AVON PRODUCTS (AVP) HOSTS 2016 INVESTOR DAY: JANUARY 21, 2016

Avon Products held its 2016 Investor Day today in Suffern, NY, where the company was founded some 130 years ago. The event was originally scheduled for last May, but was postponed after Avon began a strategic review of its business. That review culminated in an agreement on December 17, 2015, with Cleveland Apple Investor (an affiliate of Cerberus Capital Management), which decided to invest $435 million in Avon in the form of convertible perpetual preferred stock for a nearly 17% stake. In a related transaction, Cerberus also agreed to acquire an 80.1% stake in the company’s North American business for $170 million. Cerberus concluded that there is potential for the business to grow. “If we did not see that this business was growing organically…we would not have made the investment,” said Cerberus Senior Managing Director Steven Mayer. Avon North America will be governed by a board of managers, on which Cerberus will hold seven seats and Avon two, to be filled by Sheri McCoy and Susan Kropf. Avon has named Steve Bosson as the leader of the Avon North America transition team, following the departure of Pablo Muñoz as President of Avon North America, effective January 4, 2016. Cerberus will be naming a new CEO of Avon North America. Avon revealed that sales from its international operations rose by 3% on a constant-currency basis in 2015 and also said its global sales were flat last year. CEO Sheri McCoy said Avon plans to “drive out” $350 million in annual operating expenses—a new three-year goal—and invest a similar amount in the company’s growth. A previous restructuring had generated $400 million in cost reductions since late 2012. McCoy said Cerberus’s involvement in the company “is a catalyst and opens many doors for us.” Avon’s turnaround plan includes cutting jobs, pouring more money into revamping its technology and services, and seeking alternatives for its China business, which represents about 1% of total sales. The company’s sales took a beating in China after its Chinese unit pleaded guilty in 2014 in connection with its executives bribing government officials. The Cerberus deal, which Mayer said is “on track” to close this spring, will effectively separate Avon’s international and North American businesses. It buys McCoy more time to turn the company around and improve its share price, but will also see Avon replace half its board of directors and suspend its quarterly dividend. Cerberus intends to work “hand in glove” with Avon’s management to cut costs, improve the strategic positioning, and “contemporize” the business and reinvest in the Avon brand, Mayer said. He noted that the broader direct-selling industry in North America is expanding, but said the Avon business being carved out will require “a major transformation” before it becomes competitive again. Through September 2015, constant-currency revenue for North America was down 15%. The division currently generates around $1 billion in annual sales, but revenues could decline further before stabilizing, Mayer noted. “The direct-selling business is growing; it’s not declining structurally,” he said. Separately, but in conjunction with its Investor Day, Avon reaffirmed the outlook provided on its third-quarter 2015 earnings call. “Our full-year performance is expected to be in line with our most recent outlook,” said Jim Scully, Executive Vice President, Chief Operating Officer and Chief Financial Officer. “We will provide full details of our fourth-quarter and full-year 2015 performance at our earnings call on February 11th, which will include the reporting of our North American business as discontinued operations caused by its anticipated separation from Avon.” In 2015, Avon made progress against its full-year objectives, in line with its previously stated outlook. Including the results of North America, Avon’s full-year 2015 constant-dollar revenue is expected to be flat compared with the prior year. Excluding North America, the company expects full-year 2015 results to include:

• Total revenue of approximately $6 billion.
• Constant-dollar revenue growth of 2% (a decline of 19% in reported dollars), which was negatively impacted by approximately 1 point from the Liz Earle divestiture.
• Growth in active representatives of 1%.

Shares of Avon took a roller-coaster ride today. They were down initially as Avon execs gave their pitch, but spiked to a high of $2.79 after Cerberus called them “significantly undervalued” and added that there were “zero concerns about liquidity” at Avon.