Avon Reports Third-Quarter 2012 Results and Provides Goals for Future Performance

NEW YORK, Nov. 1, 2012 /PRNewswire/ -- Avon Products, Inc. (NYSE: AVP) today reported third-quarter 2012 results and provided goals for future performance. "Avon's third-quarter results remain disappointing.  The challenges that Avon faces developed over time, not overnight, and it will take time to implement the solutions as well," said Sheri McCoy, Chief Executive Officer.  "However, we have identified the first critical actions to return Avon to a position of financial health and improve our competitive position.  With a clear focus on growing the top-line, managing costs, and improving our working capital, I am confident that we are moving Avon toward a steady recovery."

Third-Quarter 2012 (compared with third-quarter 2011)

For the third quarter, total revenue of $2.6 billion decreased 8%, or increased 1% in constant dollars. Total units grew 1% and price/mix was flat during the quarter. Active Representatives were down 1%.

Avon Beauty sales declined 9%, or flat in constant dollars. On a reported basis, fragrance was down 7%, color and skincare both declined 11%, and personal care was down 9%. On a constant-dollar basis, fragrance increased 2% while color and skincare declined 1% and 3%, respectively. Personal care was flat.

Third-quarter 2012 gross margin was 61.2%, 270 basis points lower than the prior-year quarter, due to the net unfavorable impact of product mix and pricing, higher supply chain costs primarily due to costs associated with obsolescence as well as the negative impact from foreign exchange.

Operating profit was $106 million in the quarter and operating margin was 4.2%. Adjusted Non-GAAP operating profit was $152 million and adjusted Non-GAAP operating margin was 5.9%, down 440 basis points from the third quarter of 2011.  The decline was due to lower gross margin and increases in overhead costs, primarily due to higher employee compensation costs. The negative impact of foreign exchange was also a factor. This was offset by an $18 million decline in advertising, down 24% to $58 million.

Based on the continued decline in revenue performance in China and corresponding lowering of our long-term growth estimates, we completed an interim impairment assessment of the fair value of goodwill related to the business, which resulted in a Q3 non-cash impairment charge of $44 million, or $0.10 per share.

Third-quarter 2012's effective tax rate was 58.2%, versus 31.5% in the third quarter of 2011. The tax rate was unfavorably impacted by 21.0 points from the goodwill impairment charge related to our operations in China, for which no tax benefit was recorded. On an adjusted Non-GAAP basis, the effective tax rate was 37.2%, versus 31.5% in the third-quarter 2011, due primarily to lower benefits from audit settlements and statute expirations.

Income from continuing operations in the third quarter of 2012 was $33 million, or $0.07 per diluted share. Adjusted Non-GAAP income from continuing operations was $78 million, or $0.17 per diluted share.

Net cash provided by operating activities was $220 million for the nine months ended September 30, 2012, compared with $247 million in the same period of 2011, as lower net income was partially offset by improvements in working capital, lower contributions to the U.S. pension plan, and a payment in 2011 associated with a long-term incentive compensation plan of $36 million. The overall net cash used in the nine months ended September 30, 2012 was $148 million, compared with a use of $192 million for the same period in 2011, primarily due to lower capital expenditures.

Avon's net debt (total debt less cash) for the third quarter of 2012 was $2.2 billion, up $152 million from the year-end level.

Goals for Future Performance

Management is focused on stabilizing the business and returning Avon to sustainable growth and has set financial goals of mid single-digit constant-dollar revenue growth and a low double-digit operating margin over the next three years.  Management has the team fully aligned around actions that will accelerate top-line growth, reduce costs and improve working capital. Management is also targeting cost savings of at least $400 million by the end of the three years to be largely driven by a reduction in Selling, General and Administrative expenses (SG&A).  It also expects that there will be charges associated with the achievement of these goals.  

Earlier today, the company announced a reduction in its quarterly dividend from $.23 per share to $.06 per share.  This is part of an overall review of the capital structure and is consistent with prior communication that the company would assess the dividend in light of current operating performance as well as Avon's peer group.  This dividend reduction, in conjunction with continued efforts to improve working capital, should help provide financial flexibility. 

Third-Quarter 2012 Regional Highlights (compared with third-quarter 2011)

Note: Effective in the second quarter of 2012, the Dominican Republic was included in Latin America, whereas in prior periods it had been included in North America. The impact was not material to either segment. Accordingly, Latin America amounts include the results of the Dominican Republic for all periods presented.

• Third-quarter constant-dollar revenue was driven by growth in average order as well as an increase in Active Representatives.
• Brazil was down 19%, or up 2% in constant dollars, driven by increases in both Active Representatives and average order.
• Mexico was up 1%, or 10% in constant dollars, driven primarily by an increase in Active Representatives as well as higher average order.
• Venezuela grew 6% in both reported and constant dollars, as average order benefited  from the year-over-year inflationary impact on pricing, but was partially offset by a decline in Active Representatives.
• The decline in adjusted Non-GAAP operating margin was due to lower gross margin, primarily impacted by the net unfavorable impact of pricing and mix, including planned initiatives to flow excess inventory and the negative impact of foreign exchange. This gross margin decline was partially offset by lower advertising spend and lower investments in Representative Value Proposition⁽²⁾ ("RVP"), both primarily in Brazil. Lower bad debt and lower variable compensation were also factors.

Note: 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. Accordingly, Europe, Middle East & Africa amounts include the results of Central and Eastern Europe and Western Europe, Middle East & Africa for all periods presented. 

• Third-quarter constant-dollar revenue declined due to lower average order, partially offset by an increase in Active Representatives. The revenue decline was impacted by approximately 2 points due to a benefit from a Value Added Tax ("VAT") settlement in the U.K. in the prior-year period.  
• Russia was down 9%, or up 1% in constant dollars, due to higher average order partially offset by a decline in Active Representatives.
• U.K. was down 25%, or down 23% in constant dollars. Revenue in the U.K. was negatively impacted by approximately 12 points due to the benefit of the VAT settlement in the prior-year period that did not recur in 2012. The decline was also due to lower average order and a decrease in Active Representatives.
• Turkey was up 9%, or up 14% in constant dollars, primarily due to growth in Active Representatives.
• South Africa was down 14%, or up 2% in constant dollars, primarily due to growth in Active Representatives.
• The decline in adjusted Non-GAAP operating margin was partly due to the non-recurring benefit of 2 points from the VAT settlement that occurred in 2011. In addition, lower gross margin was caused by the net unfavorable impact of pricing and mix and negative overhead leverage. Operating margin was also negatively impacted by increased overhead expenses, primarily due to higher employee compensation costs.  Also, higher investments in RVP, mainly in Turkey, and higher advertising expenses, primarily in Russia, had an impact.  Higher bad debt expense was also a factor.

Note: Effective in the second quarter of 2012, the Dominican Republic was included in Latin America, whereas in prior periods it had been included in North America. The impact was not material to either segment. Accordingly, North America amounts exclude the results of the Dominican Republic for all periods presented.

• The North America Avon business (which excludes Silpada) was down 6%, due to a decline in Active Representatives, partially offset by higher average order due to stronger performance in Fashion and Home and Representative mix.
• Silpada sales declined 25% due to a decline in average order as well as a decline in Active Representatives.
• The decline in adjusted Non-GAAP operating margin was due to increased investments in RVP primarily related to the One Simple Sales Model implementation as well as higher brochure costs. Gross margin also declined largely due to higher obsolescence and the net unfavorable impact of pricing and mix, partially offset by savings related to the closing of a manufacturing facility in the U.S.

• Third-quarter constant-dollar revenue decreased due to a decline in Active Representatives, partially offset by higher average order.  The decline in the region's Active Representatives was primarily due to China, where it has become apparent that our business is predominantly retail. We no longer include as Representatives those individuals who place their orders through retail locations.
• Revenue in China declined 31% on both a reported and constant-dollar basis due to ongoing business challenges in that market.
• The Philippines grew 6%, or 4% in constant dollars, primarily due to growth in Active Representatives.
• The region's adjusted Non-GAAP operating margin decline was largely driven by lower gross margin, which was caused primarily by the net unfavorable impact of mix and pricing as well as foreign exchange. Higher bad debt expense and field incentives were also factors. Partially offsetting these items was lower overhead, primarily due to headcount reduction.

Avon will conduct a conference call at 8:30 A.M. today to discuss the 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: 38905905). The call will be webcast live at www.avoninvestor.com and can be accessed or downloaded from that site for a period of one year. Please refer to the Form 10-Q for additional information on Avon's results for the quarter.

Avon, the company for women, is a leading global beauty company, with over $11 billion in annual revenue. As the world's largest direct seller, Avon markets to women in more than 100 countries through over 6 million active independent Avon Sales Representatives. Avon's product line includes beauty products, as well as fashion and home products, and features such well-recognized brand names as Avon Color, ANEW, Skin-So-Soft, Advance Techniques, Avon Naturals, and mark. Learn more about Avon and its products at www.avoncompany.com.

Footnotes

⁽¹⁾ "Adjusted" items refer to financial results presented in accordance with U.S. GAAP that have been adjusted to exclude certain costs as described below, under "Non-GAAP Financial Measures."

⁽²⁾ "RVP" - In the first quarter of 2012 we revised the definition of Representative Value Proposition to represent the expenses of activities directly associated with Representatives and sales leaders including the cost of incentives and sales aids (net of any fees charged). RVP no longer includes strategic investments such as the Service Model Transformation and Web enablement, and it no longer adjusts for the impact of volume.

Non-GAAP Financial Measures

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including revenue growth, operating profit, adjusted Non-GAAP operating profit, operating margin, and adjusted Non-GAAP operating margin. We refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends.  To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates.

We also present gross margin, selling, general and administrative expenses as a percentage of revenue, net global expenses, operating profit, operating margin, income from continuing operations, earnings per share from continuing operations and effective tax rate on a Non-GAAP basis.  The discussion of our segments presents operating profit and operating margin on a Non-GAAP basis.  We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measure and the financial measure calculated and reported in accordance with GAAP.  The Company uses the Non-GAAP financial measures to evaluate its operating performance and believes that it is meaningful for investors to be made aware of, on a period-to-period basis, the impacts of costs to implement ("CTI") restructuring initiatives, and the goodwill impairment and intangible asset charge related to China ("Impairment charge").  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 Impairment charge includes the impact on the Statement of Income caused by the goodwill impairment and intangible asset charge related to China in 2012.

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. 

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements in this release that are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "estimate," "project," "forecast," "plan," "believe," "may," "expect," "anticipate," "intend," "planned," "potential," "can," "expectation" and similar expressions, or the negative of those expressions, may identify forward-looking statements. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Such 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, and there can be no assurance that actual results will not differ materially from management's expectations. Such factors include, among others, the following:

• our ability to implement the key initiatives of, and realize the gross and operating margins and projected benefits (in the amounts and time schedules we expect) from, our stabilization strategies, multi-year restructuring programs and other initiatives, product mix and pricing strategies, Enterprise Resource Planning, customer service initiatives, sales and operation planning process, outsourcing strategies, Internet platform and technology strategies, information technology and related system enhancements and cash management, tax, foreign currency hedging and risk management strategies;
• our ability to realize the anticipated benefits (including any financial projections concerning, for example, future revenue, profit, cash flow and operating margin increases) from our stabilization strategies, and multi-year restructuring programs or other initiatives on the time schedules or in the amounts that we expect, and our plans to invest these anticipated benefits ahead of future growth;
• the possibility of business disruption in connection with our stabilization strategies, multi-year restructuring programs or other initiatives;
• our ability to realize sustainable growth from our investments in our brand and the direct-selling channel;
• our ability to transition our business in North America, including enhancing our Sales Leadership model and optimizing our product portfolio;
• a general economic downturn, a recession globally or in one or more of our geographic regions, or sudden disruption in business conditions, and the ability of our broad-based geographic portfolio to withstand an economic downturn, recession, cost inflation, commodity cost pressures, economic or political instability, competitive or other market pressures or conditions;
• the effect of political, legal, tax and regulatory risks imposed on us in the United States and abroad, our operations or our Representatives, including foreign exchange or other restrictions, adoption, interpretation and enforcement of foreign laws, including in non-U.S. jurisdictions such as Brazil, Russia, Venezuela and Argentina, and any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny in China;
• our ability to effectively manage inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;
• our ability to achieve growth objectives, particularly in our largest markets, such as the U.S., and developing and emerging markets, such as Brazil or Russia;
• our ability to successfully identify new business opportunities and identify and analyze acquisition candidates, secure financing on favorable terms and negotiate and consummate acquisitions as well as to successfully integrate or manage any acquired business;
• the challenges to our businesses, such as Silpada and China, including the effects of rising costs, macro-economic pressures, competition, any potential strategic decisions, and the impact of declines in expected future cash flows and growth rates, and a change in the discount rate used to determine the fair value of expected future cash flows, which have impacted, and may continue to impact, the estimated fair value of the recorded goodwill and intangible assets;
• the effect of economic factors, including inflation and fluctuations in interest rates and currency exchange rates, as well as the designation of Venezuela as a highly inflationary economy, foreign exchange restrictions and the potential effect of such factors on our business, results of operations and financial condition;
• general economic and business conditions in our markets, including social, economic and political uncertainties in the international markets in our portfolio;
• any developments in or consequences of investigations and compliance reviews, and any litigation related thereto, including the ongoing investigations and compliance reviews of Foreign Corrupt Practices Act and related U.S. and foreign law matters in China and additional countries, as well as any disruption or adverse consequences resulting from such investigations, reviews, related actions or litigation;
• key information technology systems, process or site outages and disruptions;
• disruption in our supply chain or manufacturing and distribution operations;
• other sudden disruption in business operations beyond our control as a result of events such as acts of terrorism or war, natural disasters, pandemic situations, large-scale power outages and similar events;
• the risk of product or ingredient shortages resulting from our concentration of sourcing in fewer suppliers;
• the quality, safety and efficacy of our products;
• the success of our research and development activities;
• our ability to attract and retain key personnel;
• competitive uncertainties in our markets, including competition from companies in the cosmetics, fragrances, skincare and toiletries industry, some of which are larger than we are and have greater resources;
• our ability to implement our Sales Leadership program globally, to generate Representative activity, to increase the number of consumers served per Representative and their engagement online, to enhance the Representative and consumer experience and increase Representative productivity through field activation programs, execution of Service Model Transformation and other investments in the direct-selling channel, and to compete with other direct-selling organizations to recruit, retain and service Representatives and to continue to innovate the direct-selling model;
• the impact of the typically seasonal nature of our business, adverse effect of rising energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences, particularly given the global nature of our business and the conduct of our business in primarily one channel;
• our ability to protect our intellectual property rights;
• the risk of an adverse outcome in any material pending and future litigations or with respect to the legal status of Representatives;
• our ratings, our access to cash and short and long-term financing and ability to secure financing, or financing at attractive rates;
• our ability to comply with certain covenants in our debt instruments, including the impact of any significant non-cash impairments, significant currency devaluations,  significant legal or regulatory settlements, or obtain necessary waivers from compliance with, or necessary amendments to, such covenants, and the impact any non-compliance may have on our ability to secure financing;
• the impact of possible pension funding obligations, increased pension expense and any changes in pension regulations or interpretations thereof on our cash flow and results of operations; and
• the impact of changes in tax rates on the value of our deferred tax assets and our ability to realize foreign tax credits in the U.S.

Additional information identifying such factors is contained in Item 1A of our 2011 Form 10-K for the year ended December 31, 2011. We undertake no obligation to update any such forward-looking statements.

SOURCE Avon Products, Inc.