Avon Products profit falls short of estimates

Avon Products profit falls short of estimates

Avon Products profit falls short of estimates

The FINANCIAL -- Avon Products, Inc. on February 16 announced its results for the fourth quarter and fiscal year ended December 31, 2016.

"We made good progress in the first year of our Transformation Plan, exceeding our cost savings targets, improving our profit margin, and significantly strengthening our balance sheet. However, the financial results for the fourth quarter were disappointing, largely due to the decline in Active Representatives and an unexpected increase in bad debt expense," said Sheri McCoy, Chief Executive Officer, Avon Products Inc. "As we move into 2017, we are taking actions to deliver more consistent performance across our markets, with Representative engagement remaining a key priority in our growth plan, while navigating continued challenging global economic and political headwinds."

Highlights for Fiscal 2016:

Revenue declined 7% to $5.7 Billion; Increased 2% in constant dollars

Active Representatives and Ending Representatives, both from Reportable Segments, declined 1% and were relatively unchanged, respectively

Operating Margin increased 290 bps to 5.6%; Adjusted1 Operating Margin increased 80 bps to 6.5%

Diluted Loss Per Share From Continuing Operations of $0.25; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.04

Foreign currency negatively impacted Diluted Earnings Per Share by an estimated $0.27 per share and Adjusted Diluted Earnings Per Share by an estimated $0.28 per share, driven in each case by the strength of the U.S. dollar against the currencies of the countries in which the Company operates

The Company realized an estimated $120 Million of cost savings in year one of the Transformation Plan

Debt was reduced by approximately $260 Million and the maturity profile was extended

Highlights for Fourth Quarter of 2016:

Revenue declined 2% to $1.6 Billion; Relatively unchanged in constant dollars

Active Representatives from Reportable Segments declined 2%

Bad Debt Expense increased 210 bps, primarily in Brazil

Operating Margin increased 290 bps to 6.8%; Adjusted Operating Margin increased 130 bps to 7.3%

Diluted Loss Per Share From Continuing Operations of $0.03; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.01

Full-Year 2016 Income Statement Highlights (compared with full-year 2015)

Total revenue for Avon Products, Inc. declined 7% to $5.7 billion, but increased 2% in constant dollars.

Total revenue from reportable segments declined 7% to $5.7 billion, but increased 3% in constant dollars.

Active Representatives declined 1%, primarily due to a decline in Asia Pacific that was partially offset by an increase in Europe, Middle East & Africa.

Average order increased 4% due to growth in all reportable segments as the Company benefited from pricing actions.

Ending Representatives were relatively unchanged as growth in Europe, Middle East & Africa and South Latin America was offset by a decline in Asia Pacific.

Gross margin was 60.5%, up 20 basis points and Adjusted gross margin was 60.5%, down 30 basis points. These year-over-year comparisons were negatively impacted by an approximate 260 basis point impact from foreign exchange, largely offset by pricing actions and lower supply chain costs.

Operating margin was 5.6%, up 290 basis points while Adjusted operating margin was 6.5%, up 80 basis points. These year-over-year comparisons benefited from the favorable net impact of price/mix, as well as continued benefits from cost savings initiatives. These benefits were partially offset by approximately 310 basis points of unfavorable impact of foreign exchange, as well as an increase in bad debt expense, primarily in Brazil.

The provision for income taxes was $125 million, compared with $819 million for 2015. The 2015 tax provision was most significantly impacted by valuation allowances for U.S. deferred tax assets. On an Adjusted basis, the provision for income taxes was $166 million, compared with $161 million for 2015. The effective tax rate from continuing operations was 399.4% and on an Adjusted basis was 82.6%.

Loss from continuing operations, net of tax was $93 million, or a loss of $0.25 per diluted share, compared with a loss of $797 million, or a loss of $1.81 per diluted share, for 2015. Adjusted income from continuing operations, net of tax was $35 million, or $0.04 per diluted share, compared with income of $7 million, or $0.01 per diluted share, for 2015. Earnings allocated to convertible preferred stock had a negative $0.04 impact on both Diluted earnings per share and Adjusted diluted earnings per share. The impact of the devaluation in Egypt on working capital balances had a negative $0.04 impact on both Diluted earnings per share and Adjusted diluted earnings per share, according to Avon.

Loss from discontinued operations, net of tax was $14 million associated with the previously separated North America business, or $0.03 per diluted share, compared with a loss of $349 million, or $0.79 per diluted share, for 2015, which included $340 million associated with the estimated loss on the sale of the North America business.

During 2016, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, increased Diluted earnings per share from continuing operations by $0.29:

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 costs to implement restructuring within operating profit of approximately $77 million before tax (approximately $64 million after tax), primarily related to employee-related costs as part of the previously announced Transformation Plan.

The Company settled claims relating to professional services that had been provided to the Company prior to 2013 in connection with a previously disclosed legal matter. The proceeds, net of legal fees, of approximately $27 million were recognized as a reduction of selling, general and administrative expenses.

The Company recorded a net income tax benefit that included an approximate $29 million benefit recognized as a result of the implementation of foreign tax planning strategies, an approximate $7 million benefit recognized primarily as a result of a release of a valuation allowance associated with Russia and a non-cash income tax charge of approximately $9 million associated with valuation allowances to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized.

The Company recorded a net gain on extinguishment of debt of approximately $1 million related to debt repayments through cash tender offers, open market repurchases and make-whole prepayments.

Other operating segments and business activities include the business results for Liz Earle, which was sold in July 2015, and Venezuela, through its deconsolidation, which was effective March 31, 2016. Other operating segments and business activities also include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products.

Full-Year 2016 Reportable Segment Highlights

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

Europe, Middle East & Africa revenue was down 4%, or up 4% in constant dollars. Constant-dollar revenue was impacted by increases in Active Representatives and average order.

Russia revenue was relatively unchanged, or up 9% in constant dollars, primarily due to an increase in Active Representatives and, to a lesser extent, higher average order.

U.K. revenue was down 12%, or relatively unchanged in constant dollars, as higher average order was offset by a decline in Active Representatives.

South Latin America revenue was down 7%, or up 5% in constant dollars, driven primarily by higher average order, partially offset by a decrease in Active Representatives. Constant-dollar revenue was negatively impacted by an estimated 1 point due to MVA taxes in Brazil, which are additional VAT-like state taxes that went into effect in various jurisdictions in Brazil in late 2015. In addition, an IPI tax on cosmetics in Brazil, that went into effect in May 2015, had an estimated 1 point negative impact on the segment's constant-dollar revenue growth. Further, Argentina contributed approximately 4 points to the segment's constant-dollar revenue growth, primarily due to inflationary pricing.

Brazil revenue was down 3%, or up 2% in constant dollars, primarily driven by higher average order. MVA taxes (discussed above) negatively impacted Brazil's constant-dollar revenue growth by an estimated 3 points. Constant-dollar revenue was also negatively impacted by an estimated 3 points from the impact of the IPI tax discussed above.

North Latin America revenue was down 8%, or up 3% in constant dollars. Constant-dollar revenue benefited from higher average order.

Mexico revenue was down 11%, or up 5% in constant dollars, primarily driven by higher average order.

Asia Pacific revenue was down 11%, and down 7% in constant dollars. Modest constant-dollar growth in the Philippines was not enough to offset declines in other markets. The segment's constant-dollar revenue decline was driven by a decrease in Active Representatives, partially offset by higher average order.

Philippines revenue was down 3%, or up 2% in constant dollars, as higher average order was partially offset by a decline in Active Representatives driven by a reduction in the number of sales campaigns.

Full-Year 2016 Cash Flow Review

Net cash provided by operating activities of continuing operations was $128 million for the twelve months ended December 31, 2016, compared with $91 million for the same period in 2015. Cash provided by operating activities during 2016 was favorably impacted by lower operating tax payments, primarily in Brazil, higher cash-related earnings, and net proceeds related to settling claims related to professional services. The impact of these items was offset by the timing of payments, primarily for inventory, increased levels of accounts receivable, primarily in Brazil, and a contribution to the U.S. pension plan. When comparing the year-over-year cash provided by 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 in 2015, which did not recur in 2016.

For the twelve months ended December 31, 2016, there was $83 million of net cash used by investing activities of continuing operations, compared with net cash provided of $143 million in the same period in 2015. Cash provided by investing activities of continuing operations in 2015 included net proceeds of $208 million on the sale of Liz Earle.

Net cash provided by financing activities of continuing operations was $137 million for the twelve months ended December 31, 2016, a $568 million increase over the prior year, primarily due to:

net proceeds from Senior Secured Notes issued in 2016;

the issuance of Series C Convertible Preferred Stock;

the suspension of the common stock dividend; and

the prepayment of the Company's 2.375% Notes in 2015; partially offset by

payments for the August 2016 cash tender offers of debt;

payments for the October and December 2016 debt repurchases; and

the prepayment of the remaining principal amount of the Company's 4.20% Notes and 5.75% Notes.

Fourth-Quarter 2016 Income Statement Highlights (compared with fourth-quarter 2015)

Total revenue for Avon Products, Inc. declined 2% to $1.6 billion, but was relatively unchanged in constant dollars.

Total revenue from reportable segments declined 2% to $1.6 billion, but was relatively unchanged in constant dollars.

Active Representatives declined 2%, primarily due to decreases in Asia Pacific and Europe, Middle East & Africa.

Average order increased 2% as growth in South Latin America, Asia Pacific and North Latin America was partially offset by a decline in Europe, Middle East & Africa.

Ending Representatives were relatively unchanged as growth in Europe, Middle East & Africa and South Latin America was offset by a decline in Asia Pacific.

Gross margin was 60.3%, up 160 basis points while Adjusted gross margin was 60.3%, up 150 basis points. These year-over-year comparisons were positively impacted by pricing, partially offset by an approximate 80 basis point unfavorable impact from foreign exchange.

Operating margin was 6.8% in the quarter, up 290 basis points while Adjusted operating margin was 7.3%, up 130 basis points. These year-over-year comparisons benefited from the favorable net impact of price/mix, continued benefits from cost savings initiatives, as well as lower compensation costs. These benefits were partially offset by approximately 210 basis points from higher bad debt expense, primarily in Brazil, and by approximately 100 basis points of unfavorable impact of foreign exchange.

The provision for income taxes was $53 million, compared with $22 million for 2015. On an Adjusted basis, the provision for income taxes was $44 million, compared with $40 million for 2015. The effective tax rate from continuing operations in the quarter was 122.7% and on an Adjusted basis was 83.0%.

Loss from continuing operations, net of tax was $10 million, or a loss of $0.03 per diluted share, compared with a loss of $15 million, or a loss of $0.04 per diluted share, for the fourth quarter of 2015. Adjusted income from continuing operations, net of tax was $9 million, or $0.01 per diluted share, compared with income of $1 million, or $0.00 per diluted share, for the fourth quarter of 2015. Earnings allocated to convertible preferred stock had a negative $0.01 impact on both Diluted earnings per share and Adjusted diluted earnings per share. The impact of the devaluation in Egypt on working capital balances had a negative $0.04 impact on both Diluted earnings per share and Adjusted diluted earnings per share.

Loss from discontinued operations, net of tax was $1 million associated with the previously separated North America business, or $0.00 per diluted share, compared with a loss of $317 million, or $0.72 per diluted share, for the fourth quarter of 2015, which included $340 million associated with the estimated loss on the sale of the North America business.

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

During the fourth quarter of 2016, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, increased Diluted earnings per share from continuing operations by $0.04:

The Company recorded a non-cash income tax charge of approximately $9 million associated with valuation allowances to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized.

The Company recorded costs to implement restructuring within operating profit of approximately $7 million before and after tax, primarily related to the previously announced Transformation Plan.

The Company recorded a net loss on extinguishment of debt of approximately $3 million related to debt repayments through make-whole prepayments and open market repurchases.

Other operating segments and business activities include the business results for Venezuela, through its deconsolidation, which was effective March 31, 2016. Other operating segments and business activities also include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products.

Fourth-Quarter 2016 Segment Highlights (compared with fourth-quarter 2015)

Fourth-Quarter 2016 Reportable Segment Highlights

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

Europe, Middle East & Africa revenue was down 7%, or 3% in constant dollars. Constant-dollar revenue was impacted by  declines in Active Representatives and average order.

Russia revenue was up 2%, or down 3% in constant dollars, driven by declines in average order and Active Representatives.

U.K. revenue was down 20%, or 3% in constant dollars, due to a decline in Active Representatives.

South Latin America revenue was up 9%, or 6% in constant dollars, driven primarily by higher average order, partially offset by a decrease in Active Representatives. Argentina contributed approximately 3 points to this constant-dollar revenue growth, primarily due to inflationary pricing.

Brazil revenue was up 27%, or 7% in constant dollars, primarily driven by higher average order.

North Latin America revenue was down 10%, or up 1% in constant dollars. Constant-dollar revenue primarily benefited from higher average order.

Mexico revenue was down 14%, or up 2% in constant dollars, primarily driven by higher average order, partially offset by a decline in Active Representatives.

Asia Pacific revenue was down 9%, and down 6% in constant dollars. Modest constant-dollar growth in the Philippines was not enough to offset declines in other markets. The segment's constant-dollar revenue decline was driven by a decrease in Active Representatives, partially offset by higher average order.

Philippines revenue was down 3%, or up 1% in constant dollars, as higher average order was partially offset by a decline in Active Representatives.

Transformation Plan

The Company made good progress in 2016, the first year of its three-year Transformation Plan, exceeding cost targets and significantly strengthening the balance sheet. 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. The Transformation Plan began in January 2016 and includes three pillars: investing in growth, reducing costs in an effort to continue to improve cost structure and improving financial resilience.

Invest in Growth

Over the three years that began in 2016, the Company expects to invest $350 million into the business with an estimated $150 million in media and social selling and $200 million related to the service model evolution and information technology, primarily capital expenditures, which will be aimed at improving the overall Representative experience. The Company expects to incrementally invest, over time, in media, shifting media spend more to digital, with the focus of the spending in its top 10 markets.

Improve Cost Structure

The Company believes it is on track to deliver the targeted $350 million in savings related to Transformation Plan over the three-year plan period, 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.

For 2016, the Company accelerated certain cost savings initiatives and came in ahead of the targeted $70 million of savings, as well as savings to cover the approximately $20 million in stranded costs that resulted from the separation of the Company's North America business. The Company realized an estimated $120 million of savings in 2016.

Improve Financial Resilience

With respect to improving its financial resilience, the Company targeted to reduce debt by approximately $250 million during 2016. The Company exceeded this target, reducing debt by approximately $260 million and extending its maturity profile with no long-term debt due until March 2019, thereby strengthening the balance sheet.