Sheri McCoy - Investor Relations

Avon’s Turnaround Journey
To Profitable Growth
Sheri McCoy
Chief Executive Officer,
Avon Products Inc.
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• Please see our earnings release of February 13, 2014 for our cautionary
statement regarding forward-looking statements made in today's remarks.
• Please see the appendix to this presentation posted on avoninvestor.com
for a reconciliation of certain Non-GAAP financial measures included
in this presentation.
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VISION
Restore Avon to its rightful position
as an iconic Beauty brand with products
that consumers love and demand,
reinforce our global leadership in direct sales,
and continue to fulfill our mission
of empowering women
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Our Three-Year Financial Goals
By 2016 . . .
• Mid-single digit constant dollar revenue growth
• Low-double digit adjusted operating margin
• At least $400 million net cost savings
• $100 million+ working capital reduction
And it must be sustainable!
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What Has Been Accomplished in 2013?
Progress Toward Improving our Financial Performance
• C$ Revenue down 1% vs PY
• Adjusted Operating Margin 7.9%, up 130bps vs PY
• Achieved approximately one third of $400M cost savings
• Working capital improved by 6 days operationally
• Improved capital structure
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CAGNY 2013 – What We Told You To Expect
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Financials
Drive Simplification and Efficiency
• Modest improvement in financial
performance
• Improvement in capital structure
• Continued reduction of SG&A
• Retire legacy IT systems
Execute Growth Platforms
Improve Organizational Effectiveness
• Year-on-year performance
improvements in Brazil and Russia
• Stem decline of U.S.
• Stem decline of U.K.
• Exit markets where appropriate
• Year-on-year performance improvements
in CFT category
• Color, Fragrance, F&H, Skincare
• Strengthen leadership across top markets
• Make progress on litigation matters
Accomplished
Progress Made
Ongoing Work
Not yet Accomplished
What to Expect in 2014
• Improved financial performance
• Move top markets through stabilization to growth
• Significant improvement in the U.S. business
Continued progress toward
our three-year goals to return to profitable growth
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How Will We Drive Profitable Growth?
By Improving Access to our Brands and Products
Expand Our Brands
and Channels
Strengthen and Leverage
Our Direct Sales Core
Maximize
Geographic
Portfolio
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North America
Pablo Muñoz
Senior Vice President and President,
North America
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U.S. Diagnosis
We See Three Main Challenges in the U.S. Business
Field is not
Engaged
Store is Stagnant
Operations are
Inefficient
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• Representative pipeline is shrinking
• Field structure is not aligned with the business model
• Brand message to Representatives and customers is not clear
• New earnings opportunities for Representatives have not been created
• Not attracting new customers
• Bloated, ineffective cost structure for size of business
• Infrastructure not aligned with the business today
• Speed of delivery and service levels discouraging Representatives
U.S. Turnaround Strategy
What Are We Doing About It?
Re-engage The Field /
Set Up For Growth
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Revitalize
The
Store
Drive
Operational
Excellence
U.S. Turnaround Strategy
We are Taking Clear, Bold Actions to Address the U.S. Issues
Re-engage The
Field/ Set Up For
Growth
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Anchor back to the fundamentals of direct selling
Revitalize the
Store
Brochure must drive sales for Representatives and a better
experience for consumers
Drive
Operational
Excellence
Boldly transform the business and create a sustainable cost basis
Stabilize and Set the Stage for Growth in the Field
Return to the Fundamentals of Direct Selling to Drive Performance
Improvement and Energize and Empower the Field
• Target efforts to strengthen and invest in high potential districts
• Increase Representative contact and connections
Field work commenced in Q4 and will continue
through end of year
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The Field Cycle of Growth
Bring in the
Additions
Get them
to Sell
Drive Earnings
and Growth
Opportunities
R A P
Recruiting
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Activation
Promoting
U.S. Districts with Strong Growth: Q4 2013 vs. Q3 2013
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Re-engage and Set the Stage for Growth in the Field
Segmentation is Key
Focus on Hispanic Segment
• Hispanic women will drive 100% of the growth among all women
aged 18 to 49*
Avon’s Hispanic Footprint
• Top 10 Avon U.S. Districts mostly Hispanic
• 31% of Senior Leadership Representatives are Hispanic
• 11% higher average order size for Hispanic Representatives
Implemented Hispanic Area Leadership
Dedicated Field and Marketing Support
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*U.S. census projections, released 2008.
Hispanic Growth Opportunity
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Re-engage and Set the Stage for Growth in the Field
Improving Representative Recruitment and Retention
Use the Right Recruiting Channel:
• Optimize online appointment engine
• Advertise earnings and growth opportunity
in the new brochure 2x per quarter –
showcase successful new Representatives
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Re-engage and Set the Stage for Growth in the Field
Improving Representative Recruitment and Retention
Design the opportunity and incentive
structure to motivate Representatives:
• New recruitment strategy and new recruits
commission structure launched in late January
intended to attract higher quality recruits
• Launching re-activation campaign to engage
lapsed Representatives
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From: Paper
To: Demonstrable Products
Revitalize the Store
Effective Tools for Representatives and a Compelling Shopping
Experience for Consumers
Remove product line complexity to increase
Representative earnings
• Simplify product lines through SOL reductions
and more standardization
• Focus on high value categories: Skincare,
Fragrance
Implement pricing guardrails to restore profitability
• Reduce depth and frequency of discounting
• Short-term unit declines expected, but average order
stabilization is a priority
• Representative training will be required – higher prices
increase earnings potential
Work started in January . . . but will take time
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New Product Architecture
Size of Line Reductions will Support Efforts to Gain Share in Skincare
From 45 to 31
ANEW Products
• Representative training
• Demonstration tools
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Revitalize the Store
Buried Launch to Hero Product + Representative Activation
From:
Campaign 18-2013
To:
Campaign 4 -2014
Post-CAGNY Slide & Audio Clarification:
Mega Effects mascara originally launched on the cover of Campaign 17 and sold at a higher price in Campaigns 17 & 18 than the 2014 re-launch.
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Revitalize the Store
Improve Effectiveness and Reduce Complexity
From 7 Sales Vehicles to 4
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Drive Operational Excellence
Improve Effectiveness and Reduce Complexity
Reducing the number of pages in the Brochure
# of pages in Brochure
SKUs
2013
2014
2015
180
164
152
Reduce by 15%
6 Billion printed pages saved annually
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Drive Operational Excellence
Radical Transformation
of the Cost Structure
• Lower SG&A across the value chain
• Reduced fixed costs
• Streamline and reinvest thoughtfully for growth
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Operational Improvements
• Transform Avon U.S. Management Team
• Segment growth opportunities
• Simplify business processes
How We Plan To Execute
Team Organization
Pablo Muñoz
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Day-to-Day
Flawless Execution
Transformation
Team
New North America
Management Team in Place
Avon Team + External
Transformation Support
12 – 18 Months
U.S. Summary
Focused on Ensuring Our Profitability in the U.S.
Focus Area
DISTRICTS
RECRUITS
SIZE OF LINE
BROCHURE
PRICING
COST STRUCTURE
Short-Term
Risk To Sales
Long-Term Benefit
Improvement
in target
districts
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Retention of
best-fit
recruits
Improvement
in average
order
Increased
Representative
productivity
Increased
profitability
What to Expect in 2014
• Lower SG&A and reduced fixed costs
• Dramatically improved Representative experience and field engagement
• Stronger eCommerce platform
Critical to get the U.S. business on
track to ensure a profitable 2015
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Restoring Profitable Growth
Sheri McCoy
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Building Blocks for Profitable Growth
Avon has Many Strengths to Build Upon
Brand
Iconic. Loved. Resilient.
Channel
Robust. Personal Connection. Reach.
Products
Strong Innovation. Growing Categories.
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By focusing on the Brand, the Channel
and the Products, we will expand access to
Avon, strengthen
our relevance and position the company
for profitable growth
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How Will We Drive Profitable Growth?
By Improving Access to our Brands and Products
Expand Our Brands
and Channels
Strengthen and Leverage
Our Direct Sales Core
Maximize
Geographic
Portfolio
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Strengthen and Leverage Our Direct Sales Core
Direct Sales Fundamentals
Field Management (Push)
• Strengthen field management capabilities to ensure more
Active Representatives selling more product
Commercial Marketing (Pull)
• Improve commercial marketing to create campaign energy
and consumer demand
Push and Pull work together to support Representative earnings opportunity
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Strengthen and Leverage Our Direct Sales Core
Field Management – More Active Representatives Create Push
Components
Recruit
• Consistently execute fundamentals of recruiting
• Strong Avon Field Management in every market
Retain
•
•
•
•
Modernize
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Activities
Good earnings opportunity
Accelerate progression up the earnings curve
Improve and simplify the selling and support systems
Training and recognition
• Improve earnings-to-effort ratio through digital tools
• Make it easier to do business with Avon
Strengthen and Leverage Our Direct Sales Core
Good Progress on Modernization
Digital Tools
• Social Media Tools and Activation
Campaigns
• Virtual Makeover Tools
Ease of Doing Business
• Online Ordering
• Mobile Brochure App
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Strengthen and Leverage Our Direct Sales Core
Commercial Marketing – Creates the Pull
Components
Product
Portfolio
Pricing
Campaign
Energy
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Activities
• Category strategy
• Continuously innovate and develop strong products
• Improve innovation rhythm
• Continue to build equity
• Balance price / volume mix
• Provide trade-up opportunities
• Activate Representatives every campaign
• Offer exciting product features
• Leverage event driven campaigns
Product Portfolio
Each category has a role to play and requires
clear category strategy
Color is the point of entry to Avon
Fragrance is the key driver of Representative earnings
Skincare leads to repeat purchases and higher earnings for Representatives
Fashion & Home brings incremental sales
Categories work together for competitive advantage
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Product Portfolio
Getting the Rhythm Right
• Rebalance innovation resources to better support base brands
• Reactivate key brands and simplify the consumer experience
• Launch new brands with a three-year support plan
• Opportunity to build sub-brands
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Pricing
Drive Brand Equity and Overall Performance
• Strategic pricing at all tiers
• Balance price / volume
Upper Mass
• Pricing guardrails
• No discounting on new innovation
at launch
Mass
• Build pricing skills
Value
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Portfolio, Pricing and Campaign Energy
Successful Encanto Launch in Brazil
• Leveraged strong local consumer insights
• Activated with 360° to drive Representative
engagement
• Supports Higher Price Points
• Local Innovation that has potential
to expand
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Campaign Energy
Gifting
• Campaign energy that is not dependent on new innovation
• Gifts at all price levels
• Avon is a unique and special destination for the Holidays
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Build on Direct Sales Core with eCommerce
Avon U.S.
• Provide added convenience
for our Representatives
• Build our brand and bring new
consumers to Avon
• Bring awareness and increase
trial of our Products
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Avon U.K.
eCommerce Consumer Insights
From a consumer who loves her Representative and also wants the convenience of online:
“I love the convenience of the Avon online. My Representative keeps me advised of special sales
and is always very helpful. I enjoy the personal service. If I have questions about products,
I can always ask Ruth and she responds right away.”
From a consumer who doesn’t have a Representative, but wants both our Products and the beauty advice of a Representative:
“I love the quality of Avon products and the prices as well. I have purchased Avon for many years.
I do miss having a Representative…sometimes it is hard to show colors accurately, and if I knew what
they really looked like or had an actual sample, I would be a little more adventurous in ordering,
particularly lipsticks.”
From a consumer who wants to interact directly with Avon:
“Always loved Avon and now it's even better. Love being able to order online on my time vs. waiting for
a brochure and then waiting for an order. Very convenient when I just moved and don't know any Avon
Representative in the area”
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Build on Direct Sales Core using eCommerce
Re-launch U.S. eCommerce Site in the Summer of 2014
• Category driven – not coupled
with brochure; choice to have
a Representative relationship
• Representatives will receive
commissions for their customers
who order online
• Subset of Avon beauty portfolio
• Price points at or above brochure price
• Use learnings for U.K. launch in 2015
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shop.avon.com
VIDEO
Philippines
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How Do We Drive Profitable Growth?
By Improving Access to our Brands and Products
Expand Our Brands
and Channels
Strengthen and Leverage
Our Direct Sales Core
Maximize
Geographic
Portfolio
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Maximize Geographic Portfolio
Avon’s Top Markets
Brazil
U.S.
Mexico
Russia
Central Europe
Venezuela
Argentina
Colombia
U.K.
Philippines
Turkey
South Africa
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Maximize Geographic Portfolio
Need More Consistent Performance Across Top Markets
• Move top markets through stabilization to growth
• Look for new profitable growth
• Build out business in existing markets
• Strategically expand to new geographies
• Continue to exit where it makes sense
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Maximize Geographic Portfolio
Business Unit Perspective
Latin America – Continue to invest to grow
• Brazil, Colombia – Invest to grow
• Mexico – Stabilize and invest to grow
• Venezuela, Argentina – Manage through volatility
EMEA – Continue building on stable base and invest where we see growth potential
• Russia – Stabilize and invest to grow
• U.K. – Continue stabilization efforts
• Central Europe, Turkey, South Africa - Support profitable growth efforts
• Build out existing markets with growth potential
APAC – Reset strategy for growth
• Philippines – Stabilize and return to growth
• Build out existing markets with growth potential
• Strategically expand to new geographies
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How Do We Drive Profitable Growth?
By Improving Access to our Brands and Products
Expand Our Brands
and Channels
Strengthen and Leverage
Our Direct Sales Core
Maximize
Geographic
Portfolio
51
Expand Our Brands and Channels
Reach New Customers through New Brands
• Attract new customers with targeted brands
• KORRES
• Liz Earle
Maximize Potential of Selective Avon Brands
• Increase the potential of existing, strong brands in the Avon portfolio,
beyond the current scope and scale
• ANEW
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Expand Our Brands and Channels
Reaching New Customers
KORRES and Avon Latin America
Gives Avon access to a new set of consumers
Gives Representatives in Latin America
the opportunity to increase earnings opportunity
with premium brand
Fills gap in our skincare portfolio
and complements Avon brand products
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Expand our Brands and Channels
Liz Earle
Multi-Channel Success to Learn From:
• Liz Earle is a trusted name in premium,
botanical skincare, strong U.K. roots
• Sold direct-to-consumer through retail,
QVC and own website
• Evaluating geographic expansion
opportunities
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Expand Our Brands and Channels
Maximize Brand Potential - ANEW
• Benefits from strong brand commitment,
loyal users, impressive credentials
and competitive benchmarks
• Captures consumers with higher
involvement in skincare
• Opportunity to reach ~47 million consumers
who are currently using competitive
anti-aging brands
• Leverage our channels and evaluate
new channels to build the ANEW brand
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How Will We Drive Profitable Growth?
By Improving Access to our Brands and Products
Expand Our Brands
and Channels
Strengthen and Leverage
Our Direct Sales Core
Maximize
Geographic
Portfolio
56
What to Expect Moving Forward
57
2014 Financial Outlook
Improved Financial Performance
• Revenue growth to resume in the second half of the year
• 1H margin down with 1Q particularly weak
• Continue cost reduction efforts
• Continued working capital improvement
Continued progress toward our three-year financial goals
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Timeline and Milestones
2014
2016
Milestones for 2014
Milestones for 2015
Milestones for 2016
• Improve financial
performance
• Profitable North America
• Three-year goals achieved
• Improve North America
business performance
• Strengthen processes and
talent
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2015
• Growing top markets
• APAC Growth Strategy
• Growing eCommerce
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we disclose
operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including
changes in: revenue, operating margin and Adjusted operating margin. We also refer to these adjusted financial measures as Constant $ items, which
are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends. To exclude the impact of
changes due to the translation of foreign currencies into U.S. dollars, we calculate current-year results and prior-year results at a constant exchange
rate. Currency impact is determined as the difference between actual growth rates and constant-currency growth rates.
We also present operating margin on a Non-GAAP basis. We refer to these Non-GAAP financial measures as "Adjusted." We have provided a
quantitative reconciliation of the difference between the Non-GAAP financial measures and the financial measures calculated and reported in
accordance with GAAP. The Company uses the Non-GAAP financial measures to evaluate its operating performance and believes that it is meaningful
for investors to be made aware of, on a period-to-period basis, the impacts of 1) costs to implement ("CTI") restructuring initiatives, 2) costs and
charges related to Venezuela being designated as a highly inflationary economy and the subsequent devaluation of its currency in February 2013, a
valuation allowance for deferred tax assets related to Venezuela and the benefit related to the release of a provision associated with the excess cost of
acquiring U.S. dollars in Venezuela ("Venezuelan special items"), 3) the total $89 million accrual for the potential settlements related to the FCPA
investigations ("FCPA accrual"), 4) the goodwill and intangible asset impairment charges and a valuation allowance for deferred tax assets related to
the China business, as well as the capitalized software impairment charge related to the SMT project ("Asset impairment and other charges"), 5) costs
and charges related to the extinguishment of debt ("Loss on extinguishment of debt") and 6) the additional provision for income taxes as we are no
longer asserting that the undistributed earnings of foreign subsidiaries are indefinitely reinvested ("Special tax items"). The Company believes
investors find the Non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a
disproportionate positive or negative impact on the Company's financial results in any particular period.
These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance
with GAAP.
61
FY 2013 Total Revenue Reconciliation F$ to C$
TOTAL AVON
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FY 2013
Total Revenue Growth F$
-6%
FX Translation
-5%
Total Revenue Growth C$
-1%
FY 2013 Operating Margin Reconciliation
GAAP to Non-GAAP
TOTAL AVON
GAAP Operating Margin F$
4.3%
Venezuela Special Items
0.5
CTI Restructuring Initiatives
0.7
FCPA Accrual
0.9
Asset Impairment and Other Charges
1.6
Adjusted Operating Margin F$
63
FY 2013
7.9%