Avon reports Q1 net loss of US$168.3M, compared to year-ago loss of US$13.7M, as revenue falls 11% to US$2.18B

Nevin Barich

NEW YORK , May 1, 2014 (press release) – First-Quarter Revenue Down 11%; Down 3% in Constant Dollars(1)

Operating Loss $51 Million; Adjusted(1) Operating Profit $134 Million

Operating Margin (2.3)%, down from 7.1% in the First-Quarter 2013

Adjusted(1) Operating Margin 6.1%, down from 8.5% in the First-Quarter 2013

Avon Products, Inc. (NYSE: AVP) today reported first-quarter 2014 results. "As I look at our first-quarter results, I'm not satisfied with our performance, but I'm encouraged by our progress," said Sheri McCoy, Chief Executive Officer of Avon Products, Inc. "We saw significant headwinds that further impacted our financial results, particularly in EMEA. However, we continue to stay the course on our plans to return Avon to sustainable, profitable growth."

First-Quarter 2014 (compared with first-quarter 2013)

For the first quarter of 2014, total revenue of $2.2 billion decreased 11%, or 3% in constant dollars. Total units decreased 6% and price/mix was up 3% during the quarter. Active Representatives² were down 4%, while average order² increased 1%.

Beauty sales declined 12%, or 4% in constant dollars. Fashion & Home sales declined 9%, or 1% in constant dollars.

First-quarter 2014 gross margin was 56.2%. Gross margin included a $116 million charge associated with highly inflationary accounting for Avon Venezuela and the Company's move from the official exchange rate to a new foreign exchange system ("SICAD II") rate to remeasure its Venezuelan operations as of March 31, 2014. Adjusted gross margin was 61.5%, 120 basis points lower than the prior-year quarter, primarily due to the unfavorable impact of foreign exchange driven by Europe, Middle East & Africa.

Operating loss was $51 million and operating margin was (2.3)% in the quarter. Adjusted operating profit was $134 million and Adjusted operating margin was 6.1%, down 240 basis points from the first quarter of 2013. The decline in Adjusted operating margin was driven by the unfavorable impact of foreign exchange, primarily in Europe, Middle East & Africa. Adjusted operating margin was also negatively impacted by the revenue decline with respect to fixed expenses.

First-quarter 2014's effective tax rate from continuing operations was (18.6)%, compared with 139.4% in the first quarter of 2013. The Adjusted effective tax rate was 46.3% for the first quarter of 2014, compared with 33.8% for the first quarter of 2013. The higher 2014 Adjusted effective tax rate is primarily due to valuation allowances for deferred taxes and the country mix of earnings.

First-quarter 2014's net loss from continuing operations was $167 million, or a loss of $0.38 per diluted share, compared with net loss from continuing operations of $12 million, or a loss of $0.03 per diluted share, for the first quarter of 2013. First-quarter 2014's Adjusted net income from continuing operations was $52 million, or $0.12 per diluted share, compared with net income from continuing operations of $113 million, or $0.26 per diluted share, for the first quarter of 2013.

Net cash used by operating activities was $113 million for the three months ended March 31, 2014, compared with $117 million for the same period in 2013. The overall net cash used during the three months ended March 31, 2014 was $313 million, due to cash used by operating activities and a significant exchange rate impact on cash balances, primarily due to the Venezuelan currency. This compares with cash provided of $279 million for the same period in 2013, which benefited from cash inflows from financing transactions in that period.

Avon's net debt (total debt less cash) for the first quarter of 2014 was $1.9 billion, up $299 million from the year-end 2013 level, and $239 million lower than at March 31, 2013.
Impacts from the Company's Move from the Official Exchange Rate to the SICAD II Foreign Exchange Rate to Remeasure its Venezuelan Business

In February 2014, the Venezuelan government announced a new foreign exchange system, SICAD II, which began operating on March 24, 2014. As the SICAD II exchange rate represents the rate which better reflects the economics of Avon Venezuela's business activity, the Company is utilizing this rate to remeasure its Venezuelan operations as of March 31, 2014. At March 31, 2014, the SICAD II exchange rate was approximately 50 Bolivars to the U.S. dollar, as compared with the official exchange rate of 6.30 Bolivars to the U.S. dollar, that the Company used previously, which caused the recognition of a devaluation of approximately 88%.

As a result of the change to the SICAD II rate, the Company recorded an after-tax loss of $42 million ($54 million in other expense, net and a benefit of $12 million in income taxes) in the first quarter of 2014, primarily reflecting the write-down of monetary assets and liabilities. Additionally, certain non-monetary assets are carried at their U.S. historic dollar cost subsequent to the devaluation. As a result of using the U.S. historic dollar cost basis of non-monetary assets, such as inventories, these assets continue to be remeasured at the applicable rate at the time of acquisition. As a result, the Company determined that an adjustment of $116 million to cost of sales was needed to reflect certain non-monetary assets at their net realizable value, which was recorded in the first quarter of 2014. These items had an aggregate negative impact of $0.36 per diluted share.

Assuming a SICAD II exchange rate of approximately 50 Bolivars to the U.S. dollar for the remainder of 2014, the Company estimates an additional negative impact to 2014 operating profit and net income as a result of using the U.S. historic dollar cost basis of certain non-monetary assets of approximately $21 million, primarily during the second quarter of 2014.

Avon Venezuela's income statement for the quarter ended March 31, 2014 was remeasured at the official rate of 6.30 Bolivars to the U.S. dollar, not at the SICAD II exchange rate.

The use of the SICAD II exchange rate is expected to meaningfully reduce Avon Venezuela's reported revenue and Adjusted operating profit, beginning in the second quarter of 2014.
Other Adjustments to First-Quarter 2014 GAAP Results to Arrive at Adjusted Results

During the first quarter of 2014, the Company recorded costs to implement restructuring within operating profit of approximately $23 million pre-tax, or $0.04 per diluted share, primarily related to the Company's $400M Cost Savings Initiative.

During the first quarter of 2014, the Company recorded an additional accrual related to the previously disclosed government Foreign Corrupt Practices Act ("FCPA") investigations of $46 million, or $0.11 per diluted share, within operating profit, bringing the total liability accrued at March 31, 2014 to $135 million. As further discussed in the Form 10-Q, the Company has now reached an understanding with respect to terms of settlement with each of the DOJ and the staff of the SEC, subject to authorization by the Commission, including payments of $135 million with respect to alleged violations of the books and records and internal control provisions of the FCPA, a deferred prosecution agreement with the DOJ, a compliance monitor for 18 months, which can then be replaced, if the government approves, with self-monitoring and reporting for an additional 18 months and a guilty plea by a subsidiary of the Company operating in China in connection with alleged violations of the books and records provision of the FCPA. See the Form 10-Q for additional information with respect to these matters.

First-Quarter 2014 Regional Highlights (compared with first-quarter 2013)

Latin America

First-quarter constant-dollar revenue growth was primarily due to higher average order, which benefited from pricing, including inflationary impacts, primarily in Venezuela, partially offset by a decrease in Active Representatives.

Brazil revenue was down 10%, or up 5% in constant dollars, primarily due to higher average order. The growth was driven by continued strength in Fashion & Home and improvement in Beauty sales.

Mexico revenue was down 12%, or 8% in constant dollars, primarily driven by a decrease in Active Representatives and lower average order.

Venezuela revenue was up 27%, or 54% in constant dollars, primarily due to higher average order, benefiting from the inflationary impact on pricing that was partially offset by a decrease in units sold.

Adjusted operating margin was negatively impacted by lower gross margin, primarily due to the unfavorable impact of foreign exchange. Higher net brochure costs, primarily in Venezuela, driven by inflation, and higher administrative expenses, driven by inflationary costs in Venezuela and Argentina, were also factors. These impacts were partially offset by lower field spend, primarily in Brazil.

Europe, Middle East & Africa

First-quarter constant-dollar revenue declined primarily due to a decrease in Active Representatives.

In Russia, revenue was down 23%, or 11% in constant dollars, primarily due to a decrease in Active Representatives, negatively impacted by a slowing economy, including the impact of geopolitical uncertainties.

U.K. revenue was up 1%, or down 6% in constant dollars, primarily due to a decrease in Active Representatives, as well as lower average order.

Turkey revenue was down 22%, or 3% in constant dollars, primarily due to a decrease in Active Representatives.

South Africa revenue was down 16%, or up 1% in constant dollars, primarily due to an increase in Active Representatives, partially offset by lower average order. The results of South Africa were negatively impacted by a postal strike during the first quarter of 2014.

The decrease in Adjusted operating margin was primarily due to the unfavorable impact of foreign exchange.

North America

First-quarter constant-dollar revenue decline was primarily due to a decrease in Active Representatives and a decline in units sold.

North America constant-dollar Beauty sales and Fashion & Home sales each declined 21%.

Cost reduction actions to move the business toward profitability almost fully offset the impact on Adjusted operating margin of the revenue decline with respect to fixed expenses.

Asia Pacific

First-quarter constant-dollar revenue was primarily driven by a decline in China.

Revenue in the Philippines was down 10%, or 1% in constant dollars, due to a decrease in Active Representatives, partially offset by higher average order.

Revenue in China was down 41%, or 42% in constant dollars, primarily due to a decline in the number of beauty boutiques, which negatively impacted unit sales.

The decline in Adjusted operating margin was primarily due to lower gross margin caused by higher obsolescence expense, as well as the unfavorable net impact of pricing and mix.
The impact on margin of the revenue decline with respect to fixed expenses was also a factor.

Global Expenses

Adjusted total global expenses decreased, primarily due to lower professional and related fees associated with the FCPA matters.

Avon will conduct a conference call at 9:00 A.M. today to discuss the 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: 23118236). 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. Please refer to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, for additional information on Avon's results for the quarter.

Avon, the company for women, is a leading global beauty company, with $10 billion in annual revenue. As one of the world's largest direct sellers, Avon is sold through more than 6 million active independent Avon Sales Representatives. Avon products are available in over 100 countries, and the product line includes color cosmetics, skincare, fragrance, and fashion and home products, featuring such well-recognized brand names as Avon Color, ANEW, Skin-So-Soft, Advance Techniques, and mark. Learn more about Avon and its products at www.avoncompany.com.

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