Avon Products' (AVP) CEO Jan Zijderveld On Q4 2017 Results - Earnings Call Transcript

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

Avon Products, Inc. (NYSE:AVP) Q4 2017 Results Earnings Conference Call February 15, 2018 9:00 AM ET

Executives

Gina Grant - Capital Markets, Treasurer

Jan Zijderveld - - CEO

Jamie Wilson - EVP and CFO

Connie Weaver - Investor Relations

Analysts

Lauren Lieberman - Barclays

Wendy Nicholson - Citigroup

Ali Dibadj - Sanford C. Bernstein & Co., LLC.

Olivia Tong - Bank of America Merrill Lynch

Ashley Helgans - Jefferies

Faiza Alwy - Deutsche Bank Securities, Inc.

Linda Bolton-Weiser - D.A. Davidson & Co.

Mark Astrachan - Stifel, Nicolaus & Company

Douglas Lane - Lane Research

Operator

Good morning. My name is Holly and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Fourth Quarter and Full Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

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

Gina Grant

Thank you, Holly. Good morning and thank you for joining us to review Avon's fourth quarter and full year 2017 results. I'm here with Jan Zijderveld, Avon's new CEO; and Jamie Wilson, Executive Vice President and CFO. Jan and Jamie will take you through the fourth quarter results and we will then move to a Q&A session.

Today, we will use slides to support our prepared remarks. These slides will be visible via the webcast available on our Investor Relations website, investor.avoncompany.com. A downloadable PDF of the presentation will be available at the conclusion of the call.

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

Our call will also contain forward-looking statements that concern our business and financial strategies, including our transformation plan, cost actions, and savings, as well as performance trends, and the impact of foreign currency, tax, and tax rates, among other things. These statements involve risks and uncertainties, which are detailed in the cautionary statement available in today's slides on our Investor Relations website and in our SEC filings.

I will now hand the call over to Jan.

Jan Zijderveld

Thank you, Gina. Good morning and thank you for joining us today. Before Jamie reviews the fourth quarter result, I want to take a few minutes to introduce myself and share a few thoughts.

Many people have asked me why I was attracted to this role. I'm excited to be joining such an iconic company of this important time in Avon's history. Very few companies have the brand recognition, extensive global reach, whole market positions in beauty and direct selling that Avon has. In a world where trust in companies is becoming a scarce commodity, Representatives relationship with the consumers has never been relevant.

At its core, Avon is an organization with a clear and compelling purpose that has endured 130 years of history. Operating in an attractive beauty and personal care categories across the globe and skewed towards developing and growing markets.

Through our direct selling Representatives, we empower millions of micro entrepreneurs globally. The opportunity to modernize and enable them to be more competitive and serve their consumers better is a powerful proposition, and this is at the heart of Avon's value proposition. However, the performance has not what it should have been.

During upon my 30 years of experience at Unilever as a global leader, I've ran many different and complex businesses and personal care, home and food industries. I've lived in seven countries across three continents and I'm very energized by the opportunity to leverage my experience to help Avon.

I came here because I can make a difference. Avon is operating a dramatically changing consumer and competitive environment and business as usual is not an option. The Board has given me a clear mandate to dive deeply into all aspects of this business.

We're taking a fresh look at everything, with a sense of urgency that you would expect. We have extensive plan to spend time in our markets, talk to our Representatives and managers and understand the reality of our operating climate and competitive landscape as a basis to improve our performance.

I will continue to listen to all stakeholders to gain a balanced understanding of what Avon is doing well and not so well today, to learn where our near and long-term opportunities lie, and most importantly, determine how to address prioritize, sequence, and act to overcome our challenges.

I'm conscious a significant turnaround is needed, but I am sure we can unleash the potential power of this iconic business. My primary objective is to accelerate the pace of change, drive quality growth and strength in Avon's position as a market leader.

While we will require time to complete our review and refine our plans, I can assure you we will act decisively and above all, with a sense of urgency. I'm excited of what the future hold. I look forward to an open and candid dialogue with you all and sharing our progress along the way.

And with this, let me turn to Jamie for a discussion around the fourth quarter and full year results. Jamie?

Jamie Wilson

Thank you, Jan. It's great to have Jan join us last week. With the management team now complete, we're well-positioned to accelerate our path as we enter this phase of our journey.

To summarize our results, during the fourth quarter, we faced ongoing revenue growth challenges while continuing to make progress against key initiatives, such as cost savings and cash generation. Our focus on profitability and exceeding our cost saving target contributed to improved operating margin as we ended the year.

On slide four, let's focus on our performance highlights from the fourth quarter of 2017. As a reminder, we are only providing revenue in constant dollars using adjusted non-GAAP information for the fourth quarter.

Results show revenue from reportable segments was down 2%, driven by declines in Brazil, Russia and the U.K. Of our top 15 markets, nine grew revenue and six declined. Excluding Brazil, revenue from our top 15 markets would be flat.

The number of Active Representatives declined more than anticipated, largely due to a decrease in Brazil, which impacted volumes. In addition, price/mix did not compensate as much as we expected, largely influenced by pricing, leaving us behind our revenue expectations for the quarter.

Last quarter, I spoke about our need to improve the quality and use of our data, a key initiative that is already underway. This revenue shortfall highlights the need of an urgency to shop and the focus on self-managing and forecasting through data and analytics.

More importantly, it demonstrates the impact of not having sufficiently granular Representatives' insights to inform pricing, promotional and discount decisions to realize revenue benefits. We have been developing the framework to facilitate our understanding of our Representatives and their needs within various segments and I'll talk more about this later.

Now, let's take a closer look at our sales by category. Beauty declined 1%, modestly down in all categories. While Color improved in many markets, overall, the quarter declined marginally due to Brazil. We see consistent improvement in execution of the distinction between Avon True for the color loyalist and mark. for the color enthusiast. Additionally, the launch of mark. Liquid Lip is performing above expectations.

Fragrance declined due to weaker performance in gifting, particularly in Brazil and the U.K., where the competition intensified through increased incentives and strong discounting. In addition, we saw mixed results from each product launched in EMEA region.

Skincare was impacted by weak start of instant effects in EMEA. We're providing Representatives training on the product to improve our performance ahead of the LatAm launch in the second quarter.

Fashion & Home was down 4% due to weak EMEA performance, primarily in Russia and the U.K., where we're working our focus our offering to respond to consumer trends for discounts through online and outlet channels.

Moving to slide five, adjusted operating margin. Our overall adjusted operating margin improved by 250 basis points to 9.8% due to improved gross margin and lower fixed expenses, including cost savings from the Transformation Plan and bad debt.

The cost saving improvements were partially offset by inflation and investments in field and selling. Even with these additional cost pressures and excluding the year-over-year favorability from bad debt management, largely from Brazil, adjusted SG&A was still favorable by 50 basis points.

We recognize the need to continue to look for opportunities to decrease the cost base in a way that does not impact our topline or disrupt the business. This continued approach by our leadership team will be key to providing the flexibility to fuel investments that will enable us to accelerate our path to growth.

Position to highlights from our segments and top markets on slide six. In EMEA, Active Representatives turned positive for the first time in 2017, driven by efforts to improve representative experience, while revenue was pressured by declines in average order.

Segment margin declined by 120 basis points, largely because of higher distribution costs, mainly in Russia, due to increased delivery cost, as we mentioned in previous quarters.

In Russia, we made progress improving the representative experience, including enhancing communication between the Representatives and Avon, and by increasing flexibility in ordering and delivering in two major cities.

However, innovation issues and competitive pressure led to a decline in revenue, particularly in Fashion & Home. We continue to focus on innovation and how to more effectively target our product offering, marketing, and advertising.

In the U.K., Active Representatives continued to decline and average order was flat. While the Avon U.K. brand remains wrong, rank second for top of mind beauty brand awareness, the new management team is assessing all aspects of the strategy to overhaul the commercial model.

Since we're just beginning this effort and many other improvements are planned to come, we understand that the road to recovery in the U.K. will take time. In the meantime, we continue to make progress along the way by including recent improvements in order flexibility.

In SOLA, revenue continued to decline due to a decrease in Active Representatives, especially in Brazil, offsetting the benefits from the increase in average order. Segment margin increased 480 basis points, primarily due to Brazil's lower bad debt expense versus the fourth quarter last year. The bad debt situation continues to improve, however, it is not a rate consistent with economic conditions.

Brazil's decrease in revenue was driven by declines in Active Representatives. Continued application of tighter credit policies impacted recruiting efforts, as well as representative activity. This was expected to a degree, given the strong comparison from last year.

In addition, Brazil's average order was down due to price reductions as the market remains price-sensitive, along with decline in units. We also increased investments in field and selling to support representative engagement and activity. Brazil will be a key focus area for the management team during 2018.

Lower revenue declined in the fourth quarter, negatively impacted by the earthquakes in Mexico in September. We estimate the earthquake impacted revenues by approximately $4 million. Otherwise, sales would have been flat.

Segment margin declined 180 basis points due to continued higher levels of bad debt, largely driven by the change in regulations on collection processes in Mexico introduced in quarter two.

Our remediation efforts are beginning to take effect, but we expect this pressure to continue in the near-term. We also experienced higher transportation costs, which we expect to continue to impact the business.

In Mexico, revenue declined. After driving improvement in service quality during the third quarter, we saw disruption from the earthquake but managed to recover the representative base by the end of the fourth quarter, aided by a strong holiday push.

In Asia-Pacific, the Philippines grew and most other countries declined, which led to a decrease in revenue. Segment margin declined 240 basis points, driven by lower gross margins due to product mix, as well as higher field and selling investments, primarily in the Philippines.

However, revenue in the Philippines grew due to Active Representatives following the recruitment initiatives, strong leadership, and enhancements to the representative experience facilitated this improvement.

Moving to slide seven, other key financial performance indicators. Our adjusted income tax provision was $51 million in the fourth quarter, which was $7 million higher than the prior year. The additional taxes in this quarter were driven by higher earnings before tax, yielding an adjusted effective tax rate for the quarter of 44.1% compared to 79.4% last year.

Our full year effective tax rate was 76.4% on an adjusted basis. This is an unexpectedly high tax rate, stemming from our operating structure and the results of our inability to recognize tax losses and carryforward tax credits.

Clearly, we need to move towards a more normal tax rate and the first step will be supported by two changes in how we do business. Firstly, the move to the U.K. -- with the move to the U.K., we have decided to centralize our strategic management and risk, including inventory risk and foreign exchange risk in our EMEA segment to better drive business performance. Consequently, we will now be able to recognize tax losses in this segment.

Secondly, we intend to more closely align the currency of our debt with currencies in which we earn money to provide a natural hedge for the business, which has the additional advantage of locating our debt in a jurisdiction where we can benefit from interest expense deduction.

Regarding the recent U.S. tax reform, we expect any impact to be limited, given the foreign jurisdictions in which we operate in, the level of net income we have in the U.S., and our excess foreign tax credits. However, we continue to assess the impact as we await legislative clarification on various provisions that are potentially applicable to Avon.

For year-to-date cash flow from operations, we saw an increase of $143 million versus prior year, primarily due to improvements in working capital. Adjusted EPS for the quarter improved from $0.01 last year to $0.12 this year.

On slide eight, you can see that our liquidity profile is strong. We ended the year with $882 million of cash, up from $654 million in the previous year. This was largely due to nearly $175 million in free cash flow generation due to targeted improvements in working capital. This represents substantial improvement in our cash conversion metric during 2017 and we expect that this rate conversion will continue.

In addition, we further supported our financial flexibility by renegotiating the covenant levels in our $400 million secured credit facility. We will repay $238 million remaining -- of the remaining amount due in our 2019 note from our cash resources and still retain the plan's financial flexibility to fund investments.

Slide nine highlights our progress in executing the basics. We continue to make progress on several fronts. To bring you up-to-date from last quarter, we'll start in the top right pink box. Looking to play and win in the right geographies. As we work to return Avon to long-term profitable growth, the company is focusing on markets with the most growth potential.

Consequently, today, we announced the closure of our Australia and New Zealand businesses. After considering our options, this was the right decision based on historic performance, dynamics in the direct selling Beauty market, and the inability to deliver quality growth.

Turning to the boxes in the middle of the slide, we already spoke about our progress in strengthening the balance sheet. On the topic of driving our cost, we remain vigilant on cost savings and have exceeded our 2017 target, with over $250 million and are on track to hit our three-year target of $350 million.

These savings have been partially offset in several markets by inflationary pressure on the cost base that could not be covered fully by pricing. We continue to review all of our cost base to identify additional opportunities that help to mitigate future cost pressure.

Moving to slide 10, we told you last quarter that achieving our near-term goals requires a coordinated effort in four foundational areas. Each area is interconnected, requiring us to make progress in all four places. First, prioritize investments to upgrade systems. Last quarter, we spoke about the need to develop an adult digital analytical tools to improve representative segmentation, targeting engagement and earnings potential.

From the Brazil rollout, we learned that the new front end has many benefits, including a reduction in impersonations where one representative places orders for multiple Representatives for convenience, fewer abandoned orders, improved representative self-learning, and faster order submissions.

We have plans to roll out My Avon business, a new front-end representative-facing system that will improve connection between Representatives and Avon. We plan to start with Poland later in 2018 and move on to other Central European markets.

We're also set out to increase our investment to drive our mobile capability last quarter. During 2018, we intend to enable mobile connection to our systems for the majority of our Representatives.

Second, we're improving representative-focused data and analytics. We will work to align our rewards to better motivate each representative, target our offers, and provide better measures of satisfaction. We defined our framework for Representative segmentation in 2017 and look to execute on gathering and leveraging the data in 2018.

This data already shows that simplifying Representative composition models will be important to managing revenue growth. This will be done thoughtfully and in conjunction with other changes to improve the profitable revenue growth management within the company.

Third, the critical mass to effect change. We're on-track to develop the talent and capabilities required to get our business back to growth. Our new Executive team is working well together and will now begin to step-up performance management, hold ourselves accountable, and lead by example to inspire the right behavior across the organization.

Fourth, embedding our service first mindset. We need to deliver a step change in service performance from demand forecasting through delivery. For example, we are testing campaign planning automation, which uses analytics to drive improvements and demand forecast. We understand this will take time, but it is a crucial improvement.

We have defined what good service means with Avon -- within Avon and with the goal of developing a clear framework and KPIs. We have set a goal of improving our service measure by at least 10% as we exit 2018.

As part of our strategic an operational review and our intense focus on improving and executing the basics, we will look for opportunities to accelerate, sequence, and enhance these critical core platforms and initiatives.

Finally, let me wrap-up by summarizing a few key themes. We continue to believe Avon has the capacity to achieve its long-term goals, but recognize it will take time. While competitive pressure will continue in 2018, it is shaping up to be a year of executing on significant operational improvements to develop the fundamentals that underpin our future revenue growth.

At the same time, we will continue to maintain our cash conversion rate and make improvements to our cost base that will support operating margin and fuel investments. We will continue to share our progress as well as our plans as we move into 2018.

And with that, we'll turn to question and answers. But firstly, I want to take a moment to introduce Connie Weaver, an experienced Investor Relations professional, who will be and has been working closely with me in our Investor Relations team. Connie?

Connie Weaver

Thank you, Jamie, and good morning to all. I'm pleased to be working with you and the rest of the team and look forward to getting to know many of you in the days ahead. So, now, let's kick things off and move to the Q&A session. As many of you know -- as many of you would like to ask questions on today's call, we ask you to limited to one question with one follow-up and appreciate you following that direction.

As a reminder, it's our intention on today's call to introduce Jan and for Jamie to really talk about the fourth quarter and full year results. We appreciate if you would keep your questions focused accordingly.

With that, let me turn things over to Holly, our conference operator, just one more time my remind you of the Q&A instructions. Holly?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Our first question comes from Lauren Lieberman. Please state your affiliation, then pose your question.

Lauren Lieberman

It's Barclays. So, first thing I wanted to ask about is I think originally for 2018, there were some plans for increased reinvestment spending and particularly higher CapEx. So, first question was just is that still intact? Or Jan, as you kind of perform your business review, is some of that on hold until you kind of come up with your view of how the business should take shape?

Jamie Wilson

Lauren, let me jump in and answer that question. I mean the plans to put more money into investment are still intact. At the end of the call, I was talking about the areas where that needs to happen to -- firstly, to increase the mobile connectivity of our systems and also to reengage more with the Representatives and make the system more intuitive for them to connect with Avon. That is critical to the business as we go forward and obviously, it's something that would be underpinning any of the strategic work that Jan is going to carry out with the team as we go through 2018.

Lauren Lieberman

Okay, great. And one thing, Jan, for you. I mean, first, welcome and your prepared remarks were -- you hit on a lot of things and I think sort of like unrequired promise of what Avon should be and recognizing what this brand should be able to be and the business should be. So, I hope you're able to make things better.

But one thing on the business I think is always surprising to me or maybe come to accepted is how disruptive change always seems to be for this business? So, whether it's years ago, adjusting the mix of what was in the Fashion & Home segment around holiday to improve inventory levels as a huge impact on rep behavior or in the U.S., or more recently, going to more flexible order management in the U.K. and Russia. Everything that seems to be for the long-term benefit of the business ends up being really, really painful to execute.

So, 10 days in, I know, but you've still surely been looking at the business from the outside as you made your decision to join. Any early thoughts on how that -- we should think about that going forward? Is that just a cost of change, is that something that can be managed differently?

Jan Zijderveld

That's a big question and thank you for that, Lauren. I think you're right. I think you're talking about the culture business strategy and that's really what we're going to do. We got first steps of sharpness in what we want to do.

But secondly, get a cultural transformation. And that's also about really getting the current reality into the business where the business is, what the challenges are, what opportunities are.

And then secondly, mobilizing people around that and really making sure that we increase the sense of urgency and the pace of change. And that is about changing the culture and changing -- what the expectations are and what good looks like.

And I think that is a big part of the job. If you're talking about the hardware, what to do, and the software, how to do it in the sense of how you influence the culture to become faster and accept change in a rapidly changing world. I think that's one of the exciting challenges that lie ahead.

Connie Weaver

Thank you. Next question please.

Operator

Our next question will come from Wendy Nicholson. Please state your affiliation, then pose your question.

Wendy Nicholson

Hi, from Citigroup. First, just quick question for Jamie, just the Australia and New Zealand exit, can you quantify for us how big an impact that will be, what kind of headwind it will be on the results for 2018? And are there other markets -- any of size that you're also contemplating exiting at this point?

And then Jan, just sort of bigger picture, I thought was interesting that you chose to reiterate the target for mid-single-digit topline growth as a long-term target for the company. And in my view, stocks usually work best when you under promise and over deliver as opposed to over promise and under deliver. And that target in particular has just seemed so elusive for so very long.

So, I'm curious as to what specific way in your, again, research sort of looking at the company in choosing to take the job, why is it that you think that that target is now achievable, when it hasn't been historically? Thanks.

Jamie Wilson

Wendy, hi. I mean with Australia and New Zealand, obviously, we had -- took the decision to close it and we have made some provision for the closure costs within the 2017 numbers within the CTI cost in there because we had a decision to take before we close the booth.

So, really, we're not looking to have that as a major hit within 2018. Although, there will obviously be some cash cost that turns up into 2018 as the business closes. And it is a business, however, that has been a net loss position for a number of years and obviously, as we exit that, that loss will then no longer hit our results. But we haven’t been any more specific than that.

Jan Zijderveld

Yes, Wendy, thank you. I think rather than the number, I think I want to keep a sense of ambition of the business that we are a business that I think is relevant today and will be more relevant tomorrow.

So that -- we have to hold on to that and that's why joined. I wouldn't have joined a business which I didn't think would have potential and wouldn't be able to be competitive in the future.

So, I think that is a sort of horizon destination that I want to hold on to and I want the team to hold onto the relevant business for today and tomorrow. However, there are no quick fixes. There's a lot to be done to modernize this business, whether to modernize the route to market and sales rep experience, whether to modernize the brand and become more relevant, whether to modernize the IT systems and the whole digital agenda, whether to modernize the culture.

And these are the chunks we get to get into. But I'm convinced that if you do these things, that this business can absolutely be relevant. I really do believe that that direct selling is a relevant proposition for the future.

In a world where people are thinking -- they don't trust big companies, big multinational, big governments, and big brands. Who do you trust? You trust the person around the corner, you trust the lady down the road, you trust the lady from the school ground.

But the trick is, can we make sure that we equip that rep in a modern way with a right portfolio, the right service, the right products around it to be able to become more a consultant of a person rather than just a distributor.

So, I think if I can see the destination, which I can absolutely see, I can see a business where have educated and inspiring, and motivated consultants, equipped and supported by the whole business to do well, that propositioned then skewed towards an attractive beauty category.

I mean, it's a great category to be in where people want advice, where people are interested in the products and the categories. And skewed towards D&E markets where most of the people in the world live, where most of the economic growth is, where most of the incomes are growing, that's quite an attractive proposition. But that sort of destination and the reality are quite far apart.

And so the destination motivates me, the job to be done scares me. But I think that can be done, but it will take time. It will take time. But long-term, this has a future. Short-term, there's a heck of a lot of work to do.

Connie Weaver

Thanks Wendy. Let's move to the next question please.

Operator

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

Ali Dibadj

Hey guys, I'm from Bernstein. So, just to build on that comment, you talked a lot about it's going to take time, and I think for all the look like a mirage very far away on the horizon and it's an aspiration, I get it.

But how do you think about not just time, but investment, right? How do you strike the right balance between investments and growth? Because for years and years and years, it doesn't seem like Avon can grow without spending and when you try to spend margins, easy this quarter, you can't grow.

And so I understand patience of time, but do you have the resources to spend back? In the D&E markets fighting against mobile phones and e-commerce or getting your Representatives motivated and just kind of wholesale change in the strategy and the culture doesn't take time, that take a lot, a lot of money.

And we've been concerned for quite some time that it's just going to cost you so, so much to get to sustainable profitable growth that you just don't have the resources to do with without a lot more capital. So, I'd love to hear your initial reaction at least on that, Jan.

Jan Zijderveld

I think that's a fair question. But these things, Rome wasn't built in one day. So, this is about really taking the big things first, sequencing, prioritizing, and starting to execute our plan. And then increase the speed and the sense of urgency.

I think first and foremost, you got to go like what we're going through now is get into the basics. And this is about executing the plan, driving tighter performance management, improving the operational grip, and this is really the first things. And I think there's a lot low hanging fruit there. Just getting a tighter organization, tighter execution, more performance management.

The second thing is then we start to focus on the big markets. You get Brazil right, you get Russia right, you get Mexico right, you start maybe -- starting to see a root eye to the U.K. and more developed markets. But you take the big markets, the big brands, the big categories and you start driving that.

Then you start looking at the rep experience, what can we do? Is there some quicker things that we can do and around the brand? I believe there's further opportunities in cost and waste where we can create some fuel for growth. I think revenue management is a lever, which we haven't played with as actively as we could have, tearing up, linking about, what discounts, what commissions and that whole structure, so I think there's opportunities there.

So, I think there are plenty of things to go after. There may be areas, there will -- for no doubt, be areas where we'll need to invest more, the digital agenda, but I think we need to get the themes right, we need to sequence it right and start on the path. But first things first, start focusing on the basics, execution, performance management, operational grip, get the big markets right, get the core rep experience slightly better every day and we start on our journey. And I do think yes, there will be areas of investment, which we'll need to think through.

Ali Dibadj

So, I guess, we're not -- I don't know if that strategy is incorrect in any way. I think it’s a strategy we've heard for a long time and a lot of us -- some of us have hoped for it. But I think I still struggle with the how, in particular, around the balance between investments and return on that investment in terms of growth.

So, just to focus on this quarter as an example of that. You have margin improvement, that's great. Clearly, your topline is not good, you've said that. Even though Brazil should be getting better from a consumer perspective from macro from every else that we're hearing.

And then when you look at the margin improvement, there's no margin improvement in the regions, right? So, all your region expect for LatAm are down, probably Brazil, bad debt helped there a little bit, but it just doesn't look like you can and have really over a very, very long period of time, balanced that investment.

So, I guess, execution -- the execution -- forget digital, the execution is going to require investment. The brand supports going to require investment, the education for the Representatives will require investment. And I just don't know if you have enough investment to get to where you want to be. I understand timewise, you can spend a little bit of time every day, but I just don't know if you have those resources in your current structure as an independent company as an example.

Jamie Wilson

Ali, let me just jump in here because I think obviously, Jan is not going to mutually jump into all the investment criteria. I mean he said that what we need to do. We have been working strongly on our tax generation and also looking at how we can improve our margins because actually, we do some investments need to go back in.

We need to be targeted, we need to be spent well and we are getting a return on that investment, and not spread too thinly and actually not spend without getting the required return on that.

So, the whole point and change of the performance management is that we are only going to be spending where we get returns on those investments. We are not going to just be increasing things, elements of our SG&A where don't see a clear direct return on that.

We've talked before, you and I, about the fact that the brand itself is well known and healthy. What isn't good is how we're actually getting the product into the consumer's hands via the representative in a way that delights our each time that engages with Avon.

The systems changes that we're making are not a huge cost, but the ability to go from a situation where we're almost very limited mobile connectivity to our systems to where we can have the majority of our reps mobile connected within 2018 is not a huge cost and certainly well within our resources.

So, I think what Jan was saying is quite right, is how do you sequence these things and prioritize the ones that got the biggest return, that in itself starts generating the fuel to do the next investments.

So, we're not sitting here at the moment concerned that we don't have sufficient resources. We just want to make sure that we're deploying very effectively, very efficiently, and driving return on that. And then using those returns to reinvest and get the next return up in the next investment.

Connie Weaver

Thanks Ali. Next question please.

Operator

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

Olivia Tong

Great. Thank you. It's Bank of America Merrill Lynch. First, just specifically, Jamie, for the quarter. You guys had always thought that second half revenue generation would be a fair bit better than first half. So, first you mentioned Brazil, but where else the biggest prices relative to your going in expectation?

And what's your view on price/mix for the 2018, given where FX spot rates currently stand and price/mix haven’t turned negative for the first time in quite a few years? And then also what your outlook on Brazil? And then a follow-up for Jan.

Jamie Wilson

Okay, Olivia, I think there was about four questions in one, quite impressive. Let me see if I can pick the part -- pieces there. I mean the biggest -- I mean if you look at quarter four, I mean, as we said in the comments, I mean, Brazil performed below our expectations for the quarter. We knew the quarter will be a tricky quarter.

Last year, at the peak of the additions that happened in third quarter were flowing through into fourth quarter and as we've tightened up the controls on the creditworthiness of reps entering, we knew we would have a lot less Representatives in Brazil in the quarter.

We also, obviously, as Brazil has been interesting issues throughout the year, as we had some issues with Color business in the first half, which we've been trying to bring back in the second half. But I mean, all of these -- the combination of lower active reps, Color categories, which is key in Brazil to driving representative activity, means that Brazil came in below where we would have liked it to be.

And the second -- the other two areas that we would look at in the fourth quarter was the really Russia, particularly, in Fashion & Home, which is high particular items and therefore has a material impact on average order. And that performed less well that we would have liked. And obviously, the U.K. where there's been -- we're going through sort of a change because we didn't perform as well in the Christmas period as we would have liked.

So, those are the three drivers, I guess, that meant that the fourth quarter was below where we would have liked it to be. And I guess, it sort of flows into the commentary that you're making in other parts of your question.

I mean, it is competitive, that doesn't mean we can't compete. We just need to be relevant with the right products at the right price. And I think Jan alluded to that in his remarks and how we tighten up and sharpen our profitable revenue growth management strategies, which are not where we would like them to be. We can get better with that and will make us more competitive in these markets.

And obviously, key focus is getting those markets, particularly Brazil, focusing a lot of attention as we move into 2018 to get that market back into growth. It is a very large market for us, it is our biggest market, and it's important that it performs. But we also have to continue to leverage insights. We're beginning to generate and ensure that we're actually using them effectively to drive that activity.

So, I do think -- yes, the revenue is slightly lower than we would have liked it to be, but we still drove the quarter and delivered the result to the bottom-line and the cash generation that we look forward for the full year. And that's what we go to continue to do going forward. Yes, we're putting investments in, but we will use these insights to drive, keep the balance between driving the revenue, but driving it the right way in the big markets.

Connie Weaver

Great. And what's your follow-up please?

Olivia Tong

Yes, thanks. And then for Jan, I realize obviously that only been in your role for a short amount of time. But I've love to hear your assessment of what the company has done right over the past few years in navigating, clearly, challenging market and -- versus where you see the opportunity for improvement?

And how much do you think the recent challenges are a function of externals, which you guys have less control over, versus your own execution? And then lastly, clearly the companies are very different, but what do you think you bring from your prior experience at Unilever to Avon? Thank you.

Jan Zijderveld

Olivia, you're the master in creating one question with three questions or more questions, and congratulations packing that in. So, what does the company have done right? I think first of all, what the company has done right for the last 130 years is still be here 130 years later. So, I think that a legacy of a business that can last so long is great.

I think what they have done right is well is the cash generation last quarter, the cost agenda, and I think we've on-boarded some great new people in the business to the Executive team, but that's just day nine, plus the weekend, so basically, 11 days into the job. So, I think we've got to contextualize that a little bit.

Then yes, my background, yes. I've done a heck of a lot of things. I've worked in the D&E markets a long time, I've worked in a tough European market where you have to grow and cut cost and manage a very complex portfolio, getting that out of slower growth segments into faster growth segments.

And I think -- relevant, especially for the direct selling experience, as some of you have said, we've got a consumer guy here that understands customer. I've obviously worked with customers, especially in Europe whether the Tescos, the Carrefours, and Amazons of this world. But especially in my D&E time, we have a huge portfolio of small customer.

If you think about inside this stage, I think we had about 1 million customers. And those are very, very small retailers that not often a lot bigger than our reps something. They had shops the size of your bathroom, an American bathroom, which is a bigger one, or European bathroom, which is really small bathroom with very SKUs and really thinking about how to develop their businesses, whether their businesses in the slums of Manila or on the Islands of Indonesia or in the Mekong Delta. So, you really get out there, talk to them, getting to what they need to run and grow their businesses or whether it's in the hot tea shops in the Middle East, in Yemen or in Syria, in the [Indiscernible] or the wet markets. I'm passionate about that, I like that and I think direct selling and our 6 million reps are not dissimilar in terms of what they need for us to help them.

So, I think I'm regionally well-equipped in terms of business challenges, business situation where there's accelerating growth, reducing cost, changing portfolio, building brands, but also working in the markets with our 6 million representatives and our team to really see what they need to grow their businesses. And that, to be honest, excites to me. And I think sort of a connection closer to the consumers and our reps is a huge strategic advantage.

And having no intermediaries between the brand and the consumer and the rep for me is one of the big potentials of this business. The trick is to modernize that and to add data and digital capability to that. And we need to, obviously, do that and transform the business into a direct, digitally-powered and databased insightful company with relevant brands skewed towards the relevant and growing segments.

I mean that's the destination and coming back to an earlier question, we need to find the fuel to be able to do that and we'll need to find the sequencing to get there. But that -- I think I'm equipped to do that. I can see the destination and we need to prioritize sequence to be able to get there and get the right funding of fuel for growth to be able to -- yes, fund this change program.

Connie Weaver

Thanks Olivia. And I'm going ask to -- I'm going to remind everyone, let's really try to keep it to one question, one follow-up, because there are a number of you that are still in the queue. Thanks. next question.

Operator

Our next question comes from the line of Stephanie Wissink. Please state your affiliation, then pose your question.

Ashley Helgans

Hi, this is Ashley Helgans for Steph Wissink from Jefferies. Thanks for taking our question. We were wondering if you're seeing any changes in the competitive dynamics in your top markets?

Jamie Wilson

Again, I can't speak specifically about Avon yet. I'm going to be traveling, but I can tell you, the world is changing, obviously. There's modern retail, there's ecommerce, there's direct selling competitors that are changing, evolving. It is all about business staying relevant as a business for our reps. So, that's the whole modernization. But I think the whole world is changing and Avon needs to modernize and do that.

Ashley Helgans

Okay, great.

Connie Weaver

You have a follow-up?

Ashley Helgans

I guess, was the potential for SKU rationalization?

Jan Zijderveld

Again, probably, it's too early for me, but it is a complex business with lots of SKUs. So, it is one of the areas. And I'm sure, you I want to say something, but it's one of them as we look at.

Jamie Wilson

Yes, I mean we always look at our SKUs and we do rationalize and we do add SKUs and we take SKUs out from that the time that selling them and keep doing. And as we continue to look at our markets and address what they need, and obviously that will sharpen up our view in the use of that market needs as well. So, yes, it is something we look after on a regular basis.

Connie Weaver

Thanks. Holly, next question.

Operator

Our next question comes from the line of Faiza Alwy. Please state your affiliation, then pose your question.

Faiza Alwy

Yes, hi. Good morning, it's Deutsche Bank. So, Jan, I just have two questions for you. First of all, nice to meet you and welcome to Avon. I was just -- a lot of the things that you talked about that Avon needs to do are candidly very similar to what we heard from your predecessors for more than five years ago. I'd love to hear from you sort of what's different this time?

And then my second question is given everything that needs to be accomplished. It's interesting to me that you sort of blast the current long-term goal of -- the long-term targets of mid-single-digit organic growth and double-digit operating margin. Sort of what kind of due diligence did you do? What makes us comfortable with those targets over the long-term? Thank you.

Jan Zijderveld

Thank you very much. I think that's often the case but if you -- strategy is 10%, execution is 90%. In fact, you can get a strategy done -- the big headline strategy done relatively quickly. It is all about the rigor and the follow-up and the execution, and evolution of the strategy and the fine-tuning of the strategies. So, I'm absolutely convinced about that, that it is about 10% strategy, it's about 90% execution.

And around the earlier question, change in the culture to be able to adapt more quickly, to stay relevant and create a sense of urgency and speed in the organization. So, I think that has to be the big delta.

I think the second thing is a mindset of serving the rep. Putting really the rep and the outside world and the comparative context, back into the heart of the business or become more externally oriented, become more thin-skinned to what the environment is doing or what the consumers and the customers want from us.

So, that is a lot about software actually. So, I think that the how is much more important often than the what and driving that. I hope that's different. And I've done that a lot of times in a lot of companies and lots of geographies, so that's I think what the big difference is.

And while we hold onto the long-term goals, I think it's just -- it’s a point on the horizon. That's what the sort of numbers that are successful business eventually should come to. Reasonable growth, market growth, improvement of profitability, that's what -- to be honest, it's not even what we do for the investors. I think the model only works -- a business can only survive long-term if it stays relevant, and what does relevant mean? More consumers buy us, more reps want to be part of the Avon story, which means you're going to grow. And you got to grow in a quality way, which means you got to grow with good products, great experiences, therefore you may be charge a little bit more, you can tear it a little bit more, you have to maybe discount a little bit less. And through that, you get quality growth.

So, the whole concept of quality growth is not for the investors, it's for the reps. It's for the consumers, it's for Avon to be here another 100 years from now. So, that's why I want to hold onto that because it is about relevance and about having a successful business that people and reps want to buy into and want to be part of.

As a consequence, we will grow and make some more money. And you will be happy and everyone will be happy. But I think that's an order of things. So, it's about staying relevant.

Connie Weaver

Thanks. Next question please.

Operator

Our next question will come from the line of Linda Bolton-Weiser. Please state your affiliation, then pose your question.

Linda Bolton-Weiser

Hi, D.A. Davidson. So, I seem to remember what -- back in my memory banks that Unilever had some sort of direct selling organization years ago for penetrating emerging markets. Is that the case? And Jan, did you have any familiarity with that organization and how important do you think it is to have direct selling experience to run an organization like Avon?

Jan Zijderveld

Thanks Linda. Yes, you're absolutely right, well done. So -- and in fact, it was part of my portfolio, we had a brand called -- we still -- no, not we anymore, Unilever, had a business called Aviance in Thailand, which is also part of my portfolio, which is recently business -- beautiful business, direct selling business, exact copy of Avon, big in Thailand, expanding regionally.

The second thing that we had in the big way is the Shakti Ladies in India, 70,000 Shakti Ladies which to be honest are almost similar to the Avon reps, which are ladies in rural villages in India selling only Unilever products in that village where Unilever couldn't get to and there's about 70,000, we expanded this to other markets.

And I think the third bit of experience, which I think is super relevant, is the ice cream business. If you think about what ice cream is about, in Europe alone, Unilever had 1.2 million cabinets, 800,000 points of sales. In Asia, we had hundreds of thousands, again, points of sales.

A guy on a bike with an ice cream cabinet in front of him on a beach or in a park is not dissimilar to an Avon rep. A little kiosk in front of a school where the guy's selling ice cream is not dissimilar in terms of mindset of an Avon rep.

So, I think I can -- with my experience in all these areas, I get direct selling, and I get different routes to markets. And I can also think, because of seeing so many things, flex models, think about different solutions and different combinations.

Then your second, is it relevant to direct selling? I think it's useful, but I think it's more about do you get -- do you have passion for the market? Do you have passion for your consumers? Do you have passion for your customers? Do you have empathy for what their world is about?

So, I think it is about that more than direct experience. I always believe in character over experience in many cases. So, we'll need a combo of experienced people. We need people that are passionate about consumers and customers and growth, and you can learn direct selling if you have the right mindset.

Connie Weaver

We have time for about two more questions. We're almost at the top of the hour, so let's try to get the next two in before we run out of time.

Operator

Okay. Our next question will come from the line of Mark Astrachan. Please state your affiliation, then pose your question.

Mark Astrachan

Yes, it's Stifel. I was just curious. From your prior life, given all that Unilever's done and share its gain in acquisitions and focused on prestige, what makes you believe the Avon brand is relevant as you look at it today? And then just broadly, how do you see value add in direct selling these days? And maybe how does Avon fit into that?

Jan Zijderveld

Yes. Thanks, Mark. Well, I think Avon is a phenomenal brand. Everyone in the world you talk to knows Avon. So, anyone that understands brands, having that sort of level of awareness, is absolutely phenomenal.

Now, I do understand as well that we need to make it relevant and talk about again. So, there's a job to be done in terms of relevance, in terms of what product portfolio do we sell. And how do we make sure it's on trend? And how do we make it a bit more talked about? It's a little bit -- a dustier thinking that needs some polishing up again. So, strong brand that needs some work.

I also think, at the moment, it's a more mass brand, and which is good, by the way. So, Unilever obviously went into prestige, and we have lots of mass brand. This is a more mass brand. But I think a mass brand is also a great opportunity. The trick is, how do you make sure you stay relevant? And Zara is a mass brand, H&M is a mass brand, Massimo Dutti is a mass brand.

So, the trick is, how do you get the fast trends and democratize the trends and make them available to the masses or lots and lots of people? I think that, as a brand, is a phenomenal opportunity. So, how can you quickly pick up all the latest things and make it available to the, yes, normal people around the world? And so that's where I see also the brand opportunity for a big brand that gives and democratizes big trends for everyone, up the right price. And so that's where I see Avon play. And direct selling is a great opportunity because you can then, yes, get the consultant to explain why.

Connie Weaver

Great. Thank you. Let's go to our last question please.

Operator

Our last question will come from the line of Doug Lane. Please state your affiliation, then pose your question.

Douglas Lane

Yes, hi everybody its Lane Research. Thanks for taking my question. I just noticed in your release, you mentioned in the quarter, you had higher representatives, sales leader and field expense to drive representative activity. Jamie, I wonder if you could talk a little bit more about what specifically kind of -- what specific kind of expenses you were focused on there. And can you talk about what you have in the budgets for 2018 for those kind of spending?

Jamie Wilson

Well, I won't touch on 2018 because we never talk about the future budget. But yes, I mean, in the last quarter, what you're seeing was a number of incentive programs in there to drive activity in the reps through the gifting piece in Christmas. You saw in Russia a drive to bring back the representative base as we go into 2018. So, there's money being put into the -- to fuel that pickup in activity around the engagement of representatives or the appointment of representatives, so that we have active reps as we enter the new year.

And so the investments were very specifically targeted around ensuring that we ended the year with the rep numbers in a number of key markets, but also that we were driving activity around the Christmas push.

You saw the comments on Mexico. It was the same thing. Trying to pick up the representative base after the earthquake had sort of -- some depression in the quarter. We'll pulled it back towards the end of the quarter. That's what those investments were being turned against in the fourth quarter.

Connie Weaver

Thank you.

Douglas Lane

Okay, that's helpful. Can I just have a quick follow-up?

Connie Weaver

Sure.

Douglas Lane

Can I at least assume, Jamie, that those kind of spending -- that kind of spending on the Representatives will be higher in 2018 than it was in 2017?

Jamie Wilson

Yes. I'm not going to comment whether it was high or low, but these are the kind of spend that we'll continue to be spending in 2018 as well as 2019 because we believe they're important to keep the channel energized and delivering what we need to deliver. But I'm not going to comment on the scale of it.

Douglas Lane

Okay. Fair enough. Thank you.

Connie Weaver

Okay. Well, thank you very much and thank you all for joining us this morning on Avon's fourth quarter and full year earnings call. We look forward to continue to have conversation with you. And as always, you can go to our website to get the presentation, and also to get the call replay a little bit later today. So, with that, have a great day.

Operator

Thank you. That concludes today's conference call. You may now disconnect.