The FINANCIAL — Avon Products, Inc. on August 3 announced its results for the quarter ended June 30, 2017.
“Second-quarter performance fell below our expectations as we cycled a strong quarter last year. As previously guided, we expect the second half to yield a stronger performance based on our exciting product innovation plans and other initiatives to increase Representative activity,” said Sheri McCoy, Chief Executive Officer, Avon Products, Inc. “We continue to implement the strategies defined in our Transformation Plan to better meet the needs of our Representatives and continue progress towards delivering sustainable profitable growth in the longer term.”
Highlights for Second Quarter of 2017:
Revenue decreased 3% to $1.4 Billion; Decreased 4% in constant dollars
Active Representatives and Ending Representatives, both from Reportable Segments, declined 3% and 2%, respectively
Operating Margin decreased 430 bps to 2.3%; Adjusted1 Operating Margin decreased 230 bps to 5.0%
Diluted Loss Per Share From Continuing Operations of $0.12; Adjusted Diluted Loss Per Share From Continuing Operations of $0.03
Foreign currency favorably impacted both Diluted Loss Per Share and Adjusted Diluted Loss Per Share by an estimated $0.02 per share
The Company is on track to achieve its 2017 cost savings target of $230 million
Second-Quarter 2017 Income Statement Review (compared with second-quarter 2016)
Total revenue for Avon Products, Inc. decreased 3% to $1.4 billion and decreased 4% in constant dollars.
From reportable segments:
Total revenue decreased 3% to $1.4 billion and decreased 4% in constant dollars.
Active Representatives declined 3% with decreases in all segments.
Average order decreased 1% with growth in South Latin America offset by declines in North Latin America and Europe, Middle East & Africa.
Ending Representatives declined 2% primarily due to declines in Asia Pacific and South Latin America.
Gross margin and Adjusted gross margin each increased 180 basis points to 62.4%, primarily due to the favorable net impact of price/mix and the net favorable impact of foreign currency transaction gains and foreign currency translation.
Operating margin was 2.3% in the quarter, down 430 basis points, while Adjusted operating margin was 5.0%, down 230 basis points. The operating margin comparison was unfavorably impacted by a loss contingency related to a non-U.S. pension plan and higher costs to implement (“CTI”) restructuring in the current year. Both the operating margin and Adjusted operating margin year-over-year comparisons were negatively impacted by the net impact of the constant-dollar revenue decline causing deleverage of the Company’s fixed expenses; higher bad debt expense, primarily in Brazil; higher Representative, sales leader and field expenses; higher transportation costs, primarily in Russia; and planned investments in advertising related to product launches. These factors were partially offset by approximately 140 basis points of benefit from foreign exchange on operating margin and approximately 130 basis points of benefit from foreign exchange on Adjusted operating margin, the favorable net impact of price/mix, and lower incentive compensation plan expenses.
The provision for income taxes was $34 million, compared with $36 million for the second quarter of 2016. On an Adjusted basis, the provision for income taxes was $34 million, compared with $44 million for the second quarter of 2016.
Loss from continuing operations, net of tax was $46 million, or a loss of $0.12 per diluted share, compared with income of $36 million, or income of $0.07 per diluted share, for the second quarter of 2016. Adjusted loss from continuing operations, net of tax was $8 million, or a loss of $0.03 per diluted share, compared with income of $37 million, or income of $0.07 per diluted share, for the second quarter of 2016. Earnings allocated to convertible preferred stock had a negative $0.01 impact on Diluted earnings per share and Adjusted diluted earnings per share, in the second quarter of both 2017 and 2016, according to Avon.
Loss from discontinued operations, net of tax in the prior year of $3 million, or a loss of $0.01 per diluted share, was associated with the previously separated North America business.
Adjustments to Second-Quarter 2017 GAAP Results to Arrive at Adjusted Results
During the second quarter of 2017, 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 $0.09:
The Company recorded costs to implement restructuring within operating profit of approximately $20 million before and 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.
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.
Second-Quarter 2017 Segment Review (compared with second-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 5%, or 6% in constant dollars, impacted by declines in Active Representatives and average order.
Russia revenue was up 7%, or down 7% in constant dollars, driven by declines in average order and Active Representatives.
U.K. revenue was down 20%, or 10% in constant dollars, due to declines in Active Representatives and average order.
South Latin America revenue was up 4%, or relatively flat in constant dollars, driven by higher average order, offset by a decrease in Active Representatives.
Brazil revenue was up 7%, or down 2% in constant dollars, primarily driven by a decrease in Active Representatives.
North Latin America revenue was down 7%, or 5% in constant dollars, driven by lower average order and a decline in Active Representatives.
Mexico revenue was down 9%, or 6% in constant dollars, driven by declines in Active Representatives and average order.
Asia Pacific revenue was down 11%, or 7% in constant dollars, primarily driven by a decrease in Active Representatives.
Philippines revenue was down 10%, or 3% in constant dollars, primarily driven by a decline in Active Representatives.
Second-Quarter 2017 Cash Flow Review
Net cash provided by operating activities of continuing operations was $11 million for the six months ended June 30, 2017, compared with $130 million net cash used in the same period in 2016. The $141 million increase was primarily due to improvements in working capital. The year-over-year comparison also benefited from 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) and the 2016 contribution to the U.S. pension plan of $20 million.
Net cash used by investing activities of continuing operations was $40 million for the six months ended June 30, 2017, compared with $44 million in the same period in 2016.
Net cash used by financing activities of continuing operations was $13 million for the six months ended June 30, 2017, as compared to net cash provided of $413 million in the same period in 2016. The $426 million decrease was primarily due to the net proceeds related to the issuance of Series C Preferred Stock received in the prior year.
The Company is in year two of its three-year transformation plan focused on three pillars:
Improve financial resilience; and
Invest in growth
The Company expects this plan to deliver on its long-term goals of mid-single-digit constant-dollar revenue growth and low double-digit operating margin.
Halfway through the plan period, the Company has seen solid progress against its first two pillars. In 2016, the Company generated approximately $120 million of cost savings and improved financial resilience by significantly strengthening the balance sheet as it lowered debt by approximately $260 million and extended 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 half of 2017, the Company believes it is on track to achieve this target. These savings have helped offset the impact of inflation.
With that work well underway, the Company is now firmly focused on the third pillar, to invest in growth, implementing the strategies that position it to maximize the power of Avon and drive profitable growth. The Company has defined the focus areas, evaluated detailed plans, and has started putting in place the key enablers to drive the roadmap for growth, enabling Avon to become the leading social beauty company. The key enablers include
Delivering a competitive, seamless experience for the Representative;
Ensuring she has the right product to sell;
Ensuring that the Company is playing and winning in the right geographies.
The investment in growth includes spending related to media and social selling as well as spending related to service model evolution and information technology, primarily capital expenditures, which will be aimed at improving the overall Representative experience.
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.
As previously guided in May, for full-year 2017, 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.
Based on second-quarter performance, the Company now expects to be at the low end of the guidance ranges provided. Revenue growth is expected to be driven by the Company’s Active Representative growth target of 0%-1% in the second half, supported by its innovation pipeline and the expected impact of ongoing Transformation Plan initiatives. This growth, along with continued cost savings initiatives, is expected to support operating margin expansion. The Company’s incremental investments in capital, previously guided at $65 million, are now expected to be approximately $20 million lower, which will increase free cash flow.