Avon Reports Second-Quarter 2018 Results

LONDON, Aug. 2, 2018 /PRNewswire/ -- Avon Products, Inc. (NYSE: AVP) today announced its results for the quarter ended June 30, 2018.

Jan Zijderveld, Avon CEO said, "Entering my seventh month at Avon, I am encouraged by improved revenue growth in 3 of our top 5 markets and the promising trends we are seeing across the majority of the rest of our business. This is underpinned by our improving service quality and operational efficiencies, and in turn reflected in our higher operating margin. However, we are not yet satisfied with the overall operating results of the quarter."

Mr. Zijderveld continued, "The senior leadership team and I continue to focus on immediate corrective priorities, while also finalizing plans for Avon's long-term success. We are prioritizing achieving profitable, sustainable topline growth by focusing on our Representative experience and satisfaction through enhanced training for 500,000 Representatives in the second half, as well as new sales incentives programs, better service and improved forecasting. We are becoming more agile, halving the time to bring on-trend products to market with over 200 expected to launch in the second half. We will support our second half global launches with an additional $30 million of advertising and marketing spend. And, finally, we are placing digital at the center of all actions to drive our future progress, enhancing our digital and e-commerce capabilities through initiatives such as our new mobile e-brochure, which is locally customizable and distributed via social media. This is an important first step to build a digital social selling beauty company."

"Importantly, Avon is rapidly injecting new talent and capabilities into the business, most notably a new Chief Digital Officer and three new General Managers in our top markets, while we continue to institute a performance culture through increased accountability, agility and speed of execution," concluded Mr. Zijderveld.

Jamie Wilson, Avon CFO said, "During the second quarter, we successfully completed the early redemption of our 2019 bonds to reduce our debt and further strengthen our balance sheet. We also continued to generate efficiencies, and will strive to improve on these second quarter trends in the second half. We are strategically redirecting investments to support underlying growth initiatives."

Highlights for Second Quarter of 2018:

• Total Reportable Segment Revenue decreased 3% to $1.3 billion, or increased 2% in constant dollars¹, both including a 4% reporting benefit due to the impact of adopting the new revenue recognition standard required by generally accepted accounting principles in the United States ("GAAP")
• The Brazil truckers' strike reduced Revenue and constant dollar Revenue by approximately 1%
• Active Representatives and Ending Representatives, both from Reportable Segments, each declined 4%, or each declined approximately 3%, excluding the Brazil truckers' strike
• Operating Margin increased 160 bps to 3.9% and Adjusted Operating Margin increased 60 bps to 5.7%, both including a decline of approximately 10 bps due to the impact of the new revenue recognition standard
• Diluted Loss Per Share From Continuing Operations ("Diluted Loss Per Share") of $0.09 and Adjusted Diluted Loss Per Share From Continuing Operations ("Adjusted Diluted Loss Per Share") of $0.03, both including a negligible benefit due to the impact of the new revenue recognition standard

New Revenue Recognition Standard (Accounting Standards Update 2014-09, Revenue from Contracts with Customers codified as Accounting Standards Codification Topic 606 ("ASC" 606))

As previously disclosed, during the first quarter, the Company adopted GAAP revenue recognition standard, ASC 606. The Company adopted the standard as a cumulative-effect adjustment as of January 1, 2018, therefore, comparative information for prior periods was not restated. The new standard has a significant impact on the presentation of sales incentives and Representative fees and associated costs, primarily for brochures.

The impact of the change in accounting for revenue recognition on second-quarter 2018 performance is summarized on pages 16-18 of this release.

Second-Quarter 2018 Income Statement Review (compared with second-quarter 2017)

• Total revenue for Avon Products, Inc. decreased 3% to $1.4 billion, or increased 1% in constant dollars, both including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard and both including an approximate 1% unfavorable impact from the Brazil truckers' strike.

• From reportable segments:
• Total revenue decreased 3% to $1.3 billion, or increased 2% in constant dollars, both including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard and both including an approximate 1% unfavorable impact from the Brazil truckers' strike.
• Active Representatives declined 4% driven by decreases in South Latin America, primarily Brazil, Europe, Middle East & Africa and North Latin America, or declined approximately 3% excluding the Brazil truckers' strike.
• Ending Representatives declined 4% with decreases reported in all segments.
• Average order in constant dollars increased 6%, including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Growth in South Latin America, North Latin America and Asia Pacific was offset by a decline in Europe, Middle East & Africa.

• Gross margin and Adjusted gross margin each decreased 230 basis points to 60.1%, including a decline of approximately 330 basis points due to the impact of adopting the new revenue recognition standard. Gross margin and Adjusted gross margin were favorably impacted by non-recurring Brazil net tax recoveries and the net impact of price/mix, partially offset by higher supply chain costs.

• Operating margin was 3.9% in the quarter, up 160 basis points, while Adjusted operating margin was 5.7%, up 60 basis points, both including a decline of approximately 10 basis points due to the implementation of the new revenue recognition standard. The Operating margin year-over-year comparison was favorably impacted by a loss contingency recorded in the prior year related to a non-U.S. pension plan. Both the Operating margin and Adjusted operating margin year-over-year comparisons were favorably impacted by non-recurring Brazil net tax recoveries.

• The provision for income taxes was $37 million, compared with $34 million for second-quarter 2017. On an Adjusted basis, the provision for income taxes was $31 million, compared with $34 million for second-quarter 2017.

• Net loss was $37 million, including a benefit of approximately $2 million due to the impact of the new revenue recognition standard, compared with a loss of $46 million for second-quarter 2017. Adjusted net loss was $8 million, including a benefit of approximately $2 million due to the impact of the new revenue recognition standard, compared with a loss of $8 million for second-quarter 2017.

• Diluted loss per share was $0.09, including a negligible benefit due to the impact of the new revenue recognition standard, compared with a Diluted loss per share of $0.12 for second-quarter 2017. Adjusted diluted loss per share was $0.03, including a negligible benefit due to the impact of the new revenue recognition standard, compared with an Adjusted diluted loss per share of $0.03 for second-quarter 2017.

Adjustments to Second-Quarter 2018 GAAP Results to Arrive at Adjusted Results

During the second quarter of 2018, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, reduced Diluted loss per share by approximately $0.06:

• The Company recorded costs to implement ("CTI") restructuring within operating profit of approximately $24 million (before and after tax), primarily related to the Transformation Plan.

• The Company recorded one-time tax reserves of approximately $6 million associated with its uncertain tax positions.

Second-Quarter 2018 Segment Review (compared with second-quarter 2017)

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.

Total Reportable Segment revenue decreased 3% to $1.3 billion, or increased 2% in constant dollars, both including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by declines in Active Representatives, primarily in Brazil, Russia and Mexico. The Company experienced continued variability with challenges in key markets, particularly Brazil, including the impact of the truckers' strike.

• Europe, Middle East & Africa revenue was up 1%, or relatively unchanged in constant dollars, both including a benefit of approximately 3% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by a decrease in Active Representatives.
• Russia revenue was down 5%, or up 3% in constant dollars, both including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by a decrease in Active Representatives, partially offset by higher average order.
• U.K. revenue was down 3%, or 9% in constant dollars, both including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by a decrease in Active Representatives, partially offset by higher average order.

• South Latin America revenue was down 8%, or up 3% in constant dollars, both including a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by a decrease in Active Representatives, partially offset by higher average order. Revenue and constant-dollar revenue were primarily impacted by a decline in Brazil, partially offset by growth in Argentina, driven by inflationary pricing.
• Brazil revenue was down 13%, or 2% in constant dollars, both including a benefit of approximately 9% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by a decrease in Active Representatives, as well as lower average order.
• Brazil suffered an outsized impact from the trucking strike in the second quarter, which resulted in lower sales, slower cash collection, higher inventory levels and loss of Representatives. The Company is taking corrective actions to re-energize the market including implementing new Representative training programs, implementing Sales Leader and Top Seller incentives, and launching relevant product offerings supported by an increased media investment of $10 million in the second half of 2018.

• North Latin America revenue was relatively unchanged, or up 3% in constant dollars, both including a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by a decrease in Active Representatives, partially offset by higher average order.
• Mexico revenue was up 2%, or up 6% in constant dollars, both including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by higher average order, offset by a decrease in Active Representatives.

• Asia Pacific revenue was down 1%, or up 1% in constant dollars, both including a benefit of approximately 1% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by higher average order, offset by a decrease in Active Representatives.
• Philippines revenue was down 3%, or up 2% in constant dollars, both including a benefit of approximately 2% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were impacted by an increase in Active Representatives, offset by lower average order.

Second-Quarter 2018 Cash Flow Review (compared with second-quarter 2017)

• Net cash used by operating activities of continuing operations was $107 million for the six months ended June 30, 2018, compared with net cash provided by operating activities of continuing operations of $11 million in the same period in 2017. The approximate $118 million increased use of net cash from continuing operating activities was primarily due to higher inventory purchases, the timing of payments, the costs associated with the prepayment of the Company's 6.5% Notes in the second quarter of 2018, and a $10 million contribution to the U.S. pension plan, partially offset by lower net receivables.

• Net cash used by investing activities of continuing operations was $50 million for the six months ended June 30, 2018, compared with $40 million in the same period in 2017. The approximate $10 million increased use of net cash from continuing investing activities was primarily due to higher capital expenditures.

• Net cash used by financing activities of continuing operations was $252 million for the six months ended June 30, 2018, compared with $13 million in the same period in 2017. The approximate $239 million increased use of net cash from continuing financing activities was primarily due to the prepayment of the Company's 6.5% Notes in the second quarter of 2018.

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 +1 (706) 643-1815 from non-U.S. locations (conference ID number: 1961989). 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. Please note that the Company intends to file its Form 10-Q on August 3, 2018.

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 GAAP, but which have been adjusted to exclude certain items. "Like-for-like" refers to comparable year-over-year figures that exclude the impact of the adoption of ASC 606. 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

This press release contains "forward-looking statements" that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements relating to the Company's growth and long-term success, improved representative engagement and service, efforts to implement new digital strategies and advertising spend.  Because forward-looking statements inherently involve risks and uncertainties, actual future results may differ materially from those expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, the possibility of business disruption, competitive uncertainties, and general economic and business conditions in Avon's markets as well as the other risks detailed in Avon's filings with the Securities and Exchange Commission. Avon undertakes no obligation to update any statements in this press release for changes that happen after the date of this release.

AVON PRODUCTS, INC.
SUPPLEMENTAL SCHEDULE
(Unaudited)
(In millions)

The Company adopted ASC 606, as a cumulative-effect adjustment to retained earnings, as of January 1, 2018. Comparative information for prior periods has not been restated. Therefore, this supplemental schedule provides balances without the adoption of ASC 606 to enhance comparability to the prior year.  We applied the transition guidance to all outstanding contracts at January 1, 2018.

We recorded a cumulative-effect adjustment upon adoption of the new revenue recognition standard as of January 1, 2018 comprised of the following:

• a reduction to retained earnings of $52.7 before taxes ($41.1 after tax), with a corresponding impact to deferred income taxes of $11.6;

• a reduction to prepaid expenses and other of $54.9;

• an increase to inventories of $39.3; and

• an increase to other accrued liabilities of $37.1 due to the net impact of the establishment of a contract liability of $91.8 for deferred revenue where our performance obligations are not yet satisfied, which is partially offset by a reduction in the sales incentive accrual of $54.7.

The impact of the change in accounting standard on second-quarter 2018 performance is:

The impact of the change in accounting standard on the first and second-quarter 2018 performance is:

Non-GAAP Financial Measures

To supplement the Company's financial results presented in accordance with 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) before taxes, income taxes, net income (loss), diluted earnings (loss) per share 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 Non-GAAP financial measures to the most directly comparable financial measures calculated and reported in accordance with GAAP. See "Supplemental Schedule -  Non-GAAP Financial Measures" within this release for these quantitative reconciliations.

The Company uses 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; and 2) one-time tax reserves associated with the Company's uncertain tax positions ("Special tax items"); and 3) a charge for a loss contingency related to a non-US pension plan ("Loss contingency").

The Special tax items include the impact during the first and second quarters of 2018 on the provision for income taxes in the Consolidated Statements of Operations due to one-time tax reserves of approximately $9.2 million and $5.5 million, respectively, associated with the Company's uncertain tax positions. There was no Special tax impact in 2017.  

SOURCE Avon Products, Inc.

Related Links

http://www.avon.com