The FINANCIAL — Avon Products, Inc. on May 4 announced its results for the quarter ended March 31, 2017.
“Our first quarter was broadly in line with our expectations and we remain confident in our strategic initiatives and the progress against our plan,” said Sheri McCoy, Chief Executive Officer, Avon Products, Inc. “We are moving into the second year of our three-year Transformation Plan, in which we will continue to build on the robustness of our brand, drive beauty innovation, and invest in initiatives to enhance Representative engagement while ensuring continued cost discipline. Today we are providing full-year 2017 guidance consistent with our longer-term financial goals.”
Highlights for First Quarter of 2017:
Revenue increased 2% to $1.3 Billion; Decreased 1% in constant dollars
Active Representatives and Ending Representatives, both from Reportable Segments, declined 3% and 1%, respectively
Operating Margin increased 160 bps to 2.2%; Adjusted1 Operating Margin decreased 130 bps to 2.9%
Diluted Loss Per Share From Continuing Operations of $0.10; Adjusted Diluted Loss Per Share From Continuing Operations of $0.07
Foreign currency favorably impacted both Diluted Loss Per Share and Adjusted Diluted Loss Per Share by an estimated $0.03 per share
The Company is on track to achieve its 2017 cost savings target of $230 million
As part of its Transformation Plan, the Company completed the implementation of a new Representative-facing system in Brazil
First-Quarter 2017 Income Statement Review (compared with first-quarter 2016)
Total revenue for Avon Products, Inc. increased 2% to $1.3 billion, but decreased 1% in constant dollars.
From reportable segments:
Total revenue increased 3% to $1.3 billion, but decreased 1% in constant dollars.
Active Representatives declined 3% with decreases in all segments except North Latin America, which was relatively unchanged.
Average order increased 2% with growth in all segments except Europe, Middle East & Africa, which declined.
Ending Representatives declined 1% primarily due to a decline in Asia Pacific.
Gross margin and Adjusted gross margin both increased 90 basis points to 61.2%, primarily due to the favorable net impact of price/mix.
Operating margin was 2.2% in the quarter, up 160 basis points, while Adjusted operating margin was 2.9%, down 130 basis points. The operating margin comparison benefited from lower costs to implement 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, an out-of-period adjustment related to equity compensation and higher transportation costs. These factors were partially offset by the favorable net impact of price/mix and by approximately 60 basis points of benefit from foreign exchange.
The provision for income taxes was $30 million, compared with a benefit from income taxes of $2 million for the first quarter of 2016. On an Adjusted basis, the provision for income taxes was $31 million, compared with $37 million for the first quarter of 2016. The effective tax rate and Adjusted effective tax rate, both from continuing operations, were not meaningful in the quarter. These rates were negatively impacted by the country mix of earnings and the inability to recognize additional deferred tax assets in various jurisdictions, including the impact caused by the recognition of withholding taxes associated with the repatriation of cash to the U.S.
Loss from continuing operations, net of tax was $37 million, or a loss of $0.10 per diluted share, compared with a loss of $156 million, or a loss of $0.36 per diluted share, for the first quarter of 2016. Adjusted loss from continuing operations, net of tax was $28 million, or a loss of $0.07 per diluted share, compared with loss of $27 million, or a loss of $0.07 per diluted share, for the first quarter of 2016. Earnings allocated to convertible preferred stock had a negative $0.02 impact on Diluted earnings per share and a negative $0.01 impact on Adjusted diluted earnings per share, according to Avon.
Loss from discontinued operations, net of tax in the prior year of $10 million, or a loss of $0.02 per diluted share, was associated with the previously separated North America business.
Adjustment to First-Quarter 2017 GAAP Results to Arrive at Adjusted Results
During the first quarter of 2017, the Company recorded costs to implement restructuring within operating profit of approximately $10 million before tax (approximately $9 million after tax), primarily related to the Transformation Plan. These restructuring costs have been reflected as an adjustment to GAAP results to arrive at Adjusted results and reduced GAAP Diluted loss per share from continuing operations by $0.03.
Other operating segments and business activities 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. Other operating segments and business activities also include the business results for Thailand, which was closed in 2016, as well as the first-quarter 2016 business results for Venezuela, which was deconsolidated effective March 31, 2016.
First-Quarter 2017 Segment Review (compared with first-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.
Europe, Middle East & Africa revenue was down 2%, or 4% in constant dollars, impacted by declines in Active Representatives and average order.
Russia revenue was up 13%, or down 10% in constant dollars, driven by declines in Active Representatives and average order.
U.K. revenue was down 18%, or 6% in constant dollars, due to declines in Active Representatives and average order.
South Latin America revenue was up 17%, or 2% in constant dollars, driven primarily by higher average order, partially offset by a decrease in Active Representatives.
Brazil revenue was up 26%, or 2% in constant dollars, primarily driven by higher average order, partially offset by a decrease in Active Representatives.
North Latin America revenue was down 6%, or up 2% in constant dollars, benefiting from higher average order.
Mexico revenue was down 10%, or up 1% in constant dollars, primarily driven by higher average order, partially offset by a decline in Active Representatives.
Asia Pacific revenue was down 8%, or 5% in constant dollars. Modest constant-dollar growth in the Philippines was not enough to offset declines in most 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 4%, or up 2% in constant dollars, as higher average order was partially offset by a decline in Active Representatives.
First-Quarter 2017 Cash Flow Review
Net cash used by operating activities of continuing operations was $80 million for the three months ended March 31, 2017, compared with $191 million in the same period in 2016. The approximate $111 million decrease to net cash used by continuing operating activities was primarily due to lower inventory, the 2016 contribution to the U.S. pension plan of $20 million and Industrial Production Tax (“IPI”) payments made in Brazil in 2016 that did not recur in 2017 (based on the favorable outcome received in May 2016 related to the injunction on cash deposits for IPI taxes).
Net cash used by investing activities of continuing operations was $22 million for the three months ended March 31, 2017, compared with $25 million in the same period in 2016.
Net cash used by financing activities of continuing operations was $5 million for the three months ended March 31, 2017, as compared to net cash provided of $436 million in the same period in 2016. The $441 million decrease was primarily due to the net proceeds related to the issuance of Series C Preferred Stock received in the prior year.
Transformation Plan
In January 2016, the Company initiated a three-year Transformation Plan in order to enable it to achieve the long-term goals of mid single-digit constant-dollar revenue growth and low double-digit operating margin. The plan includes three pillars: invest in growth, reduce costs in an effort to continue to improve cost structure and improve financial resilience.
The Transformation Plan was designed to focus on cost savings and financial resilience in the first year, in order to support future investment in growth. The Company made good progress in 2016, achieving cost savings of approximately $120 million and significantly strengthening the balance sheet by reducing approximately $260 million in debt and extending its maturity profile. In 2017, the Company’s cost savings target is $230 million, which includes both run-rate savings from 2016, along with in-year savings from current year initiatives. Based on savings realized through the first quarter of 2017, the Company believes it is on track to achieve this target.
During 2017, the Company is increasing its focus on the invest in growth pillar, which includes investment in media and social selling as well as spend related to service model evolution and information technology, primarily capital expenditures, which will be aimed at improving the overall Representative experience. The Company expects to increase capital expenditures by approximately $65 million in 2017 related to invest in growth.
Full-Year 2017 Outlook
The following guidance is given on a Non-GAAP basis. The Company is not able to provide a reconciliation of the Non-GAAP financial measures to GAAP because certain items that impact these measures, such as the timing and amount of charges related to our Transformation Plan and the impact of foreign currency fluctuations, which could have a material impact on GAAP results for the guidance period, have not yet occurred and are not possible to estimate at this time.
For full-year 2017, including the impact of the first quarter, the Company expects constant-dollar revenue growth in the low single-digits, Adjusted operating margin expansion of 100 to 140 bps over the prior year and free cash flow to be slightly positive including the expected $65 million in increased capital expenditures. The Company defines free cash flow as net cash provided (used) by operating activities of continuing operations less capital expenditures. These expectations are based on forward foreign exchange rates, which imply modest tailwinds from currency and are underpinned by Active Representative growth in the range of 0% to 1% in the second half of the year.
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