Total Revenue Up 6%
Results Include $120 Million in Implementation Costs for Continued
Restructuring
NEW YORK, April 28 /PRNewswire-FirstCall/ -- Avon Products, Inc. (NYSE:
AVP) today reported that earnings in the first quarter 2006 were $.12 per
share, compared with 2005 first-quarter earnings of $.36 per share. The
company said the 2006 quarter included a negative impact of $120 million
pretax, or $.19 per share after taxes, in costs to implement the current
phase of its previously announced restructuring program.
Avon said that total revenue was $2.0 billion in the first quarter of
2006, an increase of 6% in both dollars and local currency. Active
Representatives grew 4%, primarily due to the company's acquisition of its
business in Colombia in 2005, as well as continued growth in Central &
Eastern Europe and Latin America. Units increased 3% year over year. Total
sales of Beauty products in the quarter rose 6% in both dollars and local
currency.
Operating profit of $86 million decreased 67%, or $174 million, from
the 2005 level. This reduction was due primarily to significant costs
related to the company's turnaround plan, most significantly the $120
million in costs to implement restructuring initiatives. These initiatives
included an ongoing downsizing in all regions, and at the corporate level,
to reduce organization layers to move management closer to its markets,
Representatives and consumers; outsourcing of certain U.S. Representative
customer-service transactions; realignment of certain manufacturing
processes; and the exit of certain unprofitable operations.
In line with its major initiative to boost brand competitiveness, Avon
said it increased its advertising spend in the quarter by 57% to $40
million. The company also recorded higher inventory obsolescence expenses
in each of its segments, totaling $27 million, primarily to support its
size-of-line reduction program.
In addition to costs associated with the turnaround plan, the first
quarter of 2006 was also negatively impacted by the adoption of
stock-option expensing, which reduced operating profit by $12 million in
the quarter. First-quarter 2006 operating margin was 4.3%, versus 13.9% in
the prior year.
Interest expense in the first quarter 2006 rose significantly year over
year due to a higher debt level associated with the company's aggressive
share repurchase program in late 2005, as well as higher interest rates.
The quarter's effective tax rate was 20.3% compared with 2005's rate of
31.5%. The lower 2006 rate resulted primarily from favorable tax audit
settlements, which more than offset the adverse impact of restructuring
activity on the effective tax rate. Net income in the first quarter 2006
was $56 million, compared with $172 million a year ago.
At quarter end, Avon's net debt had increased $36 million from the
year-end level. The company said it repurchased $43 million of its stock in
the first quarter, and continues to repurchase its shares under an existing
five-year, $1.0 billion repurchase authorization.
Andrea Jung, chairman and CEO, commented on these results saying, "The
quarter's results reflect the aggressive actions we are taking to return
our business to sustainable growth. At this early point, we are pleased
with the progress we are making on our restructuring initiatives, and we
continue to work diligently on all fronts of our previously announced
four-point turnaround plan, with 2006 being a transition year.
"Along with actions aimed at streamlining our organization and reducing
our cost structure, we are committed to improving our brand
competitiveness. In particular, our large first-quarter increase in
advertising is reflective of early action on this front, and we plan a
similar lift in advertising spend in the second quarter," she continued.
"These efforts to restore the long-term health of Avon's business
remain our primary focus going forward. Our organization is committed to
this task and aligned behind our turnaround strategies," Ms. Jung
concluded.
First-Quarter Regional Highlights
In the North America region, first-quarter revenue rose 3% on both a
dollar and local-currency basis, with all markets contributing solid
increases. Active Representatives were 5% lower and units decreased 3%.
These declines were more than offset by a larger average order that was
driven by strong product launches in skin care, as well as strength in the
Beauty Plus category. Reflecting $26 million of costs to implement
restructuring activities, as well as a substantial increase in advertising
in the U.S., segment operating profit decreased 41%, and operating margin
was 6.2%.
In Latin America, first-quarter revenue grew 28% (20% in local
currency) as the region benefited from the Colombia acquisition and
continued strength in Brazil. The region's active Representatives rose 12%
and units increased 10%. The Colombia acquisition favorably impacted
revenue growth by 10 points and Representative growth by eight points. The
region's operating profit decreased 16%, as it was unfavorably impacted by
costs to implement organization restructuring initiatives of $15 million
and a doubling of advertising spend. The region's operating margin was
11.3%.
First-quarter revenue in Western Europe, Middle East & Africa was flat
compared with the prior year, but rose 7% in local currency, primarily
driven by growth in Turkey. Active Representatives grew 2% and units
increased 6%, versus the year-ago period. The region reported an operating
loss of $34 million in the quarter largely as a result of $31 million in
costs to implement restructuring plans. The region's operating margin was
(14.6)%.
In Central & Eastern Europe, revenue in the first quarter rose 3% (7%
in local currency) and units increased 5% versus the year-ago period. In
part due to the region's continued roll-out of Avon's Sales Leadership
program, active Representatives grew 13%. The region's operating profit was
30% lower primarily due to higher product costs as well as $5 million in
costs to implement restructuring plans. Operating margin was 20.2%.
Asia Pacific revenue was 11% lower in the quarter (8% lower in local
currency), units declined 10% and active Representatives decreased 15%, as
the region's performance continued to be impacted by a sizeable revenue
decline in Japan. Avon's Japan business continued to face issues as it
shifts from a direct-mail, customer-centric model to a more traditional
direct-selling model. The region had an operating loss of $2 million in the
quarter, versus operating profit of $29 million in the prior-year quarter,
mainly due to the lower revenue and $13 million in costs to implement
restructuring in the quarter. Operating margin was (1.1)%.
China saw revenue decline 27% (29% in local currency) and units
decrease 18% in the first quarter as Avon's Beauty Boutique owners
continued to place smaller orders with the company, compared with the prior
year, in connection with the resumption of direct selling. During the first
quarter, Avon received the first direct-selling license issued by the
government, and has begun national roll-out of its direct-selling business.
China had an operating loss of $1 million in the first quarter, versus
operating profit of $15 million in 2005's first quarter, due to the
region's revenue decline, higher advertising and $3 million in costs to
implement restructuring initiatives. Operating margin was (1.2)%.
Global expenses, net of allocation to the operating segments, rose 93%
largely due to $27 million in costs to implement restructuring initiatives.
Avon will conduct a conference call at 9:00 A.M. today to discuss the
quarter's results. The dial-in number for the call is (973) 528-0014 (entry
code 2272). Additionally, the call will be webcast live and can be accessed
at http://www.avoninvestor.com for a period of two weeks.
Avon, the company for women, is a leading global beauty company, with
over $8 billion in annual revenue. As the world's largest direct seller,
Avon markets to women in well over 100 countries through over five million
independent Avon Sales Representatives. Avon's product line includes beauty
products, fashion jewelry and apparel, and features such well-recognized
brand names as Avon Color, Anew, Skin-So-Soft, Avon Solutions, Advance
Techniques, Avon Naturals, Mark, and Avon Wellness. Learn more about Avon
and its products at http://www.avoncompany.com.
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," "plan,"
"believe," "expect," "anticipate," "intend," "planned," "potential" 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 our global business
strategy, including our multi-year restructuring initiatives, product
mix and pricing strategies, enterprise resource planning, and cash
management, tax, foreign currency hedging and risk management
strategies, and our ability to achieve anticipated benefits from such
initiatives;
* the possibility of business disruption in connection with our multi-year
restructuring initiatives;
* our ability to achieve growth objectives, particularly in our largest
markets and new and emerging markets;
* our ability to replace lost sales attributable to the repositioning of
the Beauty Plus and Beyond Beauty business in the United States;
* our ability to successfully identify new business opportunities and
acquisition candidates, and our ability to successfully integrate or
manage any acquired business;
* the effect of political, legal and regulatory risks, as well as foreign
exchange or other restrictions, imposed on us, our operations or our
Representatives by governmental entities;
* our ability to successfully transition our business in China in
connection with the resumption of direct selling in that market and our
ability to operate using the direct-selling model permitted in that
market;
* the impact of substantial currency fluctuations on the results of our
foreign operations;
* general economic and business conditions in our markets, including
social, economic and political uncertainties in Latin America, Asia
Pacific, Central and Eastern Europe and the Middle East;
* a general economic downturn, information technology systems outages,
disruption in our supply chain or manufacturing and distribution
operations, or other sudden disruption in business operations beyond our
control as a result of events such as September 11, 2001 or Hurricane
Katrina;
* the quality, safety and efficacy of our products;
* our ability to attract and retain key personnel and executives;
* competitive uncertainties in our markets, including competition from
companies in the cosmetics, fragrances, skin care 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
increase Representative productivity, and to compete with other direct-
selling organizations to recruit and retain Representatives;
* the impact of 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 our material pending and future
litigations;
* our access to financing; and
* the impact of possible pension funding obligations and increased pension
expense on our cash flow and results of operations.
Additional information identifying such factors is contained in Item 1A
of our Annual Report on Form 10-K for the year ended December 31, 2005,
filed with the U.S. Securities and Exchange Commission. We undertake no
obligation to update any such forward-looking statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three months ended Percent
March 31 Change
2006 2005
Net sales $1,982.4 $1,860.9 7%
Other revenue 20.8 20.2
Total revenue 2,003.2 1,881.1 6%
Cost of sales (1) 779.7 698.2
Marketing, distribution and
administrative expenses (1) 1,137.3 922.4
Operating profit 86.2 260.5 -67%
Interest expense 26.5 10.1
Interest income (13.2) (7.8)
Other expense, net (2) 1.6 4.5
Total other expenses 14.9 6.8
Income before taxes and minority interest 71.3 253.7 -72%
Income taxes (3) 14.5 79.8
Income before minority interest 56.8 173.9
Minority interest (0.6) (1.9)
Net income $56.2 $172.0 -67%
Earnings per share:
Basic $.12 $.36 -67%
Diluted $.12 $.36 -67%
Average shares outstanding:
Basic 450.75 471.95
Diluted 452.62 477.00
Notes:
(1) For the three months ended March 31, 2006, costs to implement
restructuring initiatives impacted cost of sales by ($0.5) and
Marketing, distribution and administrative expenses by $120.6.
(2) For the three months ended March 31, 2006 and 2005, Other expense,
net includes foreign exchange (gains) losses of ($0.5) and $1.9,
respectively.
(3) For the three months ended March 31, 2006, income taxes were impacted
by a reduction in tax expense of $12.6, due to audit settlements and
the closure of tax years by expiration of the statute of limitations.
AVON PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
March 31 December 31
2006 2005
Cash, including cash equivalents $1,158.0 $1,058.7
Accounts receivable, net 595.7 634.1
Inventories 860.0 801.7
Prepaid expenses and other 466.9 435.1
Total current assets 3,080.6 2,929.6
Property, plant and equipment, net 1,043.7 1,050.8
Other assets 799.7 791.6
Total assets 4,924.0 4,772.0
Debt maturing within one year 530.8 882.5
Accounts payable 538.3 538.2
Other current liabilities 1,152.2 1,089.6
Total current liabilities 2,221.3 2,510.3
Long-term debt 1,253.8 766.5
Other non-current liabilities 702.3 701.0
Total shareholders' equity 746.6 794.2
Total liabilities and shareholders' equity $4,924.0 $4,772.0
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three Months Ended
March 31
2006 2005
Cash Flows from Operating Activities:
Net income $56.2 $172.0
Depreciation and amortization 40.0 31.1
Provision for doubtful accounts 31.8 28.3
Provision for obsolescence 40.6 14.1
Share-based compensation 15.5 3.2
Deferred income taxes (23.5) 1.4
Other 2.9 3.7
Changes in assets and liabilities:
Accounts receivable 11.3 (17.0)
Inventories (98.8) (101.8)
Prepaid expenses and other (11.9) (21.5)
Accounts payable and accrued liabilities 97.3 (51.1)
Income and other taxes (40.9) (2.4)
Non-current assets and liabilities (19.6) (68.8)
Net cash provided (used) by operating
activities 100.9 (8.8)
Cash Flows from Investing Activities:
Capital expenditures (25.2) (32.5)
Disposal of assets 4.0 2.8
Other investing activities (0.3) (0.2)
Net cash used by investing activities (21.5) (29.9)
Cash Flows from Financing Activities:
Cash dividends (79.4) (78.9)
Total debt, net change 143.7 176.9
Repurchase of common stock (42.5) (44.9)
Proceeds from exercise of stock options,
net of taxes 6.4 31.7
Other financing activities (1.0) (0.3)
Net cash provided by financing activities 27.2 84.5
Effect of exchange rate changes on cash
and equivalents (7.3) (23.4)
Net increase in cash and equivalents $99.3 $22.4
AVON PRODUCTS, INC. - SUPPLEMENTAL SCHEDULE
FIRST QUARTER 2006 - THREE MONTHS ENDED 3/31/06
REGIONAL RESULTS
Total
Revenue
$ in Total in Local Operating Op. Active
Millions Revenue US$ Currency Profit US$ Margin Units Reps
------------- -------- ------------ ------ ----- ------
% var. % var. % var. 2006 % var. % var.
vs vs vs per- vs vs
1Q05 1Q05 1Q05 cent 1Q05 1Q05
------------- -------- ------------ ------ ----- ------
North America $613.8 3% 3% $38.0 -41% 6.2% -3% -5%
Latin America (1) 612.6 28 20 69.0 -16 11.3 10 12
Western Europe,
Middle East &
Africa 233.0 0 7 (34.1) -796 -14.6 6 2
Central & Eastern
Europe 306.0 3 7 61.7 -30 20.2 5 13
Asia Pacific (2) 190.4 -11 -8 (2.1) -107 -1.1 -10 -15
China 47.4 -27 -29 (0.6) -104 -1.2 -18 NA
Total from
Operations 2,003.2 6 6 131.9 -54 6.6 3 4
Global Expenses - - - (45.7) -93 - - -
Consolidated
(1) (2) $2,003.2 6% 6% $86.2 -67% 4.3% 3% 4%
CATEGORY SALES (US$)
Consolidated
------------
% var.
vs
1Q05
Beauty (cosmetics/fragrances/toiletries) $1,385.3 6%
Beauty Plus
(fashion jewelry/watches/apparel/accessories) 398.5 16
Beyond Beauty
(home products/gift and decorative/candles) 198.6 -4
Net Sales $1,982.4 7%
Other Revenue 20.8 3
Total Revenue $2,003.2 6%
In December 2005, we announced changes to our global structure.
Effective January 1, 2006, we began managing Central and Eastern Europe and
also China as stand-alone business units. These changes increase the number
of our operating segments to six: North America; Latin America; Western
Europe, Middle East and Africa; Central and Eastern Europe; Asia Pacific;
and China. Also effective January 1, 2006, we began allocating certain
expenses, previously classified as global expense, to our business
segments. Other costs associated with the corporate function remain
unallocated as global expenses.
(1) The acquisition of our licensee in Colombia increased active
Representative growth in Latin America and Consolidated Avon for the
three months ended March 31, 2006 by 8 points and 4 points,
respectively. The acquisition also favorably impacted units sold in
Latin America and Consolidated Avon for the three months ended March
31, 2006 by 6 points and 2 points, respectively.
(2) Growth in active Representatives was negatively impacted by the exit
of the business in Indonesia in the first quarter of 2006. This
negatively impacted active Representative growth in Asia Pacific and
Consolidated Avon for the three months ended March 31, 2006 by 2
points and 1 point, respectively. The exit of the business in
Indonesia in first quarter of 2006 also negatively impacted units
sold in Asia Pacific for the three months ended March 31, 2006 by 4
points.
SOURCE Avon Products, Inc.
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CONTACT:
Media: Victor Beaudet, +1-212-282-5344, or
Sharon Samuel, +1-212-282-5322, or Investors: Renee Johansen or
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