Avon Products, Inc. (AVP)

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Avon Products (AVP)

Q3 2012 Earnings Call

November 01, 2012 8:30 am ET


Amy Low Chasen

Sherilyn S. McCoy - Chief Executive Officer and Director

Kimberly A. Ross - Chief Financial Officer and Executive Vice President


William Schmitz - Deutsche Bank AG, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

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

Constance Marie Maneaty - BMO Capital Markets U.S.

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

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Javier Escalante - Consumer Edge Research, LLC



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 Third Quarter 2012 Earnings Conference Call. [Operator Instructions]

I'll now turn the conference over to Amy Chasen, Group Vice President, Investor Relations. Ms. Chasen, you may begin your conference.

Amy Low Chasen

Thank you. Good morning, and thank you for joining us to review Avon's third quarter results. With me today on the call are Sheri McCoy, Avon's CEO; and Kimberly Ross, our Executive Vice President and CFO. Sheri will provide an update as well as our goals for future performance. Kimberly will then review third quarter results and provide further color on our outlook. Then we'll have our usual Q&A session.

With that, I refer you to the cautionary statement in today's earnings release, as well as to our non-GAAP reconciliations, which is available on the Investor Relations section of our website. As usual on the call, we'll focus on these adjusted non-GAAP financial measures.

I'll now hand the call over to Sheri.

Sherilyn S. McCoy

Good morning, and thank you, all, for joining us, and a special thanks to those of you joining us from the New York-New Jersey area. I recognize that many of you are still dealing with some challenging circumstances, so thank you for being here.

By now, you've seen the press release with our third quarter results, which remained disappointing. It is clear that Avon faces a challenging situation. I spent the past 6 months visiting major markets, meeting with our management teams and representatives to gain a good understanding of our strengths and weaknesses. I am confident that we have identified and started implementing actions critical to moving Avon toward a measured and steady recovery.

This morning, I will take you through some of these actions, including our plans to drive top line growth and aggressively manage our cost base. We need to do both in parallel to succeed. Kimberly will then take you through details of our third quarter results, and then we will open the line for Q&A.

I recognize you would like to hear me present a magic bullet or a quick fix. But our business is complex. As I've said in our earlier calls, the challenges Avon is facing developed over time, not overnight, and the solutions will take time as well. We still have a tremendous amount of work to do to address issues that Avon has wrestled with for years: the complexity of our model, consumer access to our products, the impact of technology and the best approach to representative earnings opportunity. Six months in, I don't have all the answers yet, but I can share my thinking on how we will approach these longer-term and substantive issues. And I will tell you today that we have identified and begun to take the necessary actions critical to stabilize the company and return to growth.

We are taking an aggressive yet very reasonable approach. Our goal is to achieve mid-single-digit revenue growth and a low-double-digit operating margin over the next 3 years. I believe this is both reasonable and achievable for a number of reasons.

We compete in large and growing categories and geographies with a strong developing market footprint. The global beauty industry is projected to grow 6% annually, with most of the growth expected to come from developing markets where Avon has a strong presence. As you know, the global direct selling industry has been growing at 4% to 5%. And advice from friends and word of mouth, 2 attributes of the Avon business model, are still the most powerful drivers of purchase consideration. Also historically, Avon's growth was in line with our competitive set, and once we stabilize, it should return to this level.

In the past, our growth exceeded our revenue growth -- our cost exceeded our revenue growth. This will not happen again. Cost is something that we can and we'll control. We've already instilled increased clarity and discipline in the 2013 budget process. Historically, our operating margins have been in the low double digits. And given where the business is today and the nature of Avon's competitive set in our key markets, we believe that returning to low double digits is a reasonable objective.

All told, we have the brand, we have the product, we have the scale and we will build the capabilities. We know what we need to do to get there. We must execute, and I am holding us accountable to deliver.

In our last call, I outlined 5 priority areas for the company: stabilize and drive top line growth, improve income by a more effective cost structure and cash generation, invest in our people and build a culture of accountability, use technology to better serve our representatives and connect with consumers and build a strategic roadmap for our future. In my early months, we've organized our internal efforts against these priorities. Examining our plans against these priorities has helped us better understand how and why Avon underperformed in the past and what we need to do differently as we move forward.

First, let's discuss driving top line growth. From my early days at Avon, it was clear to me that we need to put the representative and consumer back at the center of our business. It's quite simple. We can't succeed in direct sales without our representatives and we won't succeed in beauty unless we know who our consumers are and what they need. We must understand and execute against both the push and pull in each market. This requires both a mindset change for the organization as well as an alignment of resources.

The push comes from representatives who are engaged and motivated as ambassadors of Avon. They gain personal satisfaction from being part of the Avon family. More important, they are confident to reach out to consumers and their peers to drive sales and to recruit because they believe in the products and the proposition. I've met representatives in all our key markets, and whether I'm in Dallas or Sao Paulo, Istanbul or Mexico City or Manila, there is a common chorus: our representatives love Avon and they love Avon products.

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