Avon Reports Fourth-Quarter and Full-Year 2017 Results

LONDON, Feb. 15, 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 fourth quarter and fiscal year ended December 31, 2017.

Highlights for Fourth Quarter of 2017:

• Total Revenue was relatively unchanged at $1.6 billion; Declined 2% in constant dollars¹
• Active Representatives and Ending Representatives declined 2% and were relatively unchanged, respectively
• Operating Margin increased 150 bps to 8.3%; Adjusted¹ Operating Margin increased 250 bps to 9.8%
• Diluted Earnings Per Share From Continuing Operations of $0.17; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.12

Jan Zijderveld, Avon CEO, said, "I am excited to be joining such a special business at this important chapter in the company's history. Very few brands have Avon's brand recognition, extensive global reach and operate in attractive beauty channel categories. In a world where trust in companies is becoming a scarce commodity, our Representatives' relationships with their consumers has never been more relevant or compelling."

Jamie Wilson, Avon CFO, remarked, "Our top line remains under pressure as we continue to operate in challenging macro and competitive conditions, particularly in our largest markets. We delivered improving operating margins in the fourth quarter supported by continued benefit from our ongoing cost savings initiatives. Importantly, we continued to strengthen our cash position, enhancing the financial flexibility necessary to fund priority investments."

Zijderveld went on to say, "With the support of the Board of Directors, and the reality of our current performance, I am taking a fresh look, diving deeply into our business, starting with spending time in our key markets to gain a full picture of the operating climate as a basis to improve performance. I am committed to accelerating the pace of change and to positioning Avon for success."

Fiscal 2017 overview:

• Total Revenue was relatively unchanged at $5.7 billion; Declined 2% in constant dollars
• Avon realized more than $250 million of cost savings, exceeding its target of $230 million for 2017
• Active Representatives and Ending Representatives declined 3% and were relatively unchanged, respectively
• Operating Margin decreased 80 bps to 4.8%; Adjusted Operating Margin decreased 30 bps to 6.2%
• Diluted Loss Per Share From Continuing Operations of $0.00; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.06
• Foreign currency favorably impacted both Diluted Loss Per Share and Adjusted Diluted Earnings Per Share by an estimated $0.07 per share, driven by the strength of the currencies of the countries in which the Company operates against the U.S. dollar

Fourth-Quarter 2017 Income Statement Review (compared with fourth-quarter 2016)

• Total revenue for Avon Products, Inc. was relatively unchanged at $1.6 billion and declined 2% in constant dollars.
  
  
• From reportable segments:
• Total revenue was relatively unchanged at $1.6 billion and declined 2% in constant dollars.
• Active Representatives declined 2% primarily due to decreases in South Latin America and North Latin America.
• Average order was relatively unchanged primarily due to growth in South Latin America that was offset by a decline in Europe, Middle East & Africa.
• Ending Representatives was relatively unchanged primarily due to growth in Europe, Middle East & Africa that was offset by a decline in South Latin America.
  
  
• Gross margin was 61.0%, up 70 basis points and Adjusted gross margin was 61.1%, up 80 basis points, primarily due to the favorable net impact of price/mix.
  
  
• Operating margin was 8.3% in the quarter, up 150 basis points, while Adjusted operating margin was 9.8%, up 250 basis points. The operating margin comparison was unfavorably impacted by higher costs to implement ("CTI") restructuring in the current year. Both the operating margin and Adjusted operating margin year-over-year comparisons were favorably impacted by lower bad debt expense, primarily in Brazil, and lower fixed expenses, including the benefit of cost reductions associated with the Transformation Plan. These factors were partially offset by higher Representative, sales leader and field expense to drive Representative activity.
  
  
• The provision for income taxes was $1 million, compared with $53 million for 2016. The difference is primarily driven by tax benefits associated with the enactment of the Tax Cuts and Jobs Act in the U.S., net valuation allowances released in several markets in Europe, Middle East & Africa, and a favorable court decision in Brazil. On an Adjusted basis, the provision for income taxes was $51 million, compared with $44 million for 2016.
  
  
• Income from continuing operations, net of tax was $90 million, or $0.17 per diluted share, compared with a loss of $10 million, or a loss of $0.03 per diluted share, for 2016. Adjusted income from continuing operations, net of tax was $65 million, or $0.12 per diluted share, compared with $9 million, or $0.01 per diluted share, for 2016. Earnings allocated to convertible preferred stock had a negative $0.04 impact on Diluted earnings per share and a negative $0.03 impact on Adjusted diluted earnings per share in the fourth quarter of 2017, compared with a negative $0.01 impact on both Diluted earnings per share and Adjusted diluted earnings per share in the fourth quarter of 2016.
  
  
• Loss from discontinued operations, net of tax in the fourth quarter of the prior year of $1 million, or $0.00 per diluted share, was associated with the previously separated North America business. There were no amounts recorded in discontinued operations in the fourth quarter of 2017.

Adjustments to Fourth-Quarter 2017 GAAP Results to Arrive at Adjusted Results

During the fourth quarter of 2017, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, reduced Diluted earnings per share from continuing operations by approximately $0.05:

• The Company recorded CTI restructuring within operating profit of approximately $24 million before and after tax, primarily related to the Transformation Plan, due primarily to contract terminations and the impact of the Company's decision to exit its Australia and New Zealand markets. Following a review and determination that there is no path to long-term profitability in these markets, the Company chose to close these operations.
  
  
• The Company recorded a $50 million net income tax benefit that included an approximate $30 million net benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of $26 million associated with a number of markets in Europe, Middle East & Africa, and an approximate $10 million benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 million associated with valuation allowances to adjust deferred tax assets in Mexico.

Fourth-Quarter 2017 Segment Review (compared with fourth-quarter 2016)

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 was relatively unchanged, or down 2% in constant dollars, driven by declines in Active Representatives, primarily in Brazil. The Company saw constant-dollar revenue growth in 9 of its top 15 markets while experiencing continued variability and challenges to sales momentum including an intense competitive environment.

• Europe, Middle East & Africa revenue was up 3%, or down 2% in constant dollars, driven by lower average order, partially offset by an increase in Active Representatives. The constant-dollar revenue decline was primarily driven by Russia and the U.K., partially offset by growth in Turkey with mixed results in the rest of the segment.
• Russiarevenue was down 2%, or 9% in constant dollars, due to lower average order.
• U.K. revenue was down 6%, or 12% in constant dollars, due to a decrease in Active Representatives.
• South Latin America revenue was down 2%, or 1% in constant dollars, driven by a decrease in Active Representatives, partially offset by higher average order. Constant-dollar revenue was primarily impacted by a decline in Brazil, partially offset by growth in Argentina, driven by inflationary pricing.
• Brazilrevenue was down 8%, or 9% in constant dollars, driven by a decrease in Active Representatives and lower average order.
• North Latin Americarevenue was relatively unchanged, or down 2% in constant dollars, driven by a decrease in Active Representatives which includes the impact of the September 2017 earthquake in Mexico, partially offset by higher average order.
• Mexico revenue was up 2%, or down 3% in constant dollars, primarily due to a decrease in Active Representatives which includes the impact of the September 2017 earthquake and lower average order.
• Asia Pacific revenue was down 3%, or 2% in constant dollars, primarily due to lower average order and a decrease in Active Representatives. Constant-dollar revenue growth in the Philippines was offset by declines in most other markets in the segment.
• Philippinesrevenue was up 1%, or 4% in constant dollars, driven by an increase in Active Representatives.

Full-Year 2017 Income Statement Review (compared with full-year 2016)

• Total revenue for Avon Products, Inc. was relatively unchanged at $5.7 billion and declined 2% in constant dollars.
  
  
• From reportable segments:
• Total revenue was relatively unchanged at $5.7 billion and declined 2% in constant dollars.
• Active Representatives declined 3% due to decreases across all segments, most significantly in South Latin America and Europe, Middle East & Africa.
• Average order increased 1% primarily due to growth in South Latin America, that was partially offset by a decline in Europe, Middle East & Africa.
• Ending Representatives was relatively unchanged primarily due to growth in Europe, Middle East & Africa that was offset by a decline in South Latin America.
  
  
• Gross margin and Adjusted gross margin each increased 100 basis points to 61.5%, primarily due to the favorable net impact of price/mix.
  
  
• Operating margin was 4.8%, down 80 basis points, while Adjusted operating margin was 6.2%, down 30 basis points. The operating margin comparison was unfavorably impacted by proceeds recognized in 2016 as a result of a legal settlement and a loss contingency recorded in 2017 related to a non-U.S. pension plan, partially offset by lower CTI restructuring in the current year. Both the operating margin and Adjusted operating margin year-over-year comparisons were negatively impacted by higher bad debt expense, primarily in Brazil, higher Representative, sales leader and field expense and the inflationary impact on costs outpacing revenue growth. This was partially offset by the favorable net impact of mix and pricing and the benefit of cost reductions associated with the Transformation Plan.
  
  
• The provision for income taxes was $101 million, compared with $125 million for 2016. On an Adjusted basis, the provision for income taxes was $152 million, compared with $166 million for 2016.
  
  
• Income from continuing operations, net of tax was $20 million, or a loss of $0.00 per diluted share, compared with a loss of $93 million, or a loss of $0.25 per diluted share, for 2016. Adjusted income from continuing operations, net of tax was $47 million, or $0.06 per diluted share, compared with $35 million, or $0.04 per diluted share, for 2016. Earnings allocated to convertible preferred stock had a negative $0.05 impact on both Diluted loss per share and Adjusted diluted earnings per share in 2017, compared with a negative $0.04 impact on both Diluted earnings per share and Adjusted diluted earnings per share in 2016.
  
  
• Loss from discontinued operations, net of tax in the prior year of $14 million, or $0.03 per diluted share, was associated with the previously separated North America business. There were no amounts recorded in discontinued operations for 2017.

Adjustments to Full-Year 2017 GAAP Results to Arrive at Adjusted Results

During 2017, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, improved Diluted loss per share from continuing operations by approximately $0.06:

• The Company recorded CTI restructuring within operating profit of approximately $60 million before tax (approximately $59 million after tax), primarily related to the Transformation Plan.
  
  
• The Company recorded an approximate $18 million charge for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.
  
  
• The Company recorded a $50 million net income tax benefit that included an approximate $30 million net benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of $26 million associated with a number of markets in Europe, Middle East & Africa, and an approximate $10 million benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 million associated with valuation allowances to adjust deferred tax assets in Mexico.

Full-Year 2017 Segment Review (compared with full-year 2016)

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 was relatively unchanged, or down 2% in constant dollars, primarily due to a decrease in Active Representatives. Results continued to be impacted by challenging macro and competitive conditions in some of the Company's largest markets. However, the Company did see second half performance improve versus the first half of the year and saw constant-dollar revenue growth in many of its top 15 markets.

• Europe, Middle East & Africa revenue was down 1%, or 4% in constant dollars, driven by a decrease in Active Representatives and lower average order. The constant-dollar revenue decline was primarily driven by Russia and the U.K., partially offset by growth in South Africa with mixed results in the rest of the segment.
• Russiarevenue was up 5%, or down 8% in constant dollars, primarily due to lower average order along with a decrease in Active Representatives.
• U.K. revenue was down 14%, or 11% in constant dollars, primarily due to a decrease in Active Representatives.
• South Latin America revenue was up 4%, or relatively unchanged in constant dollars, as higher average order was offset by a decrease in Active Representatives. Constant-dollar revenue was primarily impacted by a decline in Brazil, partially offset by growth in Argentina, driven by inflationary pricing.
• Brazilrevenue was up 4%, or down 4% in constant dollars, primarily due to a decrease in Active Representatives, partially offset by higher average order.
• North Latin Americarevenue was down 2%, or 1% in constant dollars, due to a decrease in Active Representatives which includes the impact of the September 2017 earthquake in Mexico.
• Mexico revenue was down 4%, or 2% in constant dollars, primarily due to a decrease in Active Representatives which includes the impact of the September 2017 earthquake.
• Asia Pacific revenue was down 6%, or 3% in constant dollars, primarily due to a decrease in Active Representatives, partially offset by higher average order. Constant-dollar revenue growth in the Philippines was offset by declines in most other markets in the segment.
• Philippinesrevenue was down 2%, or up 3% in constant dollars, driven by higher average order and an increase in Active Representatives.

Full-Year 2017 Cash Flow Review (compared with full-year 2016)

• Net cash provided by operating activities of continuing operations was $271 million for the twelve months ended December 31, 2017, compared with $128 million in the same period in 2016. The $143 million increase was primarily due to improvements in working capital. The year-over-year comparison was unfavorably impacted by net proceeds received in 2016 related to settling claims related to professional services. This was partially offset by Industrial Production Tax ("IPI") payments made in Brazil in 2016 that did not recur in 2017 (based on an injunction received in May 2016 that no longer required the Company to make cash deposits related to IPI taxes).
  
  
• Net cash used by investing activities of continuing operations was $70 million for the twelve months ended December 31, 2017, compared with $83 million in the same period in 2016. The year-over-year improvement was primarily due to a $22 million cash distribution received from New Avon LLC in the third quarter of 2017, partially offset by lower asset disposals.
  
  
• Net cash provided by financing activities of continuing operations was $0 million for the twelve months ended December 31, 2017, compared with $137 million in the same period in 2016. The $137 million decrease was primarily due to the net proceeds of debt issued in the third quarter of 2016 and the net proceeds related to the issuance of series C preferred stock received in 2016, partially offset by the repayment of certain debt in 2016.

Foundational Initiatives

The Company continues to make progress in a number of key areas. Transformation will require the Company to continue to execute in a coordinated way against each of these foundational initiatives:

• Deliver a Seamless, Competitive Representative Experience - invest to upgrade systems and drive mobile connectivity in its markets to make doing business easier for our Representatives;
  
  
• Insightful Data & Analytics - improve the Company's ability to support the Representative and help her run her business more effectively through deeper insight and analytics into Representative behavior and needs;
  
  
• Rigorous Performance Management - the new executive team is a key enabler to driving a performance-based culture for ownership of results and is working well together, taking action to enforce accountability and beginning to identify ways to drive the right behavior; and
  
  
• Relentless Focus on Execution Capabilities - focus on developing a service mindset and using pilot programs that cover service from end to end to enable the implementation of changes, with minimal disruption.

The Company realized more than $250 million of cost savings under the Company's Transformation Plan that was initiated in 2016, exceeding its cost savings target of $230 million for 2017, which includes both run-rate savings from 2016, along with in-year savings from current year initiatives. These savings have mostly been offset by the impact of inflation.

The Company believes it has the capacity to achieve its long-term goals of mid single-digit constant-dollar revenue growth and low double-digit operating margin. However, the Company recognizes it will take time. While competitive pressure will continue, 2018 is shaping up to be a year of executing on significant operational improvements. The Company is taking a fresh look, diving deeply into our business as a basis to accelerate improved performance.

Conference call

Avon will conduct a conference call at 9:00 a.m. Eastern Time today to discuss its quarterly and full-year 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: 7054628). 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 generally accepted accounting principles in the United States ("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 Company's Transformation Plan, including planned executive leadership changes, planned changes to mobile connectivity, data analytics, 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.