Avon Reports First-Quarter 2018 Results

LONDON, May 3, 2018 /PRNewswire/ -- Avon Products, Inc. (NYSE: AVP), a globally recognized leader in direct selling of beauty and related products, today announced its results for the quarter ended March 31, 2018.

Jan Zijderveld, Avon CEO, said, "Avon's first-quarter results were unsatisfactory and do not represent the underlying potential of the business. During my first 90 days, I have been deeply engaged in a comprehensive review of the Company's operations, including on-the-ground visits to many of our top markets where I have met with many of our direct selling Representatives."

Zijderveld emphasized, "While we are focused on the formulation of Avon's longer-term plans, we are already implementing near-term fixes that support the success and satisfaction of our Representatives--starting with actions to improve service delivery. Our long-term mission is clear, to return Avon to a competitive market position, and we are moving with deliberate urgency to design our turnaround plan."

Highlights for First Quarter of 2018:

• Total Revenue increased 5% to $1.4 billion, or 2% in constant dollars¹, both including a 6% reporting benefit due to the impact of adopting the new revenue recognition standard required by generally accepted accounting principles in the United States ("GAAP")
• Active Representatives and Ending Representatives declined 4% and 1%, respectively, largely due to declines in Brazil
• Operating Margin increased 100 bps to 3.2% and Adjusted¹ Operating Margin increased 100 bps to 4.0%, both including a benefit of 120 bps due to the impact of the new revenue recognition standard
• Diluted Loss Per Share From Continuing Operations of $0.06 and Adjusted Diluted Loss Per Share From Continuing Operations of $0.02, both including a $0.03 benefit due to the impact of the new revenue recognition standard

During the first quarter, the Company adopted the new GAAP revenue recognition standard, which had a significant impact on the presentation of sales incentives and Representative fees and associated costs, primarily for brochures. The Company adopted the standard as a cumulative-effect adjustment as of January 1, 2018, therefore, comparative information for prior periods has not been restated. Where appropriate, the impact from adopting the new standard has been separately quantified in this release.

New Revenue Recognition Standard (Accounting Standards Codification Topic ("ASC" 606), Revenue from Contracts with Customers)

As further discussed in Avon's Form 10-Q for the quarter ended March 31, 2018, the Company adopted ASC 606, as a cumulative-effect adjustment to retained earnings, as of January 1, 2018. The impact of the cumulative-effect adjustment to the Company's Consolidated Balance Sheets is primarily driven by sales incentives and Representative fees and associated costs, primarily for brochures.

Historically, the cost of sales incentives was presented as other accrued liabilities and prepaid expenses and other and recognized in selling, general and administrative expenses ("SG&A") over the period that the sales incentive was earned. Under the new standard, the portion of sales incentives or prospective discounts that are associated with a distinct performance obligation are initially deferred on the balance sheet and recognized in net sales and cost of sales when the performance obligation is satisfied.

Historically, brochure costs were initially deferred to prepaid expenses and other and charged to SG&A over the campaign length. Under the new standard, the revenue associated with brochures is recognized in other revenue when delivered to the Representative and the related cost is recognized in cost of sales, except in the case of costs for free brochures which are recognized in SG&A. In addition, other fees paid by Representatives to the Company for items such as late payments and payment processing are now reported as revenue, rather than as a reduction of SG&A. The other changes resulting from the new revenue recognition standard were not material.

The impact of the change in accounting for revenue recognition on first-quarter 2018 performance is summarized on pages 13-14 of this release.

First-Quarter 2018 Income Statement Review (compared with first-quarter 2017)

• Total revenue for Avon Products, Inc. increased 5% to $1.4 billion, or 2% in constant dollars, both including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard.
  
  
• Active Representatives declined 4% primarily due to decreases in South Latin America and North Latin America.
  
  
• Average order in constant dollars increased 6%, including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. Growth in South Latin America was offset by a declines in the other segments, primarily Europe, Middle East & Africa.
  
  
• Ending Representatives declined 1% primarily due to declines in South Latin America and North Latin America that were partially offset by growth in Europe, Middle East & Africa.
  
  
• Gross margin and Adjusted gross margin each decreased 280 basis points to 58.4%, including a decline of approximately 310 basis points due to the impact of adopting the new revenue recognition standard. The change in gross margin was primarily due to the favorable net impact of price/mix partially offset by higher supply chain costs.
  
  
• Operating margin was 3.2% in the quarter, up 100 basis points, while Adjusted operating margin was 4.0%, up 100 basis points, both including a benefit of approximately 120 basis points due to the implementation of the new revenue recognition standard. The operating margin and Adjusted operating margin year-over-year comparisons were both unfavorably impacted by higher Representative, sales leader and field expense, partially offset by lower bad debt expense, primarily in Brazil.
  
  
• The provision for income taxes was $32 million, compared with $30 million for first-quarter 2017. On an Adjusted basis, the provision for income taxes was $24 million, compared with $31 million for first-quarter 2017.
  
  
• Net loss was $21 million, or $0.06 per diluted share, including a benefit of $0.03 per diluted share due to the impact of the new revenue recognition standard, compared with a loss of $37 million, or $0.10 per diluted share, for first-quarter 2017. Adjusted net loss was $3 million, or $0.02 per diluted share, including a benefit of $0.03 per diluted share due to the impact of the new revenue recognition standard, compared with a loss of $28 million, or $0.07 per diluted share, for first-quarter 2017.

Adjustments to First-Quarter 2018 GAAP Results to Arrive at Adjusted Results

During the first quarter of 2018, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, reduced Diluted loss per share by approximately $0.04:

• The Company recorded costs to implement ("CTI") restructuring within operating profit of approximately $11 million before tax (approximately $9 million after tax), primarily related to the Transformation Plan.
  
  
• The Company recorded one-time tax reserves of approximately $9 million associated with its uncertain tax positions.

First-Quarter 2018 Segment Review (compared with first-quarter 2017)

With regards to the discussion below on segment revenue, the difference between the reported and constant-dollar revenue growth is the estimated impact of foreign currency translation.

Total Reportable Segment revenue increased 5% to $1.4 billion, or 2% in constant dollars, both including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard.  Revenue and constant-dollar revenue were impacted by declines in Active Representatives, primarily in Brazil and Mexico. The Company experienced continued variability with challenges in key markets, particularly Brazil.

• Europe, Middle East & Africa revenue was up 12%, or 2% in constant dollars, both including a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives and lower average order.
• Russiarevenue was up 9%, or 4% in constant dollars, both including a benefit of approximately 8% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by lower average order and a decrease in Active Representatives.
• U.K. revenue was up 1%, or down 9% in constant dollars, both including a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives.
  
  
• South Latin America revenue was relatively unchanged, or up 4% in constant dollars, both including a benefit of approximately 9% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives. Revenue and constant-dollar revenue were primarily impacted by a decline in Brazil, partially offset by growth in Argentina, driven by inflationary pricing.
• Brazilrevenue was down 4%, or 1% in constant dollars, both including a benefit of approximately 11% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives, as well as lower average order.
  
  
• North Latin Americarevenue was up 1%, or down 3% in constant dollars, both including a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives and, to a lesser extent, by lower average order.
• Mexico revenue was up 6%, or down 1% in constant dollars, both including a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives.
  
  
• Asia Pacific revenue was down 2%, or 3% in constant dollars, both including a decline of 1% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by a decrease in Active Representatives, most significantly in Malaysia, as well as lower average order.
• Philippinesrevenue was down 5%, or 2% in constant dollars, both including a benefit of approximately 1% due to the impact of adopting the new revenue recognition standard. Revenue and constant-dollar revenue were negatively impacted by lower average order, partially offset by an increase in Active Representatives.

First-Quarter 2018 Cash Flow Review (compared with first-quarter 2017)

• Net cash used by operating activities of continuing operations was $96 million for the three months ended March 31, 2018, compared with $80 million in the same period in 2017. The approximate $16 million increase to net cash used by continuing operating activities was primarily due to an increase in working capital, most significantly from higher inventory levels.
• Net cash used by investing activities of continuing operations was $27 million for the three months ended March 31, 2018, compared with $22 million in the same period in 2017. The approximate $5 increase to net cash used by continuing investing activities was primarily due to higher capital expenditures.
• Net cash provided by financing activities of continuing operations was less than $1 million for the three months ended March 31, 2018, compared with net cash used by financing activities of continuing operations of $5 million in the same period in 2017. The approximate $6 million benefit to net cash provided (used) by continuing financing activities was primarily due to lower repurchases of common stock relating to employee stock compensation.

Conference call

Avon will conduct a conference call at 9:00 a.m. Eastern Time today to discuss its quarterly results. The dial-in number for the call is (800) 843-2086 in the U.S. or +1 (706) 643-1815 from non-U.S. locations (conference ID number: 8872599). The call and related slide presentation will be webcast live at www.avoninvestor.com and can be accessed or downloaded from that site for a period of one year.

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 approximately 6 million active independent Avon Sales Representatives. Learn more about Avon and its products at www.avoncompany.com.

Footnotes

¹ "Adjusted" items refer to financial measures that are derived from measures calculated in accordance with GAAP, but which have been adjusted to exclude certain items. Other Adjusted financial measures that the Company refers to include constant dollar ("C$") items. All of these adjusted items are Non-GAAP financial measures as described below under "Non-GAAP Financial Measures." These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP.  Please refer to the Company's "Non-GAAP Financial Measures" description at the end of this release and the reconciliations the Company provides of these Non-GAAP financial measures to their comparable GAAP measures.

Forward-Looking Statements

Statements in this release that are not historical facts may be forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed from time to time in reports filed by Avon Products, Inc. with the U.S. Securities and Exchange Commission, including Forms 8-K, 10-Q, and 10-K. Some forward-looking statements in this release include and concern the Company's outlook and expected results, cost reduction actions and savings, the impact of adopting the new revenue recognition standard, the Company's Transformation Plan and Foundational Initiatives, planned changes to mobile connectivity, data analytics, and performance and service measures, and the impact of foreign currency, taxes and tax rates amongst others. These 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. These risks and uncertainties include, but are not limited to, the Company's ability to improve its financial and operational performance, its ability to achieve the anticipated benefits of the strategic partnership with Cerberus, the impact of the Company's business results, the possibility of business disruption, competitive uncertainties, and general economic and business conditions in its markets, including fluctuations in foreign currency exchange rates. There can be no assurance that actual results will not differ materially from management's expectations. Therefore, you should not rely on any of these forward-looking statements as predictors of future events. Any forward-looking statements speak only as of the date they are made. The Company does not undertake to update any such forward-looking statements.

Non-GAAP Financial Measures

To supplement the Company's financial results presented in accordance with GAAP, the Company discloses 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. The Company also refers to these adjusted financial measures as constant dollar items, which are Non-GAAP financial measures. The Company believes these measures provide investors an additional perspective on trends and underlying business results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, the Company calculates current-year results and prior-year results at constant exchange rates, which are updated on an annual basis as part of the Company's budgeting process. Foreign currency impact is determined as the difference between actual growth rates and constant-dollar growth rates.

The Company also presents cost of sales, gross margin, selling, general and administrative expenses, selling, general and administrative expenses as a percentage of revenue, operating profit, operating margin, income (loss) before taxes, income taxes, net income (loss), diluted earnings (loss) per share and effective tax rate on a Non-GAAP basis. The Company refers to these Non-GAAP financial measures as "Adjusted." The Company has provided quantitative reconciliations of the Non-GAAP financial measures to the most directly comparable financial measures calculated and reported in accordance with GAAP. See "Supplemental Schedule -  Non-GAAP Financial Measures" within this release for these quantitative reconciliations.

In addition, the Company defines free cash flow as net cash used by operating activities of continuing operations less capital expenditures.

The Company uses Non-GAAP financial measures to evaluate its operating performance. These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. 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 Company believes that it is meaningful for investors to be made aware of the impacts of: 1) CTI restructuring initiatives; and 2) one-time tax reserves associated with the Company's uncertain tax positions ("Special tax items").

The Special tax items include the impact on the provision for income taxes in the Consolidated Statements of Operations during 2018 due to one-time tax reserves of approximately $9 million associated with the Company's uncertain tax positions.

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SOURCE Avon Products, Inc.