenges of 2005, we experienced little deterioration in consumer and representative perception of our brand and some cases shows healthy growth. So with the formalization of our new global brand marketing business units, starting in 2006, we are ramping up investments in consumer research and analytics and accelerating our innovation pipeline. As we said on November 15th, our focus will be on fortifying our mid-tier brands such as Avon Solutions, which will be infused with anti-aging trickle down technology, and Avon Color which will receive a 360 degree brand to make over this year.

In terms of advertising, not only we will ramp up our investment level, but, we will move from sort of launching the brand to a continuity strategy that continues to build awareness and stimulate purchase intense across the year. On a total company basis, advertising spent is anticipated to increase 50% in 2006. The U.S. represents the large dollar increase, this year the U.S. account quadrupled, its TV advertising exposure with Fox airing 42 weeks during the year compared with 11 in 2005. Screen advertising for the general market will run for nine months of the year, compared with four months of last year.

In addition to these brand investments, we’re also increasing our investments in our direct selling channel to drive and accelerated rollout of peer leadership, which we mentioned to you all. With the establishment of our new global direct selling function, we are also investing direct selling capabilities, including people development, talent acquisition to reinforce our direct selling leadership and deliver on the promise of our unique commercial advantage in the marketplace.

And let’s with the quick summary of some of the actions we’ve taken in the business since we met, last November. My message to you today is the same as it was then, you know, the Company is totally committed to making the changes that would be necessary to strengthen our business for the long-term. You know in recent months, I think we have made a good start on this journey, as we begin 2006; we do so with a clear idea of our current challenges, but also a clear plan to address them and a continuing sense of the opportunities ahead.

The fundamental strength of our business model have not changed as these have proved enduring and as I traveled around the world, I was really hardened that the entire organization is firmly committed and confident that we’re taking the right action against the properly identified challenges. And the we can move as quickly as possible on the path of resuming sustainable growth. So those are just my qualitative perspective on the business at this point, and with that, you know, I am going to turn the call over to Renee, and what will be our new conference call format going forward. She is going to actually take you through the review of the quarter and the full year and then we’ll all be back to open it up for questions.

Renee Johansen, Vice-President of Investor Relations

Thank you Andrea, good morning every one. As you read, Avon reported fourth quarter 2005 earnings of $0.40 per diluted share, 34% lower compared with earnings of $0.61 per share in the same period of last year. Fourth quarter revenues increased 4% in dollars, 3% in local currency. Active Representatives grew 7% and unit volume increased 5%. Looking at net sales from a category perspective, Beauty sales, which include color cosmetics, skincare, fragrance and personal care rose 5%. Fourth quarter growth in fragrance and color outpaced the overall Beauty category, helping to offset a modest decline in skin care sales.

Beauty Plus sales rose 8%, with strong growth in jewelry, watches, and accessories. Beyond Beauty declined 7%, driven by the U.S. repositioning of its offerings and wellness during the high-teens. Operating profit in the quarter declined 28% to $297 million as it was heavily impacted by a $56 million of implementation cost associated with the first phase of our turnaround plan. The after-tax per share impact of those implementation cost was $0.10 in the quarter.

Interest expense increased to $11 million, more than doubling in the quarter to $20 million, due to increase in debt outstanding upon the share repurchase program, and the higher rate environment. Our tax rate was significantly higher at 35.7% or 10 points above 2004’s fourth quarter rate of 25.2%, due to unmatched one time benefit in 2004, as well as the impact of the restructuring cost and unfavorable country mix in 2005.

Our average shares are outstanding during the quarter, were down $21 million year-over-year, to $457 million on a diluted basis. That reflects our aggressive repurchase over the last year, more specifically in the third and fourth quarter, when we initiated the internal $500 million program. As you read, that program as well as our $1 billion dollar program begun in 2000 was completed by year end. In total, we bought 23 million shares in 2005 at an average price of $31.75, with 7 million shares bought in the fourth quarter alone, at an average price of just over $28. At year end, we had 451.7 million shares outstanding.

Now, let me move out to the regional review, starting with North America and the U.S. In the fourth quarter, North America’s revenue was 6% lower, 7% in local currency, both units and active Representatives decreased 4%. Operating profit declined 20%, and included a total of $7 million in cost to implement restructuring with nearly all of that in the U.S.

U.S.’s fourth quarter performance was pretty much unchanged from that of the third quarter, revenue declined 7% to $609 million, the 4% decline in active Representatives was largely a function of lower Representative activity. Units were 5% lower. U.S. Beauty sales declined 9%, with decreases in all categories. Bad performance was partially attributable to about a 40% lower advertising spent in the quarter. The U.S. category repositioning continued in the quarter with the 21% decline in Beyond Beauty, as we’ve paired the holiday gifts and decorative offering and reduced special front covers allocated to these product buy. Beauty Plus grew 8%, driven primarily by foundation fashion accessories and watches. Before moving of the U.S. revenue picture, I want to touch on few strategic growth initiatives Wellness and Mark, both had strong performances throughout the year and in the fourth quarter. Fourth quarter sales of Wellness were up nearly 40% and Mark captured the mid-teen sales increase. In the quarter, U.S. operating costs have declined 25% to $76 million, due to the revenue decline, unfavorable product mix and approximately $7 million of cost to implement the early stages of our restructuring. U.S. operating margin was 12.4% compared with 15.3% in the prior year quarter.

Turning to Europe, the recent fourth quarter revenue grew 2% in dollars to $713 million and 6% in local currency, and that’s inline with the third quarter growth on a local currency basis. Active Representatives grew 6%and units increased 7%. Central and Eastern Europe, whose results will be broken up separately staring next quarter had 6% revenue grown in the quarter, driven by 7% higher active Representatives. Russia, the region’s largest market saw revenues stand in the low-teens on a local currency basis outpacing the overall Russian Beauty market. UK revenue was flat, year-over-year on a local currency basis for its second consecutive quarter of sequential improvement in a country - in a year marked by difficult consumer environment in that country. As noted restructuring initiatives in Europe, fell to $13 million, those costs together with the impact of unfavorable pricing and product mix and the ERP implementation cost caused operating profit to decline 26% in the quarter to $140 million. Operating margin was 19.6%, compared with the prior year’s 27.1%.

Now for Latin America, fourth quarter revenue grew 27% in dollars to $680 million and 17% of local currency, these results include Colombia, where we bought out licensee in early October. Even without Colombia’s $39 million of revenue, the regions revenue increased nearly 20%, a pick up from the third quarter’s 14% increase. Brazil, Venezuela and Argentina, all contributed strong, double-digit local currency growth in the quarter, and all have very healthy Beauty performances. Latin America’s active Representatives rose 15% and units were 13% higher, excluding Columbia, those measures were sold off nicely with Representatives increasing 9% and units rising 8%.

In the quarter, Brazil’s high-teens Local-Currency revenue increased more than offset Mexico’s 5% decrease. Behind Brazil’s growth, was a doubling of advertising spends in 2005, that market has healthy increases in both active Representatives and Representative productivity. We just completed an annual study of our brands health in Brazil and the result shows significant improvement again due to large parts to the advertisement investment. Mexico’s decline in the quarter, 5% in local currency, reflected a lower average order and past Beauty performance. Latin America’s operating profit grew 10% to $152 million in the quarter, campaigned by higher administrative infrastructure cost, additional consumer and strategic investment, and approximately $3 million of cost for early restructuring action. Operating margins was 22.4% compared to 25.8% in the prior year quarter.

Turning to Asia-Pacific, revenue declines in Japan and China, again contributed for an overall revenue decrease in the region of 7% to $281 million, or down 5% on local currency. Both units and active Representatives were 4% lower in the quarter. We spoke last quarter about Japan’s transition to a more traditional dealer-centric direct selling model from a customer-centric model, that transition continued to impact the country’s and region’s fourth quarter performances. China’s fourth quarter local currency revenue declines 24%, compared with 46% growth in the prior year quarter. While revenue reflected a year-over-year reduction in average order from the Boutique, average order has now shown sequential improvement for two quarters since disruption in last year’s second quarter, so some of that improvement is due to seasonality.

In the fourth quarter, Boutique order activity rate continued to be high around 90% and inline with year-ago level. In addition, we saw solid orders for those products, which were advertised or promoted. We did apply for a direct selling license in early December, when Beijing began accepting application. We are not predicting when we might receive approval or what that approval might look like, but we do believe that national approval is the first step towards country-wide approval.

In the mean time, we continue to move forward with our preparations for the opening of direct selling. Our work right now is focused on readying a large force of field supervisors to recruit representatives when we were granted a license. We have new direct selling talent to the areas to mobilize this effort, and additionally we are continuing our comprehensive communication program with our China Beauty Boutique dealers.

Asia-pacific’s fourth quarter operating profit was impacted by the lower revenues in China and Japan, and particularly by $22 million of cost to implement restructuring initiative in the region, primarily the Indonesia closing. Reflecting that, operating profit decreased 72% to $16 million and operating margin was 5.6%, compared with 18.6% in 2004’s fourth quarter. Global expenses rose 18%, largely due to $11 million of cost for organization downsizing under the restructuring’s initiative.

Now, I would like turn to the year-end balance sheet, and full year’s cash flow statement. For 2005, we have record cash flow from operations of $896 million. Looking at working capital, and those account close to sales. So inventory days did increase by about four days, due to our shortfall versus sales forecast. Full year capital expenditures totaled $207 million, our investments for Colombia is captured in other investing activity on the cash flow statements and the other assets that account to the balance sheet reflects an increase due to the goodwill associated with that acquisition. In cash flows from financing activities, you can see the increase in debt incurred with the – just on to step up in the sharing repurchase program. Again we did repurchase 728 million in stock over the course of 2005.

Going forward, we have an existing $1 billion authorization that was approved last February, that we can begin working on to now that the two earlier authorizations have been completed. Subsequent to the quarter, we floated a $500 million bond, primarily to refinance the short-term financing that we drew on during 2005 for share repurchases. And as a final note, our Board last week approved a 6% increase in our quarterly dividend to $0.175 per share effective with the March 1 payment. That completes the wrap up of 2005, and I have just a few house keeping notes before I turn the call back to Andrea for questions.

First, as previously announced, we’re changing our segment reporting structure effective to first quarter to begin our new organizational structure. Going forward, we will report results of six segments of Commercial Business Units in North America, Latin America, Western Europe, Central and Eastern Europe, Asia-Pacific and China. We will provide you with restated, 2004 and 2005 quarterly results on this new basis in advance of reporting the first quarter.

Second, we will begin reporting option expense in the first quartet of 2006, using the modified perspective approach. The full-year 2006 impact should be on a $0.07 to $0.08 per share. And third, as we continue forward with our restructuring initiative, you can expect the implementation cost in nearly every quarter and in nearly every CBU, except volatilities well, as the amounts will vary by quarter and by Commercial Business Units.

As you seen today, we will provide details, as we begin each phase in a press release or 8K filings. Please understand that, any of these initiatives may be sensitive to our business and our circuits around the world. So sometimes you won’t have the details at the time you’d like. After we announce our actions for those impacted, you will have the details and that will help you stay in with the numbers released today. Now back to Andrea.

Andrea Jung, Chief Executive Officer, Chairman

Thanks Renee, that concludes for the prepared remarks on the quarter and the year end, and my view of, what we have been working on, since we saw you last. So we are going to just open it up now and again Susan, myself, Chuck and Renee, can take any question.

Questions-and-Answer Session

Operator

Thank you, Operator’s instruction. The first question is coming from Wendy Nicholson, please announce your affiliation, then pose your question.

Q - Wendy Nicholson

Sure, calling from Citigroup. My first question has to do with Eastern European profit margins; can you give us a sense if we stripped out, what the restructuring activities were in that region, whether the core business is showing strong profit margins or whether they are down, because of reinvestment opportunities?

A - Renee Johansen

Sure, Wendy it’s Renee, what I‘d like to say on this is, we’ve provided detail – where we intend to provide it with regards to specific market and different regions of the world. And we’re not going to get into every metric with and without certain measures this quarter. We’ve tried to provide the details on the cost to implement, and what you’ll have to do is take the information we provided to you and work that through. Now, that, I don’t know if Susan wants to provide any additional color on that.

Q - Wendy Nicholson

And what I am trying to get a sense for is, whether there is some sort of structural change in the profit margins for that business because there is more competition or that kind of stuff?

A - Susan Kropf

We are investing, Wendy, incrementally against the consumer in the context of advertising other brand awareness measures. There was some gross margin impact in this quarter throughout Europe, including Central and Eastern Europe, reflecting some investments, and some pricing and mix impact as we really was focused on driving the top line, there is some gross margin mix in that that region.

A - Andrea Jung

Going forward Wendy, Central and Eastern Europe be broken out as a separate Commercial Business Unit, so you will be able to see sales and profits and we will be identifying restructuring charges each quarter by Commercial Business Unit.

Q - Wendy Nicholson

Okay terrific, that will be helpful.

A - Andrea Jung

You’ll be able to see it every quarter.

Q - Wendy Nicholson

Okay, the second question I had, could you comment on the direct selling function you talked about, I guess, it surprises me that you are putting something in place that, the global in nature because of striking at a direct selling is so different region-by-region, I sort of wonder what you hope to accomplish by having a fees so far reaching and global?

A - Andrea Jung

Well, I think what we’re talking about is establishing a center of excellence in terms of share practices, on-field fundamentals, and again corporate oversight to the rollout of sales leadership, which will – it don’t have regional new ones to the center, it still, got a pretty much for corporate framework, and so I think, you know, Brian Connolly, who is leading that function and we also have taken one of our very, very experienced leaders from Europe, who will be working in addition to some other of the team who are specifically going to be in Asia helping ramp up, for example direct sales in China, providing corporate assistance to the local team there, as we now go out to really recruit and put the fundamentals of training and recruiting in to China for example. But a few things, just the oversize of the corporate framework to make sure that we are on track around the world as we accelerate sales leadership, understanding new answers to your point that are different by market. But keeping the framework and the timing of the rollout impact, spreading the fundamentals, one thing to say is, we will be doing, is training -- uniform training, a direct selling university in the second quarter where general managers and sales leaders from all market will be able to attend our own version, if you would, of ongoing excellence. So I think that the expertise in terms of developing sales leadership is what they will be able to help us to provide, it’s a not huge group, but I think it is extremely experienced, it provides some of the most longstanding understanding of direct selling and allows us to extend market-to-market, let’s just say India, to be able to transfer that knowledge and make sure that the corporate strategy of leadership is transferred worldwide.

A - Renee Johansen

Wendy, I would only add to that that I think that even as you say, sales is local, that is true, however there are basic even in types of leadership relating to just basic field fundamentals with respect to prospecting, appointment, training, development and actually are the same around the world despite local markets, local culture. If you look at other direct sellers as well, you would see fairly universal model from market-to-market and I think they are proven things that work across the world and that we’re just trying to make sure we got best practices in place throughout.

Q - Wendy Nicholson

Sounds terrific, thanks.

Operator

Your next question is coming from Bill Schmitz, please announce your affiliation then post your question.

Q - Bill Schmitz

Yeah, it’s Deutsche Bank, would you start with the Colombian impact on EPS for the quarter? I know it had, like 9% of the growth, Latin America was from that, but how did that impact profitability there?

A - Charles Cramb

It was very a little really, the, Colombia is a relatively small business, remember we prior to the acquisition of the, its fair bit, we did have a royalty stream coming in from that Country. So its impact, net impact is really minuscule.

Q - Bill Schmitz

Okay, alright, thanks, and then just in terms of some of the initiatives going forward, I think you said that, you’re going to increase advertising to 50% next year, but I think in your Analyst Day, I mean, you said, you are double or triple it over the next two or three years, so is there going to be a acceleration, I guess in 2007 onwards?

A - Andrea Jung

We will continue to see advertising increase year-on-year throughout the period that we are taking about. We are obviously making a significant step up in 2006 particularly in the United States.

Q - Bill Schmitz

Okay.

A - Andrea Jung

Hope that answers your question.

Q - Bill Schmitz

Yes, I thought it would be little bit higher, just because you said you had double or triple over in two or three years, so that means there is going to have be some significant increases in 2007 and 2008?

A - Charles Cramb

No, I think if you, you know, run the math over, I think, you’ll see significant increases coming up in each of the following years, but the first step of doubling, I think, I think is a very substantial increase.

Q - Bill Schmitz

Okay, great thanks. And then just in terms of the rep compensation structure, I know you are like reinvesting pretty significantly, and prove any earnings opportunity for rep is that begin already and that explains some of the negative price mix in this quarter in the U.S.?

A - Andrea Jung

No, that’s just something that we are really doing some very significant analysis on, as we speak. We are looking at it by market and not all markets are the same, and we are doing extensive evaluation of that in the first half of 2006 that’s not something that we generated.

Q - Bill Schmitz

Okay, then how come prices mix is so negative, is that just getting out of the Beyond Beauty staff?

A - Andrea Jung

Well, in terms of pricing, I mean, I think what we’ve said on November 15th is that, you know, we obviously saw in the slowing of sales and then exasperation by excessive price discounting, as you know, again sales were lower, and expectations on a market basis a lot of market used more frequent discounting, deeper discounts on products, and the yield did not have the same historical returns that we saw in previous years, but you know you are taking about from a pricing point of view, what I would say would be excessive discounting that, you know is an opportunity going forward, but certainly was applied in the back half of 2005.

Q - Bill Schmitz

Okay, just one last one, I am sure you are not going to answer the question, but on the $300 million to $500 million restructuring charges, is there any kind of update on what the savings might be?

A - Charles Cramb

No, we are not going to give that, it is a little bit too close to guidance, I will tell you those as the paybacks, as I have been looking at the programs, the paybacks are, you know, they are reasonable, they are strong, the programs are legitimate, and I am pleased with what I am looking at.

Q - Bill Schmitz

Great, thanks very much.

Operator

Your next question is coming from Bill Pecoriello, please announce your affiliation, then pose your question.

Q - Bill Pecoriello

Morgan Stanley, good morning everybody. On the, those savings, that are going to be generated can you give us some more color on the reinvestment needs? I know you have talked about the advertising in frame there, but in terms of the compensation structure, the commissions representatives, the price mix which would include things like promotion, discounts and mid-tier brand extension, you mentioned people development, I know you are going through this, but do you have any idea kind of to frame the reinvestment needs over that period through 2008?

A - Charles Cramb

Sure, and we’re not going to get quite as granular as the way you framed the question, but I think if you put it in the prospective of we are going to realize some significant savings from the overall restructuring program. Those savings, I think, as you are thinking about the business, those savings are the funding mechanism to reinvest in the business. We have given you some indication on advertising that’s a significant dollar increase, if you move after that 2008 period. So that’s one piece of it. The whole area of training, and you’ve have started to hear from Andrea a little bit about some of the things that we want to put in place, that will be a second piece. And we do have to address the whole area, the opportunity for the representatives in terms of their overall compensation scheme; the analytics are just starting now. So I would look at this in terms of -- it is the underlying foundation of funding for investment in the business to ensure that we get sustained sales growth over the long-term.

Q - Bill Pecoriello

Okay, and then in terms of the U.S., many of the leverage that you had pulled in ’05, the business wasn’t responding to so other than the increased advertising spend, what are some of the leverage that you will be pulling in ’06, and what gives you the confidence, that the business is going to respond, given some of the secular trends, and channels shift, and competitive strength in innovation there?

A - Andrea Jung

One of the things, that I think we talked about in November, were some issues in our Skin Care category, which obviously is a critical category for the United States, and I think there is a very robust plan, a very big delta ’06 to ’05 in terms of the pipeline, in terms of the innovative breakthrough products. Not just the advertising gains, but the products themselves. We talked about a mid-tier new brand or if you would reposition Solutions brand, which will have an ageless results franchise, which will trickle down technology, anti-aging technology in to the $12 to $15 price points. So in addition to significant support against Anew with a much stronger pipeline than ’05, we are also introducing in the end of second quarter, in to the second half, Avon Solutions ageless result, which is another I think a very strong Skin Care franchise which will be new into that market. So I think that those are significant steps in addition to just the advertising amount itself in the United States that will help resume activity in the market.

Q - Bill Pecoriello

And then, jump starting recruiting in the U.S. what – was there anything behind that?

A - Susan Kropf

Yes, I think that one of the things that we began to work on towards the latter part of fourth quarter was the rebuilding some slippage that we had experienced, in our up line leadership representatives, and we actually made quiet good progress, and had eliminated any deficit that we had as of the end of year, and are now building a positive comparison, which is meaning, obviously, more people recruiting and we have got to take the threshold calibrated properly. So we are expecting some additional support from an order standpoint in addition to the stronger category performance that Andrea mentioned.

Q - Bill Pecoriello

Thank you.

Operator

Your next question is coming from Chris Ferrara, please announce your affiliation, then pose your question.

Q - Chris Ferrara

Hi, Merrill Lynch, can you tell us about a little bit more on the strength in Brazil, and Venezuela, and Argentina, and you know what specifically might be going in on those markets to push up such a strong local currency growth?

A - Andrea Jung

Yeah, as Brazil had strong growth in Representatives, I think that double-digit growth in active Representatives during the year. Very strong performance in Beauty, Beauty was up, I don’t know, close to 20% during the high-teens. This was related to, number one, a number of very well integrated events, field and marketing integration, really company-wide efforts in terms of getting behind some of the major new launches in the Anew brand and other brand last year. As well as a significant step up in advertising, we have really pushed up our advertising investment quite significantly in Brazil last year, and I think that has proven to be a very, a very wise decision. And, you know, Venezuela and Argentina also had a strong performance overall from their representative count standpoint, and good growth in average order, good brand support, and overall we were very pleased with the whole South American group had very strong year in ’05.

Q - Chris Ferrara

And what was implemental, I guess, in Q4 to drive that, if there was any -- I would imagine there was at least acceleration in those markets in Q4, was there something different?

A - Andrea Jung

If I look at the different slots of sales indicated throughout the year I would say that’s the biggest delta in ’04 from a sale or revenue standpoint, would be order growth. There was a real focus on growing orders and it paid off quite nicely in the quarter.

Q - Chris Ferrara

Okay, and then can you just talk about Central and Eastern Europe on the top line and the deceleration there, and whether that was what you had expected and you know what’s driving that because sequentially now, you know, it seems to be continues to be declining?

A - Renee Johansen

Well, as we look at a number, just kind of breaking it down, I guess and as we look at the markets of Central and Eastern Europe, and particularly Russia, the largest by foreign market in that group for us. Although there was clearly a deceleration in top line growth, the preliminary data that we have on growth of the Beauty market itself and I would say it is quite preliminary. But what we have seen, as relates to the year overall and specifically the second half of the year, is that the market growth there has slowed very significantly. And we believe to be determined after this data is all finalized, but we believe with the growth that we did-- deliver of that,-- we still outpaced the market quite significantly, and as a result of that gain’s share. In the case of some of the other markets in the region in Central Europe, for example in Poland, there I would say the market growth appears to have been a little bit stronger. We probably lost a little bit of share there and we are focused on really rebuilding that with some focus on some key brands and some really major launches such as what we were very successful in doing in Brazil really company wide efforts around thriving a high degree of awareness and energy around the significant launches that are planned in Central Europe in 2006. So hopefully, as it gets larger obviously the rate of growth in Central Europe will not be what it was when it was a smaller part of portfolio but nonetheless we look forward to a strong contribution from that region in 2006.

A - Andrea Jung

I think that the overall company turn around plan is also applicable in terms of the initiative to driving Central and Eastern Europe, I think that the commitment to brand competitiveness, I think the pipeline it will color inter as well as significantly enhance advertising in that commercial business unit as well as the focus on sales leadership on the channel side and really accelerating itself leadership that’s really no different than anywhere else and you obviously had margins that were much higher to start with as we looked to investing to continue to maintain and that will be a advantage we had in share.

Q - Chris Ferrara

Got it and then just finally can you talk a little bit more about what you have said on rep activity in China and how I guess things look better, you know to imagine I get reorder rate have to pick up unless your few things you can have no inventory left at some point so can you just give a little more color on what you saw?

A - Susan Kropf

Chris, if we look at the average size of their order sequentially we saw improvement in the fourth quarter from where we were in the third quarter, which was sequentially better than the second quarter. And obviously they are still down year-over- year, but we, that is what we are seeing on that front. Their participation in ordering remains on far with where was it year ago at around 90%. And just qualitatively and quantitatively we were over there when we made the tour around the world right coming out of the box on January 3rd there was a large group beauty boutique dealers in Hong Kong as we were launching the fourth quarter line etc. First 2006 program and I would say that’s the moral is very good in talking to some of the top dealers, I think there was a feeling that down they felt good about the program and the communication from management.

Q - Chris Ferrara

Got it, thanks a lot.

Operator

Your next question is coming Amy Chasen, please announce your affiliation and then pose your question.

Q – Amy Chasen

Goldman Sachs, a couple of things, first of all on sales leadership you mentioned the accelerated global rollout and I know you were going to do Latin America in the fourth quarter did you do that and what are some of the initial results that you can share with us?

A - Susan Kropf

In Mexico we are largely rolled out, Brazil not yet in terms of the large market for the region Brazil we are still working on that and that is an active project for us in 2006. As we relate to the results from leadership, it does as I think we have explained earlier it does take time this is not something that overnight we are going to implement leadership and we are going to see an immediate lift. There is a transition period, a training period, a development period, so it will take some time. We have not -- our plans are not assuming any incremental lift from leadership in Latin America in 2006, but we are very confident that over the long haul it is absolutely the right strategy and will help strengthen our direct selling position in that region.

Q – Amy Chasen

And so can you just talk a little about Mexico and, that business has been weak for so long and it’s been historically such a strength for you guys. What you are doing there to fix it any further color?

A - Susan Kropf

Well I think, Andrea mentioned the person, who I think is quite skilled from a marketing perspective and with his strategic skills to lead that market we just announced that placement in a couple of weeks ago. I think it is the question of a major shift in competitive intensity in that market and I think though that underlying the competitive intensity it’s still the importance of direct selling from a cultural standpoint in that particular market, which I do not believe well – will diminish at all. So it’s a matter of getting this leadership program firmly in place and getting through the transition and at the same time strengthening the marketing offering I think that’s very critical. So really upgrading from a product pipelines stand point as Andrea as mentioned a couple of time, as well as some of the brochure and merchandising practices to make them more compelling. So, we are very focused on the market and it is a tougher market then it used to be first but nonetheless you know over the long haul we certainly believe that our performance can be and should be better than the performance we delivered in 2005.

Q – Amy Chasen

I guess I was just a little bit surprised given the cultural affinity for direct selling in that market that you haven’t seen any initial benefit from leadership realizing that it takes time, but I just remember in the U.S. there was a fair amount euphoria around that and it doesn’t seem like to you are yet witnessing that in Mexico?

A - Susan Kropf

Yes, but Amy we are just literally put the leadership in place, I mean there are some divisions that just adapted to leadership model within, I am talking a couple of months some are just turning over as we speak. Though its still very, very new in that market, it took quite a bit of time, there is a large set of control between this for sales managers and Representatives in that market and the evolution of the models to do it the right way and they did do it right way by the way, but it has taken – its taken a little bit more time than we thought, but we are there now but I think we just to need to ourselves a little time to see the result.

Q – Amy Chasen

And can you also just talk about broadly, the sales in the fourth quarter came in better than I had expected even if you exclude the Columbia impact and yet you are looking for sales to be essentially flat in ’06. So a deceleration from the fourth quarter level, why is that?

A - Charles Cramb

Amy, as we are looking into our next year we have said its going to be flat, only slightly up we did a lot of transition to go through this – there is going to be a lot of change out in market place as we go through our barriers reorganizations. We feel that this is an appropriate way to think about the business it is also appropriate way to cause the business in terms of what we are striving to do from a restructuring perspective. I cant comment on, what you had recently assumed and why we are up versus that for the fourth quarter, but that perspective in terms of going forward for next year, it is the year of transition.

Q – Amy Chasen

Okay and last but not least Chuck, can you give us sort of a range of what you expect charges to be in ’06 even if you won’t give quarters?

A - Charles Cramb

No, I can’t Amy that’s guidance.

Q – Amy Chasen

Okay, thanks.

A - Charles Cramb

Sure.

Operator

And next question is coming from Constance Maneaty, please announce your affiliation then post your question.

Q - Constance Maneaty

Prudential, good morning everyone.

A - Charles Cramb

Hi Constance.

Q - Constance Maneaty

And way back at investor meeting you laid out a list of challenges, now they you have some time to address them all is that working and then could you give us a sense of which you think would be the easiest for the organizations to assign to and which would be the most challenging?

A - Renee Johansen

Yeah I mean again we – I will just come back to saying that I think that the challenges that we identified are still very much I think the once we feel contributed to the flowing in 2005. There are certain things that take a little bit longer, but certainly one of them one thing we talked about was, various to invest probably the amount that we needed to invest in that I think its been addressed. That will be addressed across the year, so I mean if it is something we already said we are up in the advertising by 50%. We know when we are doing it by markets and I think that is something with that we immediately did that you gone to see as soon as, the first quarter in terms of investments in the brands. There are going to be certain things when we talked about them in terms of the brand focus, solutions and ageless results. Even in the second half the launch of that sub brand and so that’s happening in 2006. We are working on some of color -- color cosmetics and towards the real re-ignition of that brand. I think we have got a strong pipelines but again some of the things we will be able to do it the multiyear, but certainly we have got some strong product lined up in terms of launches in 2006.

Sales leadership is one of the things that we talked about in terms of, accelerating it. So as we present, we are not going to necessarily see the results in 2006, but the acceleration of the launch more aggressive launch move up of launches whether it is Central and Eastern Europe or some in Latin America, we are going to do that and I don’t think that you are going to see the actual result of that in 2006, but the activity and the initiative certainly will be something that we will accelerate. Organization effectiveness is a huge one, I mean, I think I just mentioned that we are flatting the organization and that is something that we have started on as we came out of the year, which was reflected in the fourth quarter charge and that we are effectively working on now. So benefits from that as well as the program it self are going to be 2006. Other of the restructuring costs that Chuck said, it’s a multi year effort some will and some will not happen in this year, but I think the activity against all of them is a urgent and very accelerated as the results if we sum in ’06 some cost benefits. Some things like the organization effectiveness then some, spending to get us back on track in terms of the brand you will start seeing that right away too.

Q - Constance Maneaty

I am surprised how quickly the change to the organization is coming through. How many layers are you going from and what is the target?

A - Renee Johansen

Well we are targeting half the number of layers but just to give you an idea, I mean you know not being very specific I mean you can see companies that can have seven to eight layers as sort of world class and as I said, we are nearly having our customarily having. So it just depends this is not different number of layers by different regions, but if you take overall Avon there is an opportunity to have the number of layers in the company.

Q - Constance Maneaty

And so the changes to get there would be taken this year?

A - Renee Johansen

Yes.

Q - Constance Maneaty

Okay, just real simple question, what was I forget the name was almost pharmaceutical skin care product you put out for fourth quarter. How did that do if you had skin care sales decline and also hence how the foundation businesses is doing?

A - Renee Johansen

A new alternative was the product that you are talking about that launched in the fourth quarter of the total sales I think we -- the primary large market that launched with the United States and Europe with ahead of expectations very significantly in Europe and most of the markets in the U.S. and Mexico it was slightly below the new brand itself did okay, and since the fourth quarter all those certainly, not the kind of growth rate that we had previously but again it was approximately, what we expected but less in the U.S. and Mexico.

Q - Constance Maneaty

Okay.

A - Susan Kropf

Hi, with regard to foundation as I mentioned U.S. Beauty cost was up 8% in the quarter foundations was the major contributor to that, but we also increases in fashion accessories and watches.

Q - Constance Maneaty

Is the foundations business meeting the expectations?

A - Susan Kropf

Yes they are.

Q - Constance Maneaty

Okay great, thank you very much.

Operator

Your next question is coming from Sandy Beebee, please state your affiliation then post your question.

Q - Sandy Beebee

HSBC, it seems like you have been able to turn around the UK business much more quickly then the U.S. business how soon able to recover, and I guess what just is happening differently down in the UK versus the U.S. and obviously size of the market is different but why do you think the UK business are able to stabilize, relatively quickly?

A - Renee Johansen

Well the UK is a -- has worked very hard on trying to develop innovative marketing offers and I think they have done a good job with that. They also, rolled out leadership in 2005, that’s completely rolled out now and they have begun to see order growth in that market after quiet a number of years where order growth was elusive for them. So, I would say it’s a combination of both of those obviously the UK is competitive market as well and they continue to be vigilant in that, in that area as related to making sure that they have a, kind of commercial edge from a merchandizing perspective as to the brochure offering versus the nearly retails, opportunities that is in the past. So they have done a nice job with that I think.

Q - Sandy Beebee

And do you think that there are any as soon as that you can take away from the UK program and as far as the U.S. to try to improve their top line performance?

A - Renee Johansen

Well I think the whole structure of these global business units that Andrea had spoke about earlier as well as its global direct selling position on the sales side is an attempt do just that. It’s an attempt to kind of get that sustained high standard to the extent that we know things that work to provide the -- organization structure and the wiring such that those kinds of successes can be leveraged in other markets.

Q - Sandy Beebee

And then in sense of the ARP implementation in Europe can you talk a little bit about how that is going and where do you expect that system to be rolled out now?

A - Charles Cramb

Sure, we actually went live with ARP in Germany on November 1st had a very good go live performance went through year end with only a few very tiny wrinkles. So, from my past experiences rolling out a system like that this is a very good start in terms of what to look forward to in the future in 2007 we will be implementing in Poland, the UK, and the U.S. and some of that implementation will carry forward in to I mean 2000 I said 2007. 2006 we will be implementing in UK, Poland, and the U.S. with some of that implementation carrying forward in to the 2007.

Q - Sandy Beebee

As you told give us a sense when we should expect to see some benefits in the European implementation?

A - Charles Cramb

You will see the benefits in terms of our factory management, it has to do with how you are running control and manage your factory. I think if you start to look at the successes in terms of our overall factory cost and our overall asset investment inventory those will be the key trademarks of when we get to benefits. It is a global system, so its benefits come as you cascade throughout the Avon universe not I am sorry market-by-market. So we are really talking about an initiative that sure would be some benefits this year and then they will start to accelerate next year.

Q - Sandy Beebee

Thanks and one last question just in terms of the level of discounting that we saw this quarter, should that start to alleviate starting in 2006 as you start to ramp up the advertising spends?

A – Andrea Jung

Yeah I mean we certainly in our diagnosis of the back half of 2005, we feel that we used excessive discounting in sense that we are looking to improved in terms of margin improvement in ’06, based on the gross margin aspect of price yield.

Q - Sandy Beebee

Thank you.

Operator

Your next question is coming from Linda Bolton Weiser, please say your affiliation and pose your question.

Q – Linda Bolton Weiser

Thank you. Oppenheimer. I was just curious if you thought that Nutura recent entry in to Mexico might be hurting you or not maybe because of that are different price points and products?

A – Andrea Jung

Nutura entered Mexico only in the later part of last year, I believe it was in September. So the possible the reason we see of the entrance across the size of the business at this point in time is really immaterial, certainly in 2005 we would not have a material impact on a result.

Q – Linda Bolton Weiser

Well I mean what you expect going forward I mean do you think they could take away from some of your recruitment activities or?

A – Andrea Jung

Well I mean let’s look at Brazil where Nutura is, obviously Nutura is home country and stronghold obviously and we grew representative by a 10% in the fourth quarter and we had a smashing year in Brazil. So we are playing at a slightly different price point in the market and while some representatives do participate in both companies brand in general. I think, as long as the market is growing and the Beauty portfolio is robust there is more than enough room from more than one direct selling player and on, we are obviously committed to improve our performance in Mexico.

Q – Linda Bolton Weiser

Okay as this time a question relating to your increase in advertising expenditure, are you making any changes in how you measure or monitor the effectiveness of the advertising or do you feel that you have good measures in place to look at that?

A – Andrea Jung

I think I have mentioned when we were together on November 15th that we really did part of a first time real quantitative look in terms of our marketing mix analysis that the impact of advertising on the United States business by category, by brand etc. And I think that keep learning from that would say that there is certainly is a strong impact over index response on advertising. We are not talking about levels of advertising, PNG and L’Oreal outside lots of advertising, but for the amount that we have spent even forget about 2005 in the United States there is the direct positive corollary effect on sale. They were negative corollary like the investing or disinvesting if you would. So I think we have learned a lot more starting with the analytics that we put in the back half of this year there was a real learning’s that we are applying. We are doing this in the other market as we speak, as we look to double the triple the advertising spend over the next several years, we are going to be using analytic to play it out by brand and by country to understand the return. So I think this is a good new fact sates to discipline that we are putting in against now what will be a much more significantly at resource line.

Q – Linda Bolton Weiser

Okay and then just one final question on Japan, how long do you expect this transition period to allow while you transition for the new business model?

A – Andrea Jung

Its really hard to say Japan, things take time in that market as you know and we look to reasonable amount of efforts still required still ahead of us in that market. So, I don’t to expect to see any huge tilt there from its top line of perspective there in the short term.

Q – Linda Bolton Weiser

Okay thanks very much.

Operator

Your next question is coming from Alex Longley, please state your affiliation then you’re your question.

Q - Alex Longley

Hi, Buckingham, could you give us more detail on your thinking on where pricing should be, I am looking specifically at Skin Care in the U.S. versus Olay which is obviously really important for us there. Where should Anew be versus Olay, where should Avon Solutions be and on light of looking online and I look at Anew online on your site and some important and Anew SKU’s are being price promotion as two for the price of one and those are below Olay, but other important SKU’s are way above Olay. Where should you be in pricing and, I know that you highlighted this is a major issue, which is why I am talking about.

A - Andrea Jung

Yes. I give the new Avon Solution’s ageless results franchise as the price – comparative if you would to the Olay brand $12 to $15 U.S. retail. The Anew brand should be higher than Olay, it has been, I think when you look at the technologies that are -- I mean the strong hold has been in the equity of above $20 price points and that’s what Anew should be. And ageless solution, the ageless result is part of solution should be the more mid-tier skin care brand dealing with a different consumer price point receptivity and that’s how we are going to positions sales portfolio.

Q - Alex Longley

You don’t think Avon Solution should be below Olay?

A - Andrea Jung

Well in general term product-by-product, but I think there will be products in Avon Solutions line that are under $10, but I think that for the technology there that again set even that’s but Olay when we talk about the, a new technology differently packaged, different positioning, to trickle down and we were– this is not the me too technology. This is world class leading technology that’s coming out in Anew and I think that we got proprietary technology that’s very strong I think with more investment against that brand, so the advertising investment as well as for brochure state investment and federal, I think we can have a very compelling mid-tier offer. So I am not going to go – I cant talk product- by-product, but I think it will be competitive to and there are products in the solutions brand that are under $10 -- $8 to $10. So I think it would be -- I think will priced against that…

Q - Alex Longley

Okay. Thank you.

A - Andrea Jung

There’s time, I think for one last question.

Operator

Your last question is coming from Laura Lieberman, please state your affiliation then pose your question.

Q - Laura Lieberman

Thanks Lehman Brothers. I just want to spend a little bit more time on China as I understand it there is kind of – you guys have eluded to sort of a hybrid model in the test market so far with how direct selling as to interacting with boutique owners and if you could just give us all a little bit detail on how that compensation and relationship between the two is working, some of the details of that?

A - Andrea Jung

Okay, well I think the most important thing is that are our planned hybrid model is the right one for us. It’s really hard to talk about how the hybrid model is working, because technically that is not some thing that we are -- we are doing anymore than a small test as it relates to a couple of provinces and that test is intact in terms of numbers. I think -- well we believe is that the way we have structured the going forward hybrid between direct selling, once we can start recruiting as well as the repositions that we have for Beauty boutiques, we will be able to talk more about that after we do get the license. We feel that we have a solid plan for a hybrid model that can coexist very well in the future, that’s where we are.

Q - Laura Lieberman

So there is a, – is there a reason then cannot talk specifically about compensation levels for boutique owners versus direct selling representatives and the relationship between two right now in the existing market?

A - Andrea Jung

It would really be premature to discuss that before we have the approval to direct sell in the market on a broad basis.

Q - Laura Lieberman

Okay, all right thank you.

A - Andrea Jung

Thanks Laura. Okay, thanks every body and thanks for being with us this morning, take care.

Operator

Thank you ladies and gentlemen, this concludes today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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