Avon Reports First-Quarter Results

OREANDA-NEWS. Avon Products, Inc. (NYSE: AVP) today reported first-quarter 2016 results. Total revenue for Avon Products, Inc. declined 16% to $1.3 billion, but increased 2% in constant dollars¹ and increased 3% in constant dollars when excluding the impact of the sale of Liz Earle. In addition, Adjusted Diluted Earnings per Share from Continuing Operations declined $0.10 per share versus the same period last year and included a negative currency impact of $0.13 per share, driven by the strength of the U.S. dollar against the currencies in which the Company operates.

"Our first-quarter results were in line with our expectations, and we are executing against our transformation plan with speed and rigor. Since sharing the plan with the investment community in January, we have successfully completed the sale and separation of the North America business, implemented a new organizational structure, identified actions to deliver our 2016 savings targets, and reconstituted our Board of Directors," said Sheri McCoy, Chief Executive Officer of Avon Products, Inc. "With these actions, we are well-positioned as we move forward aggressively to drive out cost, invest in growth, and improve our financial flexibility."

As discussed in Avon's Form 10-Q for the quarter ended March 31, 2016, this quarter includes the following changes to the Company's reporting and disclosures:

1. The Company deconsolidated its Venezuela business as of March 31, 2016 due to the continued lack of exchangeability of the Venezuelan currency and its impact on the Company's ability to exercise sufficient control over the operations of the business in Venezuela. For reporting purposes, this means that the operating results (revenue and expenses) of Venezuela are included in the first quarter of 2016 consolidated operating results but will not be included in the future results beginning with the second quarter of 2016. The associated net assets of Venezuela have been written off as of March 31, 2016. As discussed further below in item (2), the operating results of Venezuela are not included in a reportable segment and instead are presented in Other operating segments and business activities;
2. Changes to segment reporting:
   1. To align with the revised operating model, the Company has changed its reportable segments to now be: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific;
   2. Avon is including the items below in Other operating segments and business activities. The Company believes this presentation will provide a clearer comparison of core operating results.
      1. Venezuela operating results, which have been deconsolidated as of March 31, 2016;
      2. The historical results of the Liz Earle business, which was sold in July of 2015;
      3. Royalties for the use of the Company's name and trademarks in various countries; and
      4. Product sales to the recently sold North America business;
   3. Avon has changed the methodology of allocating global expenses to the segments. Segment profit excludes any allocation of global expenses other than global marketing expenses. The Company has allocated global marketing expenses to the reportable segments to ensure comparability between periods;
   4. Avon has changed the measure of profit disclosed for segments and refers to it as Segment profit and Segment margin, which is similar to what the Company previously used in its segment reporting as Adjusted operating profit and Adjusted operating margin, which will simplify the disclosure of segment profit;
3. A new metric: Change in Ending Representatives³, which the Company believes can be a useful indicator of potential revenue performance; and
4. A discussion of the impact of the newly issued Series C Preferred Stock to an affiliate of Cerberus Capital Management for $435 million.

The results of the Company's former North America business, which was separated as of March 1, 2016, continue to be reflected in the financial statements as discontinued operations.

First-Quarter 2016 Income Statement Review (compared with first-quarter 2015)

• Total revenue for Avon Products, Inc. declined 16% to $1.3 billion, but increased 2% in constant dollars and increased 3% in constant dollars when excluding the impact of the sale of Liz Earle.
• Total revenue from reportable segments declined 15% to $1.3 billion, and increased 2% in constant dollars. In addition, the year-over-year comparison is impacted by the Industrial Production Tax ("IPI") levied by the Brazilian government on cosmetics beginning in May 2015. Excluding the estimated impact of the Brazil IPI tax, constant-dollar revenue would have grown approximately 4%². While we will anniversary the Brazil IPI tax in May, there have been additional state taxes, referred to as MVA taxes, that went into effect in various jurisdictions in Brazil in the latter part of 2015. These taxes negatively impacted the results in the first quarter of 2016 and will continue to affect the growth rates for the remainder of the year. Argentina (a market experiencing high inflation) contributed approximately 1 point to this constant-dollar revenue growth.
  • Active Representatives were down 1% year over year, as increases in Europe, Middle East & Africa were more than offset by declines in the other reportable segments, most significantly South Latin America.
  • Average order increased 3% due to growth in all reportable segments as the Company continues to benefit from pricing.
  • Ending Representatives increased 2% due to growth in Europe, Middle East & Africa, most significantly Russia and South Africa.
• Gross margin was 60.3%, down 30 basis points. Adjusted gross margin was 60.3%, down 130 basis points, driven by an approximate 420 basis points of unfavorable impact of foreign exchange, partially offset by the favorable net impact of price/mix and lower supply chain costs.
• Operating margin was 0.6% in the quarter, up 270 basis points. Adjusted operating margin was 4.2%, down 230 basis points. These year-over-year comparisons were negatively impacted by approximately 80 basis points due to the impact of the IPI tax in Brazil. Excluding this impact, Adjusted operating margin would have decreased 150 basis points², which was primarily driven by an estimated 560 basis points of unfavorable impact of foreign exchange. The foreign exchange impact was partially offset by the favorable net impact of price/mix, as well as the continued benefits from cost savings initiatives.
• The effective tax rate from continuing operations was impacted by the deconsolidation of the Venezuelan operations. This negative impact to the effective tax rate was partially offset by the recognition of a benefit associated with the implementation of foreign tax planning strategies. The Adjusted effective tax rate in first-quarter 2016 was negatively impacted by the country mix of earnings and the inability to recognize additional deferred tax assets associated with current period operating losses in various jurisdictions. The Adjusted effective tax rate is expected to be volatile on a quarterly basis due to the country mix of quarterly earnings, as well as withholding taxes associated with repatriation of cash, on lower pre-tax earnings.
• Loss from continuing operations, net of tax was $156 million, or a loss of $0.36 per diluted share, compared with a loss of $143 million, or a loss of $0.33 per diluted share, for the first quarter of 2015. Adjusted loss from continuing operations, net of tax was $27 million, or $0.07 per diluted share, compared with Adjusted income from continuing operations, net of tax of $15 million, or $0.03 per diluted share, for the first quarter of 2015.
• Loss from discontinued operations, net of tax was $10 million, or a loss of $0.02 per diluted share, compared with a loss of $4 million, or $0.01 per diluted share, for the first quarter of 2015.  
• Foreign currency has impacted the Company's financial results of continuing operations as shown in the table below:

Adjustments to First-Quarter 2016 GAAP Results to Arrive at Adjusted Results

During the first quarter of 2016, the following items had an aggregate impact of $0.29 per diluted share on the financial results:

• The Company recorded costs to implement restructuring within operating profit of approximately $47 million before tax, primarily related to employee-related costs as part of the previously announced Transformation Plan.
• The impact of the deconsolidation of the Venezuela operations as of March 31, 2016 for which the Company recorded an after-tax loss of approximately $120 million.
• The Company recorded an income tax benefit of approximately $29 million, which was recognized as a result of the implementation of foreign tax planning strategies.

First-Quarter 2016 Regional Highlights (compared with first-quarter 2015)

First-Quarter 2016 Regional Highlights

• Europe, Middle East & Africa revenue was down 2%, and up 11% in constant dollars. Constant-dollar revenue was driven by an increase in Active Representatives as well as higher average order.
  • Russia revenue was up 5%, or up 25% in constant dollars, primarily driven by an increase in Active Representatives, which continued to benefit from sustained momentum in recruiting and retention, and higher average order, which was driven by pricing.
  • U.K. revenue was down 3%, or up 4% in constant dollars, primarily driven by higher average order as a result of strength in Fashion & Home, while Active Representatives declined.
• South Latin America revenue was down 28% and declined 2% in constant dollars. Constant-dollar revenue was negatively impacted by the IPI tax in Brazil (as discussed above). Excluding the estimated impact of this item, constant-dollar revenue would have grown approximately 2%² driven by higher average order, which was partially offset by a decline in Active Representatives. The additional MVA taxes in Brazil (as discussed above), had an estimated 1 point impact on revenue growth for South Latin America.  Argentina contributed approximately 3 points to this constant-dollar revenue growth.
  • Brazil revenue was down 33%, and declined 7% in constant dollars. Constant-dollar revenue growth was negatively impacted by an estimated 8 points due to the impact of the IPI tax. Excluding this impact, constant-dollar revenue would have increased approximately 1%², driven primarily by higher average order, which was partially offset by a decline in Active Representatives. This market continues to be impacted by a difficult macroeconomic environment as well as the additional MVA taxes (as discussed above). These additional taxes negatively impacted Brazil's constant-dollar revenue growth by an estimated 3 points, as it has not been offset by pricing given the macroeconomic environment combined with the pricing taken to offset a portion of the IPI tax. 
• North Latin America revenue was down 11% and up 2% in constant dollars. Constant-dollar revenue benefited from higher average order, which was partially offset by a decrease in Active Representatives.
  • Mexico revenue was down 15% and rose 2% in constant dollars, primarily driven by higher average order due to strength in Fashion & Home, partially offset by a decline in Active Representatives.
• Asia Pacific revenue was down 17%, and declined 10% in constant dollars due to declines in most markets, led by China. The region's constant-dollar revenue decline was primarily due to lower Active Representatives.
  • Philippines revenue was down 6% and relatively unchanged in constant dollars driven by higher average order, offset by a decline in Active Representatives due to a decline in activity, which was impacted by a reduction in the number of sales campaigns as well as the timing of the Easter holiday.

First-Quarter 2016 Cash Flow Review

• Net cash used by operating activities of continuing operations was $191 million for the three months ended March 31, 2016, compared with $178 million for the same period in 2015. Operating cash flow during the first quarter was unfavorably impacted by lower cash-related earnings (including the unfavorable impact of foreign currency), a contribution to the pension plan for corporate U.S.-based associates and higher purchases of inventory. When comparing the year-over-year use of cash from operations, the comparison benefits from the $67 million payment made during the first quarter of 2015 to the U.S. Securities and Exchange Commission in connection with the FCPA settlement, which did not recur in 2016.
• For the three months ended March 31, 2016, there was $25 million of net cash used by investing activities of continuing operations, a $2 million increase over the prior year.
• Net cash provided by financing activities of continuing operations was $436 million for the three months ended March 31, 2016, or $472 million higher than the prior year, primarily due to the proceeds from the sales of Series C Preferred Stock and the suspension of the dividend.

Transformation Plan

In January 2016, the Company announced a Transformation Plan, which includes cost reductions in an effort to continue to improve its cost structure and to enable the Company to reinvest in growth. As a result of this plan, the Company expects pre-tax annualized cost savings of approximately $350 million after three years, with an estimated $200 million from supply chain reductions and an estimated $150 million from other cost reductions. These pre-tax cost savings are expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. The Company plans to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help the Company modernize its business. The Transformation Plan was initiated in order to enable the Company to achieve its long-term goal of a targeted low double-digit operating margin and mid single-digit constant-dollar revenue growth.

On March 1, 2016, the Company and Cerberus closed their strategic partnership transaction, including the separation of the North America business that is now privately held and managed by an affiliate of Cerberus. Under the terms of the transaction, an affiliate of Cerberus invested $435 million in exchange for shares of Avon's Series C Preferred Stock.

In March 2016, the Company announced significant changes to its operating model that include a reduction in corporate infrastructure, the transition of the Company's headquarters to the United Kingdom over time, headcount reductions of approximately 1,700 filled positions, and the elimination of approximately 800 open positions.  These changes in the operating model are expected to deliver $50 million of the $70 million savings expected in 2016. In addition, the Company has identified additional areas, primarily within supply chain and sourcing, to deliver the remaining savings.

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 nearly 6 million active independent Avon Sales Representatives.

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