AVP Avon Products Inc

NEW YORK, July 31, 2014 /PRNewswire/ -- Avon Products, Inc. (NYSE: AVP) today reported second-quarter 2014 results. "As anticipated, our second-quarter results were tough.  While Avon's turnaround remains challenging, we are putting the people and processes in place to lay the foundation for returning Avon to sustainable, profitable growth," said Sheri McCoy, Chief Executive Officer of Avon Products, Inc. "As we move to the second half of the year, we continue to expect improved performance."

Second-Quarter 2014 (compared with second-quarter 2013)

For the second quarter of 2014, total revenue of $2.2 billion decreased 13%, or 3% in constant dollars. Total units decreased 6% and price/mix was up 3% during the quarter. Active Representatives² were down 6%, while average order² increased 3%.

Beauty sales declined 13%, or 3% in constant dollars. Fashion & Home sales declined 15%, or 5% in constant dollars.

Second-quarter 2014 gross margin and Adjusted gross margin were 63.0%. Adjusted gross margin was 30 basis points lower than the prior-year quarter, primarily due to the unfavorable impact of foreign exchange driven by Latin America and Europe, Middle East & Africa. This was partially offset by lower supply chain costs, and the favorable net impact of mix and pricing, primarily due to inflationary pricing in Latin America.

Operating profit was $93 million and operating margin was 4.3% in the quarter. Adjusted operating profit was $186 million and Adjusted operating margin was 8.5%, down 100 basis points from the second quarter of 2013. The decline in Adjusted operating margin was driven by the unfavorable impact of foreign exchange, primarily in Latin America and Europe, Middle East & Africa. Adjusted operating margin was also negatively impacted by the revenue decline with respect to fixed expenses.

Second-quarter 2014's effective tax rate from continuing operations was 69.7%, compared with 41.8% in the second quarter of 2013. The Adjusted effective tax rate was 42.7% for the second quarter of 2014, compared with 34.9% for the second quarter of 2013. The higher 2014 Adjusted effective tax rate is primarily due to an adjustment to the carrying value of the Company's deferred tax balances, an out-of-period adjustment and the country mix of earnings.

Second-quarter 2014's net income from continuing operations was $20 million, or $0.04 per diluted share, compared with net income from continuing operations of $85 million, or $0.19 per diluted share, for the second quarter of 2013. Second-quarter 2014's Adjusted net income from continuing operations was $91 million, or $0.20 per diluted share, compared with Adjusted net income from continuing operations of $127 million, or $0.29 per diluted share, for the second quarter of 2013.

Net cash used by operating activities was $7 million for the six months ended June 30, 2014, compared with net cash provided of $70 million for the same period in 2013, unfavorably impacted primarily by lower earnings. The overall net cash used during the six months ended June 30, 2014 was $330 million, which was comparable with the same period in 2013.

Avon's net debt (total debt less cash) at June 30, 2014 was $1.9 billion, up $240 million from the year-end 2013 level, and $170 million lower than at June 30, 2013.

Adjustments to Second-Quarter 2014 GAAP Results to Arrive at Adjusted Results

During the second quarter of 2014, the following items had a significant impact on the financial results:

• The Company recorded costs to implement restructuring within operating profit of approximately $51 million pre-tax, or $0.09 per diluted share, comprised primarily of employee-related costs associated with the global headcount reduction of approximately 600 positions, largely in the corporate organization and North America business unit.
• In an effort to better manage the Company's future pension obligations, the Company offered former employees who are vested and participate in the U.S. pension plan a payment that would fully settle its pension plan obligation to those participants who elected to receive such payment. As a result, the Company recorded a settlement charge associated with these payments of $24 million pre-tax, or $0.04 per diluted share.
• During the first quarter of 2014, the Company began utilizing the SICAD II rate to remeasure its Venezuelan operations. As a result of the use of the historical U.S. dollar cost basis of non-monetary assets, such as inventory, second-quarter 2014 operating profit was negatively impacted by approximately $18 million, or $0.04 per diluted share.

Second-Quarter 2014 Regional Highlights (compared with second-quarter 2013)

• Second-quarter constant-dollar revenue growth was favorably impacted by approximately 1 point as a result of the recognition of Value Added Tax ("VAT") credits in Brazil. In addition, higher average order was offset by a decrease in Active Representatives.
• Brazil revenue was down 5%, or up 3% in constant dollars, favorably impacted by approximately 2 points as a result of the VAT credits. Brazil's constant-dollar revenue was pressured by demand forecasting issues and disruption from the World Cup. Constant-dollar Beauty sales were relatively unchanged and Fashion & Home sales were up 2%.
• Mexico revenue was down 16%, or 12% in constant dollars, primarily due to a decrease in Active Representatives.
• Venezuela revenue was down 84%, or up 31% in constant dollars, primarily due to higher average order, which benefited from the inflationary impact on pricing that was partially offset by a decrease in units sold.
• Adjusted operating margin was negatively impacted by lower gross margin, primarily due to the unfavorable impact of foreign exchange. Higher transportation expenses and inflationary costs were also factors. These were partially offset by the benefits associated with the VAT credits in Brazil. 

• Second-quarter constant-dollar revenue was relatively unchanged. Constant-dollar revenue was negatively impacted by approximately 1 point as a result of the closure of the France business. In addition, higher average order was partially offset by a decrease in Active Representatives.
• In Russia, revenue was down 13%, or 4% in constant dollars, primarily due to a decrease in Active Representatives, which was partially offset by higher average order. Russia continued to be negatively impacted by a difficult economy, including the impact of geopolitical uncertainties.
• U.K. revenue was up 11%, or 1% in constant dollars, primarily due to higher average order, partially offset by a decrease in Active Representatives.
• Turkey revenue was down 13%, or relatively unchanged in constant dollars, as an increase in Active Representatives was offset by lower average order.
• South Africa revenue was down 2%, or up 9% in constant dollars, primarily due to higher average order.
• The decrease in Adjusted operating margin was primarily due to the unfavorable impact of foreign exchange.

• Second-quarter constant-dollar revenue declined primarily due to a decrease in Active Representatives and a decline in units sold.
• North America constant-dollar Beauty sales declined 20% and Fashion & Home sales declined 19%.
• Adjusted operating margin increased, primarily due to cost-reduction actions. The favorable impact of pricing also contributed to the increase in Adjusted operating margin. These impacts were partially offset by the impact of the revenue decline with respect to fixed expenses.  

• Second-quarter constant-dollar revenue declined due to declines in most markets.
• Revenue in the Philippines was down 4%, or up 1% in constant dollars, primarily due to higher average order, partially offset by a decrease in Active Representatives.
• Revenue in China was down 31%, or 30% in constant dollars, primarily due to a decline in the number of beauty boutiques, which negatively impacted unit sales.
• The decline in Adjusted operating margin was primarily due to the impact of the revenue decline with respect to fixed expenses. Lower gross margin, primarily caused by the unfavorable impact of foreign exchange, and the unfavorable net impact of pricing and mix, was also a factor. These were partially offset by a benefit from lower bad debt expense in the Philippines.

Adjusted total global expenses decreased, primarily due to lower expenses related to the Service Model Transformation project, and lower professional and related fees associated with the FCPA matters.  

Avon will conduct a conference call at 9:00 A.M. today to discuss the quarterly 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: 63622254). The call will be webcast live at www.avoninvestor.com and can be accessed or downloaded from that site for a period of one year. Please refer to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, for additional information on Avon's results for the quarter.

Avon, the company for women, is a leading global beauty company, with $10 billion in annual revenue. As one of the world's largest direct sellers, Avon is sold through more than 6 million active independent Avon Sales Representatives. Avon products are available in over 100 countries, and the product line includes color cosmetics, skincare, fragrance, and fashion and home products, featuring such well-recognized brand names as Avon Color, ANEW, Skin-So-Soft, Advance Techniques, and mark. Learn more about Avon and its products at www.avoncompany.com.

Footnotes

¹ "Adjusted" items refer to financial results presented in accordance with U.S. GAAP that have been adjusted to exclude certain costs as described below, under "Non-GAAP Financial Measures."  We also refer to Adjusted financial measures as Constant $ items, which are Non-GAAP financial measures as described below under "Non-GAAP Financial Measures."

² In the first quarter of 2014, we revised the definition of our "Change in Active Representatives" performance metric. The change from the previous definition is that we no longer divide the unique orders by the number of billing days. This update aligns our external performance metrics with how we internally monitor the performance of our business. The updated definition is as follows:

This metric is a measure of Representative activity based on the number of unique Representatives submitting at least one order in a sales campaign, totaled for all campaigns in the related period. To determine the change in Active Representatives, this calculation is compared to the same calculation in the corresponding period of the prior year. Orders in China are excluded from this metric as our business in China is predominantly retail. Liz Earle is also excluded from this calculation as they do not distribute through the direct-selling channel.

In addition, we have added a definition for our "Change in Average Order" performance metric, as follows:

This metric is a measure of Representative productivity. The calculation is the difference of the year-over-year change in revenue on a Constant $ basis and the change in Active Representatives. Change in Average Order may be impacted by a combination of factors such as inflation, units, product mix, and/or pricing.

Non-GAAP Financial Measures

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we disclose 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. We also refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current-year results and prior-year results at a constant exchange rate. Currency impact is determined as the difference between actual growth rates and constant-currency growth rates.

We also present gross margin, selling, general and administrative expenses as a percentage of revenue, total and net global expenses, operating profit, operating margin, income from continuing operations, diluted earnings per share from continuing operations and effective tax rate on a Non-GAAP basis. The discussion of our segments presents operating profit and operating margin on a Non-GAAP basis. We refer to these Non-GAAP financial measures as "Adjusted." We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measures and the financial measures calculated and reported in accordance with GAAP. The Company uses the Non-GAAP financial measures to evaluate its operating performance and believes that it is meaningful for investors to be made aware of, on a period-to-period basis, the impacts of 1) costs to implement ("CTI") restructuring initiatives, 2) costs and charges related to the devaluations of Venezuelan currency in March 2014 and February 2013, combined with being designated as a highly inflationary economy ("Venezuelan special items"), 3) the $12 million accrual recorded in the second quarter of 2013 for the offer of settlement relating to the FCPA investigations and the additional $46 million accrual recorded in the first quarter of 2014 for the potential settlements related to the FCPA investigations ("FCPA accrual"), 4) the settlement charge associated with the U.S. pension plan ("Pension settlement charge"), and 5) costs and charges related to the extinguishment of debt ("Loss on extinguishment of debt"). 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 Venezuelan special items include the impact on the Consolidated Statements of Income in 2014 and 2013, caused by the devaluations of Venezuelan currency on monetary assets and liabilities, such as cash, receivables and payables; deferred tax assets and liabilities; and non-monetary assets, such as inventories. For non-monetary assets, the Venezuelan special items include the earnings impact caused by the difference between the historical cost of the assets at the previous exchange rate and the revised exchange rate. In the first half of 2014, the Venezuelan special items also include an adjustment of $116 million to reflect certain non-monetary assets at their net realizable value. In 2013, the devaluation was as a result of the change in the official exchange rate, which moved from 4.30 to 6.30, and in 2014, the devaluation was caused as a result of moving from the official exchange rate of 6.30 to the SICAD II exchange rate of approximately 50.

The Pension settlement charge includes the impact on the Consolidated Statements of Income in the second quarter of 2014 associated with the payments made to former employees who are vested and participate in the U.S. pension plan. Such payments fully settle our pension plan obligation to those participants who elected to receive such payment.

The Loss on extinguishment of debt includes the impact on the Consolidated Statements of Income in the first quarter of 2013, caused by the make-whole premium and the write-off of debt issuance costs associated with the prepayment of the Company's private notes, as well as the write-off of debt issuance costs associated with the early repayment of $380 million of the outstanding principal amount of the Company's term loan agreement.

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 may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "believe," "may," "expect," "potential," "will," "would" and similar expressions, or the negative of those expressions, may identify forward-looking statements. They include, among other things, statements regarding our anticipated or expected results, future financial performance, various strategies and initiatives (including our stabilization strategies, cost savings initiatives, multi-year restructuring programs and other initiatives and related actions), costs and cost savings, competitive advantages, impairments, the impact of currency devaluations and other laws and regulations, government investigations, internal investigations and compliance reviews, results of litigation, contingencies, taxes and tax rates, potential alliances, acquisitions or divestitures, liquidity, cash flow, uses of cash and financing, hedging and risk management strategies, pension, postretirement and incentive compensation plans, supply chain and the legal status of our Representatives. Such forward-looking statements are based on management's reasonable current assumptions, expectations, plans and forecasts regarding the Company's current or future results and future business and economic conditions more generally. 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 improve our financial and operational performance and execute fully our global business strategy, including our ability to implement the key initiatives of, and realize the projected benefits (in the amounts and time schedules we expect) from, our stabilization strategies, cost savings initiatives, multi-year restructuring programs and other initiatives, product mix and pricing strategies, enterprise resource planning, customer service initiatives, sales and operation planning process, outsourcing strategies, Internet platform and technology strategies including e-commerce, marketing and advertising strategies, information technology and related system enhancements and cash management, tax, foreign currency hedging and risk management strategies, and any plans to invest these projected benefits ahead of future growth;
• the possibility of business disruption in connection with our stabilization strategies, cost savings initiatives, multi-year restructuring programs, or other initiatives;
• our ability to reverse declining revenue, margins and net income, particularly in North America, and to achieve profitable growth, particularly in our largest markets, such as Brazil, and developing and emerging markets, such as Mexico and Russia;
• our ability to improve working capital and effectively manage doubtful accounts and inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;
• our ability to reverse declines in Active Representatives, to enhance our sales Leadership programs, to generate Representative activity, to increase the number of consumers served per Representative and their engagement online, to enhance branding and the Representative and consumer experience and increase Representative productivity through field activation programs and technology tools and enablers, to invest in the direct-selling channel, and to compete with other direct-selling organizations to recruit, retain and service Representatives and to continue to innovate the direct-selling model;
• general economic and business conditions in our markets, including social, economic and political uncertainties in the international markets in our portfolio, such as in Russia and Ukraine, and any potential sanctions, restrictions or responses to such conditions imposed by other markets in which we operate;
• the effect of economic factors, including inflation and fluctuations in interest rates and currency exchange rates, as well as the designation of Venezuela as a highly inflationary economy and the devaluation of its currency, the availability of various foreign exchange systems including limited access to SICAD II in Venezuela, foreign exchange restrictions, particularly currency restrictions in Venezuela and Argentina, and the potential effect of such factors on our business, results of operations and financial condition;
• any developments in or consequences of investigations and compliance reviews, and any litigation related thereto, including the ongoing investigations and compliance reviews of Foreign Corrupt Practices Act ("FCPA") and related United States ("U.S.") and foreign law matters in China and additional countries, as well as any disruption or adverse consequences resulting from such investigations, reviews, related actions or litigation, including our ability to finalize settlements with the United States Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") with regard to the ongoing FCPA investigations on terms consistent with our current understandings with the government or, if we are able to reach such final settlements, what the timing of such final settlements will be or whether the SEC settlement will be authorized by the Commission or whether each of the settlements will receive the necessary court approvals, or if we are unable to reach such final settlements, the outcome of any subsequent litigation with the government which could have a material adverse effect;
• a general economic downturn, a recession globally or in one or more of our geographic regions, or sudden disruption in business conditions, and the ability of our broad-based geographic portfolio to withstand an economic downturn, recession, cost inflation, commodity cost pressures, economic or political instability, competitive or other market pressures or conditions;
• the effect of political, legal, tax and regulatory risks imposed on us in the U.S. and abroad, our operations or our Representatives, including foreign exchange, pricing or other restrictions, adoption, interpretation and enforcement of foreign laws, including in jurisdictions such as Brazil, Russia, Venezuela and Argentina, and any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny in China;
• the impact of changes in tax rates on the value of our deferred tax assets, and declining earnings, including the amount of any domestic source loss and the type, jurisdiction and timing of any foreign source income, on our ability to realize foreign tax credits in the U.S.;
• competitive uncertainties in our markets, including competition from companies in the cosmetics, fragrances, skincare and toiletries industry, some of which are larger than we are and have greater resources;
• the impact of the adverse effect of rising energy, commodity and raw material prices, 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 attract and retain key personnel;
• 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, large-scale power outages and similar events;
• key information technology systems, process or site outages and disruptions;
• the risk of product or ingredient shortages resulting from our concentration of sourcing in fewer suppliers;
• the impact of any significant restructuring charges or significant legal or regulatory settlements on our ability to comply with certain covenants in our debt instruments;
• any changes to our credit ratings and the impact of such changes on our financing costs, rates, terms, debt service obligations, access to lending sources and working capital needs;
• the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates;
• the impact of possible pension funding obligations, increased pension expense and any changes in pension regulations or interpretations thereof on our cash flow and results of operations;
• our ability to successfully identify new business opportunities, strategic alliances and strategic alternatives and identify and analyze alliance and acquisition candidates, secure financing on favorable terms and negotiate and consummate alliances and acquisitions, as well as to successfully integrate or manage any acquired business;
• disruption in our supply chain or manufacturing and distribution operations;
• the quality, safety and efficacy of our products;
• the success of our research and development activities;
• our ability to protect our intellectual property rights; and
• the risk of an adverse outcome in any material pending and future litigation or with respect to the legal status of Representatives.

Additional information identifying such factors is contained in Item 1A of our 2013 Form 10-K, as updated by our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, and other reports and documents we file with the SEC. We undertake no obligation to update any such forward-looking statements.