Avon Products, Inc. (AVP)

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Avon Products (AVP)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

Executives

Amy Low Chasen -

Charles Cramb - Vice Chairman of Developed Market Group

Andrea Jung - Chairman of the Board and Chief Executive Officer

Analysts

Javier Escalante - Weeden & Co., LP

Dara Mohsenian - Morgan Stanley

Constance Maneaty - BMO Capital Markets U.S.

Alice Longley - Buckingham Research Group, Inc.

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

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Per Ostlund - Jefferies & Company, Inc.

Emily Klingbeil - Crédit Suisse AG

William Schmitz - Deutsche Bank AG

Wendy Nicholson - Citigroup Inc

Linda Weiser - Caris & Company

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Presentation

Operator

Good morning. My name is Geree, and I will be your conference operator Today. At this time, I would like to welcome everyone to Avon's Second Quarter 2011 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

Good morning. Thank you for joining us to discuss Avon's second quarter earnings results. With me on this call are Andrea Jung, Avon's Chairman and CEO; and Chuck Cramb, Vice Chairman, Developed Market Group and Interim CFO.

I refer you to the cautionary statement in today's earnings release, as well as our non-GAAP reconciliation in the appendix of today's slides. These slides are available on the Investor Relations section of our website and also include details of our second quarter regional and P&L results.

As usual on the call, we will focus an adjusted non-GAAP financial measures. With that, I'll hand the call over to Andrea.

Andrea Jung

Thanks, Amy. Good morning, everybody. Thanks for joining us for our second quarter call. Just to summarize the quarter, as you read this morning, our constant-dollar revenues were up 2% driven by continued strength in Latin America. Silpada contributed 1.5 points of growth. In terms of the Beauty category, our Beauty sales grew 1% in constant dollars driven by fragrance and personal care. Active Representatives were flat, that was impacted by China and North America. The adjusted gross margin was down 30 basis points as continued effect of price management and favorable foreign exchange were offset by commodity cost pressures. Adjusted operating margins declined 30 basis points due to the gross margin that I just explained, and our adjusted earnings per share from continuing operations were $0.49, that's up $0.02 versus a year ago. The year-to-date cash flow from operations down $144 million. The primary impact of that are higher inventory and pension contributions that we've made in the first 6 months.

As I look at the second quarter, I think our results are somewhat pressured by weakening macros. We continue to aggressively drive our 2011 operating priorities to get the business back on track. I'll talk more about that in a minute. We have had ongoing execution improvements in both Brazil and Russia, but we have seen some slower-than-expected Beauty market growth. We continue to see some weak macros in developed markets, and this quarter reflects the heaviest impact of the United States portfolio shift away from [indiscernible], and we are addressing that starting in September this year, and we'll talk more about that.

But if I take a look at the first 6 months, then in the first half, our results were broadly in line with expectations. Our previously stated expectations for the first half where the core revenue growth would be low single digits and the adjusted operating margin would be about flat, and again, 6 months to date, the actual are low single digits and exactly flat adjusted operating margins.

Moving to the second half in terms of our outlook, it continues subsidy that we target mid-single digit revenue growth in significant margin expansion. We'll talk a lot about that this morning, but we're going to continue to target mid-single digit growth driven by a resumption of our Active Representatives and unit growth via major field global activation program; a stronger second half innovation pipeline, as we've you've always planned; and high impact merchandising, particularly if we continue to see some of the macros stuff out there in some key markets.

We project significant adjusted operating margin expansion in the second half fueled by revenue leverage gross margin gains as pricing and FX offset commodity costs in the second half and continued tight overhead management, and we're going to talk more and I'll let Chuck talk more later about our operating margin and our assumptions, but our full year outlook remains unchanged. We continue to target 50 to 70 basis points of operating margin expansion.

Just to remind everybody about the 4 kind of key pillars in the 2011 operating priorities that the team has been driving: first, obviously, to restore growth in the all-important markets of Brazil and Russia; and stabilize our North America business by the year end; reignite skincare; and to deliver meaningful operating margin expansion. Specifically in the second half, the Playbook in the company underpins our mid-single-digit top line outlook. They are a global field activation program that is boldly designed to reignite our Active Representative growth. They are stronger product pipeline of innovation, particularly in color and skincare, which will drive pricing and average order. And importantly, they're very focused on executing high impact offers to help us to resume our volume growth.

Just to start with reigniting Active Representatives growth for a minute, our Global Believe incentive is designed to do that in the second half. This is a global sales force incentive built around the company's 125th anniversary. It targets second half sales and Active Representative growth with a "you do, you get" payout and bonus opportunity. It was just launched in July and all markets, and this incentive runs through the end of this year. It is the biggest incentive in Avon's history. It is the richest in the sense that it offers 3 to 5x greater earnings potential for our field than previous global incentives. Importantly, it's the most balanced. It targets Active Representative growth and average order growth. And some of the previous incentives have been more focused against recruiting, but sales is an equal component here. It is the broadest incentive, meaning that it -- those who can participate are in Sales Leadership up line and top sellers, in addition to field managers who are division and district sales managers. And it's the incentive. We have had incentives that last for an average of 6 weeks. This lasts 6 months during the most important time as we enter the important holiday season. This global plan is for 2011, but very importantly, plans are underway to make sure that we anniversary this in 2012 and ensure sustainable growth.

In terms of the product pipeline and innovation in the second half to support average order growth, we've got Anew Fergie Fragrance, which builds on our record 2010 launch. This is the biggest fragrance in the company's history at $90 million, so we've got a lot of exciting plans for the second Fergie Fragrance as we come out of the third quarter into the fourth. Very important in skincare. It's a breakthrough skincare innovation. It's a key contributor to our fourth quarter pricing opportunity and our average order for our representative. This is in the ANEW brand. This is called Anew Genics. We have been working on this for several years. It is the first to YouthGen technology. The packaging, the formula is really at the top of what we have developed today, much stronger than year ago the ANEW launch, and it has, of course, very, very attractive gross margins.

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