Avon Products, Inc. Q1 2008 Earnings Call Transcript

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 |  About: Avon Products, Inc. (AVP)
by: SA Transcripts

Avon Products, Inc. (NYSE:AVP)

Q1 2008 Earnings Call

April 29, 2008  9:00 am ET

Executives

Andrea Jung – Chairman & Chief Executive Officer

Charles W. Cramb – Vice Chairman, Chief Finance & Strategy Officer

Renee Johansen – Vice President Investor Relations

Analysts

Wendy Nicholson - Citigroup

Andrew Sawyer - Goldman Sachs

Lauren Lieberman - Lehman Brothers

Ali Dibadj - Sanford C. Bernstein

William Schmitz - Deutsche Bank Securities

Christopher Ferrara - Merrill Lynch

Bill Pecoriello - Morgan Stanley

Filippe Goossens - Credit Suisse

Alice Longley - Buckingham Research

Richard E. Lyall - John W. Bristol

Operator

Good morning. My name is [Selina] and I will be your conference operator today. At this time I would like to welcome everyone to Avon's first quarter 2008 earnings conference call. (Operator Instructions)

I'll now turn the call over to your host, Andrea Jung. Ms. Jung, you may begin your conference.

Andrea Jung

Thank you. Good morning, everyone. Thanks for joining us to discuss Avon's first quarter results. With me today are Chuck Cramb, our CFO, and Renee Johansen, our VP of Investor Relations.

Since some of our remarks this morning may include forward-looking statements, we just need to refer you to the cautionary statement in today's news release.

For today's call, I'm just going to begin with some high-level comments on the quarter, then I'm going to turn over to Chuck to walk you through the quarter's financial results in more detail, and then we'll take your questions.

So all in all we were very pleased with the progress we made with our turnaround once again this quarter. Revenues grew strongly, up 14% or 6% in local currencies, with strength in developing and emerging markets that more than offset challenges in North America.

Active representatives increased 14%. That's one of the highest increases that I've seen in my tenure as CEO.

Beauty was up a strong 17%, with double-digit growth in each of our four Beauty categories.

Earnings per share were up 26% in the quarter, and importantly, we captured 90 basis points of operating margin expansion, delivering the highest margin in the last two years and beginning to improve profitability as we said we would.

You know, as I think about my key takeaways for the quarter, I believe our successful performance was the result of our combined strength against each of these four dimensions: geographic leverage, active representative growth, Beauty gains, and margin improvement. So this morning I'm just going to talk briefly about each, beginning with some comments on portfolio strength.

Obviously, any discussion of our geographic strength needs to begin with Latin America. We saw strong double-digit increases in most markets in this region, capped by an exceptional increase of almost 60% in Brazil. With nearly 20% growth in active representatives in that market and nearly 60% growth in Beauty, Brazil's performance reflects the very successful impact of our balanced brand and channel strategies as we continue to strengthen our competitive position in this priority market.

I'm equally pleased with our turnaround profit in Mexico. After rebuilding the field over many quarters, in the first quarter this market broke through. Revenues grew 9%, driven by active representative growth of 12%. This is the result of relentless focus on the fundamentals and patience to execute for the long term. We will continue to follow our playbook in Mexico with an added focus on brand competitiveness now that we've stabilized the field.

In addition to Latin America we saw exceptional strength in most of our other developing and emerging markets across the portfolio.

In China, as you read this morning, revenues grew 29%. Active representatives in China grew an impressive 99%, so we doubled an already meaningful base in the quarter. I'm pleased that we continue to successfully build our business in this important strategic growth market for the company.

Turkey continues to be another developing market success story. Revenues grew almost 30% in first quarter, further strengthening Avon's number one leadership position in both Beauty and direct selling in this market.

In the Philippines we saw revenue growth of over 30%. This market now takes its place among our top contributors, having been transformed through the power of our sales leadership program.

We also feel good about our progress in Central and Eastern Europe. Active representatives increase 25% in the quarter as the region benefited from our investment in the launch of the three-week campaign. With field fundamentals improving, our focus now is on driving order size increases through sharper merchandising offers. Revenue strengthened as we exited the first quarter, and I'm very pleased about the power of the strong marketing and RVP programs we're implementing in this region going forward.

Western Europe posted an impressive performance, with revenues up 17%. You know, noteworthy to me is that we achieved this strong increase despite the announcement of dramatic restructuring of the direct selling organization in a number of markets in Continental Europe. So very strong communication and execution of a bold plan by management in this region.

Turning to North America, revenues were down 6% due to the impact of macro economic weakness and, to a lesser degree, service challenges in this region. On a positive note, active representatives in North America were up 2% in the quarter. Our continuing investment in the Representative Value Proposition helped mitigate the impact of a 30% year-over-year rise in gas prices. Average order, however, was clearly affected by the declines in consumer spending as well as by product shortages. We saw the biggest impact from the weak economy in NonBeauty, down 9% in the quarter reflecting trends in the overall retail sector.

You're all aware that we faced service challenges in North America in the quarter. We've moved rapidly to address these issues, and we expect to see improvements in service from the current levels as we move through the second quarter. Just to give you some perspective, we faced service challenges on a smaller scale in Europe last year in early 2007, but with an intense focus on process and system improvements, we were able to fix the issues as we moved through last year. As a result, service in Europe has been running at extremely high levels for the past six months, so I expect to see the same focus payoff in North America as we move forward.

Importantly, even during this challenging cycle in North America we continued to strategically invest in this business so that we are well positioned with the macro environment shifts. We sustained advertising investment in the brand during this quarter and also continued to invest in a full range of RVP initiatives.

In addition to the same focus on improving economics for U.S. representatives as we've talked to you about over the past several quarters, in the first quarter we were also pleased to add a new partnership in North America, with well respected financial guru Suzi Orman. Suzi's endorsement lends credibility to the Avon earning opportunity as a viable source of income for women, particularly during these challenging times. She's helping to educate our representatives on how to build their businesses and how to navigate the economic downturn in terms of savings and investments.

So we're staying the course in North America. Looking ahead to the second quarter, we expect the degree of decline in overall revenues for this region will be less than in the first quarter. Most importantly, we believe that the strong momentum we're seeing in developing and emerging markets will continue, more than offsetting weakness in North America, and driving another year of sustainable growth on the top-line for the total company.

So that's the perspective on our performance across our geographic portfolio in the quarter. Turning now to a discussion of active representatives and Beauty, these are really the two key drivers of our success across the enterprise.

I was extremely pleased with the 14% growth in active representatives during the quarter. This is the metric which in my mind truly defines the health of our channel. We've seen active representative accelerate from the mid single digits to strong double-digits since our turnaround began, so clearly our investments in RVP continue to pay off. We invested an incremental $37 million in RVP in the quarter, driving active representative increases in every one of our six commercial business units. We aggressively leveraged analytics to target spending for maximum returns based on two years of learning.

Key areas of RVP focus during the quarter included the continuing rollout of sales leadership across every geography, the introduction of new key business tools in both developed and developing markets, and enhanced incentives in compensation structures. Also in the quarter, in addition to our $37 million investment in RVP we invested in representative recruiting advertising in 12 priority markets, and these continue to pay back at exceptionally high levels for us.

Turning to Beauty, here, too, we saw strategic investments pay back nicely. Advertising in the quarter increased 14% over the prior year to $82 million, with advertising investments in line with growth rather than significantly ahead of growth now that we've reached meaningful scale. We were very pleased to see that this moderated rate of growth played out exactly as expected in first quarter, still driving impressive overall Beauty growth of 17%.

Color was up 15% on the continuing momentum of the Avon Color brand which we launched last spring. Results included strong performances for the classic Ultra Color Rich lipstick as well as Supershock mascara, which was our newest mascara innovation.

Skin Care was up 13%, a nice acceleration from last quarter. It was led by strong performance of the Anew brand, including the introduction of Anew Ultimate Day Cream and Anew Ultimate Eye Contour System.

In Fragrance, we saw exceptional growth of 20%, driven by a robust global pipeline in the [max] and value segments. We also continued to benefit during the quarter from celebrity and designer alliances at [inaudible] price points. For example, our Christian Lacroix franchise has delivered $100 million in sales to date and is our largest global franchise and fragrance launch ever.

Personal Care grew 15%, with strong performances by our Foot Works and Naturals lines, as well as the launch of our new Live Botanicals line in Latin America and North America.

Our strong across-the-board performance in Beauty was fueled by the continuing power of the Hello Tomorrow advertising campaign, with competitive levels of media spending in virtually all of our top markets. In second quarter this campaign is being refreshed with the introduction of Avon's new celebrity spokesperson, Reece Witherspoon. Reece will appear in all Avon Color advertising in 2008 as well as in the Avon brochures. In the fourth quarter Reece will also appear in advertising to support the launch of our newest fragrance alliance, with Emanuel Ungaro, a European designer, modeled on our success with Christian Lacroix.

In terms of other fragrance alliances, we were also very pleased to announce during the quarter that Patrick Dempsey will become Avon's newest celebrity fragrance partner. The alliance with Patrick will significantly strengthen our position in the Men's category, building on our success with the Derek Jeter franchise. The Patrick Dempsey fragrance will launch this fourth quarter in North America, and we'll have a global launch in late 2009.

I think it speaks strongly to the power of Avon's channel and geographic reach as well as the iconic reputation of our brand that we've been able to attract so many image-enhancing partners to our franchise. So overall, our alliance strategy is clearly helping drive brand competitiveness and serve as a key pillar in our turnaround.

I want to end my remarks before I turn over to Chuck with just some comments on margin. When I spoke to you last quarter I told you that our focus in chapter two of the turnaround would be on delivering sustainable profitable growth. I'm very pleased that we began the year not only with strength on the top-line, but with a 90 basis point improvement in operating margin as well. As I mentioned, operating margin in the first quarter was the highest in two years. Margin levels benefited from leverage on higher sales. Gross margin improvements also contributed to the gain.

Net per unit was up, including early results, as we implemented pricing opportunities guided by elasticity analytics. For example, we were able to drive meaningful net per unit gains in Skin Care in the quarter [inaudible] selective pricing against key and new innovation.

In first quarter we also successfully [ZOG'd], delivering zero overhead growth on period operating costs. ZOG philosophy is alive and well. It's become a way of life for us, and we will continue this in the next chapter of our turnaround.

So as we begin chapter two of the turnaround year, I'm pleased with our first quarter margin performance for the full year. Despite challenges in North America, strong growth in our developing and emerging markets coupled with benefits and lower costs from the company's turnaround strategy give us confidence that we can achieve an operating margin approaching 2005's level as we planned.

So with that I'll turn it over to Chuck for some additional financial perspective on the quarter. Chuck?

Chuck W. Cramb

Thanks, Andrea, and good morning, everyone. Let's get right to some of the highlights for the quarter.

We began 2008 with solid revenue growth of 14% or 6% in local currency. Our strong international performance more than offset the softness in North America. We continued to see strong growth in both our developing and our emerging markets. Our well balanced geographic portfolio has served us well.

As Andrea said, our sales within Beauty, which grew 17%, were also well balanced. All four categories grew double-digit.

And our channel performance was strong. Active representatives were up 14% this quarter. Our investments in RVP continue to pay off and to strengthen our channel. The increase in active representatives remains a major driver of our overall business growth.

This well-balanced growth in terms of geography, product category performance and through the continued strength of our channel gives us confidence to reiterate our guidance to achieve a full-year operating margin approaching that of 2005.

We began to make progress on the operating profit margin in the first quarter. It improved 90 basis points versus prior year, and improvements in margin should accelerate through the year. We'll see increasing benefits from restructuring, from PLS and SSI initiatives, including significantly lower cost to implement these programs. We'll also continue to benefit from the impact of our ZOG mentality on our period overhead expenses.

So let's look at what drove the operating margin improvement this quarter. Gross margin of 63.1% compares to 61.9% in the prior year. The 120 basis point improvement is primarily due to increased pricing and a decrease in inventory obsolescence offset partially by unfavorable mix. We did benefit from no further PLS inventory obsolescence charges, which had negatively impacted the 2007 quarter by $12 million or about 50 basis points.

As we said before, our advertising level this year should grow in line with our sales growth as our analytics indicate that we are at about the right scale. And in line with that, the total first quarter advertising spend of $82 million was the same percentage to total revenue as it was in 2007.

We incrementally increased our investment in our representatives or RVP by $37 million during the quarter. This is somewhat ahead of the sales growth, as we said it would be. Investing in RVP will continue to be a key strategy. We'll do it through continued implementation of our sales leadership program, increased sales campaign frequency, improved incentive programs and improved commissions. We have a powerful channel. Our active representatives are our economic engine, and RVP the essential fuel driving the 14% active representatives growth. This bodes well for continued top-line growth.

Our overall SG&A expense increased $167 million during the first quarter. This increase was due to the weak dollar combined with higher variable expenses such as freight and commissions. These expenses closely follow the growth in sales.

We also had higher restructuring related costs on our previously announced initiatives. Costs to implement restructuring of $26 million were up by approximately $16 million versus the prior year quarter.

Our period overhead expenses on a constant dollar or local currency basis were flat when compared to the prior year quarter. Thus, they were lower as a percentage of revenue, down over 1 full percentage point.

We did deliver zero overhead growth. Our ZOG mentality, our philosophy to hold and contain costs, down well below the rate of the sales growth, to constantly and relentlessly look for productivity and cost efficiency improvements, is a very important component for our strategic growth. I'm very pleased to see this mentality taking firm hold at Avon.

Let me now update you on our overall restructuring program as well as two strategic projects: our product line simplification and our strategic sourcing initiatives.

We remain on track with our overall restructuring program. For the first quarter, our cost to implement restructuring initiatives totaled $26 million. That brings the total cost to date to $469 million. Actions implemented under these programs have resulted in savings of approximately $63 million in the first quarter.

We continue to expect the total cost to implement our multi-year program to be in the range of $530 million. And here's the payoff. The total program is still on track to deliver savings in excess of $430 million a year when fully realized in 2011-12. Restructuring savings are still expected to reach $270 million in 2008 and $300 million in 2009.

Now I'd like to share with you an update on PLS. We began to implement PLS in the U.K. during the first quarter of 2008. Early results are continuing to be encouraging. As we presented at CAGNY, the first campaign impacted by PLS reversed early 2008 trends of roughly flat sales and lower average orders. We are seeing higher campaign sales and an increase in the average order. Representative reaction has been very positive as well. There has been no negative noise.

Proper communication to the representatives on how to handle the shift from the old brochure to the new brochure, with fewer SKUs, has resulted in an improved selling experience for our representatives and it has created an enhanced shopping experience for consumers. Some of you have seen the beginning of our PLS communication with U.S. representatives. It is very similar to how we handled this in the U.K.

What you should remember is that the transition will continue to the end of 2009 as we deliberately take time to implement the program. We continue to expect the first benefits of approximately $40 million to flow primarily in the second half of 2008. We believe the benefits will then grow to about $120 million in 2009 and go out of 2009 on an annualized rate in excess of $200 million, which would then be fully realized on an annual basis in 2010.

Moving now to SSI, our initiative to reduce direct and indirect costs of materials, goods and services. Under this initiative we're shifting our purchasing strategy from a local commodity oriented approach to a globally coordinated effort. It will leverage our volumes, allow our suppliers to benefit from economies of scale, utilize best in class sourcing processes and tools, and better match our suppliers' capabilities with Avon's needs.

We've completed wave one and have started wave two. We delivered approximately $20 million of savings in the first quarter of 2008. We expect to realize benefits of approximately $100 million in 2008, growing to about $175 million in 2009 and to be then in excess of $200 million by 2010.

Like other CPG companies, we have begun to see some pressure on our input costs. However, we believe that those increases will be manageable as we offset them with pricing and productivity improvements.

Now I'd like to move over to the balance sheet and cash flow statement and just call out a few specifics.

Our net operating cash flow for the first quarter improved by $119 million versus a year ago to a net use of $41 million. This was due to higher net income, favorable accounts receivable movements, and lower post-employment plan contributions.

Our inventories totaled $1.2 billion at the end of March compared to $1 billion at year end. This increase reflects the growth and the seasonality of our business as well as the impact of farm exchange.

Year-on-year our inventory days are up slightly at the end of March. We still expect to reduce this by three to five days per year for each of the next four to five years, and we have programs that are at various stages of implementation to assure that. And I think I should just briefly list them.

We have a new inventory life cycle management process which will help better control new product entries as well as old product exits. We have PLS, which drives fewer items to forecast manufacturing to warehouse. SSI, which will not only costs but will improve just in time delivery from a few strategic suppliers. ERP, it's a tool to better plan and to manage our factory production against our market demand schedules, and sales and operational planning, which integrate the market forecasts with supply chain to help build and fulfill the demand schedule efficiently. And finally, we are making inventory performance one of our critical measures to be used to evaluate incentive pay.

We also repurchased approximately $65 million of stock in the quarter, 1.7 million shares, and share repurchase continues to be an active component of our cash management strategy.

So, to summarize our performance, we have record first quarter sales, operating profits, net income, and earnings per share. Our strong sales growth reached 14%. Growth was strongest in our Beauty category, which was up 17%. All four categories within Beauty posted double-digit increases. Our growth was strongest in emerging and developing markets, where we have invested aggressively.

Advertising grew in line with our revenue growth. RVP investments increased ahead of sales in the first quarter, driving the 14% active representative growth. Our period overhead expenses were flat in the quarter, as we did achieve ZOG. We incurred $26 million in costs to implement restructuring initiatives and achieved $63 million of benefits this quarter.

Our operating margin began to improve in the first quarter, although the largest gains are expected during the second half of 2008. And our EPS was $0.43 a share, a 26% increase.

I believe our performance this quarter is further solid evidence that our turnaround is working.

With that, I'll turn it back to the operator, who will explain how our question-and-answer session will work. Thank you.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Wendy Nicholson - Citigroup.

Wendy Nicholson - Citigroup

My first question has to do with Brazil. I don't think you gave us what the local currency was in Brazil, so if you could give us that and give us a sense for what exactly drove that. I heard 20% increase in reps, but still there's got to have been a huge uptick in average order size or something to get you that kind of number.

Andrea Jung

It was about half, so it was about 30% with the local currency growth. I would just say, Wendy, bold moves are paying off in this market, obviously, great growth on a large scale, and the scale is pretty huge.

But what I'm pleased about is exactly what you said, that this is balanced productive share growth so we've got both representative growth as well as growth in terms of the average order. The sales I think were driven a lot by Beauty broad-based across all the categories, advertising, which continues to drive. I think [inaudible] productivity has been very successful in this market giving us some of the highest paybacks.

Wendy Nicholson - Citigroup

And is it your sense that the industry is growing really rapidly or did you have some particular recruiting campaign or something like that going on to drive that growth in your reps in the quarter?

Andrea Jung

Well, we made and continue to make heavy investments in RVP, as we talked about in the turnaround. I mean, I just sum this up by saying, you know, as Chuck said, for the company I think the turnaround plan is working, but Brazil is probably a great microcosm of the four-point turnaround plan: take costs out, put money into the channel, put money into the brand, and drive and defend share. And I think we're doing exactly that.

Wendy Nicholson - Citigroup

That sounds terrific. If I can just follow up with one question on China, the profit increase there, all of a sudden we're at a double-digit operating margin which is fantastic. Is that sustainable or was there some timing shift in terms of expenses so that we shouldn't model it to be mid-teens profit margin going forward?

Chuck W. Cramb

Wendy, you know I don't like to give guidance but on China I do have to call out one thing and that is that we did have some reversals from the prior year which impacted that margin favorably so you can't model it. Sustaining that margin is short-term.

Operator

Your next question comes from Andrew Sawyer - Goldman Sachs.

Andrew Sawyer - Goldman Sachs

I was just wondering if you could just help us perhaps a little bit with the U.S. and kind of compare and contrast how you're seeing sales per rep especially impacted by the consumer downturn? And perhaps if you can elaborate on how you're seeing fuel expenses impact the rep earnings as you guys see them?

Andrea Jung

Yes. Let me just start with fuel. I mean, I was pleased with our active rep growth at 2%. I think where you see the impact of fuel is clearly on rep activity, and so, while that was pressured, we offset some of the fuel pressures with some of the activities that we did, whether it was some of the gas busters programs or a lot of the RVP initiatives that we put into the quarter but have been in place for the last couple quarters as we've been talking about.

So fuel at 30% year-over-year is clearly pressuring our representative activity, and we're doing everything to improve her pocketbook and put more cash in her pocket to offset that.

As it relates to average order size, I mean, obviously there's North American contraction there and it is really based on two things. One is consumer contraction, particularly in the Non-Beauty areas. Non-Beauty was down 9%; some of that was from product outages, but a lot of that was just from consumer contraction, particularly in those categories. And the product shorts that did plague us in this particular quarter had their impact on average order, okay? Not so much rep growth but average order.

Andrew Sawyer - Goldman Sachs

Do you have any rough quantification of that or is there any way you could give us a rough estimate on that?

Andrea Jung

In terms of the?

Andrew Sawyer - Goldman Sachs

Outage impact on sales.

Andrea Jung

[Inaudible] you look at the minus 6% that we saw in the U.S. What we're saying is, you know, a good piece of this, obviously, was the macro consumer weakness in the environment. To a lesser extent we saw service problem. So, you know, not half. But there was a sizeable amount, and we would not have been down 6% had we not had the service issues.

Operator

Your next question comes from Lauren Lieberman - Lehman Brothers.

Lauren Lieberman - Lehman Brothers

First thing was you had mentioned on the call something about restructuring direct selling organizations in Europe. Could you maybe elaborate on what that was and what markets?

Chuck W. Cramb

Sure. That was at the end of last year. We announced a major restructuring within Continental Europe, and that restructuring really addressed the infrastructure that we had, the Avon infrastructure we had, in terms of how to serve as the direct sales force as well as some of our supply chain operations, and it's through a lot of Europe. If you were looking their cost structure, you'd have seen that it was not a satisfactory cost structure. So it was really, I call it a very bold change in terms of the structure.

Included in that also was the transfer of distribution for Germany out of the German facility and into Spain because it's a relatively small market. We also had some work in terms of activities to move the compensation for the remaining zone managers, our infrastructure, more to a variable as opposed to a fixed basis. And then the final part of it was, in addressing that restructuring, we also had some efforts against the overall manufacturing footprint to increase efficiency. So it really was a very, very comprehensive program.

I think as we went into a program that broad, we had some concerns about how do you manage a change like that and still maintain the business without some disruption, and there I think is really where we're very, very pleased, very proud actually, that our management team has been able to maintain the momentum in the Continental European business while at the same time addressing this restructuring.

So we've had no evidence of any disruption within the sales organization or even with our representatives.

Lauren Lieberman - Lehman Brothers

Okay, great. And then in Russia, actually both Russia and U.K., my thought is that if you back out what currency probably was that those markets were a little bit soft, the U.K. maybe had below single digits and then Russia maybe even down? Is that thought process right and, if so, can you maybe give a little color on those two markets?

Andrea Jung

Well, U.K. in local currency was up 6%.

Wendy Nicholson - Citigroup

Okay, great.

Andrea Jung

So strong growth continued there. And Russia was not down. Russia was up 3% in local currency.

Lauren Lieberman - Lehman Brothers

Okay, so that's a bit of a slowdown, though, so maybe, I mean, is it competitive dynamics or anything there just have calmed, I mean, something because that's a kind of lower number as Russia tends to trend.

Andrea Jung

Yes. I think Q1 was relatively soft. I think there's the 6% in CE which is driven in half by the 3% in Russia. It does not reflect what we expect to do for this region or for that market. I'm optimistic about the year. Reps were up 25% and very strong from this move to what we call the C-3 or the three-week campaign. We did exit the quarter with strength, and I feel very good about those marketing and RVP programs for the balance of the year.

Operator

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

Mr. Schmitz, your line is open.

Andrea Jung

Okay, let's move to the next.

Operator

Your next question comes from Ali Dibadj - Sanford C. Bernstein.

Ali Dibadj - Sanford C. Bernstein

I wanted to just follow up on a couple things that I guess on the surface look interesting and good, but digging down a little bit deeper, one is the active rep growth of 14%. Your units growth was 3% and revenue growth local currency was about 6%. What does that suggest in terms of productivity health and how should we think about that going forward?

Andrea Jung

Well, I think you can't just kind of look at it with one answer. What I would just say is two things. One is country mix, Ali. If you look at your average order per se for developed markets, it's over $100. And in sort of developing and emerging markets, by definition, it's just smaller.

And so as you see this sort of outweighted country mix change with real growth in your developing and emerging markets versus your developed markets, with North America, for example, you're just going to have country mix there on the order side.

The Campaign 3 change in Central and Eastern Europe does, in fact, show a smaller average order as you're going through this transition.

Another thought would be as we attract so many representatives and as we're recruiting so many representatives, the mix of new representatives for a period of time does depress average order.

And then lastly, and not small, the North America that I just answered earlier on, consumer contraction in that market is actually showing a productivity contraction based on macro economics.

The rest is really mix and doesn't have to do with what I would call global economy, if that helps.

Ali Dibadj - Sanford C. Bernstein

Yes, that was very helpful. You mentioned CE in particular. A 25% rep growth looks really interesting there. How much of that, well, I guess, is there a different definition there in terms of what the reps are given the C3 shift, and what would the impact have been there?

Andrea Jung

No, it doesn't. There's not a different definition, although we kind of lap that change as we go into 3Q. As you know, we implemented that end of June, late end of June '07. You're getting some benefit, but from just two to three-week campaigns from a four-week campaign.

Ali Dibadj - Sanford Bernstein

Is there any sense of how much benefit you're getting?

Andrea Jung

You know, I would just say up to 14%. It's no more than a couple points.

Chuck W. Cramb

It's not material?

Andrea Jung

I would say we still have very strong double-digit active rep growth for the company in spite of the move to C3.

Ali Dibadj - Sanford Bernstein

Okay. On Latin America, there, too, we've had quite really good numbers in Brazil. [Pardon] the siren outside. It looks like there's easy comps that you just lapped here. Going forward, how should we expect Latin America in general progressing in terms of sales growth, local currency sales growth?

Andrea Jung

We love Latin America. You know, I'll just say a couple things. You know, I mean, double-digit growth in most of the markets in this region, and I do point to, I have to point to, Mexico again. I mean, you know, again, sales up 9% in this market, and this is not a small market, it's not an incidental, you know, revenue sized market for the company; it used to be the second-largest market for most of my career at Avon, and the fact that we have been in turnaround but positive growth in Mexico.

We've had great growth, I think, in Latin America without any growth in Mexico for the last two years in the turnaround, so a return to sales growth in Mexico is not incidental to Latin America or the company, for that matter.

Ali Dibadj - Sanford Bernstein

And just switching over to balance sheet. Chuck, you mentioned this a little bit. I want to get underneath again the inventory situation. I think you said a few days a year for the next few years or so.

Chuck W. Cramb

Yes, three to five days a year over the next four to five years.

Ali Dibadj - Sanford Bernstein

When are we going to start seeing that, particularly in the context of the out of stocks and some of the forecasting issues that you have right now?

Chuck W. Cramb

Well, the out of stock issue, which really, I think, you're talking about the service issues we've had in the U.S., that is only the U.S. market, so that is not necessarily a major impact in terms of our inventory performance across the globe.

In terms of the programs we've got, all of them are long-term in nature so they gradually roll in. I still look to the second half of this year as when we really should start to see some movement. But again, when you're talking about three to four days, you're not going to see a jump in any given quarter. It's going to be gradual improvement as we put the new processes in place.

So as I look at it, I still look at that total [inaudible] target and say that's the right target, but we're going to get their gradually.

Ali Dibadj - Sanford Bernstein

Okay. And so my last question is around the gas buster program, I think you call it.

Chuck W. Cramb

What?

Andrea Jung

Gas buster, yes.

Ali Dibadj - Sanford Bernstein

On gas buster, what's, I mean, it looks like that's been implanted for awhile. I mean, clearly with the gas price as it is right now, it probably has some diminishing effect here. Have you checked on the ROI of that program? How does it work exactly, and what do you suspect going forward given everyone's best guess of where gas prices are going to be at.

Andrea Jung

Well, I mean, I'm not going to respond necessarily just to gas busters. That's just one of several programs which we call RVP, and all I would say is the following: We're doing heavy analytics on each lever within RVP, and at this point I think our analytics tell us that the things that we are doing are paying off.

I think the bigger thought is in this environment, with the assumption that gas prices are clearly going to be, are and are going to continue to be a challenge, you know, how do we get more cash in her pocket, which is about increasing her earnings and reducing her outlay. And those two things have a multiple number of initiatives so that, quote, "It really pays to be with Avon." How do you increase earnings and mitigate my outlay? And that's everything that we're doing, you know, for the balance of the year.

And all those things have analytics, if you would, that continue to show ROI, and we do that by the quarter so that we can start easing off certain ones that either don't pay off. But I feel very good that the team there has a good focus on the investments for the balance of the year on those things that will show high paybacks.

Operator

Your next question comes from William Schmitz - Deutsche Bank Securities.

William Schmitz - Deutsche Bank Securities

Have you guys thought about changing the commission structure in China given what some of your competitors are doing?

Andrea Jung

We are continuing to evaluate how, I'll call it our RVP, works in China. Obviously given the government regulations and the continued opportunity, all I would say there is we continue to evaluate the long-term strategy of China. I can't really speak to what competitors are doing. I would just say it's a fluid environment and we're very pleased with what we're doing here.

William Schmitz - Deutsche Bank Securities

Because the [regulations] are in place but it seems like Avon's the only company that's actually following them. Is that a fair assessment?

Andrea Jung

Well, I can say we're following them.

William Schmitz - Deutsche Bank Securities

And then just in terms, I think you made some comments about changing the promotional programs in Central and Eastern Europe, particularly Russia. Is that a response to some of the discounting that [inaudible] doing?

Andrea Jung

Well, we're just looking at strong investments in marketing and RVP programs for the rest of the year there. And we exited the quarter with strength, including in Russia, and I would just say that we've got a pretty aggressive and exciting plan, both from the field side as well as product innovation lineup as well as some merchandising offers, but it's not about discounting, no.

William Schmitz - Deutsche Bank Securities

Because it seems like [inaudible] growth there is still on the sort of low double-digits and you said local currency was about 3. Is that fair?

Andrea Jung

Yes, I think, as I said, the 3 does not reflect what we expect to do for this market.

Operator

Your next question comes from Christopher Ferrara - Merrill Lynch.

Christopher Ferrara - Merrill Lynch

Chuck, I wanted to ask a little bit about the dynamics between pricing and mix on the top-line versus mix on the gross margin side so obviously I guess there's some differences there. So you're saying you took pricing in the quarter, obviously price mix was up, but I think you said there was a negative mix on gross margin so are some of those higher-priced products lower in margin? How do I think about that?

Chuck W. Cramb

No, I think the mix is the product portfolio mix and then it's the country mix as opposed to taking lower margin on higher-priced products.

If you were to look at, and I'm going to give you a metric in terms of the pricing impact in terms of what we delivered, the real value of that was about a full percentage point on margin and then that was diminished by the mix that I just mentioned.

But it has nothing to do with the price component versus the cost component on higher-priced products.

Christopher Ferrara - Merrill Lynch

But have you taken price increases on what percentage of the portfolio, if any, and what geographies?

Chuck W. Cramb

Oh, I can't give you a metric on that but I will tell you it's broad-based. It's a focus point, and it's based upon analytics where we're looking at price elasticities major market by major market in terms of where we have an opportunity. And where we do, we're taking pricing, so that'd be real price increases.

Andrea Jung

The two categories where we took early pricing were Skin Care and Fragrance. That's what the analytics told us, is that certainly in sort of your higher innovation product packaging that we could take some meaningful pricing, and we've done that. We started to do that in the quarter. So it hasn't been across all categories. Those two in particular showed some meaningful pricing, [net per unit gain].

Christopher Ferrara - Merrill Lynch

So just to be clear, you're actually raising list prices and brochure prices on existing products without innovation. Is that right?

Andrea Jung

Yes. We are doing both. We are both raising prices on some of our key high innovation products that exist where the analytics show us we can get more price plus, as we introduce new products, the analytics show us we can get higher than average net per unit we may have charged before.

Christopher Ferrara - Merrill Lynch

And I just wanted to ask you on RVP, I mean, so $37 million, is that a higher number, maybe this is obvious, is that a higher number than you would have anticipated coming in, and you just made the investment because the macro environment got weaker than you had expected?

Chuck W. Cramb

No, no. And in fact, because I think your suggestion there is that it was in the U.S. and in fact the U.S. was only a very small piece of it, I think a lot of that incremental investment was actually in Latin America, where we had very, very strong growth. So part of it's just the dynamics of the growth in terms of supporting the rep.

Christopher Ferrara - Merrill Lynch

And just one last one on the U.S., why do you expect, I guess, when you said the U.S. won't decline in future quarters as it has now, is that more because the service-related issues clear up or is there some other piece of that as to why you expect improvement?

Andrea Jung

Well, I think it's your point of if you just sort of look at external-internal, we see the internal mitigating as we go through the year; the external I think is going to be there.

Chuck W. Cramb

So we expect to see service improving.

Operator

Your next question comes from Bill Pecoriello - Morgan Stanley.

Bill Pecoriello - Morgan Stanley

A question on the reinvestment with the advertising RVP up 14% plus. Are you planning that more to the local currency and we're seeing those levels go through the translation on the foreign currency, or are you also reinvesting foreign currency upsides that you're realizing to the bottom line?

Chuck W. Cramb

I think you're seeing it on the translation impact. What we've looked at is the efficiency of our advertising. First we thought we were at about the right scale. That's what our analytics showed us.

And then we felt we could actually improve the efficiency or efficacy of that advertising by changing the mix, by addressing the components of advertising, whether it's a 30 or 15-second commercial, whether it's TV versus print, whether it's representative advertising versus product versus brand image enhancing advertising, all of those components in there.

But when we looked at the overall business, we felt that this year we would basically run advertising increases along with our sales increases, and then what happened in terms of the currency gain, that obviously impacted advertising similarly.

Bill Pecoriello - Morgan Stanley

And then on the restructuring savings, you mentioned $63 million in the quarter. On an incremental basis, is that up about $8 to $10 million versus year ago in the first quarter?

Chuck W. Cramb

I'm trying to remember what it was first quarter last year. Renee will have to get back to you on that. I just can't remember it.

Bill Pecoriello - Morgan Stanley

And then just finally on the North America, you think that the weakness you're attributing mainly to the weak economy. The service disruptions played a more minimal role in the 7% decline. Just in terms of as you're rolling these new systems out around the world, what confidence can you give us in terms of not seeing those kind of service disruptions elsewhere in the world?

Chuck W. Cramb

Sure, and what you're really talking about on the service side is our ERP or Enterprise Resource Planning Initiative. And that is a global program, and I do have to go back a little bit and remind us all that we did successfully implement this in our major manufacturing facilities in Europe. That includes the U.K., Poland, Russia, Germany, as well as many of our selling companies and, in fact, we're continuing to implement it in our selling companies as we speak.

I think when we look at what we did in North America, we did drop the ball a little bit in a couple of areas. And there are lessons to be learned here from dropping those balls, and they are in the areas really of getting adherence and policing our vendor compliance, our vendor readiness to the changes that they would have to encounter as we did business with them.

And we also, through that implementation, we did lose visibility over inventory. And that was really in terms of where the inventory was and how it would then balance out against our representative's orders.

So as I look at it, I think of those things in terms of they were our errors, they were people errors. They had nothing to do with the systems, and we should be able to learn from those mistakes. However, as we go forward, let's learn, let's use some of the same people to implement the next stage. But that go forward is going to be a gradual rollout as we move to the rest of the world, and it'll be done by module. There are various modules within ERP. Think of planning as a separate model. And not only will we do it by module, but we'll do it by country. So when we think about the Latin American initiative, again, it'll be a gradual rollout by modules and by countries.

And it's a program that really, from an implementation point of view, Latin America's implementation 2011, 2012, and then we would still have Asia and a couple other pockets.

So I think we can learn from the lessons. I think we can avoid the problems that we encountered. I think we've had great success in the European rollout. But we are going to phase and stage our development and rollouts from now on even more gradually.

Operator

Your next question comes from Filippe Goossens - Credit Suisse.

Filippe Goossens - Credit Suisse

The bulk of my questions are going to be related to Brazil here this morning. Obviously a very strong performance again, particularly if you know that you were hit with a couple of months of vacation time in Brazil. So a very good performance here.

First question, can you perhaps just elaborate a little bit why the change in the value-added tax in the state of Sao Paulo could actually perhaps create a competitive benefit for [inaudible] like yourself?

Andrea Jung

Filippe, [the way I understand] that is Avon had been paying a value-added tax for many, many years in Latin America. The change in it did not impact direct sellers, so it was something that solely impacted the retail cosmetics companies.

Filippe Goossens - Credit Suisse

And you think that might actually create a competitive advantage as vendors that supply distributors and wholesalers and ultimately the mom and pops will have to raise prices as the vendors have to pay this tax now?

Andrea Jung

I look at our business there though as really kind of reflective of our own Avon-driven strategies, and I think that's what's driving the share gains and the balanced productive growth. I think it's what we're doing. I think direct sales has always been good in this market independent of tax implications on retailers. I mean, I think direct sales is an advantage to model in Brazil. It has been and I think we're just doubling down that thought at this point with the investments we're making in the business.

Filippe Goossens - Credit Suisse

Okay, then the second question on Brazil. How sustainable is the solid performance you're showing there over the last number of quarters if you know that your largest competitor now is rolling out kind of an equivalent of your Representative Value Program and is also trying to step up a little bit more their innovation, particularly now with the launch of [Amor] America last March.

Andrea Jung

Well, you know, we love Brazil. We feel very good about this market. Sixty percent is pretty [torrid] and it was sort of the easiest comp of last year.

But if you just look back for several quarters now or even the performance in 2007, this market continues to really show that our bold moves are the right ones and we intend to continue to defend our share.

Filippe Goossens - Credit Suisse

And the final question on Brazil, Andrea, obviously the top line is very strong but are you also making progress in terms of margin performance in Brazil? In other words, are you trying to strike a balance between margin expansion, because I think margins are still based on my estimates below what they are for [Natura], are you trying to focus on a balanced approach or top-line growth is still the priority at this moment?

Chuck W. Cramb

Top-line growth is certainly a priority, but we're leveraging that top-line growth as we control our expenses, particularly in the zero overhead expense area. So we are getting margin enhancement.

We're not targeting to do what Natura does on margin. You know, our margin will be defined by what our sales level is, what our investment level is, and how well we control our overheads.

Filippe Goossens - Credit Suisse

Then moving to the U.S., Chuck, if I may, based on your historical experience within the Household and Personal Care sector, where the first rebate checks, if you want to call them like that, are starting to hit households this week, to what extent do you think people might spend it also on your products versus others? In other words, do you expect any lift for our North American business as a result of this?

Chuck W. Cramb

There's no way that I think we can anticipate it. I hope the politicians are right when they say that consumer product goods companies will benefit. However, those same consumers have seen some pretty significant increases in their ongoing operating costs, whether it's food, gas for their automobile. So I'm not an economist, and I don't even think the economists can really predict exactly where that money's going to go.

Filippe Goossens - Credit Suisse

Then a final question, Chuck, if I may. In terms of the sales leadership program, in how many markets has that been rolled out and what percent of revenues would that kind of represent?

Chuck W. Cramb

I don't think we have a metric that we could give your right now. It's fairly broad in terms of its rollout but in terms of percent of the business, I don't have that right now. We could do some follow up.

Andrea Jung

It's in rollout in a number of large markets such as Mexico, Brazil, so it's difficult to come up with that on an ongoing basis.

Operator

Your next question comes from Alice Longley - Buckingham Research.

Alice Longley - Buckingham Research

I'm looking for quantification of your RVP spending in the quarter on a percent basis. We know your add was up 15%. RVP has said it's going to be up more than sales for the year. What is the percent increase?

Chuck W. Cramb

Alice, you're looking for the impact on the margin in the quarter?

Alice Longley - Buckingham Research

Well, you know, you said RVP's up $37 million, but what percent increase is that because we don't know the absolute number for the base.

Chuck W. Cramb

Right. And I think the better way to look at it is we probably invested close to a percentage point in incremental margin in the quarter, but I wouldn't want you to assume that that's projectable for the year. It just happens to be what the programs were for the quarter, and really [fielding] off of the strong Latin American experience.

Andrea Jung

In this particular case versus advertising, which I think you can get reported, for competitive reasons, in direct selling we don't disclose that, the base.

Alice Longley - Buckingham Research

And do you plan to increase that [inaudible] in sales in '09 as well?

Chuck W. Cramb

I think it's early yet. It certainly is one of our [inaudible]. We talk about it. We use the term. It's our fuel for investment in RVP, which is our key driver. The analytics will help us in terms of the exact plans as we move into 2009, but it certainly will be a focus point for continued investment.

Alice Longley - Buckingham Research

And can you detail a little bit of what was involved in the increased support for reps in Latin America since that's where apparently you did most of the increase?

Andrea Jung

Incentives, a strong incentive program.

Alice Longley - Buckingham Research

What kind of incentives?

Andrea Jung

Field incentives, recruiting incentives, and that differed by market also. As Chuck said, a very good piece of the $37 million, a big piece was in Latin America with analytics that showed great paybacks. You had investments in sales leadership, you had investment in Brazil as we looked for enablement as you would. Argentina rolled out the [Internet].

Alice Longley - Buckingham Research

Are you basically paying people more or is it more support and training or that sort of thing?

Andrea Jung

A combination. But if you look at sales leadership and expenses or incentive expenses, obviously you do. The paybacks are good because look at the revenues.

Alice Longley - Buckingham Research

Switching to PLS, when it's fully rolled out in North America, can you quantify the reduction in SKUs that we'll see in the brochures?

Chuck W. Cramb

We're looking for incremental reductions in the 15% to 20% range.

Alice Longley - Buckingham Research

And we'll see that by, say, the fourth quarter of this year versus the fourth quarter of last year?

Chuck W. Cramb

No, you won't because it's a gradual rollout. And the gradual doesn't mean country by country. It also means how we actually execute within a country. So we wouldn't see the full impact of that until very, very late in 2009 or going out at the end of the year 2009.

Andrea Jung

But you start to see it in the third quarter for some major markets after the U.K., which was our early pilot.

Alice Longley - Buckingham Research

And then one other question on developing markets. We've been hearing about big jumps in food prices impacting people throughout developing markets and maybe that could cut into their spending power. Have you seen any signs of that anywhere?

Andrea Jung

No, we are not seeing any signs. I mean, there's no global contagion that we can certainly see outside the U.S. But I just would go back to the strategic thesis that RVP is not only central to our turnaround strategy but I think it's central to the global economy and managing through that in the future. I think as long as we continue to do the right things to advantage our representatives, it's economics.

And parenthetically we are seeing no impact of that in our current developing and emerging market business. But I think we're doing the right things almost prospectively, not because of it but I think it just pays to make sure that her wallet is lined with a profitable, for her and for us, economic model and those are really all the things we're doing in every country.

Operator

Your next question comes from Richard E. Lyall - John W. Bristol.

Richard E. Lyall - John W. Bristol

I'd like to delve a little bit more into the pricing comments you made. How did your pricing compare to your costs? Most of your peers are pricing to try and recapture pressure from input costs. It sounds to me like you're doing something different, i.e., pricing more to value.

Chuck W. Cramb

We're pricing [inaudible] to what we believe the market will bear.

I'm not a firm believer in saying if my costs go up X percent then I have to recover it per se in the pricing. It's my job to try and get that cost down. And when you look at things like SSI initiatives, our PLS initiative is actually a margin enhancer long in term, what we do in the overhead structures, those are all components.

But in terms of pricing and in terms of the way we run the analytics to determine where to take pricing, it really is all about what the market will bear not built off of a cost-plus model.

Richard E. Lyall - John W. Bristol

Okay, just a follow on. What were your thoughts about net pricing realization in your margin guidance coming into this year and how's that changed?

Chuck W. Cramb

It hasn't changed at all. We expected to get the pricing realization.

Richard E. Lyall - John W. Bristol

Okay. The second question is very strong rep growth; what do your analytics tell you about follow-on productivity? The channel has changed with leadership and with e-reps, etc. Do you have any models that'll tell you when the productivity benefit will be realized following that growth?

Andrea Jung

Well, I mean, I think that in some of the models that we do there is in the out period certainly productivity gains that come from a lot of these strategies. I think if you look, though, at this year, with some of my comments earlier in terms of country mix and representative mix as we do recruit in this environment, and you've got consumer contraction in one of your largest regions, I mean, I think this is not going to be the year necessarily for productivity although I think our strategies do lead to that going forward.

Richard E. Lyall - John W. Bristol

Last question. I think Chuck said that you're going to stretch out your ERP deployment a little bit based on some of the lessons you've learned. How does that affect some of the benefits you expected to realize over the eight to 11 or 12 period?

Chuck W. Cramb

It shouldn't. Sure, at the tail they'll be a little bit longer in coming, but in terms of why we put in or why we are putting in the ERP system, there are a lot of benefits coming out of it. We're starting to realize them in Europe now. In fact, the one that we look at most strongly, I guess, is the significant increase we've had in our service levels in Europe.

And sure, it'll be a slower investment and a slightly slower payback in terms of the globe, but in terms of looking at as we're installing, I don't expect to see the paybacks to lag any more than just the timing on the implementations.

Operator

Your last question comes from Lauren Lieberman - Lehman Brothers.

Lauren Lieberman - Lehman Brothers

I just wanted to follow up on the U.K. because assuming we've got some developing markets, no global contagion, etc., but in the U.K. I think the consumer environment is also pretty tough. And it sounds from your results that you're not really seeing it at all?

Andrea Jung

Yes.

Lauren Lieberman - Lehman Brothers

Is that true or is it that you got some gas busters, similar type programs in there that are also helping out?

Andrea Jung

No. In the U.K., we haven't seen it. Certainly in the first quarter, I think our business was very healthy and we're particularly pleased given it was the first market to implement PLS. And Chuck kind of took you through the initial favorable results.

You know, having said that we certainly, I look at and read in the newspapers whether it's about bank crises in the U.K., etc., and RVP, I'll just go back to the thought that I have for the developing and emerging markets, but RVP is central to our thesis of the U.K.

And should there be a downturn, I think we're doing all the right things. This is a market where sales leadership is in its early days of national rollout and I'm very pleased with those results in terms of rep growth. But also importantly we're going to run in this market in the second quarter for the first time the rep recruiting that's been so successful in other markets. So the U.K.'s going to get their first tranche of rep advertising in the next quarter.

And I think a couple things. One is we've got a really strong Beauty market share and image in this market. We have less Non-Beauty in the U.K. than in the United States so it's a far smaller percent of the mix, where I think we've seen the toughest pressure on the consumer wallet is in the Non-Beauty category in the U.S. Very strong order fill rates. And again, today less impact from fuel in the economy that we're seeing in our analytics.

So it's something to note and we're aware of, but we're not seeing anything right now.

Lauren Lieberman - Lehman Brothers

And then just lastly, what was local currency sales growth in Mexico?

Chuck W. Cramb

It was strong mid single digits.

Andrea Jung

Six percent.

All right, so I think if there are any other follow-up questions you can get back to Renee on that. That concludes the Q&A. Thank everybody for their time. My last comments would be we love our portfolio. It's well balanced and it should make for geographically another good year of sustainable growth on the top-line. Our investments in RVP are working. Our Beauty growth is on track, and we were pleased to deliver a margin improvement in the first quarter of this year as we planned.

We're confident that we can achieve the full year operating margin approaching 2005 level. So all in all, I think we're off to a good start for the year, and appreciate everybody's support. Okay? Thank you very much.

Operator

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

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