Avon Products, Inc. (AVP)

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Avon Products (AVP)

Q3 2010 Earnings Call

October 28, 2010 9:00 am ET

Executives

Amy Low Chasen -

Charles Cramb - Vice Chairman and Chief Finance & Strategy Officer

Andrea Jung - Chairman of the Board and Chief Executive Officer

Analysts

Dara Mohsenian - Morgan Stanley

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

Ali Dibadj - Bernstein Research

William Schmitz - Deutsche Bank AG

Douglas Lane - Jefferies & Company, Inc.

Wendy Nicholson - Citigroup Inc

Zeke Kramer

Linda Weiser - Caris & Company

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Presentation

Operator

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Third Quarter Earnings Conference Call. [Operator Instructions] I'll now turn the conference over to Amy Chasen, Group Vice President, Investor Relations. Ms. Chasen, you may begin your conference.

Amy Low Chasen

Thank you, and good morning. Thank you for joining us to discuss Avon's third quarter results. With me on this call are Andrea Jung, Avon's Chairman and CEO; and Chuck Cramb, Vice Chairman and CFO.

I refer you to the cautionary statement in today's earnings release, as well as our non-GAAP reconciliation in the appendix to today's slides and also available on the Investor Relations section of our website. Today in the call, we'll focus only on adjusted non-GAAP financial measures, as we always do.

With that, I'll turn the call over to Andrea to get her perspective on the quarter, and then Chuck will take you through the details of the quarter. Then we'll take your questions. Andrea?

Andrea Jung

Thanks, Amy. I just want to begin this morning's call with my own qualitative perspective on Avon's performance during the quarter. And then as Amy said, I'll turn it over to Chuck, and he can provide more detailed outlook at our results, and then we'll take your Q&A.

So after a strong first half sales performance, Avon's overall revenue growth in the third quarter was lower than we expected at 6% in constant dollars, 4% from the core business and 2% from acquisitions. Our beauty sales were up 5% in constant dollars with 1% from units and the remainder from net per unit growth.

Active Representatives were up 4%. Top line growth was impacted by a combination of weaker skincare results and some tougher color comparisons versus a year ago, as well as some tactical challenges in Brazil and Russia that tempered sales in the quarter.

Despite this, we maintained our commitment to strategic investments in our key geographies. We always plan higher spending levels in this particular quarter, especially in terms of the flow of advertising expense in the year, as the timing of these investments impacted operating margins this quarter.

Specifically in terms of the revenue growth, just a couple of comments on my key takeaways. In Latin America, we're still pleased with overall sales growth of 13% in constant dollars, as very healthy increases in Mexico and Venezuela balanced Brazil's 7% growth in the quarter. While Brazil has consistently experienced double-digit constant dollar growth, we had average order challenges in this market in the third quarter. Our Active Representative growth was very healthy. However, results were pressured by weaker performance in skincare and color versus year-ago record launches. To a lesser extent, service disruption that was unique to Brazil also contributed to loss sales in the quarter, and there may be some lingering impacts from these issues in the fourth quarter.

In Central and Eastern Europe, we had indicated to you in July that third quarter would continue to be single-digit growth. Average order was impacted even more than we thought by weaker demand in both skincare and color. Active Representative growth is comparing against record additions in last year's second half, particularly in Russia. And we're also facing some macro challenges in Ukraine and Romania, were a result of being affected by economic weakness and new tax legislation in those two markets.

In North America, results in the quarter remained pressured. The field continued to be challenged as we lapse last year's record recruiting drive. From a macro perspective, the overall beauty industry has declined year-to-date in this market, which added headwind to the quarter's performance. In terms of the overall turnaround plan for this region, we are on track to deliberately reshape the portfolio to Beauty and to achieve our cost savings target. However, our key objective to improve representative productivity remains the largest challenge, and this is proving tougher and taking longer. The team is aggressively focused on this critical pillar of the turnaround, as we work to stabilize the North American business and deliver respectable margins in the longer term.

In terms of the operating margin in the quarter, third quarter was always planned to be a heavy investment quarter, although the lower-than-expected revenues added further pressure. Advertising was up 36% in this quarter, a $31 million incremental against key fragrance launches, as well as new category opportunities, including haircare in the Acne segment. The results of these investments were all strong. We also continue to invest at significant levels in the representative value proposition, spending an incremental $27 million in the quarter, largely against longer-term channel innovation.

For the full year, we continue to expect sales growth of at least mid single-digits in constant dollar, and now expect adjusted operating margin to be roughly flat. This is after absorbing significant FCPA costs, as well as the cost of the Venezuela devaluation, which exceed 100 basis points. So excluding these items, the company is making progress improving our underlying profitability, while continuing to make the requisite investments for the longer term.

So despite quarterly variations in performance, we continue to have our eye on the long term of the business. We've got a carefully crafted strategy to gain market and channel share, and that remains our consistent strategic road map. Nothing changes in terms of our commitment to the achievement of our corporate financial objective, which includes at least mid single-digit constant dollar revenue growth and mid-teens operating margin by 2013.

So with that, I'll just turn it over to Chuck, who's going to give you more details about the quarter.

Charles Cramb

Thank you, Andrea. I'm going to talk right into our regional results, starting with Latin America. As Andrea said, we had strong revenue. We had growth of 13% in constant dollars, and it was well balanced, which mean Active Rep growth of 8% and average order size of about 5%. When we think about the countries, in Brazil, we were up 7% in constant dollars. That was dampened somewhat in terms of the comps. New product launches in skin and color in 2009 were very, very strong. And then, as Andrea mentioned, we did -- this quarter have some short-term service issues unique to the Brazilian market.

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