CREDIT PROCESS, Avon · – Avon has no access to CP market, because of its rangs. – Private Notes were repaid in 2013, giving Avon increased liquidity, but sGll no CP access due

© Barry M Frohlinger 1981 - 2012

CREDIT PROCESS, Avon

Barry M Frohlinger

© Barry M Frohlinger, Inc. copyright 1981 - 2015

Company 12 pt. Profiles Scorecard

1

Analysis KSF/Credit Implication Recommendation

Business Risk Profile Recommendation

Earnings Profile

Asset Profile Recommendation

Liquidity Profile Recommendation

Cash Flow Profile

Capital Structure Profile Recommendation

Debt Instrument Profile Recommendation

Debt Maturity Profile Recommendation

Financial Profile

Legal Structure Profile Recommendation

Cash Flow Projections Profile

Credit Structuring Profile Recommendation

© Barry M Frohlinger, Inc. copyright 1981 - 2015 2

Transaction Assessment

•  AsofApril2015,Avonhasathree-year,$1billionrevolvingcreditfacility,whichexpiresinMarch2017;theywouldlikeanextension.•  WerecommendthatwedonotextendtherevolveratthisGme.•  Avonrequiresfinancingbecause

–  ItsNorthAmericaoperaGonhasexperiencedprolongedearningsproblems–  Thefirmhadbeenpayinganoutsizeddividend

•  Dividendpaymentisnowreasonable–  Significantamountofcashistrapped,creaGngasignificantmismatchbetweencashneedsandcashsources.–  Withthestrengtheningdollar,thefirm’sfinancialcondiGonhasweakened.–  Thefirmhasasignificant2016paymentofdebt.

•  BorrowingsunderthiscreditfacilityisbasedonaspreadoverLIBOR;reflecGngAvon’screditdefaultswaprate,withaninterestcoveragecovenantequaltoorexceeding4:1,alimitonsubsidiarydebtandleverageof3.75:1;and3.5:1starGngDecember31,2014.Thefull$1billionlineisnotavailabletothefirmwithoutviolaGngcovenants.

•  OnJuly31,2012,thefirmneededwaiversfromthebanksforafinancialcovenantbreach,duetotheimpairmentchargeofSilpada.•  OnDecember21,2012,theinterestcoverageraGo[revolver]wasamendedtoexclude(i)extraordinaryandothernon-cashlossesand

expenses,(ii)one-GmefeesorchargesincurredinconnecGonwithanyassetsale,equityissuanceorrepaymentofdebtorrefinancingoramendmentofanydebtinstrumentand(iii)cashchargesandothercashexpenses,premiumsorpenalGesincurredinconnecGonwithanyrestructuringorrelaGngtoanylegalorregulatoryacGoninanaggregateamountnottoexceed$400fromOctober1,2012unGltheterminaGonofcommitmentsundertherevolvingcreditfacility.Avonhasnomoreheadroomtoexcludecharges.

•  Therevolverbacksupthefirm’s$1billionCPprogram,whichhas$0millionoutstandingatFYE2013&2014;–  AvonhasnoaccesstoCPmarket,becauseofitsraGngs.–  PrivateNoteswererepaidin2013,givingAvonincreasedliquidity,butsGllnoCPaccessduetoAvonraGngs


Executive Summary

•  LoanCause:Avoniscurrentlyunderarestructuringprogramtorecoverprofitabilitywhichhassignificantlydecreasedsince2007–  EBITDAMargin:750bpsreducGonbetween2004and2014[17.5%to10.0%]

•  Seasonalityfurtherleadstoincreasedworkingcapital[inventory]financingneedsinthehighseason•  Purpose:RaGngagenciesrequiresufficientcreditlinestoensureliquidityofthefirm.TheCompany’scostofdebtisGedtoitscreditraGngwhichhasbeenrecentlycorrecteddownwardsbyallraGngagencies.Strongerliquidity,togetherwithmarginimprovementsfromtherestructuringacGviGes,willallowtheCompanytoimproveitsraGngs,whicharenonIGbyS&P,Moody’sandFitch.

•  LendingRaGonale:AvonborrowsthroughitsUSoperaGons,whichhaspoorperformance,significantcashis“trapped”outsidetheUS;bothduetotaxreasonsandcertaincountryrestricGons.

•  Thisshouldbecashflowloan–  althoughthefirmalsohassomeseasonality

•  Wearecomfortablereviewingtherequestlaterin2015,andincreasingthetenorproposedbyAvonbasedon:–  Management’sprovencommitmenttoboostcashflow(4Q2012DividendCut)

•  CapXcutin2014–  However,neitherearningsorleveragehaveimproved

•  Evenwiththecurrentprofitabilityissues,thefirmgeneratessaGsfactorycashflow–  SuccessfulrefinancingoftheirPrivateNotesandTermLoanPrepaymentthroughtheissuanceofnewpublic

notesdue2016,2020,2023and2043


Avon Overview

Revenue Breakdown by Region

• GlobalmanufacturerandmarketerofbeautyandrelatedproductsoperaGngworldwide.Unlike most of Avon’s CPG competitors, which sell their products through third-party retail establishments, Avon’s business is conducted worldwide primarily in one channel, direct selling throughthedirectsellingchannelwithabout6millionsellingrepresentaGves

• Significant management changes in 2012 to address key issues of Avon business:

• Competition from large scale global beauty products in developing markets

• Execution problems: inventory management, misjudging product demand, poor representative recruitment

• Significant legal issues

Latin America,

48% North

America, 14%

Europe, 31%

Asia, 8%


Industry

5

Skin and Sun Care29%

Fragrance12%

Hair Care20%

Color Cosmetic14%

Personal care16%

Mens Grooming9%

207 212 215 224 234 244 253

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012 2013

Revenue in Bn


Business Operations & Corporate Strategy

•  Sellingprocess:•  IndependentrepresentaGvescontactcustomerssellingprimarilythroughbrochures•  RepresentaGvesforwardordersfromcustomerstoaAvondistribuGoncenters•  AvonselltheproductstotherepresentaGvesatadiscountpriceandtheyon-selltothecustomer.

•  PromoGonandmarkeGng:•  Salescampaignsgenerallyrunfor2-4weeks•  SupporGngacGviGessuchasnewbrochures,samplesanddemonstraGonproductsareprovidedtosupporttherepresentaGves

toreachnewcustomers•  Print,TVandotheradverGsingisusedtoincreaseawarenessofAvonproducts•  Trainingandsupportisprovidedthroughdistrictsalesmanagers

•  Drivingprofitablegrowthbyimprovingaccesstobrandsandproducts.•  Strengthenandleveragethedirectsalesforce•  Maximizegeographicporpolioandexpandbrandsandchannels•  ReduceOperaGonalcoststoachievelowdoubledigitoperaGngmarginby2016•  Restructuringorclosureofcertainsmaller,underperformingmarkets,includingexitfromtheSouthKorea,Vietnamand

Irelandmarkets

Corporate Strategy

Business Operations

4


Industry Overview - Consumer Staples

ChanginglifestylesindevelopinginternaGonalmarketsshouldprovidegrowthopportuniGes

•  Thebeautyandbeauty-relatedproductsindustryishighlycompeGGve.•  Seasonalinnature–holidaysalespeakinQ4Worldwide,AvoncompeteagainstproductssoldtoconsumersinanumberofdistribuGonmethods,including;

•  Otherdirect-sellingcompanies,•  Internet•  Productssoldthroughthemassmarketand•  PresGgeretailchannels.•  Directsellingaccountsfor

•  29%ofBrazil’sbeautyandpersonal-caremarket•  14%ofChina•  Andonly8%intheU.S.

Outlook

5


Significant Events •  OnDecember13,2011,AvoniniGatedasearchforanewchiefexecuGveandstatedAndreaJungwillconGnueaschairmanoftheboardforthenext

twoyears.–  JungjoinedAvonin1994asthecompany'spresidentinitsproductmarkeGnggroupandinNovember1999,Jungwaspromotedto

chairmanoftheboardandchiefexecuGveofficer.ManyfeltshedidanatrociousjobasCEOandhertenurewasreflecGveofcorporategovernanceproblems.OnOctober5,2012AndreaJung,announcedherresignaGonButremainasasenioradvisorthroughApril2014.

•  AmulGtudeofcontroversiescompelledJungtoannounceherresignaGon.–  Thecompany'sstockdropped45%in2011.

•  Stockwasdown58%inpast5yearswhileS&Pup9%andpeersup21%–  AvondisclosedthatthereweretwoongoingSECinquiries.–  Thefinancialresultstrailedanalysts’projecGonsforyears.–  Therewasalsoathree-yearprobeintoanallegedbriberyofforeignofficials,whichledtotheformerinterimCFOtoleave

•  OnApril2,2012,AvonreceivedanunsolicitedbidfromCotyInc.toacquireAvonfor$23.25pershare,a20%premiumtothethenpriceof$18.60.OnMay14,Cotywithdrewitsproposal.ByYE2012,Avon’ssharepricewas$16.50.

–  InFebruary2014,AvonbeganmarkeGngCotyProductsthroughits1.5millionBrazilianreps.•  InApril2012,AvonbroughtinSheriMcCoy,aJohnson&Johnson(JNJ)vicechairmanasCEO.

–  AtJ&JsheoverseestheglobalpharmaceuGcalbusinessandtheconsumerunit,whichincludesskin-carebrandslikeNeutrogena.•  McCoyhasembarkedonanambiGousturnaroundplanthatincludeswringingout$400millionincosts,sharplyincreasingsalesand

almostdoublingoperaGngmarginswithinthreeyears.•  Thisisthethirdturnaroundsince2005

–  Management is attempting to correct many problems •  Senior talent •  Stabilization key markets, North America, Brazil and China •  Prioritize product categories, Fast track mobile and social media •  Reduce cost base and improve focus on cash management, Improve capital structure •  New management states they have “relentless focus on our Representative and consumer”


Recent Events •  Avon’s peers include the following

–  NuSkin, Estee Lauder, P&G, Clorox, Revlon, Tupperware, L’Oreal, Colgate-Palmolive and Kimberly Clark

•  Avon’s segments are based on geographic operations in four regions [was 5]: –  North America –  Latin America –  Western and Central Europe –  Asia Pacific

•  In conjunction with organizational changes, effective in the second quarter of 2012, the results of Central and Eastern Europe and Western Europe, Middle East & Africa were managed as a single operating segment.

•  The firm made a similar organizational change in 2011, managing China as part of the Asia Pacific segment. In the two years since the reporting/organizational change in Asia Pacific/China, China revenue is down over 50%.

•  Avon had reported three product categories –  Beauty - cosmetics, fragrances and skin care. –  Fashion - jewelry, watches, and apparel. –  Home - gift and decorative products, housewares, leisure products and nutritional products

•  Now, reporting 2 product categories –  Beauty and Fashion



Management Assessment

Sheri McCoy CEO and Dir

Sheri McCoy CEO and Director More than 30 years experience Johnson and Johnson most recently serving as Vice Chairman of the Executive Committee In 2013, Ms. McCoy ranked #20 on Fortune magazine's "50 Most Powerful Women in Business" list, which she has been on since 2008

Kimberly A. Rose EVP and CFO Joined Avon in 2011 after after 10 years at Royal Ahold, a Netherlands-based international group. [credited with helping Ahold after its 2003 accounting crisis]

Fernando J. Acosta SVP & President, Latin America Joined Avon in 2011 after 19 years in Unilever [Latin America and Europe are key]

•  Avon has a new management team led by Sheri McCoy who joined Avon in April 2012

•  CEO Andrea Jung and CFO, Charles Cramb stepped aside at the end of 2012 following multi-year restructuring programs and regulatory challenges in China

•  New financial goals of the new management team include mid-single digit constant dollar revenue growth and low double digit operating margin over the next three years

•  Cost savings of at least $400 million is also targeted in the next 3 years

•  While the new management changes may be positive, there is risk in their ability in direct sales business

Brief Overview Executive Management

2

Douglas R. Canant Chairman Former President & Chief Executive Officer, Campbell Soup Company; Founder & Chief Executive Officer, Conant Leadership


Management Assessment

Kimberly A. Rose EVP and CFO Joined Avon in 2011 after after 10 years at Royal Ahold, a Netherlands-based international group but left Avon in October 2014.

On September 8, 2014, Avon announced that Kimberly Ross will be resigning as of October 2, 2014. Robert Loughran, Vice President and Corporate Controller of the Company will serve as acting Chief Financial Officer, effective October 2, 2014, while the Company completes its search process for a Chief Financial Officer. Loughran, has been Vice President and Corporate Controller of the Company since May 2012, and prior to that, served as Vice President and Assistant Controller since 2009 and Executive Director and Assistant Controller since joining the Company in July 2004. Avon announced February 1, 2015 the hiring of a new CFO, James Scully, previous COO of J Crew, apparel retailer, who led J Crew through 2 years of poor performance.

Brief Overview Executive Management

2


Management Assessment: Medium/High Risk

YEAR ROLE NAME RATIONALE COMMENTS

2011 CFO Charles Cramb Steps Down. Continues as Vice-Chairman

Interim CFO Replaced by Kimberly Ross

May 2011

CFO Kimberly Ross CFO appointed

Replacing Charles Cramb Previously CFO of AHOLD

May 2011

Various Executives

S.K. Kao, G.Manager Jimmy Beh, CFO China C.Q. Sun, Head Corporate affairs for China Ian Rossetter, Head of global internal audit and security

In conncetion to alleged Avon bribery in China investigation that started in 2008

Dec 2011

CEO Andrea Jung Steps Down as CEO. Remains Chairman

2001-2011 CEO of AVON. Under allegations of bribery in China, replaced in Apr 2012

Replaced by J&J vice-chairman Sherilyn McCoy

6

•  High turnover of key senior management since 2011, notably CFOs •  CEO remains stable •  Lack of execution on key areas (Cost reduction, IT development, Internal audit, amongst others)


Management Assessment – Medium/High Risk Continued

YEAR ROLE NAME ACTION RATIONALE COMMENTS

Apr 2012

CEO Sherilyn McCoy Appointed Previously 30 yrs at J&J, latest position Vice-Chairman

Replacing Andrea Jung as CEO

Jan 2012

Vice-Cairman

Charles Cramb Dismissed AVON alleged bribery China

Dec 2012

Chairnan Andrea Jung

Resigned Replaced by Fred Hassan (independent Director at AVON)

Apr 2013

Non-Executive Chairman

Fred Hassan Resigned from the Board

To spend more time on other profesional commitments

Replaced by Doug Conant (Board Director)

Apr 2013

Chairman Doug Conant

Appointed

Sept 2014

CFO Kimberly Ross Resigns Move to Baker Hughes as CFO

Replaced by Robert Loughran

Sept 2014

CFO Robert Loughran

Appointed Acting CFO Corporate Controller at AVON

Jan 2015

CFO James Scully Appointed Replacing acting CFO Robert Loughran

9 years at JC Crew, latest CEO

7


Share purchases

15


Acquisitions and Disposals

Announced Closed Type Entity Value Description

12 02 Jul '13 03 Jul '13 MBO Silpada Designs, Inc. 100 Acquired by Silpada Designs Management

11 08 Nov '10 21 Dec '10 Disposal Avon Products Co. Ltd 50 TPG acquired 93.8% stake in Avon Ltd (Japan)

10 12 Jul '10 28 Jul '10 Acquisition Silpada Designs, Inc. 650 US-based manufacturer of Handcrafted jew elry

9 25 Mar '10 25 Mar '10 Acquisition Liz Earle Beauty Co. Ltd. -- UK-based manufacturer and (direct) distributor of beauty products

8 28 Nov '05 28 Nov '05 Acquisition Avon Manufacturing (Guangzhou) Ltd.

28 Nov '05 28 Nov '05 Acquisition Avon Products (China) Co. Ltd.

7 07 Oct '05 18 Oct '05 Acquisition Maverick Holdings 154 Cayman Islands-based HoldCo w ith business in Colombia

6 15 Mar '04 15 Mar '04 Acquisition Avon Products (China) Co. Ltd. 50 Minority Stakes in China business

5 20 Jan '99 20 Jan '99 Disposal Discovery Toys LLC -- Kids Toys business

4 22 Jan '97 22 Jan '97 Acquisition Discovery Toys LLC -- Kids Toys business

3 05 Feb '96 05 Feb '96 Acquisition Justine Pty Ltd -- South Africa-based direct seller of cosmetics

2 26 Jul '94 29 Aug '94 Disposal Giorgio Beverly Hills, Inc. 150 US-based manufacturer of natural & synthetic perfumes

1 01 Sep '93 01 Sep '93 Acquisition Avon Cosmetics SA -- Remaining stake of Avon's Spanish business

Remaining stakes of Avon's Chinese business39

1 2

34

5

6

7

89

1011

12

05101520253035404550

01.01.1990 01.25.1993 02.19.1996 03.15.1999 04.08.2002 05.02.2005 05.26.2008 06.20.2011

7


Significant Events

•  DuringJune2012,Avonenteredintoa$550million3yeartermloaninordertorefinancecommercialpaper;thisfreedupsomeliquidityforAvonastheypaiddowncommercialpaper.

•  Avonissued$1.5billionbondsin2013,including2043noteswitha6.95%yield,inordertorepaymaturingdebt,prepaytheir2010privatenotes,withamakewholepaymentof$68million,andrepay$380millionofthe2012termloan.

•  Thecompany'sstockhitamulG-yearlowof$13.81inNovember2012averAvonslasheditsdividend;itreboundedto$22withinayearbuthasfallenbackto$8.90

•  InFebruary2013,FitchloweredAvon’sCreditRaGngfromBBB-toBB+andMoody’stoBaa2[StableOutlook]fromBaa1[negaGveOutlook].S&PRaGngBBB-.FitchloweredtheraGngagaininNovember2013toBBandMoody’sloweredraGngagaininFebruary2014toBaa3,andS&PloweredraGngtoBB+inNovember2014.

•  Fourthqtrof2012,bookedaDTLforrepatriaGonofforeignincome[cash]•  SignificantliquidityandnetworthtrappedinVenezuela


Competitors

AmericasEMEAAsia Pacif ic

FragrancesColor CosmeticsSkin & Body CareOther

N/A

8

L'Oreal Revlon Estee Lauder Shiseido Beiersdorf Coty NuSkin Average

Revenue 30,500 1,500 10,400 7,500 8,200 4,500 3,200 9,400

EBITDA 6,300 280 1900 930 1150 680 580 1,689

EBITDA margin 20.7% 18.7% 18.3% 12.4% 14.0% 15.1% 18.1% 16.8%

Operating Profit 5,100 200 1,500 540 1,000 420 550 1,330

OPM 16.7% 13.3% 14.4% 7.2% 12.2% 9.3% 17.2% 12.9%

EV 95,000 3,100 25,500 7,900 22,000 7,400 4,600 23,643

EV/EBITDA 15.1 11.1 13.4 8.5 19.1 10.9 7.9 12.3

EV/Sales 3.1 2.1 2.5 1.1 2.7 1.6 1.4 2.1

Debt/EV 6% 62% 5% 21% 1% 35% 4% 19%

AVON

Revenue 8,766 Op Profit 649 EBITDA 880 EBITDA margin 10.0% EV 5,118 EV multiple 5.8


Business Risk Profile Risk Description Probability Impact Mitigant Recomendatiion

FX CashFlowsandLoansareindifferentlegalenGGesanddifferentcurrencies Very High Very High

Repatriate cash to US. Increase Local Currency borrowings

Representa2ves Fundamentalchallengeindirectsellingisgeyngpeopletosellproducts,notgeyngbuyers.5%declineinrepsin2014.Repswantraiseincommissions,lowercostbrochuresandeaseuponpressuretorecruitmorereps

Very High Very High

Newmanagementfocus

Management PriorManagementdemonstratedexecuGonweakness&acquisiGonfailures;mulGyearunsuccessfulrestructuringandweakcorporategovernance.Weakmanagementofreps New management team, however, untested and recent departure of CFO and new CFO. New Board.

High Very High

73-89%ofcompGedtoperformance;srleadershipmustholdstockmorethan6Xcomp

TowersofDebt LargeTowersin2016,2018and2019

Very High HIgh

DCM still open to the firm, however, at a cost. 2016 prepaid with asset sales

Compe22on NaturainBrazilNorthAmericaoperaGonsareunprofitable

High High

Over1millionrepsinBrazil

Sale of North America

5


Business Risk Profile Risk Description Probability Impact Mitigants Recomendatiion

PoorFinancialResults

AvonStockpricedown75%whilepeersup88%overpastfiveyears

High High

EV reflects existing core business is still somewhat acceptable. Business Model requires limited CFOps.

Governmentregula2ons

FCPA

High Moderate

Managementbelievestheyhaveasezlementfor$135butagreedtoan18monthregulatorysupervision

BusinessModel Avonmodelwasbuiltonconvenienceofbuyingfromcomfortofhome.InternethasmadeaccesstocosmeGcseasy

High Moderate

Product and Business Model work in selected countries, requires proper strategy and execution.

Bring In IB for Strategy Discussions

Operational Reliance on direct selling model IT InfrastructureManagement of Inventory levels (Seasonality) Instability of IT system can lead to loss of sales High costs in maintaining a working and stable IT infrastructure platform across 50+ countries

Moderate Moderate

5


Identification of the problem

•  Management Weakness •  Weak internal controls

–  Financial and/or non financial •  Weakness in business

–  Cost structure •  Weakness in strategy

–  Unrelated acquisitions, excessive cap X •  Inappropriate financial policies

–  Excessive debt, wrong currencies •  Competition

21


“customer reps” Get product at discount

“casual sellers” Earn 2X

min wage

“top sellers” 15 hours per week

“top leadership” Full time Provides

median income

“top leadership” “wealth creator”

2 - 3 X median income

Earnings Potential from Avon

Time spent

Reps


Invest-Rising Stars China, India, Turkey

Exit South Korea, Vietnam

Fix Big Guns US and Uk

Drive Growth Russia and Brazil

Leverage Australia and Italy

Strategy


Seasonality

AR Inventory


Revenue, change in reporting

Beauty 0%

10%

20%

30%

40%

50%

60%

70%

80%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Beauty 69% 69% 69% 70% 72% 72% 71% 73% 73% 73% 73%

Fashion 31% 31% 31% 30% 28% 28% 29% 27% 27% 27% 27%

Beauty

Fashion


Revenue – Geographic

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2006 2008 2010 2012 2014

North AmericaLatin AmericaEuropeAsia


Contribution Revenue per segment

0%5%

10%15%20%25%30%35%40%45%50%

2006 2008 2010 2012 2014

Latin AmericaNorth AmericaEuropeAsia


Non Beauty sales

0%5%

10%

15%

20%

25%

30%

35%

40%45%

2014

USRest of WorldGlobal


KPI’s, Avon utilizes key performance indicators (“KPIs”) to evaluate its business.

-6% -4% -2% 0% 2% 4% 6% 8%

10% 12% 14%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Reps 13% 3% 5% 7% 1% 9% 4% -1% -1% -2% -5% Units 11% 6% 2% 9% 7% 3% 1% -2% 0% -5% -5%

Reps

Units


Revenue - Geographic

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2006 2008 2010 2012 2014

USBrazilRest Of World


Revenue – Geographic [China business off 42%,20%, 22%, 10% in past 4 years, different model, Russia business up in 2014]

BRC 18% 21% 23% 26% 28% 29% 29% 27% 26% 27%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


OPM, adjusted

0%

2%

4%

6%

8%

10%

12%

14%

16%

2004 2006 2008 2010 2012 2014

OPM


OPM per segment

-4% -2% 0% 2% 4% 6% 8%

10% 12% 14% 16%

2010 2011 2012 2013 2014

Latin America North America Europe Asia


OPM compared to peers

-5%

0%

5%

10%

15%

20%

25%

2004 2006 2008 2010 2012 2014

AvonNu SkinRevlonL'OrealTupperwareColgate PalmoliveCloroxKimberly ClarkP&G


OPM compared to peers

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2004 2006 2008 2010 2012 2014

AvonComps


ReturnsonAssetsandCapitalLeveliss2llok,buttrendsaredown,un2l2013

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014

OPMRROOARROIC


Efficiency, Revenue/Invested Capital

0

1

2

3

4

5

6

7

2007 2008 2009 2010 2011 2012 2013 2014

Rev/IC


Efficiency

Revenue Op Profit Op Assets Inv CapitalCAGR 07 - 14 -2% -9% 0% 9%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

CAGR 07 - 14


Earnings

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014

GPM RROIC RROOA OPM

39


Profitability

•  Year2014–  Avon’sprofitabilitymetricsaremediocre.Managementbelievesfourthquarterof2014beginstoshowsomeimprovementsbutimpactedto

duedollarstrength.LaGnAmericaremainsthelargestsegment,butEuroperemainsthemostprofitablesegment,duetoastrongbusinessinCentralEurope,wherethedirectsalesmodelappearswellmatchedtothemarket.NorthAmerica,thethirdlargestsegment,performedverypoorlyduring2014.AvonstruggleswithaNorthAmericacoststructurenotinlinewiththerevenue.NorthAmericawasunprofitableattheoperaGngprofitlevel,onanadjusted.Venezuelaisalsoaproblemforthefirm.Avonperformsmuchbelowpeers,azributabletomanagementinabilitytoexecute.

–  Oneofthekeymetricsforthefirmisreps,thefirmhas6millionrepsglobally;Avonhashadproblemsretainingrepsinkeymarkets,includingNorthAmerica,wherethefirmlost18%ofrepsin2014.Avon’sfieldrepresentaGveshavethrowninthetowelsincethecompanylauncheditstransformaGonal“OneSimpleSalesModel”iniGaGvein2011,whichinvolvedslashingdistrictsalesmanagerposiGonsandreassigningexisGngrepresentaGves.Nonbeautysales,whichhavelowermarginsthanbeauty,represent45%ofUSsales,consistentwithprioryears.

–  IntheprocessofreducingthenumberofdistrictmanagersandreassigningrepresentaGves,AvonbrokesomecriGcalrelaGonships,•  directsalesisarelaGonshipbusiness•  AndtherecruiGngengine“fellapart”asthedisrupGveprogramwasrolledout.

–  AvonsGllgeneratesacceptablereturnsoncapital,becauseitisnotacapitalintensivebusiness;ithasashortcashcyclewithlimitedfixedassets.Thefirmismanagementintensive.

•  Year2013–  Avon’sprofitabilitymetricsremainmediocre.Fourthquarter2013resultswereveryweak,witha5%declineinreps.LaGnAmericaremains

thelargestsegment,butEuroperemainsthemostprofitablesegment,duetoastrongbusinessinCentralEurope,wherethedirectsalesmodelappearswellmatchedtothemarket.NorthAmerica,thethirdlargestsegment,performedverypoorlyduring2013,duetoitscoststructure.2013markedthefirstGmeNorthAmericawasunprofitableattheoperaGngprofitlevel,onanadjustedbasisThefirmlost16%ofrepsin2013.

•  Trend2014versus2013–  RevenuedeclinedinFY2014,duetoastrongdollaralongwithareducGoninunitsshipped.Revenuedeclinedinallsegments,andmargins

remainedessenGallyflatintwolargestsegments.


Profitability

•  Trend2013versus2012–  RevenuedeclinedinFY2013,duetoastrongdollaralongwithareducGoninunitsshipped.Revenuedeclinedinallsegments,althoughmarginsreboundedintwolargest

segments,EuropeandLaGnAmericaduetoimprovedproductmixandlowersupplychaincosts.ManagementalsoazributestheturnaroundintheUKduetoimprovedrepresentaGveengagement.

•  Year 2012 –  Avon’s earnings are significantly lower than peers; and most profitability metrics for Avon are mediocre. For segment reporting, Central

Europe was merged with Western Europe and now is the most profitable segment, due to a strong business in Central Europe, where the direct sales model appears well matched to the market. North America, the third largest segment, performed very poorly during 2012.

•  Trend 2012 versus 2011 –  Revenue declined modestly in FY2012, mostly due to a strong dollar as most of Avon’s business is transacted in currencies not the US

dollar. Along with revenue decline, profitability fell significantly. The firm continues to struggle with implementation of its stabilization strategies, cost savings initiatives, multi-year restructuring programs and other initiatives, including Service Model Transformation in order to achieve anticipated savings and benefits from such programs and initiatives. The firm has been attempting to implement these strategies since 2004, with no success; Consolidated Operating Profit Margin fell in 2012 due to increases product costs, the product mix and increases in selling, general and administration costs; due to unfavorable operating leverage. Revenues and margins fell in all four of the segments; Latin America and Europe, accounting for 74% of revenue, were both impacted by currency and profits impacted due to supply chain problems and currency. Also, Europe was impacted due to bad debts. North America remained weak in 2012, due to reduction in the number of reps, units shipped and the investment in the RVP.

–  In summary, margins declined in all segments. •  Earnings Trend

–  Over the past 11 years, Avon has experienced a significant decline in earnings, operating profit margins in addition to reduced returns on assets and capital. The reduced earnings have occurred throughout the entire firm. The year 2008 represented a possible turnabout in the firms results; however, this has not been sustained with operating failures in key markets. The sad story really starts around 2005, when Ms. Jung was in her sixth year as C.E.O. Rising competition, an outdated electronic supply system in Brazil, missteps in Russia and China, bloated management, misdirected marketing — all combined to choke off profits. By 2009, Liz Smith, the company’s highly regarded president, left. A flurry of regional managers exited as well. Even after Ms. Jung cut $1 billion in costs in the latest of two restructurings, profitability kept dwindling. As the share price sank, the company began to look like takeover bait. Rumors circulated that L’Oréal might swoop in. Ms. Jung simply made bad decisions. Avon spent $3 million on a Super Bowl ad in 2009 to recruit sales representatives but didn’t invest enough to train the new employees. It spent $650 million in 2010 to acquire Silpada, a direct seller of silver jewelry, only to write down the investment the next year largely because of a rise in silver prices. Then legal and regulatory issues rocked Avon. In 2011, the Securities and Exchange Commission started an investigation into possible breaches of the Regulation Fair Disclosure rule, known as Reg FD, related to corporate information that the company shared with financial analysts. That same year, Avon became the focus of an investigation into accusations that it violated the Foreign Corrupt Practices Act by bribing officials in China — an issue that has cost the company more than $250 million in legal costs and led to the dismissal of at least four executives. (Ms. Jung wasn’t accused of wrongdoing.)


Balance Sheet Profile

0

200

400

600

800

1000

1200

1400

WC needs PPE intangibles

42



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

WC needs PPE Intangibles

43



Intangibles

Equity

PPE LT Debt

0

1000

2000

3000

4000

5000

6000

Assets Financing

44


Cash cycle

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012 2013 2014

AvonNu SkinEstee LauderCloroxColgate PalmoliveKimberly ClarkP&G


Cash cycle, Avon

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014

AR daysInventory daysAP days


BS Management

0%5%10%15%20%25%30%35%40%45%

2007 2008 2009 2010 2011 2012 2013 2014

OPWC/SalesIntangibles/SalesPPE/SalesIC/Sales


BS Management

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2008 2009 2010 2011 2012 2013 2014

IC/Sales


BS Management •  Avon has a moderately short cash cycle, shorter than cosmetic peers, due to short

ar days and good financing from suppliers. Avon has short ar days due to its business models; where they sell to almost 6 million global reps and provide little financing to these customers.

–  Receivable risk has increased in recent years as 3% of sales are uncollectable and operating margins have been reduced.

•  In addition, inventory days for Avon are significantly shorter than other cosmetic firms because Avon has a continuous introduction of new products, as a sales technique for its reps.

•  Avon’s cash cycle is consistent to other packaged goods companies. •  Avon has a moderate need for capital to finance non current assets, with a

nominal investment in tangible fixed assets. Avon had a noticeable increase in intangibles assets, in 2010 due to the Silpada acquisition. The firm has few intangible assets, but a large DTA.

•  Overall, the capital financing requirements of Avon are moderate, which is very favorable. However, asset growth over the past 5 years has not produced revenue or additional profits, which is very troubling.The firm has begun to show an improved efficiency in using invested capital as the firm has pared back Cap X.


Cash Flow Profile

0200400600800

1,0001,2001,4001,6001,800

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EBITDA

Funds Flow

Cash Flow fromOperations


Cash Flows

-200

0

200

400

600

800

1,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Cash Flow fromOperationsCapital Spending

Dividends

Actual Cash Flow[Credit-SR]


Cash Flows

0

200

400

600

800

1,000

1,200

1,400

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Funds Flow

Mandatory CapitalSpendingDividends

Long Run Free CashFlow


Cash Flows

0

200

400

600

800

1,000

1,200

1,400

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Funds Flow

Cash Flow fromOperationsMandatory CapitalSpendingDividends

Long Run Free CashFlow


Cash Flows

050

100150200250300350400450

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Capital Spending

Mandatory CapitalSpending


Cash Flows

050

100150200250300350400450

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Capital Spending



Cash Flows

(200)0

200400600800

1,0001,2001,4001,6001,800

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EBITDA

Funds Flow

Cash Flow fromOperationsCapital Spending


Credit Free CashFlowsLong Run Free CashFlow


Cash Flows

-100

0

100

200

300

400

500

600

700

800

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Actual Cash Flowsto repay debtLong Run CashFlow


Cash Flows

02,0004,0006,0008,000

10,00012,00014,00016,000

Total 2004 - 2014

Total 2004 -2014

14,271 10,319 7,444 EBITDA Funds Flow CFOps


Cash Flows

01,0002,0003,0004,0005,0006,0007,0008,000

Total 04 - 14

Total 04 - 14 7,444 2,753 3,157 1,534

CFOps CAP X Dividends Credit FCF


Debt Maturity Profile Towers, Actual and Projected

-100

0

100

200

300

400

500

600

2012 2013 2014 2015 2016 2017 2018 2019

Actual CF to repay debt CPLTD


Cash Flow Profile

•  Avon’s Cash Flows during 2014 were good. Avon generated modest earnings, but as the firm is not capital intensive and has a modest dividend payout, Avon generated residual cash flows for debt payment. The firm had a small tower of debt due in fiscal 2014. In the short run, cash flows during 2014 were acceptable; Avon’s maturity schedule allowed considerable financial flexibility, as the next tower is due in 2016.

• Avon’s Cash Flows during 2013 were acceptable. Avon generated modest earnings, but as the firm is not capital intensive and has a modest dividend payout, Avon generated residual cash flows for debt payment. The firm had a sizeable tower of debt due in fiscal 2013. In the short run, cash flows during 2013 were acceptable; Avon’s maturity schedule allowed them some financial flexibility, as the next tower is due in 2016.

• Avon’s Cash Flows during 2012 were not strong. Avon generated modest earnings and with a large dividend payout, the firm has no residual cash flows for debt payment. Avon converted most of earning into cash flow; however, the actual cash flow from operations just covered both the capital spending and dividends, as the firm is slightly expanding and has a very high dividend payout ratio. The firm had a small tower of debt due in fiscal 2012. In the short run, cash flows during 2012 were not very good.

– The 74% dividend cut at YE 2012 helped stabilize the firms cash flows • During 2011, Avon did not convert a noticeable amount of earning into cash flow; this is concerning. The actual cash flow from operations didn’t cover both the capital spending and dividends, as the firm is expanding tangible fixed assets and has a very high dividend payout ratio. In the short run, cash flows during 2011 were not very good, but the firm has good potential in the long run to satisfy all its requirements.

• Over the past 11 years, EBITDA and Funds Flow haven’t increased as Avon has an earnings problem. Free Cash Flows weakened from 2007 - 2012. With the smaller dividend, long run cash flows could approximate $262 million p.a.


Liquidity Profile

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013 2014

Working CapitalNeedsWorking Capital

Cash


Liquidity

0

500

1000

1500

2000

2500

2007 2008 2009 2010 2011 2012 2013 2014

CashUnused RevolverLiquidity


Liquidity

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011 2012 2013 2014

Cash + unusedrevolver/Sales


Liquidity Profile

65

Avon Estee Lauder

Sales 8,851 10,969

Cash 917 1,629

Unused Revolver 825 1,000

Total Liquidity 1,742 2,629

Liquidity 20% 24%

CFOps 360 1,535

Maturity date revolver 2017 2019

Rating BB+ A+

Towers in next 5 years $260 million in 2016, $507 million in 2018 and $367 million in 2019

$300 million in 2017


Liquidity Profile

•  With a short cash cycle, Avon appears to have sufficient working capital at FYE 2014; however, some of the liquidity [cash] is trapped in foreign subs; this could cause a liquidity issue. Some is tax trapped and some is actually restricted.

•  Avon reported during the fourth quarter of 2012, as a result of the uncertainty of financing arrangements and the domestic liquidity profile, Avon determined that the Company may repatriate offshore cash to meet certain domestic funding needs. Accordingly, Avon no longer asserted that these undistributed earnings of foreign subsidiaries are indefinitely reinvested and, therefore, recorded an additional provision for income taxes of $168million on such earnings.

•  Cash Flows during 2014 were adequate [because no towers of debt were due]; 2013 were almost adequate; 2012 were not strong; the firm has some seasonality.

•  The firm’s revolver provides some access to credit, but the facility is used to support the firm’s commercial paper program [none outstanding at FYE 2012]. Unused availability is $1,000 million, but based upon financial covenant restrictions the firm can only access $825 million. The firm is not using CP as it has been effectively shut out of the market, due to rating.

•  Avon’s liquidity relative to Estee Lauder is weak.


Capital Structure Profile Debt/EBITDA

0

0.5

1

1.5

2

2.5

3

3.5

4

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Avon Nu SkinEstee Lauder


Solvency, also do not miss litigation and SEC

0

200

400

600

800

1000

1200

1400

1600

1800

2007 2008 2009 2010 2011 2012 2013 2014

Underfundedpensionrent adjustment

Securitizations

Total


Solvency, also do not miss litigation and SEC

0

1,000

2,000

3,000

4,000

5,000

6,000

2007

2008

2009

2010

2011

2012

2013

2014

debt+pension+leaseEBITDARP


Solvency [debt+pension+lease]/EBITDARP

0.000.501.001.502.002.503.003.504.004.505.00

2007 2008 2009 2010 2011 2012 2013 2014

leverage


Solvency

0510152025303540

20042005200620072008200920102011201220132014

EBIT/InterestEBITDA/Interest


Solvency

0%

20%

40%

60%

80%

100%

120%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Funds Flow/TotalDebtFree OCF/Total Debt

EBIT/Capital

Total Debt/Capital


Solvency

0%2%4%6%8%

10%12%14%16%18%20%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EBITDA marginCAP X marginNet


Solvency

0%

5%

10%

15%

20%

25%

30%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EBITDA margin

EBITDA-CAPX -dividendsEBITDA/Assets


Solvency

0%2%4%6%8%

10%12%14%16%18%20%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EBITDA marginCAP X marginDividends/revenue


Solvency

0%2%4%6%8%

10%12%14%16%18%20%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

EBITDA margin

EBITDA-CAPX -dividends


Equity Cushion

0

200

400

600

800

1000

1200

1400

1600

2011 2012 2013 2014

EquityDTASoftwareGoodwillIntangiblesBrochure


Capital Structure Profile Equity Cushion

0

500

1000

1500

2000

2500

2011 2012 2013 2014

EquityIntangibles


Balance Sheet

equity

Ltd

0

1000

2000

3000

4000

5000

6000

assets Financing

Cash other AR&Inv PPE Intangibles

79


Debt Rating Profile

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EBIT/Interest AAA AA- A+ A+ A+ A+ A+ A+ BBB+ BBB+ BBB

EBITDA/Interest AAA AA- A+ A+ A+ A+ A+ A+ BBB+ BBB+ BBB+

Funds Flow/Debt AA+ A+ A+ A A BBB+ BBB- BBB B+ BB BB

FCF/Debt

AA+ AA- A+ BBB- BBB- BBB+ BB+ BB+ BB+ BB+ BBB+

EBIT/Capital

AAA AAA AAA AAA AAA AAA AA- A+ BBB A A

EBITDA margin

A BBB BBB BB BB B- B- B- CCC- B- B-

LTD/Cap

BB+ BB+ BB- BB- BB- BB- BB- BB- B+ B+ CCC

TD/Cap

BBB BB- BB- B B BB- BB- BB- B+ B+ CCC

Debt/EBITDA

AAA A+ A A A A- BBB BBB- BB- BBB- BB

EBITDA/Assets

AA+ AA+ AA AA+ AA+ A+ A A B BBB BBB


FINANCIAL RISK PROFILE

BUSINESS RISK PROFILE Minimal Modest Intermediate Significant Aggressive Highly

Leveraged

Excellent AAA AA A A- BBB -

Strong AA A A- BBB BB BB-

Satisfactory A- BBB+ BBB BB+ BB- B+

Fair - BBB- BB+ BB BB- B

Weak - - BB BB- B+ B-

Vulnerable - - - B+ B CCC+

Financial Risk Indicative Ratios*:

FFO / Total Debt Total Debt / Capital

Total Debt / EBITDA

>60% <25% <1.5x

45 – 60% 25 – 35% 1.5 – 2.0x

30 – 45% 35 – 45% 2.0 – 3.0x

20 – 30% 45 – 50% 3.0 – 4.0x

12 – 20% 50 – 60% 4.0 – 5.0x

<12% >60% >5.0x

Business Risk Factors

1)  Metrics: Adjusted leverage ratios, cash flow, margins / profitability

Financial Risk Factors

We estimate the Company’s business risk profile as ‘Satisfactory/Fair’ and its financial risk profile as Significant/Aggressive, suggesting a BB indicative rating.

1)  Industry Factors

Cyclical, Competition 2) Company

Management, FX, Hedging of Debt, Liquidity, Dividend Policy, Reps, Government Regulations


Solvency

•  Avon is the world's largest direct selling company; it has a good brand and acceptable earnings along with broad geographic diversification.

•  However, there is concern about the current value of the brand.

•  Avon uses significant debt to finance its nominal capital needs.

•  The debt/cap ratio is has consistently been an outlier for Avon, signaling the use of debt to finance the balance sheet, even though financing needs are not significant. This was not a concern until the recent downturn in earnings. Also, there is large risk in the balance sheet; intangibles, deferred tax assets, foreign operations and assets and pension.

•  Leasing is not significant for the firm; although litigation is. The current pension underfunding is not significant, although the assumed rate of return on pension assets seems unreasonable Also, the switch to debt investments and hedging appears to be a risk. Also, the firm has significant capital spending commitments and product purchase obligations.

•  Solvency has declined considerably over the past 10 years. Financial Risk looks synthetically like a BB firm, the business risk is just satisfactory, due to weak management, which now is untested. With a change in management and changes in operations, the firm may regain its IG rating, but this will require a profitability turnabout.

–  Equity has been reduced due to currency and pension concerns

•  FX is difficult to hedge; hedging pension may be a risk


Debt Instrument Profile

0

500

1000

1500

2000

2500

3000

Sr Secured Debt

Fixed Rate Sr Notes

ST Debt Sub Debt Revolver Unused Revolver

83


Debt Instrument Profile

0

500

1000

1500

2000

2500

3000

US Dollar Debt US$ EBITDA Non US Dollar Debt Non US Dollar EBITDA

Revolver USD

84


Debt Profile

2013 2014 Price Avon Debt 99.2 91.0 10 yr Treasury 3.04% 2.17%

85


Hedging Profile [Notional]

Avon Estee Lauder

F/X Forwards 174 1,597

F/X Translation [net assets]

0 [ended in 2012] 0

Interest Rate 0 [terminated fixed to floating in 2011]

0 [terminated fixed to floating in 2011]

Commodity 0 0

86


Enterprise Value, Year end 2014

Book Value Fair Value [market survey]

Cash =961+21+36.4 1,018

Operating Assets 4,479

Total Assets 5,497

Supplier Financing 2,590

Debt Financing 2,601 2,380

Min Int Financing 16 16

Equity 290 3,869

Total Financing 5,497

1,889 5,246


Enterprise Value, 2014

Peers Avon

Operating EBITDA 880

Peer Multiple 12.3X

Enterprise Value by Comp 10,824

Enterprise Value by Market Survey 5,246

Total Debt 2,601

Debt/EV 50%

EV by DCF


Risk

Peers Avon

Equity Beta [Avon] 2.24

Equity Beta, EL 1.35

Debt/EV, EL 8%

Debt/EV, Avon 50%

Equity Beta, Nu Skin 2.89

Equity Beta, Herbalife 3.30

Equity Beta, L’Oreal 1.10


2015 Cash Flows, repayment from cash flow or cash?

2012 2013 2014 Long run

Funds Flow 587 722 513 513

CFOps 556 540 360 513

CapX -229 -197 -131 -141?

Dividends -329 -107 -110 -110?

Free Cash Flow

0 236 119 262

Total Debt 2,692 2,692


Projections [from 2013]

•  A key success factor for Avon is the generation of earnings. •  The firm has weakness in its key markets, the year 2012 was a very bad year for earnings, 2013 was better. •  In addition, working capital management, investment in fixed assets and the dividend policy influence the firms

cash flows and ability to repay debt. •  During early 2013, Avon’s three year outlook was mixed because

–  operating improvements will be delayed as a result of sluggish macroeconomic conditions, –  heightened competition in the direct selling channel –  Corporate governance issues and the uncertainty surrounding the financial impact of certain SEC

investigations into potential compliance violations. Also, new management is untested. •  Equity Research, guided by management, suggested no revenue growth for 2013, followed by modest growth in

2014 and significant 2015 growth. OPM improves in 2013 and continues through 2015. Under this scenario, Avon faced a refinancing risk in 2013, unless they can unlock the trapped cash outside the US.

•  However, the firm did much better in 2013 than originally forecast, due to slightly better margins and significantly lower CapX.


Forecasting, Base Case, from 2013

Originalforecast Actualresults 2013 2014 2015 2013 2014Sales 10,610 10,939 11,365 9,955 8,851OperatingProfit 796 941 1,091 791 649OPM 7.5% 8.6% 9.6% 7.9% 7.3%EBITDA 1,071 1,231 1,397 1,059 880FundsFlow 703 822 949 751 513CFO 409 637 829 540 360CapX -319 -351 -364 -198 -131Dividends -104 -104 -104 -107 -110ResidualCashFlows -14 182 361 235 119CPLTD -390 -652 -566 -390 -29


Credit Decision

•  Lenders mitigate risk using several methods: –  Risk-based pricing –  Guarantees –  Collateral –  Credit derivatives –  Covenants

•  Borrowers with high profitability and low earnings volatility generally have interest coverage and/or debt to EBITDA covenants. These ratios, are informative for stable, profitable firms.

•  In contrast, borrowers with low profitability and high volatility earnings are likely to have net worth covenants. –  Tightening

•  Tightness is defined as the distance between the threshold and the initial value of a covenant ratio. •  Business risk

–  Are you monitoring changes [acquisitions, disposals]? •  Financial risk

–  collateral helps to manage financial risk •  Collateral Risk

–  How will we be repaid in the event of a default? –  What is the appraised value, volatility and salability of the collateral?

•  Structure risk –  Have we properly boxed the risks with the appropriate covenants and term? –  Are you lending to the correct entity? –  Guarantees

•  Reporting Risk –  Is there any change in the firms reporting?

•  Funding risk –  Conditions Precedent? MAC

•  Position Risk –  Cross Default?


When a firm has financial problems

•  Stabilize the business •  Gather information •  Evaluate Options

–  Short or Medium term •  Repayment of debt

–  Full or part •  Sale of assets, entire business or subsidiaries •  Sale of the debt •  Reduce debt, improve operating working capital, extend maturities •  Inject equity •  Buy Protection

–  Long run •  Restructure the operations •  Create joint venture •  Debt for equity swap •  Strategic investor •  Restructure debt and/or interest payments

•  Formulate proposal •  Negotiate

94


OPM, adjusted

0%

2%

4%

6%

8%

10%

12%

14%

16%

2004 2006 2008 2010 2012 2014

OPM


Current forecast [2015/2016]

•  Management guidance led Equity Research to the following scenario –  2015 revenue decline of 12% due to FX, spotty execution and competitive challenges; followed by modest

revenue growth after 2016, due to increased representative engagement –  Stabilization of margins due to continued cost cutting –  Weak Conversion of Earnings to Cash Flows in 2015, but improvements in cash conversion rate in 2016 –  Modest Capital Spending and Dividends –  Minimal towers of debt in 2015 but significant in 2016

96


Management Case

97

actual Management 2012 2013 2014 2015 2016 2017 2018 2019 Cumulative Revenue 10,717 9,926 8,767 7,747 7,844 7,980 8,225 8,590 40,385 EBITDA 963.3 1,030 880 777 819 886 959 1,008 4,449 EBITDA margin 9.0% 10.4% 10.0% 10.0% 10.4% 11.1% 11.7% 11.7% 11.0% Interest -104 -121 -111 -116 -112 -105 -99 -87 -518 tax -257 -164 -185 -173 -196 -228 -261 -287 -1,146 Funds Flow 602 745 584 488 511 553 599 635 2,785 WC changes -46 -205 -224 -189 -73 66 30 35 -131 Cash Flow from Operations 556 540 360 299 438 619 630 669 2,654 Capital Spending -241 -197 -131 -135 -137 -140 -140 -140 -692 Maintance CapX -162 -165 -141 -124 -124 -123 -123 -123 -616 Dividends -329 -107 -110 -111 -114 -100 -100 -100 -525 Free Cash Flow for Debt Repayment -14 236 119 53 187 379 390 429 1,437 Cumulative FCF for Debt Repayment 53 240 618 1,008 1,437 Debt Maturity -17 -390 -29 -29 -54 -259 -6 -507 Surplus/[Shortfall] -31 -154 90 24 133 120 383 -77 Other -83 20 20 10 10 Cash 1,108 961 902 1,055 1,195 1,588 1,521 Long Run Free Cash Flow 111 474 333 253 273 329 376 412 1,644

Total Debt 2,692 2,464 2,410 2,152 2,146 1,639 % debt repaid 8% 11% 22% 25% 49%

Total Debt/EBITDA 3.06 3.17 2.94 2.43 2.24 1.63 Covenant 3.50 3.50 3.50 3.50 3.50 3.50 Pass/Fail Pass Pass Pass Pass Pass Pass

EBITDA 880 777 819 886 959 1,008 Interest 111 116 112 105 99 87 EBITDA/Interest 7.9 6.7 7.3 8.4 9.7 11.6 Covenant 4.0 4.0 4.0 4.0 4.0 4.0 Pass/Fail Pass Pass Pass Pass Pass Pass


Management Case Forecast summary

•  Base case forecasts shows –  2015 modest generation of cash flow for debt repayment but –  2016 generation of cash flow not able to repay large tower of debt –  Over the next 5 years, Avon can repay 49% of total debt in addition to building cash of $560

million

98


Projection/Sensitivity Analysis

Assumptions: •  Revenue headwinds −  Recovery in main markets 2016 −  Operating Margins start to improve

in 2017 −  EBITDA margin improvement by

170bp −  Effective Working Capital

Management in late 2015 −  Restraint in CapX and dividends

Management

Assumptions: •  Revenue headwinds continue

though end of 2016 •  Continued loss of reps −  EBITDA margins fall to 8.9% due to

unfavorable operating leverage −  Effective Working Capital

Management by end of 2017

Bank Downside

Key Drivers:

•  Revenue driven by reps, units and currency

•  Cost controls, High Operating Leverage in many markets

•  Working Capital Management

•  Capital Spending

•  Refinancing large towers of debt

Assumptions: •  Revenue headwinds continue

though end of 2018 due to loss or reps and currencies

•  Continued loss of reps

30


Bank Case

100

actual Bank

2012 2013 2014 2015 2016 2017 2018 2019

Cumulative Revenue 10,717 9,926 8,767 7,735 7,269 7,159 7,159 7,159 36,481 EBITDA 963.3 1,030 880 715 672 673 705 702 3,467 EBITDA margin 9.0% 10.4% 10.0% 9.2% 9.3% 9.4% 9.9% 9.8% 9.5% Interest -104 -121 -111 -119 -120 -118 -111 -105 -573 tax -257 -164 -185 -148 -137 -142 -159 -162 -749 Funds Flow 602 745 584 447 415 413 435 435 2,146 WC changes -46 -205 -224 -269 -78 -57 -18 -49 -470 Cash Flow from Operations 556 540 360 179 338 356 417 386 1,676 Capital Spending -241 -197 -131 -135 -137 -140 -140 -140 -692 Maintance CapX -162 -165 -141 -124 -124 -123 -123 -123 -616 Dividends -329 -107 -110 -111 -114 -100 -100 -100 -525 Free Cash Flow for Debt Repayment -14 236 119 -67 87 116 177 146 459 Cumulative FCF for Debt Repayment -67 19 135 312 459 Debt Maturity -17 -390 -29 -29 -54 -259 -6 -507 Surplus/[Shortfall] -31 -154 90 -96 33 -143 171 -360 Other 97 -32 144 -170 361 Cash 1,108 961 961 961 961 961 961 Long Run Free Cash Flow 111 474 333 212 178 189 212 212 1,004


Total Debt/EBITDA 3.06 3.71 3.80 3.60 3.18 2.98 Covenant 3.50 3.50 3.50 3.50 3.50 3.50 Pass/Fail Pass FAIL FAIL FAIL Pass Pass

EBITDA 880 715 672 673 705 702 Interest 111 119 120 118 111 105 EBITDA/Interest 7.9 6.0 5.6 5.7 6.4 6.7 Covenant 4.0 4.0 4.0 4.0 4.0 4.0 Pass/Fail Pass Pass Pass Pass Pass Pass


Bank Case Forecast summary

•  With lower sales and no margin improvement, Avon produces modest cash flow for debt repayment •  Covenant violation in 2015 through 2017, due to earning decline, although leverage modestly reduces by the end of

2019.

101


Downside Case

102

actual Downside

2012 2013 2014 2015 2016 2017 2018 2019

Cumulative Revenue 10,717 9,926 8,767 7,735 7,323 6,956 6,726 6,535 35,274 EBITDA 963.3 1,030 880 725 671 635 601 580 3,213 EBITDA margin 9.0% 10.4% 10.0% 9.4% 9.2% 9.1% 8.9% 8.9% 9.1% Interest -104 -121 -111 -120 -126 -132 -128 -132 -638 tax -257 -164 -185 -151 -134 -122 -112 -105 -624 Funds Flow 602 745 584 454 411 382 361 344 1,952 WC changes -46 -205 -224 -272 -148 -61 -18 -37 -536 Cash Flow from Operations 556 540 360 182 263 321 343 307 1,416 Capital Spending -241 -197 -131 -135 -137 -140 -140 -140 -692 Maintance CapX -162 -165 -141 -124 -124 -123 -123 -123 -616 Dividends -329 -107 -110 -111 -114 -100 -100 -100 -525 Free Cash Flow for Debt Repayment -14 236 119 -64 12 81 103 67 199 Cumulative FCF for Debt Repayment -64 -52 29 132 199 Debt Maturity -17 -390 -29 -29 -54 -259 -6 -507 Surplus/[Shortfall] -31 -154 90 -93 -41 -177 96 -440 Other 94 42 178 -95 441 Cash 1,108 961 961 961 961 961 961 Long Run Free Cash Flow 111 474 333 219 174 159 138 121 811


Total Debt/EBITDA 3.06 3.66 3.91 3.98 4.03 4.05 Covenant 3.50 3.50 3.50 3.50 3.50 3.50 Pass/Fail Pass FAIL FAIL FAIL FAIL FAIL

EBITDA 880 725 671 635 601 580 Interest 111 120 126 132 128 132 EBITDA/Interest 7.9 6.1 5.3 4.8 4.7 4.4 Covenant 4.0 4.0 4.0 4.0 4.0 4.0 Pass/Fail Pass Pass Pass Pass Pass Pass


Downside Case

103

With lower sales and margin pressure, Avon produces modest cash flow for debt repayment Covenant violation in through 2019, due to earning decline, although leverage modestly reduces by

the end of 2019, with 14% of debt repaid over 5 years.


Credit Decision

•  There has been significant risk in Avon's generation of free cash flow

–  due to profitability problems along, along with working capital needs as well as the recent volatility in active representative and organic revenue growth trends

•  The dividend cut has been very helpful as has been conservative spend on PPE

•  Improving profitability is further challenged by the highly competitive nature of the global beauty and personal care category which has required Avon to sustain high levels of brand advertising and representative investments.

•  FY 2013 looked like a turnaround year until 4th quarter of 2013, when the dollar strength and the loss of reps has again put pressure on earnings.

•  There are also risks inherent in a direct selling model, even when this business model is well-managed.

•  Avon's ratings have been cut as the company fails to reinvigorate growth and credit metrics deteriorate such as earnings margins.

•  The 2012 cut in dividend is a credit improvement, the firms focus on working capital management along with fixed asset investment and margins could stabilize the firm. However, the bank should not be the equity risk taker in this transaction.

•  Under the management case, there is risk minimal risk in debt repayment during 2015; gives management the year 2015 to work on a plan. Under a the bank and downside case, violation of covenants is a problem.

Documents

CREDIT PROCESS, Avon · – Avon has no access to CP market, because of its rangs. – Private Notes were repaid in 2013, giving Avon increased liquidity, but sGll no CP access due