Avon Products (AVP) Sherilyn S. McCoy on Q2 2015 Results - Earnings Call Transcript

| About: Avon Products, (AVP)

Avon Products, Inc. (NYSE:AVP)

Q2 2015 Earnings Call

July 30, 2015 10:00 am ET


Adam Zerfass - Director, Investor Relations

Sherilyn S. McCoy - Chief Executive Officer

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


William Schmitz - Deutsche Bank Securities, Inc.

Christopher Ferrara - Wells Fargo Securities LLC

Lauren Rae Lieberman - Barclays Capital, Inc.

Olivia Tong - Bank of America Merrill Lynch

Stephen R. Powers - UBS Securities LLC

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc.

Javier Escalante - Consumer Edge Research LLC

Stephanie Schiller Wissink - Piper Jaffray & Co (Broker)


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

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

Adam Zerfass - Director, Investor Relations

Good morning and thank you for joining us to review Avon's second quarter 2015 results. I am here with Sheri McCoy, Avon's CEO and Jim Scully, Executive Vice President and CFO. Rob Loughran, our Corporate Controller is also with us today. Sheri will make some opening remarks including her perspective on our overall performance. Jim will then take you through our second quarter results as well as the outlook. Then we will have our usual Q&A session.

With that, I refer you to our non-GAAP reconciliation, which is available on the Investor Relations section of our website. As usual on the call, we will focus on these adjusted non-GAAP financial measures. Our call will also contain forward-looking statements that concern our business and financial strategies as well as outlook, including Active Representative trends, cash flow and the impact of foreign currency, taxes, and tax rates. These statements involve risks and uncertainties which are detailed in the cautionary statement in today's 10-Q.

I'll now hand the call over to Sheri.

Sherilyn S. McCoy - Chief Executive Officer

Thank you, Adam. Good morning and thank you for joining our second quarter earnings call. Today, I'll provide some perspective on our overall performance for the quarter as well as brief comments on aspects of our growth strategy. And then I'll turn it over to Jim, who will cover our second quarter results, including the impact of currency, our outlook for Q3 and the remainder of the year, and the actions we've taken to improve our financial flexibility. And then we will open the line for Q&A.

Turning to the second quarter, despite significant currency headwinds, our operational performance is generally in line with our expectations. Constant currency revenue was flat and our adjusted operating margin was 6%, down 250 basis points due primarily to negative FX pressure.

On a regional basis, EMEA continued to deliver strong constant currency revenue growth. This was driven in large part by another good quarter in Russia, where we continued to see strong activity by our representatives. The UK was marginally down in the quarter.

In Latin America, we're pleased to see Mexico continue to recover. Brazil's underlying performance held steady. However, as expected, we were negatively impacted by the recently adopted IPI tax. And we continued to operate in a very challenging economic environment of constrained consumer spending.

North America landed where we anticipated and delivered modest profitability for the quarter, which keeps us on track for profitability for the year.

And in Asia Pacific, we saw a strong performance from the Philippines, which is our largest market in the region. However, overall revenue for Asia Pacific was down.

In terms of reported results, we continue to face extraordinary currency pressure, which impacted revenue by 17 points and adjusted earnings per share by $0.15.

That being said, I'm very pleased with the way our local management teams are performing. They are operating effectively, addressing consumer demands, improving representative engagement, managing costs well and keeping their teams productive and inspired.

Regarding Active Representatives, which is a key area of focus for us, we were down 2% in the quarter, but the trends are generally moving in the right direction. The declines we see in the global number are largely driven by North America and by the high inflation markets where Active Representatives are coming down as we have prioritized support for our top sellers.

Of note, Russia's Active Representative growth moderated in the second quarter as anticipated. However, it remains quite strong. Looking at the first half of 2015, we see strong Active Representative trends in two-thirds of our top markets. And when we step back and look at Active Representatives on a rolling 12-month basis, we see an improved trend line both globally and across the top 12 markets. This is encouraging and we expect this trend to continue.

We know that selling Avon has strong appeal to entrepreneurial women as we continue to attract millions of new prospects to Avon each year. We are all focused on ensuring that a woman who comes to Avon has a positive experience through all aspects, from her recruitment to her early campaigns and as she progresses in growing her business.

I will spend a few minutes now talking about Brazil, since I know it is top of mind for you. First, I want to start out by saying, I'm confident that our team in Brazil has a solid plan in place and is doing a good job of managing the business in a very challenging environment. To give you some context, there are three issues that are negatively impacting our performance in Brazil. First, the real is down significantly year-over-year. Second, the IPI tax, which went into effect May 1, has started to impact sales in our color and skincare portfolio. And third, the overall economic deterioration has led to significant tightening of consumer spend.

As you know, none of these are unique to Avon, although the impact of IPI is greater for us than some of our competitors. Brazil holds significant long-term value for Avon. In the short-term, we are focused on maintaining a stable business, which puts is in a strong position when the macroeconomic environment improves.

The actions we're taking to weather the current situation in Brazil fall into three areas. First, keep the field and our Active Representatives stable and engaged. We're doing this through robust recruitment and retention programs. We also have a good slate of product innovations in the second half of the year, including both Avon and Coty Fragrances, several new color products, and a strong fourth quarter Christmas offering. We also continue to work to improve the ease of doing business with Avon. Second, continue to take price in a deliberate way, balancing the need to take inflationary and IPI-driven pricing, with an increasingly price-sensitive consumer in a highly competitive market. And third, continue operating with the mindset of cost management while at the same time ensuring that we invest in critical representatives and consumer-facing activities.

One final note on Brazil. As I mentioned last call, we introduced the Premium Course line in June to a select group of representatives in a small number of cities. At this stage, we are focused on building awareness and trial in these limited geographies before moving to a broader rollout. Jim will provide some additional details on Brazil's results in his remarks.

Next, turning to our category and brand performance. As I discussed last quarter, our Beauty category strategies are in good shape. We are managing our product portfolio closely with a focus on investing in the categories and brands with the highest financial potential. Our Beauty category grew 1% in constant dollars. While color was down 2% driven mainly by Brazil, I'm encouraged by the continued improvements in skincare and fragrance.

In fragrance, we saw a 4% growth on a constant dollar basis, driven by Latin America and EMEA. Coty products continue to deliver good results in Brazil and Avon Intense and Avon Exploration fragrances performed well across the Latin American region.

In EMEA, Avon Cherish and Avon Luxe had good results. And generally, we're having success in moving our fragrance sales into the upper mass and masstige category, a payoff for the work we've done over the past two years on improving packaging and use.

And in skincare, global sales were up 1% in constant dollars. We saw skincare growth in EMEA, where we launched our new mass skincare product line, Nutraeffects and it performed well.

In North America, we are pleased with the growth of the ANEW skincare line. The North American team invested in strengthening the ANEW brand and has good results for ANEW Vitale, targeted at younger women, ANEW Men, which had strong Father's Day sales, and the restage of ANEW Ultimate.

It's encouraging to see these results and I believe it's a testament to the resiliency of both the Avon and ANEW brands in the United States. And we recently began the rollout of our new brand position. Avon's Beauty for a Purpose expresses how Avon empowers women by offering them real earnings opportunity selling beauty products at demonstrable value. As an authentically purpose-driven company, Avon has the opportunity to tap in to today's consumer sentiment that favors brands with a deeper meaning.

We see our brand story as a key driver to strengthen relationships with our representatives and her customers, as well as introducing new generation of consumers to the brands that we know they will love. Telling the whole Avon story has already become a source of energy for our representatives and will be the unifying theme across our upcoming sales conferences as we prepare for fourth quarter.

Widespread consumer activation will begin late in third quarter as we execute across the brochure and activate digital and social media campaigns. We're confident that highlighting the woman-centric, purpose-driven nature of our brand will have broad consumer appeal. And this is a position that aligns well with the word-of-mouth nature of our business and our evolution to a more social selling model.

As we said on the last call, we continue to review all aspects of the business. As part of this, we decided to sell Liz Earle. Liz Earle is a great brand, but was not adding significant strategic value to Avon at this time. We operated Liz Earle as a standalone business that was not incorporated into our core direct-selling model. I'm very pleased with the outcome of the Liz Earle divestiture.

We've also taken steps to improve our financial flexibility, which Jim will discuss. Before I hand it over to Jim, I want to mention that we look forward to Investor Day this fall, where we will review our growth strategies, areas for investment, and funding sources.


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

Thank you, Sheri, and thanks again to all of you for joining the call today. In terms of my remarks for today, I'm going to start with a review of our second quarter results. I will give you my top line observations about the quarter, as well as some brief commentary about each region.

With that, our second quarter results were in line with our overall expectations. Constant dollar revenue was flat, but declined 17% on a reported basis due to the negative impact of foreign exchange. Active Representatives were down 2%, including the negative impact of North America and continued disruption in markets experiencing high inflation, specifically Venezuela and Argentina.

Average order growth offset the decline in Active Representatives driven by inflationary pricing, primarily in Latin America. Units declined 4%, while price/mix grew 4%.

Adjusted gross margin declined 180 basis points to 61.2%. Foreign currency negatively impacted adjusted gross margin by approximately 240 basis points, primarily in EMEA and Latin America. This was partially offset by benefits from price/mix.

Adjusted operating margin declined 250 basis points to 6%. The decline was primarily due to foreign currency, which negatively impacted adjusted operating margin by approximately 390 basis points. In constant dollars, adjusted operating margin declined 70 basis points, negatively impacted by approximately 250 basis points from foreign currency transaction costs.

The change to the IPI tax in Brazil this quarter as well as lapping 2014 VAT benefits in Brazil were also factors in the decline and will cause an even larger headwind in both the third and fourth quarters. These negative impacts were partially offset with benefits from our cost-saving initiatives as well as the favorable impact of price/mix.

The adjusted effective tax rate was 43%. As a reminder, we expect the adjusted effective tax rate to be volatile on a quarterly basis due to the country mix of our consolidated earnings.

Given our current position in the United States, where our corporate expenses reside along with our U.S. business, we are no longer providing tax benefits on our current period U.S. based losses. This, along with the country mix of the specific period earnings, which is impacted by foreign currency volatility, significantly impacts the tax rate causing our quarterly rate to fluctuate from our expected annual effective tax rate. While the rate is volatile quarterly, we expect the full year tax rate to be in the low 50% range.

Adjusted EPS was $0.11 per share compared with $0.20 a year ago. Currency had a significant negative impact on a year-over-year comparison of EPS of approximately $0.15 per share with $0.08 from translation, $0.08 from transaction and a benefit of 1% from revaluation of foreign currency denominated working capital balances.

I will now provide more details on our results by region, starting with Latin America. Q2 revenue rose 3% in constant dollars. The results include an approximate 2 point negative impact from the IPI tax law change in Brazil. Furthermore, there were no significant VAT adjustments this quarter, but we did have a benefit last year which hurts the year-over-year comparison by approximately 1 point.

Active Representatives were down 3% and units were down 5%. Both of these metrics were negatively impacted by continued significant declines in our higher inflationary markets. However, average order was up 6%, driven by pricing and inflationary markets.

Latin America adjusted operating margin was 8.2%, down 310 basis points. The margin decline was primarily driven by currency, both translation as well as transaction. In constant dollars, adjusted operating margin was down 150 basis points.

The adjusted operating margin in the second quarter of 2015 was negatively impacted by 110 basis points due to the new Brazilian IPI tax, and as you recall, last year's adjusted operating margin included a 90-basis-point benefit due to recoveries representing VAT. The combination of these two tax items caused a 200-basis-point swing.

In addition, foreign currency transaction cost was a 240-basis-point drag on operating margin. These negative impacts were partially offset by the net benefit of price/mix as well as lower bad debt expense primarily in Brazil.

Turning to Brazil, constant dollar revenue declined 6%. As expected, the results include a negative impact of approximately 4 points from the change in the IPI tax law that went into effect May 1. In addition, last year's results benefited approximately 2 points from the VAT tax credit, which did not repeat this quarter.

As Sheri discussed earlier, the landscape in Brazil remains very challenging due to constrained consumer spending. During the second half of 2015, we expect improvement in underlying business due to the actions Sheri discussed regarding keeping the field and Active Representatives stable and engaged and continuing to take price as appropriate. However, this improvement will be masked by the full quarterly impact of the IPI tax as well as lapping significant VAT credits that were recognized in the second half of 2014.

In Mexico, revenue grew 1% in constant dollars. The growth was primarily driven by higher average order with stable Active Representatives. Mexico's Beauty business grew in the second quarter and the trend in Fashion & Home improved sequentially versus the first quarter.

Moving to EMEA. Q2 revenue grew 6% in constant dollars. The region posted healthy Active Representatives growth as they continue to benefit from strong underlying fundamentals. In addition, the increase in revenue was relatively balanced between growth in units and increased price/mix. As we have highlighted to you before, we are taking a deliberate approach to pricing, aimed at keeping representatives and consumers engaged.

While we are pleased with our revenue growth in EMEA, our adjusted operating margin was down 440 basis points to 9.6%, driven by currency, both translation and transaction. In constant dollars, adjusted operating margin declined 310 basis points as we were able to offset a portion of the approximate 500 basis points of currency transaction cost through revenue leverage, cost savings and price increases.

In Russia, constant dollar revenue rose 15%, driven by Active Representative growth. We also realized benefits from pricing in the second quarter. While units continued to grow in Russia during the second quarter, a larger portion of the growth was driven by price/mix than in recent quarters.

The market remains volatile and can be difficult to predict, but we are pleased that our approach is keeping our representatives engaged. As a reminder, we expected Russia's growth rates to slow to mid-single-digits in the second half, mainly due to the year-over-year comparisons becoming more difficult. But given our recent trends, we are now updating our expectations for Russia's growth to high single digits.

Constant dollar revenue in the UK declined 2%. While average order continued to grow, it was not enough to offset the decline in Active Representatives. The team remains squarely focused on strengthening the field fundamentals aimed at improving Active Representatives.

Turning to North America. Revenue declined 14% in constant dollars, in line with our expectations. Active Representatives declined 16%, while average order returned to growth. North America adjusted operating margin was 1%, up 100 basis points from the prior year. The operating margin results benefited from cost-saving initiatives that we have discussed in the past. These benefits were partially offset by the negative impact of sales deleverage.

We are pleased that North America was profitable this quarter. We continue to expect the region to deliver full year profitable results. As a reminder, historically, third quarter is our smallest quarter and puts pressure on our margins.

In Asia Pacific, revenue declined 4% on a constant dollar basis. Active Representatives declined 5%, partially offset by growth in average order. While the Philippines continued to grow, increasing 7% driven by higher average order from strength in Fashion & Home, it was not enough to offset declines in other markets led by China.

The team has been focused on rightsizing the business, which is reflected in the adjusted operating margin improving 590 basis points to 6.8%. Please see our press release and 10-Q for further discussion of the four adjustments we made to our GAAP results in the quarter which were, cost to implement restructuring, Venezuela devaluation, a write-off of issuing costs related to our previous revolving credit facility and legal costs associated with the sale of Liz Earle, and an adjustment to the valuation allowance for the company's U.S. deferred tax assets.

Moving on to cash flow. Operating activities during the first six months used $103 million more than the prior year, primarily due to lower cash related earnings which were negatively impacted by foreign currency translation, as well as the $67 million payment to the SEC in connection with the FCPA settlement.

In Q2, working capital improved nine days operationally compared with a year-ago. Accounts payable improved 10 days operationally as we continue to benefit from our focus on renegotiating payment terms with our vendors. However, inventory was three days worse operationally, primarily driven by Venezuela.

Before moving to our financial outlook, I wanted to remind you of some of the actions we have taken recently. First, during the second quarter, we closed on a new $400 million, five-year senior secured revolving credit facility. The new facility replaces the previous $1 billion unsecured revolving credit facility and importantly provides us with more flexible financial covenants.

Second, as Sheri mentioned, earlier this month, we divested our Liz Earle business which we have been operating as a stand-alone business.

And finally, we issued a notice of prepayment of our public notes that were due March 2016. This continues to strengthen our balance sheet and provides enhanced flexibility. The new revolving credit facility and repayment of debt are important pieces of our ongoing plan to proactively manage our balance sheet and liquidity needs.

Moving to our full-year outlook. I will begin with a reminder of the guidance we have provided last quarter. Our stated expectations for the current year compared with 2014 were, modest constant dollar revenue growth, an approximate 17 point negative impact on the revenues due to foreign currency translation, a 50-basis-point decline in constant dollar adjusted operating margin, which is driven by the negative impact of the IPI tax in Brazil, and a 200-basis-point decline in adjusted operating margin in reported dollars driven by an estimated 150 basis points of foreign currency translation, as well as 50 basis points from the IPI tax that I just mentioned.

Also included in our guidance was our free cash flow outlook of approximately $100 million and the expectation of offsetting the headwinds from transaction foreign currency exchange costs with additional cost reductions and pricing actions.

Our outlook for the full year of 2015 is unchanged except for the impact of the divestiture of the Liz Earle business, which will negatively impact constant dollar and reported revenue in the second half of 2015 by approximately 1 point. It is also worth noting, while we are facing a more challenging environment in Brazil, we are benefiting from continued momentum in Russia, and our outlook has been appropriately updated for these trends.

Now, I will move my focus to the third quarter. As we've said, from a timing perspective, we expect significant year-over-year declines in adjusted operating margin in Q3, partly due to currency devaluations. In addition, there are other factors that will negatively impact the year-over-year comparison of Q3.

First, the IPI tax will be a full quarter impact. Second, last year's results includes significant benefits from VAT credits recognized in Brazil, which will impact consolidated constant dollar growth by approximately 2% and adjusted operating margin by approximately 180 basis points. And third, in the third quarter of 2014 we reversed some accruals for employee incentive compensation based on estimates which benefited last year's adjusted operating margin by approximately 120 basis points.

In summary, while our second quarter results were in line with our expectations, we continued to face a very challenging environment and we expect this to continue for the intermediate term. As a result, we need to and have been reviewing the key fundamentals of our business to understand what needs to change and how, including; understanding the complexity and return dynamics of the markets in which we operate, evaluating the global operating model to deliver our long term plans while having the agility to deal with the current environment, and driving sustainable high quality earnings growth and returns.

As you can imagine, this is difficult and time consuming work given the history and complexity of our business, but we are moving quickly. Regardless, it is critical and foundation to our success and we look forward to sharing the outcome of this work in the fall.

With that, I'll hand it back to Sheri.

Sherilyn S. McCoy - Chief Executive Officer

Thanks, Jim, and we'll now open the line for Q&A.

Question-and-Answer Session


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

William Schmitz - Deutsche Bank Securities, Inc.

Yeah, it's Schmitz and it's Deutsche Bank. Hi, guys. Good morning. Can you just talk about – so there's four points for – I have a couple of housekeeping first. So, there's four points for IPI in the second quarter. Can you just tell us what do you think it will be in the third quarter? And then have you talked to Coty at all about getting licenses to Dolce & Gabbana and Gucci and HUGO BOSS and LACOSTE yet? And then I have my real question.

Sherilyn S. McCoy - Chief Executive Officer

So, thanks. Good morning. I will take the question relative to Coty. We have not talked to them specifically with respect to those equities. What I will say is we're very pleased with the relationship that we have in Brazil and equities we have in place, and the planned launches we're very excited about. So, it's doing quite well. And, Jim, relative to IPI?

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

Bill, we broke it out – within Africa, for Brazil, we just broke it out for the total company for Q3 at two points.

William Schmitz - Deutsche Bank Securities, Inc.

Okay. That's fine. And then can you just talk about the sort of the broader, longer-term progress you are making on the catalog and the product mix and the out of stocks and planning and forecasting on systems. I'm wondering if you guys are working hard on that or because of some of the financial constraints you have right now, some of that stuff gets deferred?

Sherilyn S. McCoy - Chief Executive Officer

Yes, that's a great question. One of the things – when Jim referenced working on our operating model, if you recall, we announced at the end of last year that we put Fernando Acosta in place and he is running our Global Marketing R&D organization. John Higson actually runs the sales piece. Those two are actually working with us as we look at our investment strategy moving forward. We've been going back and looking at product categories and looking at how we continue to build the Beauty piece and looking at other areas we would potentially streamline to improve profitability, as well as to reduce complexity and help us build and enhance the brand. So we have a lot of work underway that we plan to share with you in the fall at Investor Day.

William Schmitz - Deutsche Bank Securities, Inc.

Okay. Thank you very much.

Sherilyn S. McCoy - Chief Executive Officer

Thanks, Bill.


Your next question comes from Chris Ferrara. Please state your affiliation, then pose your question.

Christopher Ferrara - Wells Fargo Securities LLC

Wells Fargo. Can you guys talk a little bit about, I guess, about specifically for Brazil, what the economic sensitivity is there for your business, right? I mean, I think direct sellers have encountered different experiences in different economic environments that aren't always consistent, right? So, can your Brazilian business get materially better without an economic recovery in Brazil? How tied will you be to that?

Sherilyn S. McCoy - Chief Executive Officer

Well, one of the things that's really important that we're looking to balance similar to what we've been doing in Russia is to manage pricing, such that we are able to continue to improve the margin, but making sure that we're keeping representatives engaged.

We do see that we have been able to move up the curve a bit on the fragrance side. We are taking price now against color and skincare. What's important for us to do and we see this to make sure that we're balancing the marketing investments and the representative engagement where we are taking price. So it's going to be an important thing to make sure we manage that so that we can withstand it as the market gets – and be in a position as the market gets better where we have Active Representatives engaged.

Christopher Ferrara - Wells Fargo Securities LLC

And I guess, following up on that pricing. I guess – and this is probably more of a competitive question, but you are obviously taking a lot of pricing. Are you price leaders in your market? And I guess, specific to Latin America and Brazil, are you price leaders and how do you think about who you're pricing against, right? I mean, do you need to be watching the prices on shelf more? Who do you find yourself more price-sensitive to your retail distributed products versus others or is it not even tied necessarily for that stuff?

Sherilyn S. McCoy - Chief Executive Officer

No. I mean, it's a really good question. We are looking at pricing relative to inflation. We're still a bit behind inflation and our strategy is really to take it frequently in small increments and that's how we've been pricing. We also look at it, Chris, by category. So where we are leader – as an example, in color, we are the leader in the category. We're more likely to take price. In some other categories, we will react and we look at pricing both for our direct-selling competitors as well as some specific retail competitors in specific categories.


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

Lauren Rae Lieberman - Barclays Capital, Inc.

Thanks. Good morning. It's Barclays. First I have a follow-up actually on that pricing question, structurally, don't you have to price at a lag to at least your retail competitors? I mean, just given the timing of the brochure flows, if you see competitors moving, there's going to be a six-month lag before you can put pricing in, is that fair?

Sherilyn S. McCoy - Chief Executive Officer

Lauren, it depends a bit on market, but we can actually achieve it within two to three months. So there is a lagging component there, but we're also recognizing, we're doing some of it deliberately because we want to make sure that the representatives have customers and stay engaged. It's an important balance because obviously if we take price, she benefits because she's getting a discount or a commission based on that. But we also want to make sure that we're not going too quickly, too big and too fast. And we've seen that. We've done that in a couple of our smaller markets and we end up losing the representatives. I think the work that the Russia team is leading relative to pricing and small increments on a more frequent basis is the approach that we're taking globally.

Lauren Rae Lieberman - Barclays Capital, Inc.

Okay. Great. And then, I also wanted to ask a bit about North America. I know that you said it's in line with expectations. But I'm just curious, like, when do you think that you start to, I guess, start to see the declines mitigate, right? It just feels like more of the same. Any commentary on kind of the e-commerce launch that you did now, I guess it's already been coming on a year, maybe nine months. So, anything you can offer in North America would be great.

Sherilyn S. McCoy - Chief Executive Officer

Sure. North America, first, we're very pleased as it relates to the cost reduction efforts that we've taken, and we continue to stay focused on that. Secondly, as it relates to the marketing and the brochure, we've made very good progress there. We're very pleased with what the team has done, as I mentioned earlier, about the new skincare line. And it shows that if we focus and do a 360 activation, we can drive performance there, so we continue to do that.

The area that has been challenging for us, and you've heard me speak about this frequently in the past, is the area of representative engagement and we're certainly not all the way to bright there. We have made a lot of improvements in terms of ease of doing business with us. We have made improvements in parts of the field, and we see elements where we get – we are making progress, but these are not big enough to change and shift the momentum in the field.

We have launched the avon.com. It's doing quite well. It's double-digit growth, but it's a small portion. It's less than 10% of our business today, so it's still small. We're still working with our representatives to get them to shift over and order more online, and that's something I'm going to August conference, really prepare for fourth quarter, and I'm really excited about that, to spend time with our district sales managers as well as our top sellers and leaders to talk about how we continue to build that momentum in the field. So we see glimmers here and there, but it's certainly not enough to change the trajectory at this point in time.


Your next question comes from Olivia Tong. Please state your affiliation, then pose your question.

Olivia Tong - Bank of America Merrill Lynch

Great. Thanks. It's Bank of America Merrill Lynch. Can you talk through some of the specific initiatives in Latin America that you're putting in place to keep the field engaged despite the IPI tax change? And then on Russia, why do you think you've been able to hold on better than some of your peers?

Sherilyn S. McCoy - Chief Executive Officer

So, first of all, as it relates to Brazil, one of the things that's really important is to have personal touch. And so, we have our organization very close to the field, talking to them on a regular basis, making sure we're meeting their needs. We're very focused on service, making sure that they get the products when they need it. We're looking at how to, in some cases, help them with credit.

So, we're actually making sure that we have that personal connection and doing other things in terms of retention, giving incentives so that they stay in the business and sell consecutively so that helps them with earnings. So there's a lot of things that are very tactical but very important in this time, and that's something that our Russian team does extremely well.

And the Brazilian team is really like an army. I mean, it's a very well-run organization. We're holding the representatives where we're challenged is just making sure they have activity and getting more consumers to come in, so also being thoughtful to how we price. We're also focusing on incentives relative to our new product launches. So, I think we feel good about where we are from a Brazilian standpoint.

Russia, again, I think it's that field dynamic and that relationship and connection. We have an incredibly strong team in Russia. The Head of Sales has been in her position for – has been with Avon for a long time. The woman that runs the country came out of sales, 16 years in sales. She's very engaged and we're doing the right things relative to pricing, and doing it in a way that helps support them and support their business, and making sure we're getting out and talking to consumers with our Beauty for a Purpose positioning from a branding perspective.

Olivia Tong - Bank of America Merrill Lynch

Got it. Thanks. And then on the credit, do you guys extend more credit relative to your peers in your view? And then just on rep count overall, it did decelerate despite an easier comp. So, in your view, is this more an issue of recruitment or retention, because usually, when you see macros change, you tend to see some acceleration rather than deceleration in the rep count. So, has the dynamic changed there or can you provide a little bit more detail behind that? Thanks, again.

Sherilyn S. McCoy - Chief Executive Officer

Sure. So, first as it relates to credit, it varies by market, it varies by competitor. So in some cases, we do more, in other cases we're right on par. So, it's not a single answer relative to that.

As it relates to actual change in rep count this quarter, it was primarily driven by Russia. Russia is still strong this quarter, but is not as strong as it was in the first quarter. So, that's the change that you see. We do measure recruitment. We measure time and position so to speak at three months period. We look at the number of representatives who stayed with us for a year, and so we look at recruiting as well as retention and the trends – and we look at it on a 12-month basis and we can monitor those trends. And for the most part, we're making improvements in all areas. So, there are a couple of markets where they have specific target areas that they need to focus on, but the good news is we have visibility to that, and we work with the teams.


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

Stephen R. Powers - UBS Securities LLC

Great. Thanks. It's UBS. I guess the first question for Jim. Maybe can you just help us with the tax rate and how it's expected to trend beyond 2015 or at least just to mention for our different scenarios for what it will take to get that rate to go lower than 50%? And then, I have a broader question for Sheri.

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

Okay. Sure. So obviously, the tax rate's been very volatile. The real primary drivers are, I think I stated some of these in the remarks, but really, our current position in the U.S., where we have our corporate cost, as well as the U.S. business, and we're no longer providing tax benefits in the current period. That's the big thing. The second is the country mix of the specific earnings for the period. And the last, and I think this is really important, is just the absolute amount of pre-tax earnings that we have. So, when we talk about a rate and we talk about lower earnings as a result of the FX impact.

So some of the things that can impact, there's tax planning that we're looking at for the longer term. But to the extent that we drive pre-tax earnings higher, that will naturally bring down the rate. So, I'd say, those are the two things. I think the planning is more of a longer term issue and then the volatility is going to exist over the next, I would say, 12 to 18 months for sure.

Stephen R. Powers - UBS Securities LLC

Okay. Thank you. And then, Sheri, you seem very encouraged with the quarter's results. And I – things didn't get worse and that's definitely good. But it's still hard from the outside to see where the true future improvement will be sourced from? So, maybe two questions on that. First, the social selling campaign that you expect to ramp up in the second half. What level of consumer testing have you done to substantiate the belief that it will resonate?

And then second, as you think about the broader business over a longer period of time, next several years, how much incremental spending do you foresee needed to improve the brand and product assortment, as well as the technological capabilities to keep pace with competitors and consumer expectations for e-enablement, et cetera. Do you see those needs? And if so, do you really think you have the financial bandwidth in the current environment to make good on them?

Sherilyn S. McCoy - Chief Executive Officer

Right. So, first of all, as it relates to where we are relative to today's quarter performance and looking forward, it's really the representative trends that we feel good about. If we look at it on a 12-month basis, we can see the improvement. And as we look towards the second half of the year, we continue to expect strong trends in the representative piece. It's not all the way to bright but we are continuing to show improvement there. That's critically important and one of the key drivers. We have historically done a good job on average order and as we look at the product portfolio and our new product launches, that helps us build that business.

As it relates to the brand, we've already rolled it out in the Beauty for a Purpose branding in a number of our markets on a small level where we're getting great feedback, both from the representative and consumers. It's early days to get the overall piece because we're activating it in the end of the third quarter, so we'll get a better feel for that. But so far, so good, and we're really excited about that.

Your question around spending is something that we are going to be discussing at Investor Day as we look at what do we think we need to do to invest in the brand, to invest in the representative proposition and then how will we fund those investments. And so that's really a discussion that we'll be having with you in the fall. And there's a lot of work that we have done and are continuing to do as we get ready for that discussion.


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

Ali Dibadj - Sanford C. Bernstein & Co. LLC

Hey guys, I'm from Bernstein. I just want to add to that last question a little bit and ask Jim specifically if he can share any initial thoughts at least. I understand that we'll hear more about in the fall. By the way, I love to – if I missed it I apologize, the date of the Analyst Day will be helpful I think for all of us, but doesn't get any initial impressions, how you've been there a little bit longer, in terms of what types of things you really need to do because the business isn't necessarily improving? So, that's kind of the broad question.

The second one is a little more specific on the revolver and the fact that you're using – securitizing basically – securitized by the U.S. assets. How does that work? Does that limit you in terms of any major shift you might want to do in the U.S. strategically? So, think about retail or the best businesses or have you – how does that really limit you? So, first, initial impressions or not so initial anymore, Jim, and then second of all, on the revolver. Thanks.

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

So, I want to take it in reverse just because I think the second one is a little bit cleaner. So, in terms of the revolver, I'll just refer you to the actual documentation because what you'll find in there are carved out provisions for assets. And we have flexibility in the agreement to divest assets and to make investments. So, they take a lot of different forms and the flexibility speaks for itself in the document. I feel very comfortable that we have the ability to navigate strategically on the issues that we want to deal with, with the current revolver in place and they were contemplated as part of us putting it together.

In terms of observations, this is really – again, I really don't want to get too far in front of the work that we're doing for Investor Day. But it kind of goes back to some of the initial observations that we've had. It's obviously a challenging environment that we have externally as well as opportunities internally. But if you look at the mix of the countries, the complexity of the business, and to your point, some investments that are required, and then as Sheri mentioned, the source of funding, it's really putting all those together to say how can we drive the brand and represent a value proposition over the long term for high quality earnings growth. And I would tell you that the brand power is significant here given my experience and what we see globally.

I think a lot of people are over indexed on the 11% of the business here and don't see the power of the brand globally and the excitement of the reps. So, I think, for us, it's a detailed analysis behind the markets, how we can do things differently from an operating model perspective, where the sources of funding come from a working capital perspective, and also potentially from some expense areas and then what are the investments that we would make over the long term.

Ali Dibadj - Sanford C. Bernstein & Co. LLC

And the date on the meeting?

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

We're working through the logistics now. I think we'll probably be putting a date after Labor Day.


Your next question comes from Mark Astrachan. Please state your affiliation, then pose your question.

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc.

Yeah. Good morning. It's Stifel. Broader question on Brazil. Could you just comment on how you see the overall category growing at this point? And then within that what the direct selling category is growing at and I guess, specifically, you're looking at sort of Beauty on the direct selling side.

And then second question, as it relates to the strategic review of the business, is there something within that that would prevent insider's board members from buying stock. And I say that in the context of what you're saying here about increasing visibility and expectations for improvement yet considering where the stock is. We've not seen any insider activity in terms of buying the stock to really sort of commit to that type of improvement that you're talking about.

Sherilyn S. McCoy - Chief Executive Officer

Sure. As it relates to Brazil, we have not seen public numbers yet for the industry relative to this quarter. My expectation is that the category is coming down certainly versus where it was, but it's hard to know that. We still see very strong presence in direct selling where a lot of competitive activity and as you know, most of fragrance and skincare is sold through direct-selling channels.

So, there's been a lot of activity and people continue to do that, but it's hard to know. When we look at our business specifically, what we do see is that when consumer spending gets tight, people do contract a bit on skincare. They still continue to purchase fragrance and color. But skincare is the one that we've seen – facial skincare specifically where we see people contract a bit.

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

With respect to the buying, I would say that, as any large sophisticated company, we have obviously our policies internally in terms of executives purchasing stock. With respect to your question in terms of management buying, I'm not going to comment on that.


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

Javier Escalante - Consumer Edge Research LLC

Javier Escalante, Consumer Edge Research. My question is on North America and we focus on North America because we see that as the end game in the rest of the market, not because we're obsessed on North America. But one of the things that it is becoming clear is that you have, at this point, half of the workforce of the retail distribution points that you had five years ago. And as Sheri mentioned, you have made changes in the compensation, in the field organization and you're still losing points of distribution or shutting down doors. So, is this business mature, or is structurally unviable, which is the view of many of us? Thank you.

Sherilyn S. McCoy - Chief Executive Officer

Our focus, obviously, to your point is to have more representatives in the field. And I think that's what you're talking about in terms of lower distribution. So, our focus has been to bring more representatives in one of the other things, and we continue to do that. And I know that in talking to many of our top leaders that that's their focus and that's where we have the fields working today.

We also recognize there's an opportunity to go online with our avon.com to bring people in from that perspective. And so, looking at both of those, that's what we see as critically important. And it's important for us to do that, and we see that in all of our markets around the world. It is about making sure that when we talk about Avon and we talk about our brand positioning, people can go out and find a representative who sells that product or go online and have access to that and find a representative. And that's really when we talk about a social selling model, we know if you look at the numbers that we see, 20 million people follow us on between Facebook and Twitter. They're all over it. So, we need to make sure that we continue to get that energy in the U.S. and help us build the business back.


And our last question will come from the line of Steph Wissink. Please state your affiliation, then pose your question.

Stephanie Schiller Wissink - Piper Jaffray & Co (Broker)

Thank you. Piper Jaffray. Just a follow-up to an earlier question on the Active Reps. Sheri, could you just talk a little bit about the lifecycle analytics that you have available to you? And any insights into that falling off point? Has it been consistent or are you seeing it earlier or later in the life cycle? And maybe just tell us a little bit about the response capabilities that you have when you do start to see some slippage in the performance of some of those reps? Thank you.

Sherilyn S. McCoy - Chief Executive Officer

Yeah. So, what we look at is, for our top 12 markets, we look at length of affiliation and we can see how well people do within the first two campaigns or the first three campaigns. We look at it again at three months, and then we look at it who's been with us for over a year. And you can see that some of our stronger markets, the markets that are doing better, have much better metrics than some of the ones that are not doing as well.

So, we are able to get at that. What we know is that it's critically important to support the representatives when she first comes in because if we get her through the first two campaigns where she places two orders, then we get her through the next campaigns up to three months. She's more likely to stay with us, we have very good conversion, and she stays with us over a year.

Our data – and we'll probably be sharing some of this in the fall. You can see where we are for people that have been with us for a year, that's actually the most stable group that we have on a global basis. So, we actually have a high percentage of people who stay with us for more than a year. So, we'll share more and walk you through the mechanics of that in the fall. Thanks.


Thank you. And that was our final question. This will conclude today's conference call. You may now disconnect.

Sherilyn S. McCoy - Chief Executive Officer

Thank you, everyone, for joining the call. And we look forward to seeing you in the fall.

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