Avon Reports Third-Quarter 2016 Results

Third-Quarter 2016 Income Statement Highlights (compared with third-quarter 2015)

• Total revenue for Avon Products, Inc. declined 2% to $1.4 billion, but increased 4% in constant dollars.
• Total revenue from reportable segments declined 2% to $1.4 billion, but increased 4% in constant dollars.
  • Active Representatives were relatively unchanged year-over-year, as increases in South Latin America and Europe, Middle East & Africa were offset by declines in Asia Pacific.
  • Average order increased 4% due to growth in all reportable segments as the Company continues to benefit from pricing.
  • Ending Representatives improved 1% due to growth in Europe, Middle East & Africa and South Latin America, partially offset by declines in Asia Pacific.
• Gross margin was 60.9%, down 20 basis points while Adjusted gross margin was 60.9%, down 60 basis points. These year-over-year comparisons were negatively impacted by an approximate 250 basis point impact from foreign exchange, largely offset by inflationary and strategic pricing and lower supply chain costs.
• Operating margin was 8.0% in the quarter, up 480 basis points while Adjusted operating margin was 7.0%, up 310 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 260 basis points of unfavorable impact of foreign exchange on operating margin and approximately 270 basis points of unfavorable impact of foreign exchange on Adjusted operating margin.
• The effective tax rate from continuing operations in the quarter was 51.3% and on an Adjusted basis was 72.5%.
• Income from continuing operations, net of tax was $36 million, or $0.07 per diluted share, compared with a loss of $668 million, or $1.51 per diluted share, for the third quarter of 2015. Adjusted income from continuing operations, net of tax was $16 million, or $0.02 per diluted share, compared with a loss of $48 million, or $0.11 per diluted share, for the third quarter of 2015. Earnings allocated to convertible preferred stock had a negative $0.01 impact on Diluted earnings per share and a negative $0.02 impact on 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 $29 million, or $0.06 per diluted share, for the third quarter of 2015.
• Foreign currency has impacted the Company’s financial results of continuing operations as shown in the table on the following page.

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

During the third quarter of 2016, 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 $0.05:

• 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 in the third quarter of 2016 and were received by the Company in the fourth quarter of 2016.
• The Company recorded costs to implement restructuring within operating profit of approximately $14 million before tax (approximately $11 million after tax), primarily related to employee-related costs, as part of the previously announced Transformation Plan.
• The Company recorded a net gain on extinguishment of debt of approximately $4 million related to debt repayments through cash tender offers.

Third-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 4%, or up 2% in constant dollars. Constant-dollar revenue was driven by growth in Active Representatives and average order.
  • Russia revenue was down 2%, or up 2% in constant dollars, primarily driven by an increase in Active Representatives, partially offset by lower average order.
  • U.K. revenue was down 14%, or up 1% in constant dollars, as higher average order was partially offset by a decrease in Active Representatives.
• South Latin America revenue was up 4%, or 9% in constant dollars, due to higher average order and an increase in Active Representatives. Constant-dollar revenue was negatively impacted by an estimated 2 points 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. Argentina contributed approximately 5 points to this constant-dollar revenue growth, primarily due to inflationary pricing.
  • Brazil revenue was up 14%, or 6% in constant dollars, driven by increases in Active Representatives and average order. MVA taxes (discussed above) negatively impacted Brazil’s constant-dollar revenue growth by an estimated 3 points.
• North Latin America revenue was down 6%, or up 3% in constant dollars. Constant-dollar revenue benefited from higher average order.
  • Mexico revenue was down 5%, or up 9% in constant dollars, primarily driven by higher average order and an increase in Active Representatives.
• Asia Pacific revenue was down 9%, or 7% in constant dollars due to declines in most markets. The segment’s constant-dollar revenue decline was driven by a decrease in Active Representatives, partially offset by higher average order.
  • Philippines revenue decreased 2%, or was relatively unchanged in constant dollars as higher average order was offset by declines in Active Representatives.

Third-Quarter 2016 Cash Flow Review

• Net cash used by operating activities of continuing operations was $104 million for the nine months ended September 30, 2016, compared with $90 million for the same period in 2015. Cash used by operating activities during 2016 was unfavorably impacted by the timing of payments, primarily for inventory, increased levels of accounts receivable, and a contribution to the U.S. pension plan. When comparing the year-over-year use of cash from operations, the comparison benefits from the $67 millionpayment 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 nine months ended September 30, 2016, there was $68 million of net cash used by investing activities of continuing operations, compared with net cash provided of $140 million in the same period in 2015. Cash provided by investing activities of continuing operations in 2015 included net proceeds on the sale of Liz Earle.
• Net cash provided by financing activities of continuing operations was $569 million for the nine months ended September 30, 2016, a $914 million increase over the prior year, primarily due to:
  • net proceeds from Senior Secured Notes issued in the third quarter of 2016;
  • the issuance of Series C Convertible Preferred Stock;
  • the suspension of the common stock dividend; and
  • the prepayment of 2.375% Notes in the third quarter of 2015; partially offset by
  • payments for the August 2016 cash tender offers.

Transformation Plan

In January 2016, the Company announced a three-year Transformation Plan, which includes investing in growth, reducing costs in an effort to continue to improve cost structure and improving financial resilience.

As a result of this plan, the Company expects pre-tax annualized cost savings of approximately $350 million after three years, 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. The Company plans to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help the Company modernize its business. 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 Company is on track to deliver the targeted $350 million in Transformation Plan savings over the three years. For 2016, the Company has accelerated certain cost savings initiatives and is ahead of schedule on realizing 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. Through the nine months ended September 30, 2016, the Company has already realized approximately $80 millionof the combined $90 million targeted savings.

With respect to improving its financial resilience, the Company targeted to reduce debt by approximately $250 million during 2016. The steps taken through September 30, 2016, include the issuance of $500 million of senior secured notes due August 2022, an approximate $301 million tender of near-term public notes, as well as a reduction in the debt of foreign subsidiaries of approximately $33 million. In addition, during October 2016, the Company repurchased approximately $163 million of debt and issued notices of prepayment on the remaining public notes due March and July 2018 of approximately $238 million. In total, as a result of these actions, we will have reduced debt by approximately $235 million in 2016 and will have extended the Company’s maturity profile, with no long-term debt due until March 2019.

Conference call

Avon will conduct a conference call at 9:00 a.m. today to discuss its quarterly 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: 94968002). The call will be webcast live at www.avoninvestor.com and can be accessed or downloaded from that site for a period of one year.