Avon Reports Third-Quarter 2018 Results

LONDON, Nov. 1, 2018 /PRNewswire/ -- Avon Products, Inc. (NYSE: AVP) today announced its results for the quarter ended September 30, 2018.

Jan Zijderveld, Avon CEO, said, "As we said at the recent investor day, it is going to take time for us to execute this turn-around. While we are not yet satisfied with the overall quarterly results, I am encouraged by the speed at which initiatives are being adopted in our markets. We are beginning to see benefits from recruiting and training initiatives that have been put in place in countries around the world."

Mr. Zijderveld continued, "At its heart, Avon is the world's largest social selling company, focused on improving the lives of women.  Rebooting our sales model and returning the 6 million women to the center of everything we do, making it easier for her to succeed with Avon, will ensure our long-term success. While we are still in the beginning stages of our turn-around, we are beginning to see early results of various initiatives.  Through Avon Opportunity Meetings, we are bringing significantly more people in our Asia Pacific region, global training programs are exceeding participation goals and faster launched, on-trend beauty products are being met with strong acceptance in the marketplace. We know that in order to make "Her" successful, we have to move more quickly than we ever have in the past, make it easier for Her to do business and help Her improve Her earnings."

Jamie Wilson, Avon CFO, said, "During the third quarter, we completed the restructuring actions associated with the cost savings program initiated in 2016, exiting 2018 with run rate savings of $350 million, as targeted. We began implementing programs against our new cost savings initiative announced last month. The new initiative focuses on simplifying the business to generate efficiencies, improve revenue management, and generate interest and tax savings and is expected to free up approximately $400 million over the next three years to support underlying growth initiatives. In addition, our focus on revenue management contributed to our ability to expand gross margin 10 basis points in the quarter."

Highlights for Third Quarter of 2018:

• Total Reportable Segment Revenue in reported currency increased 1% to $1.4 billion. Adjusted¹ Total Reportable Segment Revenue in constant dollars¹ decreased 4% on a like-for-like¹ basis
• Gross Margin of 62.2%. Adjusted Gross Margin increased 10 basis points to 61.3% on a like-for-like basis, favorably impacted by the net impact of price and mix
• Active Representatives and Ending Representatives, both from Reportable Segments, declined 5% and 6%, respectively
• Operating Margin increased 690 bps to 13.1%. Adjusted Operating Margin decreased 280 bps to 3.8% on a like-for-like basis, reflecting key investments in field, advertising and brochure
• Diluted Earnings Per Share of $0.21. Adjusted Diluted Earnings Per Share of $0.02 on a like-for-like basis
• Foreign currency unfavorably impacted Diluted Earnings Per Share by an estimated $0.12 per share and Adjusted Diluted Earnings Per Share by an estimated $0.04 per share, driven by the strength of the U.S. dollar against the currencies of the countries in which the Company operates
• Structural and operational changes resulted in continued improvement in the Effective Tax Rate, on track to deliver a 15% reduction in the annualized Adjusted Effective Tax Rate to 65%

Brazil IPI Tax Reversal

In May 2015, an Executive Decree on certain cosmetics went into effect in Brazil which increased the amount of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products subject to IPI.

As of September 30, 2018, due in part to recent judicial decisions across the industry and other developments, the Company has concluded, supported by the opinion of legal counsel, that the Executive Decree is unconstitutional.

The Company has therefore classified the risk of loss during ongoing judicial reviews as reasonably possible but not probable, and accordingly, released the liability accrued to-date of $195 million and ceased accruing the IPI taxes from October 1, 2018.

The Company considered the release of the liability as a non-GAAP adjustment, and therefore, adjusted for the IPI tax of $168 million (which was recorded in total revenue in the Consolidated Income Statements), the associated interest of $27 million (which was recorded in other expense, net in the Consolidated Income Statements), and the associated tax reserve of $66 million in the Adjusted non-GAAP results during the three and nine months ended September 30, 2018.

New Revenue Recognition Standard (Accounting Standards Codification Topic 606 ("ASC" 606))

As previously disclosed, during the first quarter of 2018, the Company adopted the new 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 third-quarter and year-to-date 2018 performance is summarized on pages 18-20 of this release.

Third-Quarter 2018 Income Statement Review (compared with third-quarter 2017)

• Total revenue for Avon Products, Inc. was relatively unchanged at $1.4 billion. Excluding the Brazil IPI tax release, total revenue decreased 11% to $1.3 billion, or 1% in constant dollars, both including a benefit of approximately 3% due to the impact of adopting the new revenue recognition standard.
  
  
• From reportable segments:
• Total revenue increased 1% to $1.4 billion. Excluding the Brazil IPI tax release, total revenue decreased 11% to $1.2 billion, including a benefit of approximately 3% due to the impact of adopting the new revenue recognition standard, or was relatively unchanged in constant dollars, including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard.
• Active Representatives declined 5% with decreases reported in all segments.
• Ending Representatives declined 6% with decreases reported in all segments.
• Average order in constant dollars increased 5%, including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard, driven by increases in South Latin America, North Latin America and Asia Pacific.
  
  
• Gross margin increased 100 basis points to 62.2%, significantly impacted by the Brazil IPI tax release. Adjusted gross margin decreased 410 basis points to 57.1%. Both Gross margin and Adjusted gross margin include a decline of approximately 420 basis points due to the impact of adopting the new revenue recognition standard. Gross margin and Adjusted gross margin were favorably impacted by the net impact of price/mix, partially offset by higher supply chain costs.
  
  
• Operating margin was 13.1% in the quarter, up 690 basis points, significantly impacted by the Brazil IPI tax release. Adjusted operating margin was 3.0%, down 360 basis points. Both Operating margin and Adjusted operating margin include a decline of approximately 80 basis points due to the implementation of the new revenue recognition standard. Both the Operating margin and Adjusted operating margin year-over-year comparisons were unfavorably impacted by investments in Representative, sales leader and field expense, most significantly in Brazil to recover activity levels disrupted by the national transportation strike in second quarter 2018, higher advertising to support new product launches, and higher net brochure cost, primarily in Brazil due to an increase in brochure volumes.
  
  
• The provision for income taxes was $68 million, significantly impacted by the Brazil IPI tax release, compared with $36 million for third-quarter 2017. On an Adjusted basis, the provision for income taxes was $1 million, compared with $36 million for third-quarter 2017.
  
  
• Net income was $114 million, or $0.21 per diluted share, compared with $12 million, or $0.01 per diluted share for third-quarter 2017. Adjusted net income was $7 million, or $0.00 per diluted share, compared with $18 million, or $0.03 per diluted share for third-quarter 2017. Both net income and Adjusted net income include an unfavorable impact of $0.02 per diluted share due to the impact of the new revenue recognition standard.

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

During the third quarter of 2018, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, reduced Diluted earnings per share by approximately $0.21:

• The Company released the liability accrued to date related to Brazil IPI taxes of approximately $195 million before tax ($129 million after tax).
  
  
• The Company recorded costs to implement ("CTI") restructuring within operating profit of approximately $20 million before tax ($18 million after tax), related to both the new cost savings initiative announced last month and to the Transformation Plan.
  
  
• The Company recorded one-time tax reserves of approximately $4 million associated with its uncertain tax positions.

The Brazil IPI tax release of $168.4 is excluded from Adjusted Revenue and Adjusted Operating Profit, and CTI restructuring initiatives of $19.8 is excluded from Adjusted Operating Profit.

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 Australia and New Zealand, which the Company exited in 2018.

Third-Quarter 2018 Segment Review (compared with third-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 increased 1% to $1.4 billion. Excluding the Brazil IPI tax release, Total Reportable Segment revenue decreased 11% to $1.2 billion, including a benefit of approximately 3% due to the impact of adopting the new revenue recognition standard, or was relatively unchanged in constant dollars, 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 and Russia. The Company experienced continued variability with challenges in key markets, particularly Brazil.

• Europe, Middle East & Africa revenue was down 8%, or 3% 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 a decrease in Active Representatives and lower average order.
• Russia revenue was down 16%, or 7% 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 a decrease in Active Representatives.
• U.K. revenue and constant-dollar revenue were down 5%, 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.
  
  
• South Latin America revenue was up 9%, significantly impacted by an IPI tax reversal in Brazil. Excluding the IPI reversal in Brazil, South Latin America revenue was down 19%, or relatively unchanged 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 up 27%, significantly impacted by the IPI tax reversal. Excluding the IPI reversal, Brazil revenue was down 23%, or 5% in constant dollars, both including a benefit of approximately 7% 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.
  
  
• North Latin America revenue was relatively unchanged, or up 5% 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 higher average order, partially offset by a decrease in Active Representatives.
• Mexico revenue was up 3%, or 10% 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 higher average order, partially offset by a decrease in Active Representatives.
  
  
• Asia Pacific revenue was up 2%, or 6% 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 higher average order, partially offset by a decrease in Active Representatives.
• Philippines revenue was up 1%, or 7% 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 higher average order, partially offset by a decrease in Active Representatives.

Third-Quarter 2018 Cash Flow Review (compared with third-quarter 2017)

• Net cash provided by operating activities of continuing operations was $32 million for the three months ended September 30, 2018. This reduced net cash used by operating activities of continuing operations to $68 million for the nine months ended September 30, 2018, compared with net cash provided by operating activities of continuing operations of $35 million in the same period in 2017. The approximate $103 million increased use of net cash from continuing operating activities was primarily due to higher inventory purchases, lower cash-related earnings, and a timing difference of approximately $34 million related to refundable indirect taxes, partially offset by the judicial deposit receipt of approximately $68 million related to Brazil IPI taxes and lower net receivables.
  
  
• Net cash used by investing activities of continuing operations was $72 million for the nine months ended September 30, 2018, compared with $42 million in the same period in 2017. The approximate $30 million increased use of net cash from continuing investing activities was primarily due to a $22 million cash distribution received from New Avon LLC in the third quarter of 2017 and higher capital expenditures in 2018.
  
  
• Net cash used by financing activities of continuing operations was $255 million for the nine months ended September 30, 2018, compared with $10 million in the same period in 2017. The approximate $245 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: 7398514). 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 November 2, 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, and improved representative engagement and service. 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 third-quarter 2018 performance is:

The impact of the change in accounting standard on the year-to-date 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, Adjusted 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 revenue, 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) the Brazil IPI tax release; 2) CTI restructuring initiatives; 3) a charge for a loss contingency related to a non-US pension plan ("Loss contingency") and 4) one-time tax items that are not associated with recurring, normal operations ("Special tax items").

The Brazil IPI tax release includes the impact on the Consolidated Statement of Operations during the third quarter of 2018 of the release of the liability related to IPI tax on cosmetics in Brazil. The release was recorded in net sales and other expense, net in the amounts of approximately $168 million and approximately $27 million, respectively. The Brazil IPI tax release also includes approximately $66 million recorded in income taxes.

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-US pension plan, for which an amendment to the plan that occurred in a prior year many not have been properly implemented.

The Special tax items includes the impact on the provision for income taxes in the Consolidated Statements of Operations during the first, second and third quarters of 2018 due to one-time tax reserves of approximately $9 million, $6 million and $4 million, respectively, associated with the Company's uncertain tax positions.

SOURCE Avon Products, Inc.

Related Links

http://www.avon.com