Third-Quarter Earnings of $.19 Per Share
Projected Restructuring Benefits of Nearly $100 Million in 2006; Company
Launches Two New Turnaround Initiatives
NEW YORK, Oct. 27 /PRNewswire-FirstCall/ -- Avon Products, Inc. (NYSE:
AVP) today reported that third-quarter 2006 total revenue rose 9% year over
year (7% in local currency) to $2.1 billion. Active Representatives grew
6%, and units increased 2% versus the prior-year quarter. All of these
measures benefited from the company's late-2005 acquisition of its licensee
in Colombia.
Total sales of Beauty products in the quarter outpaced overall sales,
growing 10% in dollars and 8% in local currency. These results reflect a
16% increase in skin care sales, as well as strength in the fragrance and
personal care categories.
Third-quarter operating profit of $168 million decreased 32%, or $80
million, from the 2005 level, and operating margin was 8.1%, versus 13.1%
in the prior-year quarter.
Operating profit was unfavorably impacted by $40 million of initial
costs, principally inventory obsolescence, associated with the company's
new Product Line Simplification program. The quarter also included $16
million of costs to implement the current phase of its previously announced
restructuring program.
In line with the turnaround initiative to improve brand
competitiveness, third quarter 2006 included a substantial $32 million
increase in advertising, to $66 million, to support new products as well as
Avon China's direct-selling launch. The company is tracking well ahead of
its target to increase advertising by 50% in 2006, and now expects to spend
approximately $250 million, nearly double last year's level.
In the quarter, the company resolved a long-standing dispute regarding
value-added tax (VAT) in the U.K. That resolution resulted in a one-time
charge of $21 million.
Third-quarter 2006 expenses also included 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
$10 million.
Interest expense in the third quarter 2006 rose significantly year over
year due to a higher debt level primarily associated with the company's
share repurchase program, as well as higher interest rates.
The quarter's effective tax rate of 41.3% was higher than 2005's rate
of 31.8%, primarily due to the impact of repatriation of international
earnings in 2006. Net income in the third quarter 2006 was $86 million, or
$.19 per share, compared with $164 million, or $.35 per share, a year ago.
Despite 2006 being a transition year, cash flow from operations is ahead of
last year, totaling $439 million through the first nine months of the year
versus $370 million last year.
The company reported that it is on track with its November 2005
turnaround plan to drive out costs and reinvest to return the company to
sustainable growth. Restructuring actions implemented to date are expected
to yield nearly $100 million in savings in 2006 alone. These savings have
been used to increase advertising beyond levels originally targeted. In
total, over the multiple years of the turnaround plan, Avon still projects
that annualized restructuring savings will exceed $300 million when fully
realized, with total costs to implement its plans in the range of $500
million.
During the quarter, Avon launched two new turnaround initiatives with
benefits and costs beyond those anticipated in its previously announced
restructuring plan. The company began a Product Line Simplification
initiative to go to market with a significantly smaller range of better
performing and more profitable products. This undertaking is designed to
meaningfully improve brand image and Representative and consumer
experiences while also carrying significant cost-saving implications. The
quarter's operating profit included expenses resulting from preliminary
steps under this effort.
Avon also said it launched a Strategic Sourcing Initiative to reduce
direct and indirect costs of materials, goods and services. Under this
initiative, the company will shift its purchasing strategy toward a global
supplier orientation from one that today is more local and component
oriented. The initiative is an outgrowth of the company's recently
established Global Supply Chain organization, and will result in far
greater leverage with vendors.
Andrea Jung, chairman and CEO, commented, "We are on track with our
turnaround actions. In spite of year-over-year revenue declines in certain
key markets, we are seeing some early signs that our actions are starting
to work in those markets. We are pleased that in this transition year, our
top- line growth has exceeded our expectations, as evidenced by our 9%
revenue growth and 10% increase in Beauty sales this quarter.
"We are capturing sizeable savings already this year from restructuring
actions implemented to date. With the additional turnaround initiatives
announced today, we have significant opportunities over and above the
benefits that we had anticipated in the plans we laid out last November.
Product Line Simplification and the Strategic Sourcing Initiative should
further boost our brand competitiveness and operating efficiency.
"We still have much work ahead of us in our multi-year effort to
restore Avon to sustainable growth. We're confident in our four-point
turnaround plan and early indicators tell us that our plans are working,"
Ms. Jung concluded.
Third-Quarter Regional Highlights
In the North America region, third-quarter revenue was 1% lower than
the prior-year period on both a dollar and local-currency basis.
Third-quarter units were 9% lower. Active Representatives decreased 2%
versus the prior year, following a 6% decline in the first half of 2006.
Avon's U.S. business saw response to its ongoing actions to increase
Representative ordering activity. Fuel prices remained a negative factor
but to a lesser degree than in the first half. Operating profit was
negatively impacted by reinstatement of performance-based compensation, a
substantial increase in advertising and higher obsolescence expense.
In Latin America, third-quarter revenue grew 28% (25% in local
currency). The region continued to benefit from the late-2005 Colombia
acquisition, with that market contributing 12 points of revenue growth. The
region's revenue also benefited from ongoing strength in Brazil, Avon's
second largest market, where top-line growth approached 40%. The
performances of these two markets more than offset continued softness in
Mexico, where revenue decreased 4%. The region's active Representatives
rose 12% and units increased 13% in total. Operating profit grew 13%, as
benefits of higher revenue more than offset unfavorable inventory
obsolescence expense and other increased expenses, including advertising.
The region's operating margin was 17.8%.
Western Europe, Middle East and Africa continued to achieve solid
revenue growth, driven by a revenue increase of nearly 40% in Turkey. The
region's third-quarter revenue increased 8%, (6% in local currency). Active
Representatives rose 4% versus the prior-year period, and units increased
1% year over year. Due to the U.K. VAT resolution, significant costs to
implement restructuring initiatives and incremental inventory obsolescence
expense, the region recorded an operating loss versus an operating profit
in the prior-year quarter, and operating margin was (10.8)%.
In Central & Eastern Europe, revenue in the third quarter rose 2%
(declined 3% in local currency) and units sold decreased 4%. New Russian
importation laws for ethanol-based products dramatically affected the
company's ability to ship fragrance orders in Russia, resulting in $15
million of lost revenue in the region. Russia had revenue growth of 4%, and
top-line growth would have approached 20% if fragrance products had
shipped. The region's Active Representatives grew 8%. Apart from the
Russian importation issue, the region's performance was mostly in line with
that of the second quarter 2006, with continued softness in color
cosmetics. The region's operating profit was 10% lower than in 2005, and
operating margin was 21.5%. Operating profit was unfavorably impacted by
higher product costs and advertising expense.
Asia Pacific revenue was 3% lower in the quarter (3% lower in local
currency), active Representatives decreased 10% and units declined 9%, as
the region continued to be unfavorably impacted by a decline in Japan as
well as the first-quarter 2006 closing of Indonesian operations. Japan's
revenue declined 13% year over year, compared with a decline of nearly 30%
in 2006's first half. Japan's results reflect early response to actions to
improve direct selling and recalibrate the level of its direct mailings.
The region's operating profit was 25% lower year over year, largely due to
the revenue decline and higher product costs. Operating margin was 10.4%.
Revenue in China grew 9% (7% in local currency), despite the exit of
company-run store counters, which had a negative 10-point impact on the
quarter's revenue growth. Growth reflected the continued roll out of direct
selling. At quarter end, Avon China had over 236,000 certified Sales
Promoters registered with the government and was engaged in training these
Sales Promoters to become active Representatives within Avon's
direct-selling model. Units were 1% higher versus the prior year in the
third quarter. China had an operating loss of $3.0 million in the third
quarter, versus operating profit of $1.6 million in 2005's third quarter,
due to increased expenses associated with the launch of direct selling and
fees paid to service centers. Operating margin was (6.1)%.
In addition to the variances noted earlier, year-over-year increases in
global expense allocations negatively impacted all regions in the third
quarter of 2006. Total global expenses increased 34% year over year, but
net of allocation to the segments, rose 3%.
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
8245635). The call will be webcast live at http://www.avoninvestor.com and can be
accessed or downloaded from that site 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, product line simplification, strategic sourcing
initiative, 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;
-- the costs associated with our product line simplification program;
-- 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;
-- the possible impact of the new importation laws for ethanol-based
products in Russia;
-- 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 acts of terrorism or war,
natural disasters, pandemic situations and large scale power outages;
-- 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 Percent Nine months Percent
ended Change ended Change
September 30 ------ September 30 ------
----------------- ------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $2,038.1 $1,865.7 9% $6,079.4 $5,690.5 7%
Other revenue 20.5 20.3 61.9 60.9
-------- -------- -------- --------
Total revenue 2,058.6 1,886.0 9% 6,141.3 5,751.4 7%
Cost of sales (1) 814.8 724.5 2,371.0 2,153.1
Marketing,
distribution and
administrative
expenses (1)(2) 1,076.3 914.4 3,291.3 2,746.7
-------- -------- -------- --------
Operating profit 167.5 247.1 -32% 479.0 851.6 -44%
-------- -------- -------- --------
Interest expense 23.9 13.2 74.3 33.8
Interest income (10.9) (10.5) (40.8) (26.4)
Other expense, net 5.5 2.3 7.9 7.6
-------- -------- -------- --------
Total other
expenses 18.5 5.0 41.4 15.0
Income before taxes
and minority interest 149.0 242.1 -38% 437.6 836.6 -48%
Income taxes (3) 61.5 77.0 142.6 167.1
-------- -------- -------- --------
Income before minority
interest 87.5 165.1 295.0 669.5
Minority interest (1.1) (1.3) (1.5) (5.1)
-------- -------- -------- --------
Net income $86.4 $163.8 -47% $293.5 $664.4 -56%
======== ======== ======== ========
Earnings per share:
Basic $.19 $.35 -46% $.65 $1.41 -54%
======== ======== ======== ========
Diluted $.19 $.35 -46% $.65 $1.40 -54%
======== ======== ======== ========
Average shares
outstanding:
Basic 446.36 466.56 448.80 469.97
Diluted 447.93 468.95 450.40 473.82
(1) For the three and nine months ended September 30, 2006, costs to
implement restructuring initiatives impacted costs of sales by ($0.5)
and ($0.8), respectively, and Marketing, distribution and
administrative expenses by $16.1 and $185.9, respectively.
(2) For the three and nine months ended September 30, 2006, Marketing,
distribution and administrative expenses included $21.0 associated
with the resolution of a long-standing dispute regarding value-added
tax in the U.K.
(3) For the three and nine months ended September 30, 2006, income taxes
were impacted by an increase in tax expense due to the repatriation of
international earnings by $12.2 and $21.6, respectively. For the nine
months ended September 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, as
well as $11.8 due to tax refunds. For the nine months ended September
30, 2005, income taxes were also impacted by a reduction in tax
expense of $98.5 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)
September 30 December 31
2006 2005
------------ -----------
Cash, including cash equivalents $1,102.8 $1,058.7
Accounts receivable, net 634.6 634.1
Inventories 977.2 801.7
Prepaid expenses and other 522.2 435.1
------------ -----------
Total current assets 3,236.8 2,929.6
Property, plant and equipment, net 1,043.3 1,050.8
Other assets 1,058.3 791.6
------------ -----------
Total assets 5,338.4 4,772.0
============ ===========
Debt maturing within one year 566.3 882.5
Accounts payable 594.7 538.2
Other current liabilities 1,278.7 1,089.6
------------ -----------
Total current liabilities 2,439.7 2,510.3
Long-term debt 1,256.8 766.5
Other non-current liabilities 659.0 701.0
Total shareholders' equity 982.9 794.2
------------ -----------
Total liabilities and shareholders'
equity $5,338.4 $4,772.0
============ ===========
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended
September 30
--------------------------
2006 2005
------- -------
Cash Flows from Operating Activities:
Net income $293.5 $664.4
Depreciation and amortization 120.4 97.5
Provision for doubtful accounts 104.3 96.7
Provision for obsolescence 120.7 54.5
Asset impairment 7.7 -
Share-based compensation 46.5 8.0
Deferred income taxes (45.2) 1.0
Other 15.4 7.1
Changes in assets and liabilities:
Accounts receivable (102.3) (92.2)
Inventories (278.7) (279.9)
Prepaid expenses and other (39.1) (46.6)
Accounts payable and accrued
liabilities 234.1 27.5
Income and other taxes (21.8) (99.8)
Non-current assets and liabilities (17.0) (68.5)
------- -------
Net cash provided by operating
activities 438.5 369.7
Cash Flows from Investing Activities:
Capital expenditures (97.9) (145.0)
Disposal of assets 11.1 9.8
Other investing activities (48.4) (11.5)
------- -------
Net cash used by investing activities (135.2) (146.7)
Cash Flows from Financing Activities:
Cash dividends (239.0) (237.5)
Total debt, net change 176.1 715.3
Repurchase of common stock (233.4) (511.5)
Proceeds from exercise of stock
options, net of taxes 26.8 59.0
Other financing activities (1.4) (0.5)
------- -------
Net cash (used) provided by financing
activities (270.9) 24.8
Effect of exchange rate changes on
cash and equivalents 11.7 (31.7)
------- -------
Net increase in cash and equivalents $44.1 $216.1
======= =======
AVON PRODUCTS, INC.
SUPPLEMENTAL SCHEDULE
Three Months Ended September 30, 2006
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
3Q05 3Q05 3Q05 cent 3Q05 3Q05
-------------- -------- ----------- ------ ----- ------
North America $570.2 -1% -1% $16.4 -70% 2.9% -9% -2%
Latin America(1) 707.5 28 25 125.6 13 17.8 13 12
Western Europe,
Middle East
& Africa 261.3 8 6 (28.1) * -10.8 1 4
Central &
Eastern Europe 269.0 2 -3 57.8 -10 21.5 -4 8
Asia Pacific 201.3 -3 -3 20.9 -25 10.4 -9 -10
China 49.3 9 7 (3.0) * -6.1 1 *
Total from
Operations 2,058.6 9 7 189.6 -29 9.2 2 6
Global Expenses - - - (22.1) -3 - - -
Consolidated(1) $2,058.6 9% 7% $167.5 -32% 8.1% 2% 6%
CATEGORY SALES (US$)
Consolidated
----------------------
% var. vs
3Q05
-----------------------
Beauty (cosmetics/fragrances/skin care/toiletries) $1,433.7 10%
Beauty Plus (fashion jewelry/watches/apparel/
accessories) 382.2 6
Beyond Beauty (home products/gift/decorative) 222.2 8
------- ------
Net Sales $2,038.1 9%
Other Revenue 20.5 1
------- ------
Total Revenue $2,058.6 9%
Nine Months Ended September 30, 2006
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
9M05 9M05 9M05 cent 9M05 9M05
-------------- -------- ----------- ------ ----- ------
North America $1,804.1 1% 0% $115.2 -46% 6.4% -5% -4%
Latin America(1) 1,973.2 24 19 291.2 -9 14.8 9 12
Western Europe,
Middle East &
Africa 767.8 3 6 (36.4) * -4.7 3 2
Central & Eastern
Europe 863.6 3 2 190.6 -18 22.1 -1 9
Asia Pacific 588.0 -8 -6 30.9 -66 5.3 -10 -11
China 144.6 -6 -9 (7.9) * -5.5 -8 *
Total from
Operations 6,141.3 7 6 583.6 -36 9.5 1 5
Global Expenses - - - (104.6) -63 - - -
Consolidated(1) $6,141.3 7% 6% $479.0 -44% 7.8% 1% 5%
CATEGORY SALES (US$)
Consolidated
------------------------
% var. vs
9M05
------------------------
Beauty (cosmetics/fragrances/skin care/toiletries) $4,267.8 7%
Beauty Plus (fashion jewelry/watches/apparel/accessories) 1,196.7 12
Beyond Beauty (home products/gift/decorative) 614.9 -
-------- ------
Net Sales $6,079.4 7%
Other Revenue 61.9 2
-------- ------
Total Revenue $6,141.3 7%
* Calculation not meaningful
(1) The acquisition of our licensee in Colombia favorably impacted revenue
growth in Latin America for the three and nine months ended September
30, 2006, by 12 points and 11 points, respectively. The acquisition
also favorably impacted revenue growth in Consolidated Avon for the
three and nine months ended September 30, 2006, by 3 points in each
period.
SOURCE Avon Products, Inc.
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CONTACT:
Investors: Renee Johansen, or Rob Foresti,
+1-212-282-5320, or Media: Victor Beaudet, +1-212-282-5344, or
Sharon Samuel, +1-212-282-5322, or Jennifer Vargas,
+1-212-282-5404, all for Avon Products, Inc.
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