The FINANCIAL -- Avon Products, Inc. on November 2 announced its results for the quarter ended September 30, 2017.
"Our third quarter has been a productive period. While we saw mixed results, I am encouraged by the revenue improvement in many of our top 15 markets and the underlying business trends we are beginning to see. Our innovation pipeline is starting to gain traction and we are close to realizing our annual cost reduction milestone. We remain intensely focused on improving our Representative experience, which results in higher engagement and her success," said Sheri McCoy, Chief Executive Officer, Avon Products, Inc.
Sheri McCoy went on to say, "It will take time to fully realize the benefits from our near and long-term initiatives in this highly competitive market, but with the right team in place we are poised to accelerate the pace of our progress."
Commenting on behalf of the Board, Chan Galbato, non-executive Chairman of Avon Products' Board of Directors said, "The search for a new Chief Executive Officer for Avon is underway. The Board is pleased with the progress and the strong interest we are receiving."
Highlights for Third Quarter of 2017:
Revenue increased 1% to $1.4 Billion; Relatively unchanged in constant dollars
Active Representatives and Ending Representatives, both from Reportable Segments, declined 3% and 2%, respectively
Operating Margin decreased 210 bps to 5.9%; Adjusted Operating Margin decreased 70 bps to 6.3%, both negatively impacted by higher bad debt and Representative, sales leader and field expense
Diluted Earnings Per Share From Continuing Operations of $0.01; Adjusted Diluted Earnings Per Share From Continuing Operations of $0.03
Within approximately $25 million of our annual cost savings target of $230m and on track to meet three-year goal
Modest improvement in trends expected to continue in fourth quarter but results will fall below full year guidance
Third-Quarter 2017 Income Statement Review (compared with third-quarter 2016)
Total revenue for Avon Products, Inc. increased 1% to $1.4 billion and was relatively unchanged in constant dollars.
From reportable segments:
Total revenue increased 1% to $1.4 billion and was relatively unchanged in constant dollars.
Active Representatives declined 3% with decreases in South Latin America and Europe, Middle East & Africa partially offset by an increase in North Latin America.
Average order increased 3% with growth in South Latin America, Asia Pacific and North Latin America.
Ending Representatives declined 2% with decreases in South Latin America and Asia Pacific partially offset by increases in Europe, Middle East & Africa and North Latin America.
Gross margin and Adjusted gross margin each increased 30 basis points to 61.2%, primarily due to the favorable net impact of price/mix.
Operating margin was 5.9% in the quarter, down 210 basis points, while Adjusted operating margin was 6.3%, down 70 basis points. The operating margin comparison was unfavorably impacted by proceeds recognized in the third quarter of 2016 as a result of a legal settlement, partially offset by lower 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 higher bad debt expense, primarily in Brazil, and higher Representative, sales leader and field expense, also primarily in Brazil. These factors were partially offset by lower incentive compensation plan expenses and lower fixed expenses, including the benefit of cost reductions associated with the Transformation Plan.
The provision for income taxes was $36 million, compared with $38 million for the third quarter of 2016. On an Adjusted basis, the provision for income taxes was $36 million, compared with $42 million for the third quarter of 2016.
Income from continuing operations, net of tax was $12 million, or $0.01 per diluted share, compared with $36 million, or $0.07 per diluted share, for the third quarter of 2016. Adjusted income from continuing operations, net of tax was $18 million, or $0.03 per diluted share, compared with $16 million, or $0.02 per diluted share, for the third 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 in the third quarter of 2017, compared with a negative $0.01 impact on Diluted earnings per share and a negative $0.02 impact on Adjusted diluted earnings per share in the third quarter of 2016, according to Avon.
Loss from discontinued operations, net of tax in the third quarter of the prior year of $1 million, or $0.00 per diluted share, was associated with the previously separated North America business.
Adjustments to Third-Quarter 2017 GAAP Results to Arrive at Adjusted Results
During the third quarter of 2017, the Company recorded costs to implement restructuring within operating profit of approximately $6 million before and 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 increased diluted earnings per share from continuing operations by $0.02.
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.
Third-Quarter 2017 Segment Review (compared with third-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 constant-dollar revenue was relatively unchanged, with average order growth offset by Active Representative declines, primarily in Brazil. The Company saw constant-dollar revenue improvement in many of its top 15 markets. While these trends are encouraging, there is still a lot of work to be done, particularly in some of its larger markets, which are highly competitive and in various stages of recovery.
Europe, Middle East & Africa revenue was up 1%, or down 2% in constant dollars, driven by a decrease in Active Representatives.
Russia revenue was up 3%, or down 6% in constant dollars, due to a decrease in Active Representatives, as well as lower average order.
U.K. revenue was down 13%, or 12% in constant dollars, primarily due to a decrease in Active Representatives.
South Latin America revenue was down 1%, or relatively unchanged in constant dollars, driven by a decrease in Active Representatives, offset by higher average order.
Brazil revenue was down 3%, or 5% in constant dollars, primarily due to a decrease in Active Representatives, partially offset by higher average order.
North Latin America revenue was up 5%, or 2% in constant dollars, driven by higher average order and an increase in Active Representatives.
Mexico revenue was up 4%, or down 1% in constant dollars, primarily due to a decline in Active Representatives.
Asia Pacific revenue was down 1%, or up 3% in constant dollars, primarily due to higher average order.
Philippines revenue was up 4%, or 12% in constant dollars, driven by higher average order and an increase in Active Representatives.
Third-Quarter 2017 Cash Flow Review
Net cash provided by operating activities of continuing operations was $35 million for the nine months ended September 30, 2017, compared with $104 million net cash used in the same period in 2016. The $139 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).
Net cash used by investing activities of continuing operations was $42 million for the nine months ended September 30, 2017, compared with $68 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.
Net cash used by financing activities of continuing operations was $10 million for the nine months ended September 30, 2017, as compared to net cash provided of $569 million in the same period in 2016. The $579 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 third quarter 2016 payments for cash tender offers.
The Company is in the second year of its three-year transformation plan which is focused on three pillars - reducing cost, improving financial resilience and investing in growth.
To achieve its plan, the Company recognizes the need to focus on the foundations of its business and drive a performance-based culture. This will increase its ability to drive results and deliver steady execution going forward. While the Company is addressing challenges in the business, it is moving forward with urgency, focusing on the following key elements of its roadmap to growth:
Deliver a Seamless, Competitive Representative Experience - investment 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
Relentless Focus on Execution Capabilities - focus on developing a service mindset and enable the implementation of changes, with minimal disruption, through pilot programs that cover service from end to end.
The Company's Transformation Plan cost savings target is $230 million for 2017, which includes both run-rate savings from 2016, along with in-year savings from current year initiatives. Based on savings realized through the first nine months of 2017, the Company is within approximately $25 million of its annual savings target and is more than half way to the total cost savings targeted for the three-year Transformation Plan of $350 million. These savings have helped offset the impact of inflation.
Full-Year 2017 Outlook
"With mixed results in Q3 and some positive trends, we expect to see modest improvement continue in Q4. However, it will not be enough to overcome the slow start to 2017, and thus we expect annual results to come in below our 2017 guidance. We are focused on improving key operating metrics in our core markets, which is crucial as we exit the year and continue on our roadmap to growth. With that in mind, we remain focused on initiating the execution of key programs that will allow us to achieve our long-term goals," said Jamie Wilson, Chief Financial Officer, Avon Products, Inc.
Management has been focused on fixing the business fundamentals to improve operating performance, particularly in its largest markets. After a slow start to the year, management is encouraged by the traction that it saw in key financial areas as it exited the quarter, including improving run rates for both constant-dollar revenue and Adjusted operating margin. Management expects to see continued improvement in the fourth quarter, with flat to slightly positive performance compared to last year in constant-dollar revenue and Adjusted operating margin. Management expects to meet its 2017 cost savings target and deliver positive free cash flow for the year, enhanced by slower than planned capital expenditures in the year.