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 Third Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
I'll now turn the conference over to Amy Chasen, Group Vice President, Investor Relations. Ms. Chasen, you may begin your conference.
Amy Low Chasen - IR: Good morning and thank you for joining us to review Avon's third quarter 2013 results. With me today on the call are Sheri McCoy, Avon's CEO; and Kimberly Ross, our Executive Vice President and CFO. Sheri will make introductory comments and then Kimberly will take you through our results and provide 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 to our non-GAAP reconciliation which is available on the Investor Relations sections of our website. As usual on the call, we will focus on these adjusted non-GAAP financial measures.
I'll now hand the call over to Sheri.
Sheri McCoy - CEO: Good morning, by now you've seen the press release with our third quarter results. It was a tough quarter. Working a turnaround is not a linear process and as we said to you on our last call, we knew that the third quarter would be challenging. Given our sales performance, it's clear that it was tougher than we anticipated.
As you'll hear this morning, we experienced some macroeconomic headwinds and we continued to be impacted by the negative performance in some parts of our business. However, if I step back and look at the third quarter in the context of our overall turnaround, while it was tough, we understand what the challenges were, we are course correcting where necessary and we are moving forward.
Avon is headed in the right direction. Parts of our business are stabilizing, and we are making progress toward our three-year financial goals.
We continue to work against our strategic framework and are focused on executing growth platforms, driving simplification and efficiency, and improving organizational effectiveness.
In the area of growth platforms, we are improving our consumer proposition and have made good progress defining our product category and innovation strategies and developing fully integrated marketing plans. We've been focusing the organization on improving all aspects of the representative experience and we continue to work on our geographic optimization.
In the area of simplification and efficiency, we continue to drive a mindset of cost management and at the same time are tackling some of the larger entrenched processes that create complexity and cost.
In the area of organizational effectiveness, I feel very good about my executive team and we continue to build on management bench strength in our key markets, which was crucial to longer-term success. We have also made good progress and instilling more discipline and accountability across the organization.
This morning I will speak briefly about our third quarter performance and Kimberly will take you through a detailed review of our results. We will then open the line for Q&A.
Overall, we continued to the trend of good performance from our Latin America and EMEA business units, although the results were not as strong as earlier this year. What is clear to me is that, when we focus on the fundamentals and execute well, we deliver solid performance. I am particularly pleased with our Brazil team's strong results in both Beauty and Fashion & Home in a very competitive market environment.
I was in Brazil earlier this month and was impressed with the team and the work they are doing to drive sustainable processes to the future. They continue to take an integrated approach with good direct selling fundamentals, strong execution of locally relevant new product innovation and continued improvement in service levels.
As you'll from Kimberly, while we are facing some macro issues in parts of Latin America and EMEA, we also have the opportunity to improve the consistency of our execution. We must continue to improve our capabilities, for instance, brochure execution or in better balancing pricing decisions driving unit growth. Clearly, we are not yet where we need to be on some capabilities but we are diagnosing quickly, identifying issues and developing plans to address and course correct. We need to build strong execution into our D&A. This will take time as we build organizational capabilities, but we are making progress.
Looking at our Asia Pacific business, I'm not satisfied with our performance. We continue to work through our challenges in China, but as I said in a previous call, it will take some quarters to stabilize that business. We also saw continued softening in the Philippines. We have already taken corrective actions including the appointment of a new highly experienced a Avon General Manager for the Philippines.
We are in the process of replacing the Asia Pacific business unit leadership which for the time being is under interim management focused on stabilizing the region.
In North America, while our situation remains difficult, I do have confidence that we now have the right leader in place and that we have begun to map out an effective path to stabilization.
I'm going to give you some perspective on our North America challenges and we will then give you a sense of what we're focused on in our stabilization efforts.
The U.S. business continues to decline, at the same time the overall North America business performance was also impacted by the decline in Avon Canada, where there was significant disruption as we implemented the SMT pilot. As you will recall SMT, our Service Model Transformation was an initiative that began several years ago to improve forward our order management system and modernize the way our representatives do business with Avon. When this was initiated in 2009 it was a global program.
Most recently, the work has been focused on a pilot program in Canada, which went live in the second quarter. While the SMT pilot technology platform worked well, the degree of impact of change in the daily processes to the representative was significant.
This resulted in a steep drop in the Active Representatives account. We are working hard to get Canada stabilized and back on track on a solid performance track. This includes giving additional support to our existing representatives, those making some adjustments to the system and helping them with the transition.
We are also intensifying our recruiting efforts and supporting the new representatives, as they learn the process. In parallel, with our stabilization efforts in Canada, we continue to analyze the Canadian SMT pilot and are considering our approach to updating order management systems in other markets.
When I look at our experience in Canada with SMT and the experience in the U.S. with One Simple Sales Model, which I’ll discuss in a moment, it's clear to me that our business model has difficulty adjusting to these big-bang field initiatives. The nature of direct selling where our 6 million representatives are independent entrepreneurs is one of personal relationships and connections. It's about influencing and incenting behavior. It requires spacing change and thoughtfully and strategically not mandating abrupt changes.
We need to take a more evolutionary versus revolutionary approach to changes that impact our representatives. We see this in Central Europe, where we have good success in evolving the service model, but it was done slowly over a period of several years and in a way that gradually moves representatives from an old model to new one that provided them with better options.
This more measured approach to field change was a focus on the impact on the representatives. It's one that we are adopting our representative facing changes moving forward.
Let's go back to the U.S. where the One Simple Sales Model was intended to transform the business. Implementation of One Simple Sales Model began in 2011 and continued through late 2012. It was a big-bang change and has been much more disruptive to the business than anticipated. Into 2013, we continue to see an erosion of field health.
I know you've heard a lot about field health issues in the U.S, so let me start by giving you a brief sense of where we are today. As you recall, the One Simple Sales Model was intended to migrate our representatives to a leadership model, and the reduction in the number of district sales managers and the broad base (indiscernible) were intended to facilitate that migration, and at the same time, reduce our fixed cost base. It is taking us longer than anticipated to recover from the redistricting.
We recently completed the diagnosis of U.S. field health and three things are clear. First, we need to stabilize and build on the current field structure without forcing more disruptive change; second, in the process of reducing the number of district managers and reassigning representatives. We broke some critical relationships, and as you know, direct sales is a relationship business.
We are taking a deliberate, comprehensive and disciplined approach to rebuilding and strengthening relationships across the field. Finally, our recruiting engine fell apart. Effective recruiting is not simply bringing new representative into the system, but also giving them the support and training they need to navigate through their first few campaigns.
Moving forward, we are working with the current district sales manager base to deliver incremental recruiting capacity, and we have already begun to improve the quality and frequency of our training and support programs. At the same time, we are redeploying resources to support our sales leaders and help them grow their businesses. Across all aspects of the field, we are driving contact.
Frequent high quality contact is critical to helping our representatives be – new representatives be successful, improving representative retention and increasing productivity.
So in the U.S. improving field health is job one. This means rebuilding critical processes and putting discipline back into the field management. This is crucial to ensuring sustainable field health.
The challenges that we surfaced aren't new, but our response to them is much more deliberate, disciplined and comprehensive. Most important, we have put the representative and what she needs to succeed back at the center of our decision-making.
At the same time, we are working to improve our store or brochure, which includes strengthening the brand, aligning our product mix and improving the overall brochure energy and shopping experience.
Let me look at how the U.S. market fits into the Avon geographic portfolio. It is clear that this business needs to return to profitability. As part of that, we are working with urgency to move to a sustainable cost base that is in line with our revenue.
To summarize, in the U.S. market we are focused on restoring field health, improving our store and creating a sustainable cost base. We will take you through this in more detail at for the U.S. at CAGNY in early next year.
If I step back and look at the broader view of Avon business unit performance, we see good progress in Latin America and EMEA. Asia Pacific continues to struggle, but we are making the necessary management changes there to drive stabilization. North America continues to decline, but we are working aggressively to stabilize and move toward profitability.
Let me briefly give you an update on FCPA, as we reported last quarter. In June, we made a settlement offer to the DOJ and the SEC that was rejected. As you will see in our 10-Q, in September we received an offer from the SEC staff that included monetary penalties of a magnitude significantly greater than our earlier offer. We believe monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will make a counterproposal, although we are unable to predict the terms of its proposal or when we will receive it. I hope you can appreciate that we cannot provide any additional information beyond what is in the 10-Q.
I'm going to hand it over to Kimberly to talk about the details of the quarter. But before I do, I want to provide some perspective on the last quantifiable aspects of our performance. There is no shortage of challenges for us. There are macroeconomic issues and continued uncertainty in some of our markets. We can't control these, but we're getting better at understanding how they impact our business and we're planning accordingly.
Overall, I'm encouraged by the improvements I see in how the organization is tackling our challenges. We are seeing improvements in discipline and accountability, but we need to see it across all parts of our business as this is key to taking the volatility out of our performance. We're also improving on execution. A good example is our recently launched Avon Color. Avon Color is our flagship makeup brand and plays a crucial role in our product portfolio as it's an entry point for new consumers and representatives.
The Avon Color launch has global consistency, including brand positioning and product benefits. It was brought to life in market with our new global You Make It Beautiful brand campaign and supported by locally relevant celebrities and launch activities. It is a rolling launch and it's delivering good results in early markets. So, better accountability and discipline and improving our ability to execute.
Equally important, we are learning to stay the course. When things don't go as exactly as planned, instead of making wholesale changes and strategy, we are analyzing, adjusting, learning along the way and sharing those learning's with the rest of the organizations. Kimberly?
Kimberly A. Ross - EVP and CFO: Thank you, Sheri. As Sheri indicated, the third quarter was tough. As we outlined last quarter, in Q3 we expected volume deleverage, inflationary impact and higher spend on new launches in Latin America. However, constant dollar sales growth was weaker than we had anticipated which impacted results relative to our expectations.
For the quarter, our constant dollar revenue declined 1%, this includes a one point benefit from the recognition of tax credits in Brazil associated with the change in estimate of expected recoveries of that of $22 million.
On a reported basis, revenue was down 7% negatively impacted by currency. We continue to see positive growth in Latin America and EMEA, but this is being offset by continued weakness in North American and Asia Pacific.
Units declined 7% driven by Latin America, North America and Asia. Latin America was down partly due to the impact of price increases as well as the comparison against Q3 2012, which benefited from the flowing of excess inventory. Price/mix was up 6% in the quarter, with a one point benefit from the Brazil tax credit. The increase was largely driven by Latin America where we took price increases in some markets including Brazil.
Active Representatives were down 3% with continued declines in North America and Asia Pacific as well as declines in some markets in EMEA and Latin America. Adjusted gross margin was up a 180 basis points to $63.1% largely due to benefits in Latin America, from price increases and the comparison with quarter three 2012, when we slowed excess inventory, which negatively impacted our gross margin.
Adjusted operating margin was down 80 basis points to 5.4% in the quarter. This included an 80 basis point benefit from the VAT credits in Brazil. The decline was due to deleverage, given the weaker sales, as well as some of the factors we had flagged to you on our last call. This includes the negative impact of currency, higher transportation costs, and higher fuel spending in Latin America, largely in Brazil in support of new product launches.
Adjusted EPS was $0.14 per share compared to $0.18 a year ago.
With that said, let me move to the regional discussion. Starting with Latin America, revenue rose 6% in constant dollars, which includes a 2 point benefit associated with the Brazil tax credit. The growth was due to strength in average order which benefited from price increases across the region. Price/mix was up 12% including a 2 point benefit from the tax credit. Some of this was due to inflationary pricing in Argentina and Venezuela, but that were also price increases in other markets, including Brazil. Active Representative declined 1% and units were down 6%.
Brazil constant dollar revenue was up 13%, which includes a 4 point benefit associated with the tax credit. Growth in Brazil was driven by average order due to strong innovation in the quarter. Active Representatives were up.
Units were down, driven by a decline in Beauty, which was partly a result of the comparison to quarter three 2012 when we slowed excess inventory.
Fashion & Home units were up.
Constant dollar Beauty sales were up 6% in Brazil which benefited from the successful relaunch of our Avon Color line which Sheri mentioned. Personal Care was also strong, benefiting from the launch of (Incanto), our new hand and body line.
In addition, fragrances benefited from the launch of Garota De Ipanema. We are pleased that these products were developed, specifically with the Brazilian consumer in mind and that we were able to successfully launch them at a higher price point.
Fashion & Home sales were up 18% in constant dollars with continued benefit from the more effective pricing and improved merchandising we instituted last year. While we had expected Fashion & Home growth to slow a bit, we are pleased that it remains strong.
We also made stronger – solid progress in improving our service levels in Brazil. As you are aware, we continue to focus on driving sales with new locally relevant products, rebuilding brand health and driving representative recruitment.
That being said, the competitive environment in Brazil remains intense and we don't expect this to subside anytime soon. As a reminder, we are up against a strong quarter last year in Q4, so growth may not continue at the same pace.
Mexico declined 7% in constant dollars, primarily driven by lower average order. Active Representatives were up while units were down. During the quarter, we faced external economic issues and we also had some execution issues that impacted us.
The economic slowdown in Mexico accelerated over the past several months and the resulting consumer weakness impacted our business. Competition has reacted by increasing discounting, while we were raising prices on certain high unit movers during this time.
We are watching the economic and consumer trends in Mexico carefully. We are also putting appropriate actions in place to address execution issues. Having said that, we believe our business could decline further in quarter four in Mexico.
Venezuela was up 15% in constant dollars. The growth was driven by an increase in average order largely due to inflationary pricing. Active Representatives count was down due to service issues impacting the representative base as well as macro factors that that continue to be disruptive to the business.
Latin America adjusted operating margin was 11.3% up 10 basis points. This includes a 150 basis points benefit from the Brazil packs. Adjusted operating margin would have been down excluding this. Gross margin was up in Latin America benefiting from price increases and the comparison with the last year when gross margin was hurt by slowing of excess inventory.
This gross margin benefit was offset by the planned increase in field and selling expenses, primarily in Brazil in support of new product launches as well as increases in bad debt and legal expenses in that market. Increases in transportation cost in Venezuela and Argentina were also a factor. As we look forward, Latin America will continue to be impacted by both weaker economies as well as continued high level of those competition. However, we continue to focus on the core fundamentals of recruitment, new product innovation and improving our pricing capabilities in order to continue to drive growth in this region.
Moving to EMEA, revenues increased 2% in constant dollars. The exit of Ireland impacted the region by less than 1 point. Russia revenue declined 2% in constant dollars due to the lower average order. Active Representatives were up. We had some challenges this quarter around marketing and merchandising execution. Specifically, we focused our Fashion & Home spreads around higher end items (without) enough focus on the lower-priced unit drivers. This was in the face of continued high level of price competition from retail as well as weaker economic growth. U.K. revenue declined 2% in constant dollars. The decline was due to lower Active Representatives which is being impacted by a number of issues including high turnover among the zone managers in the field. As we indicated last quarter, we have a new, experienced and highly capable team in place in the U.K., but it will take some time to drive sustainable improvements in this market.
Turkey revenue declined 4% in constant dollars due to a decline in Active Representatives. This is a result of both a very strong base and a conscious decision to focus on improving our return by not repeating costly incentives we did in quarter three 2012, which only drove short-term results. We are starting to make some progress in reducing volatility in this market. We put in place a more sustainable field model which is less incentive driven and we are more focused on brochure execution.
In South Africa, constant dollar sales rose 21%, primarily due to higher average order driven by an increase in unit sold. Active Representatives count was also stronger as we are comparing against the quarter that was fully impacted by credit policy changes. Having said that, the currency has weakened and we are taking actions to mitigate the impact. This will temper growth in quarter four, but we continue to feel good about the fundamentals and underlying business trends in this market.
Adjusted operating margin in EMEA was 9.9%, up a 140 basis points. Gross margin was up primarily due to lower material and overhead cost. In addition, field compensation was down as a result of a high level of incentives in Turkey last year that did not repeat. Brochure costs were also down as a result of cost reduction initiatives in various EMEA markets.
Turning to North America. This region remains very challenged and reported an 18% constant dollar revenue decline. Sheri addressed the key issues in North America, so I won't repeat her commentary. The bottom line is that Active Representatives are down 16%. As Sheri outlined, restoring field health, improving our brochure and driving cost down to a sustainable level are priorities in North America.
While we have made progress with our cost savings initiative, it is not enough considering the decline in our business. As a result, as Sheri indicated, we are in the process of analyzing further cost savings initiatives.
Adjusted North American operating loss was 34%, primarily due to the lower revenue. Transportation cost as a percentage of revenue increased as the volume decline caused the cost per unit to increase. In addition, gross margin was negatively impacted by actions to drive the sale of excess inventory.
We were also impacted by negative mix as Beauty continues to underperform Fashion & Home. We are working to stabilize North America, but as we've said in the past, this will take time and we don't expect recovery in quarter four.
In Asia Pacific, revenue declined 19% on a constant dollar basis, mainly due to continued weakness in China, as well as weakness in Active Representatives in other markets. We also lost about 1 point of revenue from the exit of Vietnam and South Korea. Active Representative count declined 10%, and units were down 24%.
Philippines revenue declined 5% on a constant dollar basis due to operational challenges in this market that contributed to a decline in Active Representatives. As Sheri indicated, we have put a new general manager in the Philippines. It is very early days, but she is working on our plan to stabilize and ultimately grow this business.
China constant dollar revenue was down 69%, primarily due to decline in unit sales, which is partly due to our action to reduce inventory levels held by the Beauty boutiques. A decline in the number of Beauty boutiques also negatively impacted unit sales in China.
Our focus in China continues to be the stabilization of the BBs, which includes the reduction of the inventory levels in the trade, stabilizing the number of Beauty boutiques, improving the look, tone and feel of the BB stores and improving brand health. This will take time and we expect continued softness as we work through the issue over the next several quarters.
Adjusted operating margin was 1.6% in Asia Pacific down 500 basis points. This was largely due to revenue deleverage and lower gross margin due to the underperformance of skin care primarily in China. We also had some increases in advertising largely in the Philippines.
Asia Pacific in total remains challenging and we expect results to remain soft in the near-term. In short, we have ongoing operational issues across Asia and we'll continue to keep you posted on our progress.
Now, I'll take you through two adjustments we made to our GAAP results in the quarter. Similar to the first and second quarter, as a result of the Venezuela currency devaluation, we recorded a $15 million charge from using the U.S. historic dollar cost basis of non-monetary assets such as inventory. We will cycle through the remaining amount in quarter four.
In addition, we recorded a non-cash $42 million charge to write-off goodwill and intangible assets for China. This is the result of the decline in revenue performance in China in the third quarter, which was significantly below our expectations and the reduction of our long-term revenue and earnings projections for this market. In addition, we also recognized the valuation allowance for our deferred tax assets associated with China due to these reduced projections.
Moving on to cash flow; net cash provided by operating activities was $96 million for the nine months ending September 2013 compared with $208 million in the same period in 2012. The decrease was due to the $90 million make-whole premiums and unfavorable timing of accounts payable, higher payments for employee incentive compensation and restructuring and a $25 million contribution to the U.K. pension plan in 2013. These items were partially offset by improved operating profit.
Our net debt for Q3 was $2 billion, which is about the same as the year end level, but down $246 million from quarter three 2012. Year-to-date, we reduced the overall debt balance by $412 million of which $114 million was reduced in Q3.
For Q3, we continue to make progress on working capital, which operationally improved five days compared with a year ago. Accounts payable improved 6 days operationally as we continued to focus on renegotiating payment terms with our vendors. However, inventory levels deteriorated by 2 days operationally due to Latin America – one key factor is that Brazil employed a strategy to shift consignment inventory in Fashion & Home to purchasing that inventory outright in an effort to reduce complexity and improve cost.
However, as I've said before the teams are not yet where they need to be with regards to driving sustainable inventory management and forecasting processes. This remains a key area of focus for us as we work to improve cash flow.
Thinking about the remainder of the year, the sales recovery is taking longer than we expected. We continue to make progress in EMEA and Latin America, but our challenges in North America and Asia Pacific continue and economic uncertainty remains an issue as well.
We are still working through some of the foundational issues in our business such as ensuring we have the right representatives and consumer proposition. Driving sustainable process improvements and improving our pricing capability.
To this end, we will take a more strategic approach to pricing and discounting along with the work we are doing to strengthen our brand image. This is not easy work and we won't always get it right the first time, but we know it is crucial to our long-term success.
We continue to look very closely at our cost structure, particularly in North America for incremental opportunities to drive savings. Some of these initiatives could have restructuring charges related to them in quarter four.
As we think about the full year outlook, we expect sales to be down slightly as the sales recovery is taking longer than we expected. As it relates to adjusted operating margin, we are pleased with our progress so far this year and expect the year to come in better than the modest growth we originally set.
For Q4, keep in mind that we expect to have a continued negative impact from deleverage given weaker sales. In addition, we expect a continued negative impact from currency. In addition, we are up against a reversal in accrual for management bonuses in last year's quarter four of $34 million, which we don't expect to repeat this year. Note that we will continue to focus on cash generation and working capital, specifically.
We've said that turnarounds are not linear, which is what we saw in quarter three, but we remain focused on making steady progress and continuing to achieve the right balance between the shorter term needs to stabilize our business, while ensuring that we make the right decisions to drive the long-term sustainable growth.
With that, I'll hand it back to Sheri for some closing comments and then we will take your questions.
Sheri McCoy - CEO: Thank you, Kimberly. As you see a tough quarter, not unanticipated given the nature of a turnaround and the macro pressures in some of our markets and while the third quarter was challenging, we are in this for the long-term. When I step back and look at the quarter in the context of our overall turnaround, I'm confident that we're headed in the right direction and that we are on track against our three-year financial goals.
There is always tension around the pace of change in the turnaround. We are acting with a sense of urgency to return our key markets to health, but we know we need to be more deliberate and thoughtful about any changes impacting the field and our representatives. We are making progress, we're getting the right people in the right jobs, we are focused on execution and we will get better. Most important, we have the representatives back at the center of our business, and we are doing what's best for the organization and our shareholders for the long-term. As we move forward, we will continue to make the tough decisions, facing challenges head on and moving forward.
We'll now open the lines for Q&A.
Operator: Bill Schmitz, Deutsche Bank.
Bill Schmitz - Deutsche Bank: Hi, it's Deutsche Bank. The whole sort of price/mix equation, it looks like you're finally I think doing the right thing for the business in terms of trying to realize pricing, but I guess the volume reaction has been probably a lot worse than you thought. So I mean how long do you think it's going to take to finally get the pricing transition right? I know it's hard to pin down numbers, but your percentages in terms of like how low you think your prices are right now relative to where they should be?
Kimberly A. Ross - EVP and CFO: Yeah, I think if we look at pricing, there are multiple things to look at. Certainly, we had some challenges in some of our markets, Mexico specifically as we were managing price. We did have some success though as I look at pricing front in Brazil, where we actually were introducing higher end innovation and we're able to take price. For example, with our (Incanto) line and even our Avon Color was priced more premium, as well as some of our fragrances. So I think where we are is we have to look at that price/mix component. Then we have to look at pricing by tier and I think some of the areas where we've struggled, we cannot take pricing across the board. As we look at the low end products, we need to make sure on our high unit movers, we need to make sure that we're actually not taking price there, but looking at how we move the consumer up more broadly. So I think we are making progress. It is going to be something that is a little bit more delicate for us. So as an example, in Russia, where we were focused on premium for Fashion & Home. That was probably okay, but we didn't have the merchandising to be able to offset that with the lower end. So we just need to get better at these things and I think the organization is learning. We have stronger capabilities in EMEA as it relates to pricing, but we don't have it in Latin America and the team there is really very focused on putting more resource around to that, because I think that will help us, obviously, as you know, from a gross margin standpoint, but also help us from an equity standpoint as we build the brand.
Bill Schmitz - Deutsche Bank: Then just on the U.S., you're looking at countries to exit. I mean, could the organization handle sort of getting rid of the U.S. business? I mean, because if you look at sort of the strategic metrics for some of the businesses that you've already left, it looks like the U.S. is probably worse than a lot of those. I know it's sort of a broad question, you're probably not going to answer it, but I just love to hear your thoughts.
Sheri McCoy - CEO: Yes. I mean, the U.S. is a big market, it's an important market. I've spent a lot of time with our representatives and our sales leaders in the field and people are very committed and want the U.S. business to work. I think some of the issues that we're dealing are some strategic things that we've done over a course of many years. Even as I talked on the call with One Simple Sales Model, as we were watching that and trying to figure out how to stabilize, we were struggling with that. But as I look at the brand, I look at the importance of the U.S. market as it relates to Beauty, and even if I look at the U.S. market from a portfolio standpoint, as we're talking about volatility, it's because we're so heavily indexed in emerging markets and we don't have the offset of a stable U.S. business to help us moving forward. So I think there is a portfolio reason to get that back to profitability. As I talk to the representatives and I look at sort of some of the issues we have, I'm confident we're going to get through the challenges, the time it's going to take to actually build our field back and then we have the innovation, we have the products. So it's just a matter of being very disciplined and focused as we're move forward. I think the U.S. is an important part of our overall portfolio.
Operator: Wendy Nicholson, Citigroup.
Wendy Nicholson - Citigroup: Just a follow-up on the U.S. comments and I think the comments that you are trying to rightsize the cost structure for the size of the business. The business is kind of a third smaller than it was four, five years ago, but do you think the overall revenue base now kind of $1.5 billion, is that right size for the U.S.? As you think about your cost structure, I am trying to get a sense for whether you're constantly chasing your tail trying to cut the cost and then the business shrinks, and then you cut cost and the business shrinks. Like is there a scenario where the U.S. business, you should cut out ex number of reps and you should only have a $1 billion business there. Just another follow-up and forgive me, is the FCPA language -- I know you said, historically, in a couple of different setting that what the negotiation or the settlement discussion pertain exclusively to China. Is that still the case or are the settlement discussion, covering a broader geography?
Sheri McCoy - CEO: Certainly as it relates to the U.S. I think as we look at it, some of the changes that we've made have impacted the sales revenue. So I think to your point about what's the base that you are looking against, we're going back and saying, let's look at the range at where the business is going to be and making sure we're not doing things that are negatively impact the sales basis, and then looking at what we will have to do to drive cost out. So that's really the exercise that we are going through. We recognized that. To me, it's not so much about what the size of the U.S. business is, per se. It's about the profitability of that business. So we're looking at various ways of thinking about contingency as we look at the plans moving forward. As it relates to FCPA, Wendy, we really can't say much more about that, I wish I could, but just given where we are, it's difficult for me add any additional commentary beyond what is in the 10-Q.
Operator: Lauren Lieberman, Barclays Capital.
Lauren Lieberman - Barclays Capital: It's Barclays. I guess, I was struck by sort of a contrast between your comments on Russia and on Turkey, and the performance in the two. So in Russia where it had felt like things had really stabilized, you're having locally-relevant innovation; adjusting field, fundamentals, et cetera, et cetera, things were on the right path and then the business is down 2% this quarter. In Turkey, the commentary around we're making step in the right direction to reduce volatility long-term sounds reminiscent of what you would have said and had said about Russia six months ago. So what's the difference? I guess, reducing volatility, where I'm still struggling is it feels like the steps were in place to reduce volatility in market (X) and then the business decline. So how would you, I guess, explain that to say reducing volatility isn't really resulting in that when you have Russia suddenly turning the corner again?
Kimberly A. Ross - EVP and CFO: Yeah, I think couple of things. One, as we step back and look at volatility from a total perspective from a company, one of the challenges is we are very dependent on a few markets today based on our performance. So we need to get all of our top 10 markets performing at the appropriate level. I think in a situation with Russia, we know exactly what the situation is relative to some of the issues that they had in Fashion & Home. So I think the good news for me is when we're seeing issues today, it is very clear what the issue is. We have corrective action and we know how to address it. I think where we were struggling with Turkey for many years is, we weren't having the diagnosis or the disciplined understanding. In Turkey, we made a conscious decision, because last year in 3Q, we put a lot of money into the field. We did an analysis, we looked at the incentive did not pay-off and we made a decision to look at how are we going to get this more stable for the long-term. As we are working through pricing, to Bill's question earlier, as we're working through pricing and merchandizing, we're still not as consistent as we need to be so we're going to see blips like what we saw in Russia or what we saw in Mexico. But I think the good news from my standpoint is we understand it. We're addressing as the teams are reaching out. We have expertise to be able to help fix that, and it's going to take us some time to work through that, but we're on the path to getting execution right. So, it's one of these things that as we look at the turnaround and we look at why we set three-year goals, it's because we have some processes that we need to work on and we have some talent deficiencies or capability deficiencies that we need to continue to focus on as it relates to pricing and merchandizing in all of our markets. We're getting better at it, but we still have more work to do.
Operator: Chris Ferrara, Wells Fargo.
Chris Ferrara - Wells Fargo: It's Wells Fargo. I guess, the question is, as you go through this turnaround, two of your bigger markets, Mexico and Russia have both been pretty strong pillars of support and they waivered a bit this quarter. I hear you on Mexico that macros are a contributors, but it sounds like execution is an issue in both places to some extent and I guess the question is, are these bigger kind of structural execution issues that will ultimately prove to be part of bigger and long-term fixes, i.e., multiyear or do you think that these two markets which are pretty big and relevant can actually grow through this turnaround process?
Kimberly A. Ross - EVP and CFO: I absolutely feel that they'll grow in turnaround process. I mean, as I was saying to Lauren, we understand what the issues are. We understand how to fix it. It doesn't mean that we're going to fix everything overnight, but, it's very clear some of the things that we need to do and make sure that we have guard rails in places. We're making some of these changes to ensure that we're not making the same mistakes. With that said, we still have some talent capability gaps in some of our markets that we're working towards and making sure we're training and developing people. So, it is going to take some time, but if I look at where Russia and Mexico are relative to where the U.S. is, we're in very different places. So I feel very good about us getting back on track in those markets.
Chris Ferrara - Wells Fargo: I guess it relates to that talent gap, right? I mean, it's been a little while that you've been at this now and like I know it sounds easy, like Russia, the execution issue was pricing too high when competitors are pricing down. It sounds like Philippines, you have the new head. You have interim management in Asia Pac. To what extent is this just you getting through all the regions and finally being able to assess management as opposed to maybe the ground sort of changing underneath you at all? Could you characterize that a little bit?
Sheri McCoy - CEO: Sure. I spend a lot of time in the field and continue to meet with management throughout the world, at least in our top markets. What I will say is we've made a lot of progress in talent as it relates to the Executive Committee level. We're now going through our top markets as it relates to their teams, and we're making good progress there. We also have though in, at the more junior levels, we're doing campaign planning and we're doing some of the merchandising decisions. We need to make sure we have expertise there. So it really has to be cascaded through the organization. I think what gives me confidence is, as I look at kind of our processes, we're doing a good job. I go back to look at some of our older processes that were in the business years ago that we sort of walked away from, it's in our DNA. We know we can get it back, but we need to make sure that we're very disciplined and we continue to train people and make sure that people have the skills that they need to drive the business. So it does take time. I think we're on the right track, but we have to go through it, because we're making decision, it's a management intensive business and we're making decisions in the market level.
Operator: (Priya Ohri-Gupta, Barclays Capital).
Priya Ohri-Gupta - Barclays Capital: Barclays Capital. I understand the difficulty of adding a whole lot more clarity on what you said around FCPA, but I was just hoping that you could give some parameters around how we should think about various funding options that you might have in the context of a potential settlement?
Sheri McCoy - CEO: Again, we're not going to provide much color around this. So you're correct on that one and we're not going to speculate with regards to sizes, but what I will say is that we do have cash balances and obviously, we also have a revolving credit facility that we have in place for backup liquidity needs.
Priya Ohri-Gupta - Barclays Capital: Then just has there been any discussion with the rating agencies around the type of effect this might have on your credit ratings, or is it still too early to say?
Sheri McCoy - CEO: We have ongoing discussions with our rating agencies, we talk to them every quarter and obviously, this is something that we are also – talk to them about. So and you see what they publish at this point in time. So I'm not really going to comment on their behalf with regards to how they view FCPA, but obviously, there is something that we talk to them about.
Operator: Ali Dibadj, Sanford Bernstein.
Ali Dibadj - Sanford Bernstein: I'm from Sanford Bernstein. So I'm still struggling with is this progress or not question. So, with the negative 2% organic sales growth is the worst the Company has reported, at least as far back as I model it, maybe ever, so I'm still just confused about specifically why, and are those things fixable, and frankly, what the strategy is to fix it? I think the price/mix versus volume discussion is a really illustrative one of this, because clearly the elasticity is still driving negative top line growth. But is it even the right strategy to push pricing up the way you did and see the volume response without spending a ton more back, already in terms of improving the brand, already in terms of the field health? Or are you realizing we actually had to spend a lot more money back because there's just a real secular challenge that your business is facing? I guess a broader question I have attached to that is, with 18 months plus now in your tenure and 24 months now plus in your tenures, are you where you wanted to be and how are your 2016 targets still really on the table?
Sheri McCoy - CEO: As I step back, we set goals and we set three-year goals, because we knew that it would take time from us to go through the turnaround, particularly as we were looking at talent capability, some of the processes that we needed to address. So, from that standpoint, we were very clear that we needed to set those three-year goals. As we look at the executional part of, I think, one, we've got sort of a tale of two. We've got North America and Asia really draining on us today, we have to stay focused on those relative to fixing those businesses. Latin America and EMEA are actually – there is some ups and downs in those markets, but in general, as you look at the CBU, performing in the right direction. If we look at what we need to do in those markets, we have to get more consistent execution. If you look at the – you referenced price/mix, I think Brazil is a good example where we did invest in advertising, we did invest in pricing, we invested in higher priced products and they are doing exceptionally well. So I feel really good about that. I just want to make it clear; we did not go across the board on pricing. We focused on some markets. Europe, for example, wasn’t heavily focused on pricing. They are really focusing on driving their unit growth. So, what we're doing is, making sure we understand it. We're learning from it, because it's important for us to get ourselves in the right place for the long-term to both, as you point out, build the equity of the brand, but at the same time continue to make sure that we're getting pricing to improve our margins overall.
Operator: Olivia Tong, Bank of America Merrill Lynch.
Olivia Tong - Bank of America Merrill Lynch: It's Bank of America Merrill Lynch. Just following up on that, how is that the recruiting engine fell apart to such a drastic degree, so much more quickly? I mean, clearly, North America and Asia Pac has been decelerating for quite some time, but this is clearly a much bigger acceleration. So can you point to one or two things that – we know about the Beauty boutiques in China and the excess inventory, but maybe in North America, like what drove such a drastic acceleration and the rep count declined and the sales declined?
Sheri McCoy - CEO: Good question. So, if you look at North America, we started with One Simple Sales Model initiative back in 2011 and it was a combination of taking out district sales managers and then taking representatives and moving them over to sales leaders. So we broke some critical relationships between the district sales managers and the representatives. As we were doing that, it was not clear who is controlling the recruiting piece. So the district sales managers in the initial plan were not doing a lot of the recruiting. It was turned over to the sales leaders. What we're doing now is having district sales managers help support the sales leaders through recruiting and also making sure that we're giving the right resources to the sales leaders for their recruiting. The other thing I will say is that as we were making all these changes, I think we lost focus on the discipline that is required in recruiting. So it is not about just getting people to sign up, it is about making sure that she has – that the person that comes in has the mentor, someone that's supportive from a field management standpoint to help her navigate through the first three to six campaigns. So what we were seeing is, we were getting people coming in but because we had lost focus on the processes as we were going through all this change, we weren’t retaining people and getting them to become representatives. So that’s part of what we are working through is to really take the base of where we are today and build off of that base, making sure we're clear about how we get more people in and supporting those representatives. So that’s the critical piece. So the issue isn't new, but how we are addressing the issue is new.
Operator: Mark Astrachan, Stifel Nicolaus & Co.
Mark Astrachan - Stifel Nicolaus & Co., Inc.: It's Stifel. I wanted to go back to an earlier question on the longer-term targets, and I basically tried to drill down into your sales growth expectation. Do you think that mid-single-digit is still realistic considering that volume growth has worsened now sequentially on a two-year basis over the last four quarters and that it's just increasingly difficult to rely on pricing to drive growth longer-term? Maybe if you can just talk broadly about that and then sort of put it in the context of how you think about the broader picture of your reason to exist or strategic positioning within the markets and the growth of the overlying market?
Sheri McCoy - CEO: Yes, certainly as I look at our 2016 goals, I feel very confident that we will get there. Certainly if you look at the critical markets in Latin America and Europe, we're performing in good shape. The real challenge for us is getting profitability back in the U.S. and have the U.S. not be such a drain on it. So that's how we’re looking at it from an overall perspective and making sure that we continue to execute with excellence. I'm not sure, I'm clear on your comment about the overall market piece, the last part of your question. So, perhaps you can give me more specifics on that piece.
Mark Astrachan - Stifel Nicolaus & Co., Inc.: Yes, I guess just trying to think about it in broader context. I think as you had talked about mid-single-digits previously, you said basically, look at the markets and look at the categories that we operate in and we're still there, Beauty is still a fundamentally favorable category. Yet the results have obviously not suggested that.
Sheri McCoy - CEO: Yes, absolutely. I think as we look at where Beauty is going in the projections from a market standpoint, it's still a very attractive market. Our opportunity is to get all of our top 10 markets performing at the same level and executing well, so that we’re capitalizing on that. So it's important for us to do that moving forward.
Operator: (Philippe Gleason, Mitsubishi Securities).
Philippe Gleason - Mitsubishi Securities: My question is on Mexico and the follow-up on Brazil. In Mexico, Sheri, as you know Congress is debating a new tax law that will result in a higher tax rate for consumers and also some changes for the corporates. Based on how you're reading that discussion right now, how could that impact consumer spending since you alluded earlier already to a challenging macro-economic environment in Mexico? Then with Brazil, related to your comments on competition, how much of that competition is shifting away from the traditional guys like the Natura do more, the drug stores which have been growing very rapidly over the last couple of years?
Sheri McCoy - CEO: Yes, so I'll talk first to Brazil and then Kimberly, if you want to talk to Mexico. On Brazil, what we're seeing is that direct selling is still very attractive in Brazil and you see O Boticario and other companies coming into direct selling in the cosmetic space. So while retail is a real threat and a competitor, direct selling is still quite strong. So, we see that that we need to continue to make sure that we're competitive as it relates to innovation and putting the appropriate spend behind our business that we still see as very attractive.
Kimberly A. Ross - EVP and CFO: Then if we talk – this is Kimberly, just talking about tax in Mexico, obviously, the government there has been quite active recently with a lot of different changes, and tax being one of them. So, there are some different types of proposals that are on the table with regards to tax. We are in the process of evaluating those. It's not clear which ones will ultimately pass at this point in time. So it's something that's still under evaluation with regards to overall impact and what will or will not pass. If I understood correctly, you also asked about tax changes in Brazil, and what I would say is every single day, taxes change in Brazil. So that's one of our full-time jobs of keeping up with all the tax changes in Brazil. So, that's an ongoing area that we continue to focus on, but I would like to stop for one moment and say that we have enhanced our skillsets and our focus on taxes in Brazil, as well as we recently hired a new Head of Tax for the Company as a whole, so, definitely an area of focus for us in tax.
Operator: Javier Escalante, Consumer Edge Research.
Javier Escalante - Consumer Edge Research: It's just a quick question with regards to North America. To what extent, in order for you to restore the relationship between the reps and the function of recruiting, you may need to hire district sales managers? And if so, to what extent that impacts your $400 million target? That will be my question.
Sheri McCoy - CEO: Yes. So, as we look at the U.S., it's about moving forward, and we have a good base to build on and that's really how we're looking at it. So we're – as we look at the current district sales manager base, we are getting there more involved in recruiting, as well as looking at how we provide more resources to our sales leaders. So, we feel good about the base that we have, our focus is getting that to work and that to work well, not necessarily going back and making significant wholesale change.
Operator: Connie Maneaty, BMO Capital Markets.
Connie Maneaty - BMO Capital Markets: It's BMO Capital. I have a question about the FCPA process. Is the settlement a negotiated settlement, is it imposed – if it's imposed and you said that so far you don't think what has been proposed is warranted? Is there an appeals process and the language in your 10-Q about the settlement is really ominous. I mean, it's changed from quarter-to-quarter, I mean can you categorically state that, if it is difficult as the Q suggest that Avon is still a going concern?
Sheri McCoy - CEO: We really – as much as we love to, we really can't comment any further with – on the FCPA matter. So it outlines a bit there kind of how the process works, although I will admit to a very high level, you can see how it goes back and forth, but there is not much more we can say on this at this point in time – ongoing process.
Amy Low Chasen - IR: Thanks, Connie.
Operator: That was the end of the allotted time for questions and answers. I'll turn the conference back over to Ms. McCoy for closing remarks.
Sheri McCoy - CEO: Thank you all for joining us this morning. See you at CAGNY.
Operator: This concludes today's conference call. You may now disconnect.