Avon Reports Second-Quarter 2017 Results

LONDON, Aug. 3, 2017 /PRNewswire/ -- Avon Products, Inc. (NYSE: AVP), a globally recognized leader in direct selling of beauty and related products, today announced its results for the quarter ended June 30, 2017.

"Second-quarter performance fell below our expectations as we cycled a strong quarter last year.  As previously guided, we expect the second half to yield a stronger performance based on our exciting product innovation plans and other initiatives to increase Representative activity," said Sheri McCoy, Chief Executive Officer, Avon Products, Inc. "We continue to implement the strategies defined in our Transformation Plan to better meet the needs of our Representatives and continue progress towards delivering sustainable profitable growth in the longer term."

Highlights for Second Quarter of 2017:

• Revenue decreased 3% to $1.4 Billion; Decreased 4% in constant dollars¹
• Active Representatives and Ending Representatives, both from Reportable Segments, declined 3% and 2%, respectively
• Operating Margin decreased 430 bps to 2.3%; Adjusted¹ Operating Margin decreased 230 bps to 5.0%
• Diluted Loss Per Share From Continuing Operations of $0.12; Adjusted Diluted Loss Per Share From Continuing Operations of $0.03
• Foreign currency favorably impacted both Diluted Loss Per Share and Adjusted Diluted Loss Per Share by an estimated $0.02 per share
• The Company is on track to achieve its 2017 cost savings target of $230 million

Second-Quarter 2017 Income Statement Review (compared with second-quarter 2016)

• Total revenue for Avon Products, Inc. decreased 3% to $1.4 billion and decreased 4% in constant dollars.
  
  
• From reportable segments:
  • Total revenue decreased 3% to $1.4 billion and decreased 4% in constant dollars.
  • Active Representatives declined 3% with decreases in all segments.
  • Average order decreased 1% with growth in South Latin America offset by declines in North Latin America and Europe, Middle East & Africa.
  • Ending Representatives declined 2% primarily due to declines in Asia Pacific and South Latin America.
    
    
• Gross margin and Adjusted gross margin each increased 180 basis points to 62.4%, primarily due to the favorable net impact of price/mix and the net favorable impact of foreign currency transaction gains and foreign currency translation.
  
  
• Operating margin was 2.3% in the quarter, down 430 basis points, while Adjusted operating margin was 5.0%, down 230 basis points. The operating margin comparison was unfavorably impacted by a loss contingency related to a non-U.S. pension plan and higher costs to implement ("CTI") restructuring in the current year. Both the operating margin and Adjusted operating margin year-over-year comparisons were negatively impacted by the net impact of the constant-dollar revenue decline causing deleverage of the Company's fixed expenses; higher bad debt expense, primarily in Brazil; higher Representative, sales leader and field expenses; higher transportation costs, primarily in Russia; and planned investments in advertising related to product launches. These factors were partially offset by approximately 140 basis points of benefit from foreign exchange on operating margin and approximately 130 basis points of benefit from foreign exchange on Adjusted operating margin, the favorable net impact of price/mix, and lower incentive compensation plan expenses.
  
  
• The provision for income taxes was $34 million, compared with $36 million for the second quarter of 2016. On an Adjusted basis, the provision for income taxes was $34 million, compared with $44 million for the second quarter of 2016.
  
  
• Loss from continuing operations, net of tax was $46 million, or a loss of $0.12 per diluted share, compared with income of $36 million, or income of $0.07 per diluted share, for the second quarter of 2016. Adjusted loss from continuing operations, net of tax was $8 million, or a loss of $0.03 per diluted share, compared with income of $37 million, or income of $0.07 per diluted share, for the second quarter of 2016. Earnings allocated to convertible preferred stock had a negative $0.01 impact on Diluted earnings per share and Adjusted diluted earnings per share, in the second quarter of both 2017 and 2016.
  
  
• Loss from discontinued operations, net of tax in the prior year of $3 million, or a loss of $0.01 per diluted share, was associated with the previously separated North America business.

Adjustments to Second-Quarter 2017 GAAP Results to Arrive at Adjusted Results

During the second quarter of 2017, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, increased Diluted earnings per share from continuing operations by $0.09:

• The Company recorded costs to implement restructuring within operating profit of approximately $20 million before and after tax, primarily related to the Transformation Plan.
  
  
• The Company recorded an approximate $18 million charge for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.

*Calculation not meaningful.

Other operating segments and business activities include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products. Other operating segments and business activities also include the business results for Thailand, which was closed in 2016.

Second-Quarter 2017 Segment Review (compared with second-quarter 2016)

With regards to the discussion below on segment revenue, the difference between the reported and constant-dollar revenue growth is the estimated impact of foreign currency translation.

• Europe, Middle East & Africa revenue was down 5%, or 6% in constant dollars, impacted by declines in Active Representatives and average order.
  • Russia revenue was up 7%, or down 7% in constant dollars, driven by declines in average order and Active Representatives.
  • U.K. revenue was down 20%, or 10% in constant dollars, due to declines in Active Representatives and average order.
• South Latin America revenue was up 4%, or relatively flat in constant dollars, driven by higher average order, offset by a decrease in Active Representatives.
  • Brazil revenue was up 7%, or down 2% in constant dollars, primarily driven by a decrease in Active Representatives.
• North Latin America revenue was down 7%, or 5% in constant dollars, driven by lower average order and a decline in Active Representatives.
  • Mexico revenue was down 9%, or 6% in constant dollars, driven by declines in Active Representatives and average order.
• Asia Pacific revenue was down 11%, or 7% in constant dollars, primarily driven by a decrease in Active Representatives.
  • Philippines revenue was down 10%, or 3% in constant dollars, primarily driven by a decline in Active Representatives.

Second-Quarter 2017 Cash Flow Review

• Net cash provided by operating activities of continuing operations was $11 million for the six months ended June 30, 2017, compared with $130 million net cash used in the same period in 2016. The $141 million increase was primarily due to improvements in working capital. The year-over-year comparison also benefited from Industrial Production Tax ("IPI") payments made in Brazil in 2016 that did not recur in 2017 (based on an injunction received in May 2016 that no longer required the Company to make cash deposits related to IPI taxes) and the 2016 contribution to the U.S. pension plan of $20 million.
  
  
• Net cash used by investing activities of continuing operations was $40 million for the six months ended June 30, 2017, compared with $44 million in the same period in 2016.
  
  
• Net cash used by financing activities of continuing operations was $13 million for the six months ended June 30, 2017, as compared to net cash provided of $413 million in the same period in 2016. The $426 million decrease was primarily due to the net proceeds related to the issuance of Series C Preferred Stock received in the prior year.

Transformation Plan

The Company is in year two of its three-year transformation plan focused on three pillars:

• Reduce costs;
• Improve financial resilience; and
• Invest in growth

The Company expects this plan to deliver on its long-term goals of mid-single-digit constant-dollar revenue growth and low double-digit operating margin.

Halfway through the plan period, the Company has seen solid progress against its first two pillars. In 2016, the Company generated approximately $120 million of cost savings and improved financial resilience by significantly strengthening the balance sheet as it lowered debt by approximately $260 million and extended its maturity profile.

In 2017, the Company's cost savings target is $230 million, which includes both run-rate savings from 2016, along with in-year savings from current year initiatives. Based on savings realized through the first half of 2017, the Company believes it is on track to achieve this target. These savings have helped offset the impact of inflation.

With that work well underway, the Company is now firmly focused on the third pillar, to invest in growth, implementing the strategies that position it to maximize the power of Avon and drive profitable growth. The Company has defined the focus areas, evaluated detailed plans, and has started putting in place the key enablers to drive the roadmap for growth, enabling Avon to become the leading social beauty company. The key enablers include:

• Delivering a competitive, seamless experience for the Representative;
• Ensuring she has the right product to sell;
• Ensuring that the Company is playing and winning in the right geographies.

The investment in growth includes spending related to media and social selling as well as spending related to service model evolution and information technology, primarily capital expenditures, which will be aimed at improving the overall Representative experience.

Full-Year 2017 Outlook

The following guidance is given on a Non-GAAP basis. The Company is not able to provide a reconciliation of the Non-GAAP financial measures to GAAP because certain items that impact these measures, such as the timing and amount of charges related to our Transformation Plan and the impact of foreign currency fluctuations, which could have a material impact on GAAP results for the guidance period, have not yet occurred and are not possible to estimate at this time.

As previously guided in May, for full-year 2017, the Company expects constant-dollar revenue growth in the low single-digits, Adjusted operating margin expansion of 100 to 140 bps over the prior year and free cash flow to be slightly positive including the expected $65 million in increased capital expenditures. The Company defines free cash flow as net cash provided (used) by operating activities of continuing operations less capital expenditures. These expectations are based on forward foreign exchange rates, which imply modest tailwinds from currency and are underpinned by Active Representative growth in the range of 0% to 1% in the second half of the year.

Based on second-quarter performance, the Company now expects to be at the low end of the guidance ranges provided. Revenue growth is expected to be driven by the Company's Active Representative growth target of 0%-1% in the second half, supported by its innovation pipeline and the expected impact of ongoing Transformation Plan initiatives. This growth, along with continued cost savings initiatives, is expected to support operating margin expansion. The Company's incremental investments in capital, previously guided at $65 million, are now expected to be approximately $20 million lower, which will increase free cash flow.

Conference call

Avon will conduct a conference call at 9:00 a.m. Eastern Time today to discuss its quarterly results. The dial-in number for the call is (800) 843-2086 in the U.S. or (706) 643-1815 from non-U.S. locations (conference ID number: 43095216). The call and related slide presentation will be webcast live at www.avoninvestor.com and can be accessed or downloaded from that site for a period of one year.

About Avon Products, Inc.

Avon is the Company that for 130 years has proudly stood for beauty, innovation, optimism and, above all, for women. Avon products include well-recognized and beloved brands such as ANEW, Avon Color, Avon Care, Skin-So-Soft, and Advance Techniques sold through approximately 6 million active independent Avon Sales Representatives. Learn more about Avon and its products at www.avoncompany.com.

Footnotes

¹ "Adjusted" items refer to financial measures that are derived from measures calculated in accordance with generally accepted accounting principles in the United States ("GAAP"), but which have been adjusted to exclude certain items. Other Adjusted financial measures that the Company refers to include Constant dollar ("C$") items. All of these adjusted items are Non-GAAP financial measures as described below under "Non-GAAP Financial Measures." These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP.  Please refer to the Company's "Non-GAAP Financial Measures" description at the end of this release and the reconciliations the Company provides of these Non-GAAP financial measures to their comparable GAAP measures.

Forward-Looking Statements

Statements in this release that are not historical facts may be forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed from time to time in reports filed by Avon Products, Inc. with the U.S. Securities and Exchange Commission, including Forms 8-K, 10-Q, and 10-K. Some forward-looking statements in this release include and concern the Company's outlook and expected results, cost reduction actions and savings, the Company's Transformation Plan, including planned executive changes, and the impact of foreign currency, taxes and tax rates amongst others. These forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievement of Avon to be materially different from any future results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's ability to improve its financial and operational performance, its ability to achieve the anticipated benefits of the strategic partnership with Cerberus, the impact of a continued decline in the Company's business results, the possibility of business disruption, competitive uncertainties, and general economic and business conditions in its markets, including fluctuations in foreign currency exchange rates. There can be no assurance that actual results will not differ materially from management's expectations. Therefore, you should not rely on any of these forward-looking statements as predictors of future events. Any forward-looking statements speak only as of the date they are made. The Company does not undertake to update any such forward-looking statements.

Non-GAAP Financial Measures

To supplement the Company's financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), the Company discloses operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. The Company also refers to these adjusted financial measures as constant dollar items, which are Non-GAAP financial measures. The Company believes these measures provide investors an additional perspective on trends and underlying business results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, the Company calculates current-year results and prior-year results at constant exchange rates, which are updated on an annual basis as part of the Company's budgeting process. Foreign currency impact is determined as the difference between actual growth rates and constant-dollar growth rates.

The Company also presents cost of sales, gross margin, selling, general and administrative expenses, selling, general and administrative expenses as a percentage of revenue, operating profit, operating margin, income (loss) from continuing operations, before taxes, income taxes, income (loss) from continuing operations, net of tax, diluted earnings (loss) per share from continuing operations and effective tax rate on a Non-GAAP basis. The Company refers to these Non-GAAP financial measures as "Adjusted." The Company has provided quantitative reconciliations of the difference between the Non-GAAP financial measures and the financial measures calculated and reported in accordance with GAAP. See "Supplemental Schedules -  Non-GAAP Financial Measures" within this release for these quantitative reconciliations.

The Company uses the Non-GAAP financial measures to evaluate its operating performance. These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company believes investors find the Non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a disproportionate positive or negative impact on the Company's financial results in any particular period. The Company believes that it is meaningful for investors to be made aware of the impacts of: 1) CTI restructuring initiatives; 2) a charge for a loss contingency related to a non-U.S. pension plan ("Loss contingency"); 3) charges related to the deconsolidation of the Company's Venezuela operations as of March 31, 2016 ("Venezuelan special items"); and 4) income tax benefits realized in the first quarter of 2016 as a result of tax planning strategies and in the second quarter of 2016 primarily due to the release of a valuation allowance associated with Russia ("Special tax items").

The Loss contingency includes the impact on the Consolidated Statements of Operations during the second quarter of 2017 caused by a charge of approximately $18 million for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.

The Venezuelan special items include the impact on the Consolidated Statements of Operations in 2016 caused by the deconsolidation of the Company's Venezuelan operations for which the Company recorded a loss of approximately $120 million in other expense, net. The loss was comprised of approximately $39 million in net assets of the Venezuelan business and approximately $81 million in accumulated foreign currency translation adjustments within accumulated other comprehensive loss associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy.

The Special tax items include the impact during the second quarter of 2016 on the provision for income taxes in the Consolidated Statements of Operations primarily due to the release of a valuation allowance associated with Russia of approximately $7 million. Special tax items also include the impact during the first quarter of 2016 on the provision for income taxes in the Consolidated Statements of Operations due to an income tax benefit of approximately $29 million recognized as the result of the implementation of foreign tax planning strategies.

SOURCE Avon Products, Inc.

Related Links

http://www.avon.com