Avon Products, Inc. (AVP) CEO Jan Zijderveld on Q4 2018 Results - Earnings Call Transcript

Feb. 14, 2019 3:25 PM ETAvon Products, Inc. (AVP)1 Like
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Avon Products, Inc. (NYSE:AVP) Q4 2018 Earnings Conference Call February 14, 2019 9:00 AM ET

Company Participants

Amy Greene - Vice President of Investor & Stakeholder Relations

Jan Zijderveld - Chief Executive Officer

Jamie Wilson - Chief Financial Officer

Conference Call Participants

Ali Dibadj - Bernstein

Doug Lane - Lane Research

Linda Bolton Weiser - D.A. Davidson

Steph Wissink - Jefferies

Katie Grafstein - Barclays


Thanks, and welcome to Avon's Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in-listen only. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

The company will use slides to support today's prepared remarks. The slides will be visible via the webcast available on the company's Investor Relations website. A downloadable PDF of the presentation will be made available at the end of the call.

During the call today the company will reference certain non-GAAP financial measures which they believe to be useful to investors. Although, they should not be considered superior to the measures presented in accordance with GAAP. As a reminder, the company prospectively adopted the new revenue recognition accounting standard during the first quarter.

To provide a fair comparison, information will be shared excluding the impact of the standard. This information is labeled like-for-like. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is included in the appendix of this webcast and in the company's earnings release. Both are located on the Investor Relations section of the company's website.

This call will contain forward-looking statements that concern the company's business and financial strategies. These statements involve risks and uncertainties which are detailed in the cautionary statement available in today's slides on the company's Investor Relations website and in the company's SEC's filings.

I will now turn the conference over to Amy Greene, Vice President of Investor and Stakeholder Relations. Ms. Greene, you may begin your conference.

Amy Greene

Good morning. And thank you for joining us to review Avon's fourth quarter 2018 results. I'm here with Jan Zijderveld, Avon's CEO; and Jamie Wilson, CFO. Jan and Jamie will take you through our progress and our fourth quarter results and we will then move to a Q&A session.

Slide 3, has this morning's agenda. I will now hand the call over to Jan.

Jan Zijderveld

Thanks, Amy. Good morning and thank you for joining us today. Today, we want to cover a few key areas. First, I will start to remind you of our journey so far. Next Jamie will share the quarter four financial results. Then we will provide a business update of our progress how we're opening up Avon.

Let's begin on slide 4. It is hard to believe that it's already been a year since I joined Avon. I remember how excited I was to get into the markets to listen and learn as much as possible about our representatives all our bosses as we like to say and what do we take to make Avon successful again.

After spending time visiting virtually every market we identified and addressed a few immediate fixes starting with improving our service. Second, we pushed a new culture of performance and speed, establishing a rigorous meeting cadence and a renewed sense of urgency with Sprint teams focused on owning the outcomes for the immediate fixes. Must-win battles as we like to call them.

Third, and most importantly, we refocused the entire Avon business from rebooting and improving our direct selling model. Many initiatives are underway to improve the end-to-end representative experience. The training and the satisfaction for her and to hold ourselves accountable to improve her earnings, during the September, Investor Day, we presented our Open Up Avon strategy and outlined Avon's new success formula.

We are building repeatable models to reboot direct selling, to create demand by strengthening the value of our brand, and to unlock the big e-commerce opportunity for Avon and to use the power of our rich data, and finally to dramatically simplify and open up our culture. While we have many strengths to build upon, we have a big change agenda to execute and to build our new Avon. It will take time to fix, but we have made progress throughout each quarter.

Now to Jamie to cover the financial results.

Jamie Wilson

Thanks, Jan, and good morning. I will start on slide 5. As a reminder, starting 1st of January 2018, we adopted the new revenue recognition standard, which is reflected in our fourth quarter results, and outlined in our press release. Once again, we are providing like-for-like or LFL results.

Like-for-like provides a useful comparison of year-over-year figures that exclude the impact of the adoption of the new accounting standard on revenue recognition and our non-GAAP adjustments from our non-GAAP measures.

Importantly, it also excludes our discontinued operations like Australia and New Zealand, which we exited around the middle of last year. For your convenience, you can find a table providing a reconciliation of the like-for-like adjusted non-GAAP and reported information in the press release and in the appendix to this presentation, as well as on the Avon website. As a reminder, any discussions of revenue during today's call will be in constant dollars and our results are using like-for-like information in the presentation unless otherwise stated.

Turning to slide 6. Like-for-like revenue declined by 1.4%, and in our top 10 markets the decline was 0.7%. Despite the year-over-year decline, quarter four was material improvement from the previous quarter where sales were down by 4%. For quarter four, the key drivers of the decline were in Brazil and the U.K., along with a 6% decline in Active Representatives, largely in the beauty brand segment and with newer representatives.

Adjusted gross margins declined by 140 basis points, largely due to the result of increased material and logistics costs in addition to FX pressure. As we outlined during our recent Investor Day, we have made a conscious effort to invest in representatives and our brand.

In quarter four, we made material increased investment in representatives, recruitment and training, together with additional media spend over the prior year to create demand and rejuvenate our brand. We also invested in the representatives' incentives to help recover activity levels and reengage with our representatives. This resulted in an adjusted operating margin of 6%, a decline of 420 basis points from the prior year.

Restoring the relationship with our representatives, particularly in large markets like Brazil is imperative. These and other investments are key to resetting the foundation for future success to turn around this market and restore growth.

Moving to slide 7. As I mentioned, fourth quarter revenue from reportable segments declined by 1.4% on a constant dollar basis. Active Representatives declined 6% with the largest declines in the U.K., Brazil and Russia, but average order was up by 5% on improved productivity. We also saw a 4% improvement in average representatives sales, and a 6% improvement in price mix this quarter.

Shifting our focus more towards improved representative productivity is a priority. We continue to enhance our focus on revenue growth management as well as investing in our representatives to improve their experience and help them earn more.

Total beauty sales fell 2%, largely driven by color particularly impacted by the softness in Brazil. Sales from the innovations are encouraging with multiple success with Avon's Ultra Mascara brand refresh. Mark innovation also performed well while Color Trend was impacted by increased competition particularly in LatAm.

Of note fragrance improved to flat this quarter and average representative fragrance sales increased by 6%. In quarter four there were a few notable brand launches that contributed: New Avon Life Color our newest fragrance designed by Kenzo Takada along with selected market launches by Far Away Rebel and Segno.

Fashion & Home grew by 1% with upside driven by sales in LatAm and Russia. And Mexico sales in home category were aided by the new mini brochures. The 6% improvement in price mix is being driven by our revenue growth management efforts and Jan will share more about this later.

We expect to see continued improvement in our overall price volume mix as well as we launch better more on-trend innovative products, bundle, regimes and training of our representatives to increase her sales and her earnings.

Moving to slide 8. Adjusted operating margin decreased by 420 basis points driven by investments made in the representative experience. Adjusted gross margin decreased by 140 basis points on a 1.4% decline in revenue, primarily from FX pressure and an increase in material cost and logistics.

Adjusted SG&A, while lower than last year was an increase of 280 basis points as a percentage of revenue. As I mentioned earlier this was primarily as a result of investment in representatives for training and an advertising to create demand and excitement around the brand and an increased transportation cost. During the fourth quarter we also achieved cost savings related to the new strategy Open Up Avon were approximately $20 million.

Turning to slide 9. Our adjusted income tax provision was $3 million which was a decrease of approximately $48 million compared to the previous year. Our structural and operational changes resulted in an annualized adjusted tax rate of approximately 64% for 2018 down from 76% last year.

Looking ahead for 2019, we expect to see further reductions in the range of 10% to 15% over the course of the year. Cash flow from operations for the 3-month period was $161 million.

Our cash from operations was largely impacted by lower earnings, higher inventory levels and exchange rate pressure. Our 2018 cash conversion is lower than anticipated largely due to lower earnings. While we made some progress in reducing our inventory balances it has been slower than we expected.

As part of this we have announced a 25% SKU reduction together with taking an $88 million charge to reduce our inventory. This was designed to help improve cash conversion through 2019. In addition, we announced today that we entered a new three-year €200 million senior secured revolving credit facility which enhances our financial flexibility.

Currency headwinds negatively impacted quarter four adjusted operating profit by 150 basis points and a negative 12% of revenue. The currency headwinds increased significantly in the back half of 2018 primarily due to dramatic declines of the currencies in Argentina and Turkey along with ongoing volatility in Brazil.

Foreign exchange headwind will likely continue to pressure the business at roughly the same rate in early part of 2019. We are more aggressively taking price actions to help mitigate the revaluation and working to localize production in markets like Turkey, Russia and Argentina. In summary, we are still in the early phase of our journey, but we are optimistic about the improvements we are seeing as a result of all of our actions.

Now let me turn things back to Jan.

Jan Zijderveld

Thank you, Jamie. Speaking up on slide 11. Turning to the performance of our top markets. In the fourth quarter, we saw revenue improvements in four of our five top markets. Mexico's fourth quarter revenue increased by 2.3%, the third consecutive quarter of growth, which was driven by innovation in Fashion & Home and fragrance coupled with an increased focus on training.

Mexico is implementing the New Avon segmentation model starting with the top earners program the Stellar Circle. Advanced training behind this group of 40,000 beauty consultants is contributing to improved productivity of 25%, which help drive the overall improvement of net productivity by 2% in Mexico.

We saw slight improvements in our market share this quarter in Russia's highly competitive and shrinking beauty market. While trends are still negative, we continue to experience strength in fragrance and beauty. Argentina's strong growth continues, up 23% based on pricing to offset inflation and the ForEx headwinds. We continue to see the adoption and usage of our new e-commerce platform as well as active reps increased by 4% in Argentina.

In the Philippines, we grew 5% over the prior year as a result of our successful representative re-engagement activities that left due to the service issues that we had in the middle of last year. In addition, the Philippines successfully introduced a social media training platform which also helped reengaged representatives.

Finally, Brazil, very encouraged to see the improving trends. Revenue declined by 4.6% including a benefit from the non-incurring IPI tax. Excluding this benefit, Brazil's revenue would have declined 8%, which is an improvement on the prior quarter. The improvements were largely due to the refocus on the basics including improved service, the new incentive programs and the enhanced training that resulted in an improved field activation during the Christmas holidays.

Taking a closer look at the Brazil's progress on slide 12. After only one quarter, we are seeing the impact of our new General Manager José's experience as he has effectively diagnosed and become address Brazil's core issues. He and the team have mixed quickly to develop Brazil's turnaround, plan fully aligned with Open Up Avon priorities. They started with a focus to reboot direct selling to improve service and training to improve the critical campaign management progress, all designed to improve the earnings enhance her experience at every touch point.

Second, the team is reinventing the brand by improving the brochure quality and the brochure look and feel sharper and much better price and promotion management. And finally, they are simplifying the business. For example, they plan to significantly reduce the number of SKUs and focus more on the core brands and the biggest SKUs all while making the business much leaner and much simpler.

Brazil has also step changed its focus on e-commerce and social selling. They have set up a dedicated e-commerce business unit reporting directly to José and this unit already achieves five times the online sales in the second half of last year 2018. The Brazilian team is off to a good start, and we will continue to keep you updated on their progress, as we expect the business to return to growth and significantly improve its profitability.

On slide 13, during our recent Investor Day, we outlined the four underlying pillars that are necessary to turnaround Avon and regain our competitive position in the global beauty market. They are: first, to reboot social selling; secondly, to create more demand for our beauty consultants and increase the value of our brand; third, unlock e-commerce and the power of data, as well as capture the significant Asian growth opportunity; and finally, to dramatically simplify our business and open up.

Starting on slide 14 and the progress we are making to reboot social selling. This company-wide priority is well on the way, and already showing promise as we move to one-size-fits-all mindset to renewed focus on deleveraging and segmented approach, designed around repeatable and scalable models around recruitment, training, representative tools and incentives designed to energize, engage our representatives, while improving their satisfaction and earnings.

We are already seeing change with significant signs of improvements coming from many areas of our markets. And I shared several examples of this during our country updates.

But there is still much work to be done to fully reboot and implement our strategy. We are committed to getting it right and are addressing the different starting points across our different markets, with our focus on repeatable models. What we learn in one market, we can quickly apply in other markets thereby maximizing our learnings, as well as impacting the total impact of our programs.

On slide 15, deleveraging and segmentation and using our rich data are critical to unlocking the success of our direct selling model. In 2018, we made progress defining and testing our approach. Our focus in 2019 is on optimizing and rolling out our successful models and learnings across the key markets.

We are gaining a better understanding of our different direct, of the different characteristics, preferences and behaviors of our different representatives. And as you see on this slide, our designing targeted trainings, tools and supports to align her goals and her needs.

Turning to slide 16, and the important topic of recruiting. Last quarter I shared that we are implementing significant changes in our approach to recruiting and it improved both the effectiveness and the quality of our recruiting models, testing and building on best practices.

We are leveraging the learnings from India of mass-scale recruitment meetings which we rolled out to the Philippines. We also did nearly 90 big recruiting events in South Africa, resulting in 28% growth in new appointments over quarter three.

During the fourth quarter, we continue our mass recruiting events in India, resulting in the best quarter since 2013. In Russia, we are experimenting with the new beauty bars in shopping malls as a new innovative way to recruit and train our representatives. We also learned these beauty bars in the middle of shopping malls help build our brand quality reception.

The beauty bars is a significant improvement both for the representative, as well as the consumer experiencing and connection with the Avon brand allowing her to personally interact learn and see the immediate results.

Over 50% of the attendees placed orders and we saw a 20% improvement in representative conversion rates. That is four times higher than the average events in Russia. We continue to innovate test and share new ways to engage and delight our representatives.

The majority of our 10 markets are working to localize these and are the best practices as part of the 2019 recruiting plans, including the use of our new e-recruiting and e-appointments tools, where we are seeing promising results in Brazil. Testing and deploying repeatable scalable models globally and locally will continue in 2019 and are key to Avon's future success.

On slide 17 recruiting, communicating and training go hand-in-hand. We are arming our representatives with the right kind of training. We call this training with intent. We understand the importance of engaging and training new representatives during the first 90 days. We made good progress with our training efforts during the fourth quarter and substantially exceeded our goal to train 500,000 representatives with over 700,000 representatives participating in face-to-face training programs, plus over 500,000 representatives taking advantage of our new online e-training.

For example, Mexico launched a variety of training events including the Stellar Circle for the top 40,000 representatives, which resulted in an increase of over 25% in the average orders. Supporting our new representatives is key. Hence the Mexico focused on the first 90-day programs for our new representatives. This was launched nationwide and attracted over 57,000 participants, resulting in active rep growth for the first time in many years.

Further, the average orders increased by 2% and units per representative increased by 5% during quarter four. This repeatable model is being rolled out across other markets.

Reversing the decision made over five years ago to cut training, we reinstated the training programs globally and locally that is vital to driving retention and helping become a beauty ambassador and adviser to the clients. Fully rebuilding our training muscle is going to take time. We're testing new concepts, learning new insights and sharing best practices and scaling what works to more markets.

Turning to slide 18. In this section, we will cover a few key areas to drive demand and increase both the relevance and the value of our brand.

Turning to slide 19. Let me share how we are thinking differently. Historically, we managed the Avon Care brand our third largest brand locally, which resulted in multiple and overlapping formulas, many SKUs across many regions, there was therefore a tremendous opportunity to rationalize and reset this brand. This led to restaging the Avon Care brand with some very exciting results.

The team re-launched the Avon Care brand with a new packaging design and new range architecture. They reduced base formulas from just seven to two and reduced the SKUs by 40%. This removed more than 20 non-essential ingredients in saving of $1.2 million and 100 basis points improvement in gross margin. What is most impressive is that we did all this and grew sales last year in 2018 by 10%.

Moving to slide 20. Focusing on innovating and actions to unlock the growth of Avon's core and big brands starting with Anew in 2019. During 2019 we'll take the Avon Care lessons and refresh and reposition Anew.

We will add new exciting training tools, including interactive training and shareable videos, product information cards, as well as a new diagnostic check tool. We will launch new Anew skin care range as well as extend the brand by launching new innovative platforms each quarter starting this quarter with Anew Vitamin C product. This product has 40 oranges in each jar.

The new plan to rejuvenate the Anew brand highlights our focus on our big strong brands with better and bigger innovations, a higher price points and better materials for our representatives to help her earn more and sell more.

We are building a much stronger marketing plan for 2019 with better and bigger on-trend innovation. We will share more of these exciting new plans as we move through the 2019.

Moving to slide 21. Revenue management to create more value. During the Investor Day we shared the need to increase our average brochure price through using old revenue management levers, bigger innovations and higher prices, grow higher ticket items with bundles and regimes, improve the mix with faster growth in fragrance and skin care as well as significantly better promotion and price management.

Our quarter four average brochure prices increased by 6% over the year to $3.52. We are pleased with our early progress on promotion management and improved net revenue management, a focus that we'll continue throughout 2019.

Our price mix of 5% improved again this quarterly – quarter, largely driven by focused price increases, improved promotion management and the introduction of more premium ranges and more bundles. The bundles represented 20% of sales in the last quarter. Our overall revenue management efforts contributed to an increase of 5% in average orders.

Turning to slide 23. Our priority is to increase access through digital and e-commerce. First, we focused to improve the digital tools for our beauty consultants to help her run her business and make it easier for her. All our orders are now online and digital. And now in over 20 markets, covering 80% of our beauty consultants, she can also order from any mobile device.

Finally, we also launched the e-self-appoints for app. So you can become an Avon consultant in minutes all via your smartphone. In Brazil, our new online e-appointment app a real-time paperless process, which improved the representative experience had a 94% adoption rate in the test region. What we've learned is not enough to only have the tools, we must incorporate training to accelerate adoption and effectively drive sales.

Moving to slide 24. Driving e-commerce as a new channel and a big new growth driver for Avon. Everyone knows the Avon brand, but today you can only really buy Avon if you know a representative. Hence the e-commerce opportunity is so big and a big growth opportunity for Avon.

In 2018, we grew our online sales by 56% increasing every quarter and nearly doubling it in the second half. In the second quarter of 2018, we launched our new instant messenger brochures.

In just over two quarters this has now been rolled out to 60 markets. By the year end, the unique visitors count reached 5.5 million views and the average cart value is significantly larger than the average of the brochure sales.

Training has been critical to maximize e-commerce adoption usage and to drive sales. Last week I met Leanna in the U.K. an enterprising beauty entrepreneur who has built a highly successful and growing Avon business doing this now full-time. She built this business using only e-commerce and digital tools and she did it in just over 18 months.

We are doubling down to help her and other digital e-consultants build their business and become an effective and successful micro-influencer, building her Avon profile and spreading Avon content across their social networks. We will give her new digital assets every week to use and build her business.

In 2019, we're poised to accelerate the deployment of e-commerce and mobile capabilities across our business. Additionally, in each country, we have established a separate e-commerce business unit charged with driving e-commerce sales, reporting directly to the General Manager.

Moving to Slide 25 and unlocking growth in Asia. This is another significant growth opportunity for Avon. Within the Avon -- within the Asian market, the beauty, face care, and fragrance markets grew 6% over the last five years and this growth is expected to accelerate over the next five years.

We want to take part in this growth and we have a strong and known brand in Asia to do this. We have recruited a strong team who are building an aggressive five-year growth plan both in China and India.

In India, people are excited and want to do the business with our well-known Avon brand. Reenergizing this market is a key growth opportunities. Avon popular opportunity meetings continue to effectively generate interest resulting in the fourth quarter increase in Active Representatives by 14% an increase in retention of 2%.

For India quarter four was our best quarter since 2013 with a 27% growth rate. Avon's brand strength is another big asset as we reestablish our China business. We have shifted our business model to focus on three different channels; our Avon franchise beauty boutiques, the retail distribution channel, and the big and fast-growing e-commerce channel.

Our e-commerce business in skin and fragrance are off to a good start and we are now adding color as a new category. Notably with the ongoing success of our celebrity-endorsed fragrances Avon's Little Black Dress which has become a leading fragrance brand in China.

Avon's successful promotion Alibaba Single's Day which was five times larger as it was in the past year elevated us to a key account status on their platform and it will enable us to increase awareness and promotions in 2019.

Finally, China continues to upgrade our over 1,000 Avon brand experience beauty boutiques to demonstrate our products and innovations and create the perfect online/offline Avon experience.

Next on slide 26. Throughout 2018, we made good progress in transforming Avon's culture, to become more open to new ways of thinking, simpler, more agile and much more performance-orientated, accountable for actions and outcomes.

Moving to slide 27, let me share how we are dramatically simplifying our business, getting leaner, simpler and faster. Recently, we announced we entered into an agreement to sell our China manufacturing facility to TheFaceshop Company, a subsidiary of LG house care and health care and one of Asia's largest consumer goods beauty businesses.

We have anticipated net sales proceeds of Avon of $44 million at the closing. The sale of an important component of the optimizing of our assets. As part of the transaction, we agreed to enter into a manufacturing and supply agreement, where in that side of factory we'll manufacture products for our fast-growing Chinese business and other markets while maximizing the capacity of the plant.

This agreement is another example of our Open Up strategy and strategic shift to leveraging the best-in-class partners to improve efficiency and optimize our assets. Over the past several months, we have taken decisive actions to identify and capture cost savings with our company's existing commercial practices, supply chain and global infrastructure footprint. We also closed our Rye offices and announced the sale of this site. And we are reviewing all our assets to ensure they're all fit for purpose.

We recently announced plans to reduce our global workforce by approximately 10% to create a leaner organization that is better aligned with our business needs. These actions, coupled with the reduction of 8% completed in 2018, expected to result in annualized pre-tax savings of more than $100 million by the end of 2019.

We have become too complex and cluttered with too many SKUs and too much inventory. Therefore, we have initiated an SKU reduction program, with a target of a 25% reduction in SKUs by 2019. Reducing the long tail will help make demand management easier, improve our service levels and above all, help simplify our business. During the fourth quarter we already reduced our SKUs by roughly 6% from the levels in quarter three.

To clean up our inventory, in the fourth quarter we announced that we are making a 15% reduction and taking a one-off inventory obsolescence write-off of approximately $88 million. Combined, these efforts will advance the simplification of Avon's operation and drive down cost.

Turning to slide 28. I will share the progress that we've made building our talent and driving the cultural change. Over the last year we have been attracting significant new talent and capabilities to Avon, including the recent addition of a new Global Supply Chain Officer Vikram. And this week we announced Kay Nemoto as our new Chief Strategy and HR officer.

By the end of 2018, 73% of our top 35 leaders were new and bring fresh perspectives and talents to our company, all fully committed to turnaround Avon. As we move into 2019, we've made a conscious effort to move marketing R&D and an end-to-end supply chain responsibility closer to the markets.

We've implemented a comprehensive new governance cadence with tighter controls and established accountability for targets. All managers have clear goals with 70% of their annual bonuses tied directly to their local markets' results. I could not be happier with a deep and experienced bench that we are building and putting in place to lead the new Avon.

On Slide 29. Closing our 2018, we want to recap the progress against the items we presented on the Investor Day in September. We said in the second half of 2018, we would train 0.5 million representatives, but we exited that training over 1.2 million in just the fourth quarter. We presented the three-year target of $400 million savings to fund our fuel-for-growth strategy. And in the fourth quarter, we booked $20 million towards that amount.

As we discussed, we have sharpened our focus on revenue management and pricing and saw a greater than 5% improvement in net price and mix during the fourth quarter. With our focus on representative training, we expected to spend $10 million on those programs and during the second half of the year we did.

While sharpening our product portfolio, we are focusing on launching new relevant products that provide better earning opportunities for Her. And in the second half of 2018, we launched more than 300 such products. We are in the process of working on the relaunch of our global brand positioning and we have attracted new talent into Avon, building on our rich history in beauty and direct selling.

And lastly, we said that we would launch e-brochures in more than 40 markets and we are pleased to say that by the end of the year, we had them available in 60 markets as well as rolled out My Avon Store to over 20 countries with 16% of our representatives adopting this new My Avon Store.

Concluding on Slide 30. It's been quite a busy year. Starting with the basics, we hit the short-term fixes hard in the first half of the year, while we worked to build the new team, change the culture and define the strategy we shared with you on the Investor Day. Opening up Avon is driven by simplifying and focusing our business, people and our cost structure. We have moved to sell underutilized assets, right-size our organization and cost structure all while moving key functions closer to the markets. We are making tough decisions with speed while holding people accountable for their results.

As we move into 2019, our focus is on execution. We must continue to drive the improvements that we have made outlined throughout today's discussion while focusing the team on rolling out the repeatable models that will drive the turnaround. We have built a strong capable and determined team ready to lead and drive Avon's success on to the next leg on our journey. As we have said before, change takes time and we will not do it without our brands, but we are determined to return Avon to growth and to reclaim its competitive position in the market.

Thank you for joining us today. Now we would like to take the opportunity for questions. Let me turn back to Amy to start this process.

Amy Greene

Thank you. Before I turn things over to the operator to begin the Q&A session, we want to have plenty of time to accommodate everyone and to ensure that we can thoughtfully address as many questions as possible. So, please try to limit yourself to one question and possibly a follow-up. Operator, can you please open the Q&A session?

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ali Dibadj with Bernstein. Please proceed with your question.

Ali Dibadj

Hey, guys. So I will try to squeeze in two. One is just around the improvements that you mentioned around Russia, a little bit better negative one; Brazil again obviously still negative; but improving a bit Mexico. How much do you think that your improvement actions you're taking? Can you measure that perhaps from a market share perspective versus macro improving, which we are clearly hearing from other companies and local sources in Brazil and Mexico? So just kind of how much of your actions is question number one?

And then number two is, although you say you're on the right track and you say there's some improvement here, the results are still obviously choppy and will continue to be choppy has your confidence changed at all in terms of the idea that you're doing enough and spending back enough and changing enough and making bold enough moves to get to your near-term guidance that you mentioned before? So love those two questions if you can please. Thank you.

Jan Zijderveld

Ali, thanks a lot and good to hear again. Also we forgot obviously it's Valentine's Day, so I hope you all -- and Valentine was basically designed for Avon, the company for women and for looking after each other, so I hope you all having a good Valentine's Day including you Ali.

So on your two questions are we seeing green shoots because of the macro or because of the things we're doing? I think in the short-term the macros haven't really helped or hindered us, specifically in Brazil. In Russia by the way the macro is actually quite tough and we're seeing some shared gain. So in a tough environment actually we're seeing a little bit of a share gain.

In the other big markets, specifically Mexico I think really the actions that we're taking of specifically rebooting our direct selling operations, investing in recruitment, investing in training, investing in the field is really starting to show us that it can be done and that the fundamentals of the business are improving.

And on Brazil and our focus specifically on Brazil because we got really the reset going on. I think all of the same things are starting to happen. Now with a bit of luck we both get underlying better business and a little bit of tailwinds from the improving macros in that country.

But I would say that short-term what we're seeing now it's our own work and it's our own initiatives that are giving us more confidence that we're working on the right things whether it's indirect selling, whether it's strengthening our brand and our marketing activities, whether it's step changing and really focusing on e-commerce and digital selling and making our business much, much simpler.

I mean, I think we were clogged up too many SKUs, too much inventory, too many processes, an organization that wasn't too siloed. So all of those things coming together is I think slowly and incrementally improving the situation.

And are we doing enough? Yeah, I think if you look at it I think we are doing enough. I think we are doing a heck of a lot. If you think about we have identified the issues. We've got I think a very clear agenda with our four pillars to attack and address the issues.

We're putting a new field new team in the field in terms of who's going to do that lots of new players, lots of new capabilities that we're building and buying in whether it's direct selling capabilities and people that we bought in and placed in key places, whether it's e-commerce capabilities and people that we're putting in places, by the way of note new marketing people that we're putting in place that really know how to build our brands and build our innovations, better innovations, stronger innovations. And of course the last two appointments, a Senior Supply Chain Head now Vikram, who is joining also the EC to really look at our asset base, our cost structures, to see how we can run our logistics operations better, to manage our inventory in a better way.

So all of those things starting I think to come together. We're planting lots of seeds and giving water to those, while we're continuing to take out the weeds. And are hopefully one day -- and we're starting to see now in Q4 some of those flowers starting to come through the field Ali.

Ali Dibadj

And if I may, just on that last point in terms of weeding things one of the interesting moves that you made, bold moves where selling some of these underutilized assets obviously in Asia as well. Do you think you're done there? Is that review over? Or is that going to be ongoing from a sale of assets perspective?

Jan Zijderveld

No that's ongoing. I mean we picked the obvious one which was obviously the China factory which was a big factory which totally underutilized and we found I think a great solution with LG Care where they will take over all the factory all the people. They will start investing in it. They start filling up and we'll really build a strategic partnership with them to really drive that to the next level.

Secondly the Rye offices, we said we want to be out of the Rye office before the end of the year and move our IT people to better locations. We've done that and we hope to sell the facility very, very soon.

And then we're looking at all our assets every single asset that we have. We're reviewing is it fit for purpose, specifically we're reviewing our warehouses around the world. Can we better -- find better solutions to utilize those better, better different partnerships? So that is also under full scope and full review to both, get better operations and unlock cash where possible.

Ali Dibadj

Okay. Thanks very much.


Thank you. Our next question comes from the line of Doug Lane with Lane Research. Please proceed with your question.

Doug Lane

I just wanted to focus on the SKU reductions here. I understand the need for it and it makes a lot of sense to me, but what do you think the impact will be? Have the reps found out or been notified about the reductions? And what do you think the impact will be on sales at least in the near term?

Jan Zijderveld

So Doug thanks for your question. Well I have -- let me just -- you might agree and I have done this many, many, many times. And it is always -- people get a little bit nervous. But I can reassure you 100% that if you focus your SKUs on the top sellers and take out all the sort of clutter and complexity of all those small items you get not only a better business simpler business, but a faster-growing business.

And I knew at care example that we showed which was our third biggest brand, we reduced SKUs by 40%, we reduced the base formulations from seven to two core formulations and we relaunched it and we grew the brand double-digit.

And I can show you example, after example, after example that a fewer SKUs makes healthy business and easier to run business and drives growth. We have a phenomenally long tail in Avon and shockingly long tail in Avon.

So it's a low-hanging fruit to simplify the business to focus on the bigger SKUs. And when we do the analysis of the top 100 SKUs or the top 250 SKUs and the remaining 50 SKUs -- 50% of the SKUs they contribute very, very little to the total sales.

So I think this is sort of the basics of the basics of running a tighter sharper portfolio which will save costs, improve our service, make forecasting much easier and drive the organization to focus on the big powerful more profitable SKUs. It's cleaning the house basically to get a better-looking house.

Doug Lane

Yeah. That make sense. Okay. Thanks, Jan.


Thank you. Our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Linda Bolton Weiser

Hi. So when you talked about all your different initiatives there, one of the things you said was a new mini brochure I think for Fashion & Home in Mexico. Can you just generally talk about the wider topic that seems to me like increasing complexity if you're starting a new mini brochure and yet you're trying to reduce complexity? So maybe you could just take that one example and show why that is something that makes sense?

And then also in terms of all of these things that you have going on, all of these initiatives and you're trying this and different things in different markets, how are you able to assess the ROI and all the different money that you're spending towards trying to try out like the boutiques, I think you mentioned in one market and training and all of that? How are you looking at the ROIs to be able to better focus maybe fewer initiatives, but higher returns on the initiatives that you're doing?

Jan Zijderveld

So, thanks Linda for these two questions. One is the mini brochures. First and foremost, I think it's important that this is our marketing mechanism. This is the tools that we give to our representatives to reach for customers. And we're doing, and it's a core of our businesses at store basically. So, we're investing in better brochures, better laid out brochures. José in Brazil is actually reducing the brochure size, but increasing, the number of pages, but increasing the size and making the pages a little bit more attractive again and the whole layout, and we're really looking immediately at effectiveness of one brochure versus another one.

Another idea that we're doing is the mini brochures. We've done that in the past. They're quite effective to different audiences. So, I like the fact that we're doing these things with speed and flexibility and absolutely no complexity at all. The complexity actually comes in SKUs, comes with a number of supplies that we have, the number of raw materials that we have. It's in the system.

The frontend, we need to deleverage. We need to think about what she needs to become more successful. Whether this printed mini brochures or think about what we can now do with the IM brochures which are the digital versions of that. So we can have many digital brochures which you can make in a couple of days and send out to different audiences, at different times around different themes. I've seen some countries that have done the e-brochure, the IM brochure dedicated for Valentine's Day which then the representative can spread across her Facebook friends or Instagram network. So, experimenting and driving different solutions and brochures and it doesn't cause complexity, but really drives growth and innovation.

The second one on your initiatives, and yes, we're doing many things, but the many things are around all our key themes. And I think that's really important to come through. The activity streams that we're putting in are very, very focused about the strategy that we're doing. So, we're doing lots of things about how to recruit better, should we do big meetings, should we do small meetings, how do you, what's the script that you use.

I was in South Africa a few months ago, and we were testing different scripts. So you get 30, 40 people into a room. What's the best script that you should use? Which one works better? And what you start finding that in one neighborhood, I was in the black neighborhood just out of Joburg and one script did very, very well there. Then we went to another neighborhood. We drove for a little while. And that was a sort of more middle-class neighborhood and we had to adjust the script because the people's lives are different and the people's expectations are different and I like that very much. And one, because we are data-rich company, we follow them. It's okay. Our success over this course versus that course. And I think you heard also through my presentation, we have lots and lots of data. So we're doing all these activities to see how we can recruit better, how we train better, how we retain better, how do different representatives behave in different areas and that optimizes our marketing mission.

So I think we're doing activities around the themes that we have identified and we're measuring success. And then as I talk about we build repeatable models to say what's successful what works and those ones then we rollout with discipline. So it is a little bit learn and test passed and then scale what works. And I think that's really a great sort of management technique or to be able to drive the change programs that we need.


Thank you. Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Steph Wissink

Hi, good morning, everyone. I just have a follow-up question Jan on your comment at the very end of your prepared remarks. I think I caught everything, but you've deployed your mobile catalog in 60 markets and I think you said 20 markets have been My Avon Store. Can you just give us an update on how we should think about 2019 rollouts and the adoption of that My Avon Store interface?

Jan Zijderveld

Yes. Thanks Steph. So yes -- so we're really focused very, very strongly on e-commerce. I think the case for e-commerce for Avon's is so obvious. It started with the opening slide. Many people -- almost everyone in all our countries knows us, but they can't buy us unless you know a representative or have access to the physical brochure. So that's the really huge opportunity and that's why we're doubling down on e-commerce. And we have the two platforms that we're driving: one is the IM brochure which we only started I think in April, May from zero and we now have in 60 markets which is essentially every single country in which we operate.

And what we see is we went from 2.5 million views in Q3 to 5.5 million views in Q4 and we just start seeing increased adoption and more and more representatives understanding how to use it, but also us understanding how to use it. So one is obviously, we just repeat with physical brochure as an IM brochure, but what we also start seeing that we can do different brochures at different times maybe even targeted of different groups. So that's also in 2019 will continue around the IM brochure.

We're also adding extra functionality to the IM brochure including which we're testing now direct delivery. So the IM brochure now gets delivered by the representatives. We're now testing the IM brochure that you can order it and get it directly delivered to your home. So we continue to build and drive functionality to make it better and better. The My Avon Store is really the sort of platform for the representatives. It's first store face. That is being rolled out now to over 20 markets. I think we added another two this week. And in the markets in which we operate, 16% of the reps have opened the store. And that's really, really encouraging.

So -- and then the trick is to not only get them to open the store, but teach them how to build the business and find the successful ones like LeAnna which I met last week in the U.K. that had build her business without any physical contact. The way she builds her business all through My Avon Store driving new customers, driving her business electronically using My Avon Store. What we're now doing is My Avon Store gets updated in terms of the program, in terms of the app every two weeks. So we're building a better app every two weeks. So we get a cadence a bit like you see on your iPhone, new update, new update every two weeks with new functionality better programs. So that's one thing.

The second thing we're doing with My Avon Store is making sure that we provide better content for her. So, we've now -- our new marketing team which I think I'm also very excited about, we got some really good new marketing people. We've appointed a new agency to every week release new assets, i.e. new little films, new little demos, new little photos and ideas that we then spread out to these e-reps who then spread it out across their network to make them really micro influences. And we've now set up a pipeline of asset generation which will guard every week to help her drive her business back to My Avon Store.

So, we're at the beginning of a journey, but that's very, very exciting happening. So, it's the platforms that we have My Avon Store and My IM brochure. It's educating her to use it and then giving her assets and ideas and products and promotions and gifts so we can drive her sales.

Steph Wissink

Jan could I just ask one follow-up to that. On rep attrition, should we think about 2018 really as a year focused on training and I think you qualified that investment at $10 million. In 2019 we should start to see some activations regarding recruitments?

Or how do we square up some of these great initiatives at the rep level in mobile e-commerce the dynamics of them that you just described with the continuation of declines in the active and total reps?

Jaime Wilson

Yes they all hang together of course a little bit. So the other one -- the first one actually we're really driving as well as recruitment. We're going to get more people into Avon as well. And what you see? If you look at Q4 over Q3, we have added 170,000 net additions to the recruitment in Q4. That's a 12% increase on Q3. So we're really driving also all those recruitment events. In India alone 100,000 extra people were recruited and so the first thing is get them in.

The second thing then is to train them and that starts with a 90-day training -- it's our 90-day training to get those ones who want to earn money into the program so they're not only recruited but they all can start selling and making some money. And therefore this focus is on training. And the output of that is improved productivity.

So, her sales go up and her earnings go up and we teach not only to sell more but also sell more profitable product which is where the product training comes in so that we teach her how to sell skincare to teach her how to scale bundles to teach her how to sell fragrances.

And so these things all hang together. And what we start to see is that we start to see the productivity improving. So recruitment is up on Q3 and Q4. Training is significantly up and the average price of those people and therefore their earnings is also significantly up.

And they all hang together and we should see ongoing improvements to support that therefore we need a stronger brand with better pure innovation and a simpler portfolio. So, that's why these things are connected and are starting to work in more and more countries.

Steph Wissink

Thank you.


Thank you. Our next question comes from the line of Katie Grafstein with Barclays. Please proceed with your question.

Katie Grafstein

Thanks. I was wondering if you could talk a little about your newly announced partnership with Rappi in Brazil and have you seen any early successes for this? And maybe is this the type of partnership you consider doing in other regions outside of Latin America? Thank you.

Jan Zijderveld

Yeah, Katie that's great. So what we are – that was a really nice experiment test that we're doing in São Paulo, to really show that we're serious about e-commerce and we're driving obviously many initiatives which is the direct delivery to consumers in most countries for My Avon Store, and what I think José and the team are doing is going a step further with a two-hour delivery window a bit like ordering your hamburger or your pizza. Can we do that as well? And we're doing that. So what I'm encouraging is just to do many different things in testing on e-commerce platform with different partners in Rappi in Brazil is just another one and that's looking good and looking promising. But I can tell you and I'm encouraging the business to become more ,entrepreneurs, more testing in this area, and see what works and what doesn't work. And then those models could work in São Paulo but that model could then maybe do in Shanghai, or in London, or in Mexico City.

So the trick for us now is that we have more testing and learning going on in different places but that we then roll the learning's and the mobiles out in more faces. So test and learn in a small way and then scale and drive across the world in a big way. And that's really a sort of new culture that we're trying to build.


Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Jan Zijderveld

Yeah. Thanks everyone for joining. I really appreciate all the interest in Avon and we look forward to the next call in May for the quarter one results. So thanks very much and have a happy Valentine's Day again.


Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.

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