Total Revenue Up 5%
Results Include $49 Million in Restructuring Implementation Costs
NEW YORK, July 31 /PRNewswire-FirstCall/ -- Avon Products, Inc. (NYSE:
AVP) today reported second-quarter 2006 earnings of $.33 per share,
compared with 2005 second-quarter earnings of $.69 per share. The company
said the 2006 quarter included a negative impact of $49 million pretax, or
$.07 per share after taxes, in costs to implement the current phase of its
previously announced restructuring program. The 2006 quarter also included
a net favorable impact of less than $.01 per share resulting from a
$.03-per- share benefit from a tax refund, and $.02 per share of
incremental tax costs from repatriation of international earnings. The 2005
quarter included a $.20-per-share benefit primarily from settlements of tax
audits.
Avon said that total revenue was $2.1 billion in the second quarter of
2006, 5% higher year over year (4% higher in local currency). Active
Representatives grew 4%. Both of these measures benefited from the
company's late-2005 acquisition of its licensee in Colombia. Units
decreased 1% year over year. Total sales of Beauty products in the quarter
rose 4% in dollars and 3% in local currency.
Operating profit of $225 million decreased 35%, or $119 million, from
the 2005 level, and operating margin was 10.8% in the 2006 period, versus
17.3% in the prior-year quarter.
Second-quarter 2006 operating profit included costs of $49 million to
implement restructuring initiatives under the company's turnaround plan.
These initiatives included an organization realignment and downsizing to
reduce organization layers and move management closer to its markets,
Representatives and consumers, and the exit of certain unprofitable
operations.
In line with its major turnaround initiative to boost brand
competitiveness, Avon said it increased advertising in all regions, with
the total spend growing 78% in the quarter to over $50 million, supporting
the launch of several new products as well as the opening of direct selling
in China.
In addition to costs associated with the turnaround plan, the second
quarter of 2006 included unfavorable year-over-year increases in provisions
for performance-based compensation, reinstatement of a 401(k) matching
program and stock-option expensing. The adoption of stock-option expensing,
effective January 1, 2006, and design changes to share-based compensation
plans related to that adoption, reduced operating profit by $15 million.
Interest expense in the second quarter 2006 rose significantly year
over year due to a higher debt level primarily 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 30.7% compared with 2005's rate of
3.0%. The lower rate in the 2005 quarter resulted primarily from the
aforementioned audit settlements. Net income in the second quarter 2006 was
$151 million, compared with $329 million a year ago.
At quarter end, Avon's total debt had increased $100 million from the
year-end level, and cash had increased $56 million. Net cash provided by
operating activities was $289 million through six months of 2006, up $56
million from the prior-year period.
Avon's share repurchases totaled $94 million and $138 million in the
second quarter and first half of 2006, respectively. The company continues
to repurchase its shares under an existing five-year, $1.0 billion
repurchase authorization.
Andrea Jung, chairman and CEO, commented, "This quarter's results
reflect the aggressive actions we are taking to return our business to
sustainable growth. While we are still in the early days of our turnaround,
we are pleased with Avon's progress, and we continue to work diligently on
all fronts of our plan, with 2006 being a transition year.
"At this mid-point in the year, we have essentially completed actions
to delayer our organization, and are beginning to see early savings from
that initiative. When fully realized, we estimate that annualized savings
from delayering will approach $200 million, a majority of the more than
$300 million total benefit we expect to generate from our restructuring
effort," Ms. Jung concluded.
Second-Quarter Regional Highlights
In the North America region, second-quarter revenue was flat with the
prior year on both a dollar and local-currency basis. A larger average
order offset a 7% decline in active Representatives in the region. The
region has seen Representative ordering activity decrease as fuel prices
have escalated over the last two years. Second-quarter units were 5% lower.
North America segment operating profit decreased 36%, and operating margin
was 9.8%. Operating profit included $9 million in costs to implement
restructuring activities and a substantial increase in advertising.
In Latin America, second-quarter revenue grew 17% (13% in local
currency) as the region benefited from the Colombia acquisition, which
contributed 10 points of revenue growth, and continued strength in Brazil,
which more than compensated for continued softness in Mexico. The region's
active Representatives rose 13% and units increased 6% in total. The
region's operating profit decreased 24%, as it was unfavorably impacted by
costs to implement restructuring initiatives of $20 million and a
substantial increase in advertising. The region's operating margin was
14.8%.
Second-quarter revenue in Western Europe, Middle East & Africa
increased 2% (5% in local currency) largely driven by growth in Turkey.
Active Representatives were flat with the prior-year period, and units
increased 4% year over year. The region's operating profit decreased 11%
year over year, and operating margin was 9.5%. Operating profit included
increased advertising investment as well as ERP implementation costs.
In Central & Eastern Europe, revenue in the second quarter rose 4% (2%
in local currency) and active Representatives grew 7%. Units sold declined
6% versus the year-ago period, mainly due to underperformance in color
cosmetics, particularly in Central Europe. The region's revenue growth was
primarily driven by double-digit revenue growth in Russia partially offset
by revenue declines in certain other countries, principally Poland. The
region's operating profit was 11% lower, and operating margin was 24.6%.
Operating profit was unfavorably impacted by higher product costs and
increased advertising.
Asia Pacific revenue was 10% lower in the quarter (8% lower in local
currency), active Representatives decreased 14% and units declined 11%, as
the region was unfavorably impacted by a continued significant decline in
its Japan direct-mail business as well as the first-quarter 2006 closing of
Indonesian operations. The region's operating profit was 63% lower year
over year, largely due to the lower revenue and $10 million in costs to
implement restructuring, primarily in Japan. Operating margin was 6.2%.
Revenue in China grew 8% (5% in local currency) including the
commencement of direct selling as well as the unfavorable impact of the
exit of company-run beauty counters. Units were 4% lower year over year in
the second quarter. As announced earlier this month, Avon ended the quarter
with over 114,000 certified Sales Promoters registered with the Chinese
government, and more than 31,000 applicants currently in the process of
being certified under the direct-selling license received by Avon in March
of this year. China had an operating loss of $4 million in the second
quarter, versus an operating loss of $1 million in 2005's second quarter,
due to increased advertising expenses associated with the launch of direct
selling and $2 million in costs to implement restructuring initiatives.
Operating margin was (9.0)%.
In addition to the variances noted earlier, year-over-year increases in
global expense allocations negatively impacted all regions in the second
quarter of 2006. Global expenses, net of allocation to the segments, rose
95%, largely due to $9 million in costs to implement restructuring
initiatives, as well as higher compensation-related and option expenses.
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 (800) 843-2086 in the
U.S. or (706) 643-1815 from non-U.S. locations (conference ID number
2950050). 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, customer
service initiatives 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
generate Representative activity, to increase Representative
productivity, and to compete with other direct-selling organizations to
recruit, retain and service 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 Six months ended Percent
June 30 Change June 30 Change
------------------ ------- ---------------- -------
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $2,058.9 $1,963.9 5% $4,041.3 $3,824.8 6%
Other revenue 20.6 20.4 41.4 40.6
-------- -------- -------- --------
Total revenue 2,079.5 1,984.3 5% 4,082.7 3,865.4 6%
Cost of sales (1) 776.5 730.4 1,556.2 1,428.6
Marketing, distribution
and administrative
expenses (1) 1,077.7 909.9 2,215.0 1,832.3
-------- -------- -------- --------
Operating profit 225.3 344.0 -35% 311.5 604.5 -48%
-------- -------- -------- --------
Interest expense 23.9 10.5 50.4 20.6
Interest income (16.7) (8.1) (29.9) (15.9)
Other expense, net (2) 0.8 0.8 2.4 5.3
-------- -------- -------- --------
Total other
expenses 8.0 3.2 22.9 10.0
Income before taxes
and minority
interest 217.3 340.8 -36% 288.6 594.5 -51%
Income taxes (3) 66.6 10.3 81.1 90.1
-------- -------- -------- --------
Income before minority
interest 150.7 330.5 207.5 504.4
Minority interest 0.2 (1.9) (0.4) (3.8)
-------- -------- -------- --------
Net income $150.9 $328.6 -54% $207.1 $500.6 -59%
======== ======== ======== ========
Earnings per share:
Basic $.34 $.70 -51% $.46 $1.06 -57%
======== ======== ======== ========
Diluted $.33 $.69 -52% $.46 $1.05 -56%
======== ======== ======== ========
Average shares
outstanding:
Basic 449.36 471.45 450.05 471.70
Diluted 451.87 475.57 452.24 476.28
(1) For the three and six months ended June 30, 2006, costs to implement
restructuring initiatives impacted cost of sales by $0.2 and ($0.3)
respectively, and Marketing, distribution and administrative expenses
by $49.2 and $169.8 respectively.
(2) For the three months ended June 30, 2006 and 2005, Other expense, net
includes foreign exchange losses of $0.1 and $3.9, respectively. For
the six months ended June 30, 2006 and 2005, Other expense, net
includes foreign exchange (gains) losses of ($0.4) and $5.8,
respectively. During the second quarter of 2005, the Company recorded
a gain on the sale of marketable securities of $4.9.
(3) For the six months ended June 30, 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. For
the three and six months ended June 30, 2005, income taxes were also
impacted by a reduction in tax expense of $99.6 due to the completion
of income tax examinations as well as the closure of a tax year by
expiration of the statute of limitations, net of related adjustments.
AVON PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
June 30 December 31
2006 2005
======== ========
Cash, including cash equivalents $1,114.5 $1,058.7
Accounts receivable, net 565.2 634.1
Inventories 897.4 801.7
Prepaid expenses and other 471.1 435.1
-------- --------
Total current assets 3,048.2 2,929.6
Property, plant and equipment, net 1,035.4 1,050.8
Other assets 1,052.8 791.6
-------- --------
Total assets 5,136.4 4,772.0
======== ========
Debt maturing within one year 503.9 882.5
Accounts payable 524.6 538.2
Other current liabilities 1,174.2 1,089.6
-------- --------
Total current liabilities 2,202.7 2,510.3
Long-term debt 1,245.0 766.5
Other non-current liabilities 683.5 701.0
Total shareholders' equity 1,005.2 794.2
-------- --------
Total liabilities and shareholders' equity $5,136.4 $4,772.0
======== ========
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Six Months Ended
June 30
-------------------------
2006 2005
------- -------
Cash Flows from Operating Activities:
Net income $207.1 $500.6
Depreciation and amortization 80.1 63.7
Provision for doubtful accounts 68.8 60.3
Provision for obsolescence 62.5 29.5
Asset impairment 8.2 -
Share-based compensation 33.3 5.7
Deferred income taxes (30.1) 3.0
Other 9.8 5.1
Changes in assets and liabilities:
Accounts receivable (0.7) (28.2)
Inventories (161.0) (147.4)
Prepaid expenses and other (11.6) (10.3)
Accounts payable and accrued liabilities 106.6 (47.9)
Income and other taxes (43.2) (112.7)
Non-current assets and liabilities (40.4) (87.8)
------- -------
Net cash provided by operating activities 289.4 233.6
Cash Flows from Investing Activities:
Capital expenditures (63.0) (86.6)
Disposal of assets 6.8 7.3
Other investing activities (10.7) (11.0)
------- -------
Net cash used by investing activities (66.9) (90.3)
Cash Flows from Financing Activities:
Cash dividends (160.2) (159.7)
Total debt, net change 114.8 234.8
Repurchase of common stock (129.6) (129.7)
Proceeds from exercise of stock
options, net of taxes 16.5 55.2
Other financing activities (0.5) (0.3)
------- -------
Net cash (used) provided by financing activities (159.0) 0.3
Effect of exchange rate changes on
cash and equivalents (7.7) (33.1)
------- -------
Net increase in cash and equivalents $55.8 $110.5
======= =======
AVON PRODUCTS, INC. - SUPPLEMENTAL SCHEDULE
THREE MONTHS ENDED 6/30/06
REGIONAL RESULTS
Total
Revenue
Total Revenue in Local Operating Op. Active
$ in Millions US$ Currency Profit US$ Margin Units Reps
-------------- -------- ----------- ------ ----- ------
% var. % var. % var. 2006 % var. % var.
vs vs vs per- vs vs
2Q05 2Q05 2Q05 cent 2Q05 2Q05
-------------- -------- ----------- ------ ----- ------
North America $620.1 0% 0% $60.8 -36% 9.8% -5% -7%
Latin America (1) 653.1 17 13 96.6 -24 14.8 6 13
Western Europe,
Middle East &
Africa 273.5 2 5 25.8 -11 9.5 4 -
Central & Eastern
Europe 288.6 4 2 71.1 -11 24.6 -6 7
Asia Pacific 196.3 -10 -8 12.1 -63 6.2 -11 -14
China 47.9 8 5 (4.3) * -9.0 -4 *
Total from
Operations 2,079.5 5 4 262.1 -28 12.6 -1 4
Global Expenses - - - (36.8) -95 - - -
Consolidated (1) $2,079.5 5% 4% $225.3 -35% 10.8% -1% 4%
CATEGORY SALES (US$)
Consolidated
-------------------------
% var. vs
2Q05
-------------------------
Beauty (cosmetics/fragrances/toiletries) $1,448.8 4%
Beauty Plus (fashion jewelry/watches/
apparel/accessories) 416.0 13
Beyond Beauty (home products/gift and
decorative/candles) 194.1 -5
-------- --------
Net Sales $2,058.9 5%
Other Revenue 20.6 1
-------- --------
Total Revenue $2,079.5 5%
SIX MONTHS ENDED 6/30/06
REGIONAL RESULTS
Total
Revenue
Total Revenue in Local Operating Op. Active
$ in Millions US$ Currency Profit US$ Margin Units Reps
-------------- -------- ----------- ------ ----- ------
% var. % var. % var. 2006 % var. % var.
vs vs vs per- vs vs
1H05 1H05 1H05 cent 1H05 1H05
-------------- -------- ----------- ------ ----- ------
North America $1,233.9 2% 1% $98.8 -38% 8.0% -4% -6%
Latin America (1) 1,265.7 22 16 165.6 -21 13.1 8 12
Western Europe,
Middle East &
Africa 506.5 1 6 (8.3) * -1.6 5 1
Central & Eastern
Europe 594.6 4 5 132.8 -21 22.3 - 10
Asia Pacific 386.7 -11 -8 10.0 -84 2.6 -11 -13
China 95.3 -12 -15 (4.9) * -5.1 -12 *
Total from
Operations 4,082.7 6 5 394.0 -39 9.7 1 4
Global Expenses - - - (82.5) -94 - - -
Consolidated (1) $4,082.7 6% 5% $311.5 -48% 7.6% 1% 4%
CATEGORY SALES (US$)
Consolidated
------------------------
% var. vs
1H05
------------------------
Beauty (cosmetics/fragrances/toiletries) $2,834.1 5%
Beauty Plus (fashion jewelry/watches/
apparel/accessories) 814.5 14
Beyond Beauty (home products/gift and
decorative/candles) 392.7 -4
-------- --------
Net Sales $4,041.3 6%
Other Revenue 41.4 2
-------- --------
Total Revenue $4,082.7 6%
* Calculation not meaningful
(1) The acquisition of our licensee in Colombia favorably impacted revenue
growth in Latin America for the three and six months ended June 30,
2006, by 10 points in each period. The acquisition also favorably
impacted revenue growth in Consolidated Avon for the three and six
months ended June 30, 2006, by 3 points in each period.
SOURCE Avon Products, Inc.
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CONTACT:
Victor Beaudet, +1-212-282-5344, Sharon
Samuel, +1-212-282-5322, Jennifer Vargas, +1-212-282-5404, or
Renee Johansen or Rob Foresti, +1-212-282-5320, all of Avon
Products, Inc.
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