Avon Products, Inc. Q1 2010 Earnings Call Transcript

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Avon Products, Inc. (AVP)

Q1 2010 Earnings Call

April 30, 2010 9:00 am ET

Executives

Andrea Jung – CEO

Charles Cramb – CFO

Amy Chasen - IR

Analysts

Lauren Lieberman – Barclays Capital

Nik Modi – UBS

William Schmitz – Deutsche Bank

Wendy Nicholson – Citigroup

Alice Longley – Buckingham Research

Andrew Sawyer – Goldman Sachs

Connie Maneaty – BMO Capital

Ali Dibadj – Sanford C. Bernstein

Mark Astrachan – Stifel Nicolaus

Linda Bolton Weiser – Caris & Company

Jason Gere – RBC Capital

Victoria Collin – Atlantic Equities

Douglas Lane – Jefferies & Co.

Christopher Ferrara – Bank of America-Merrill Lynch

Presentation

Operator

Good morning. At this time I would like to welcome everyone to Avon’s first quarter earnings conference call. (Operator Instructions) I’ll now turn the conference over to Amy Chasen, Group Vice President, Investor Relations.

Amy Chasen

Good morning, thank you for joining us to discuss Avon’s first quarter results. With me on this call are Andrea Jung, Avon’s Chairman and CEO, and Charles 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 which is also available on the Investor Relations section of our website.

As you’ve seen this morning our press release now has a reconciliation between GAAP and non-GAAP measures to help you better understand the underlying performance of our business. We hope you find this new format useful.

In this quarter we’ve adjusted GAAP measures for CTI as well as the Venezuelan special items. Today in the call we will focus only on these adjusted non-GAAP financial measures. With that I’ll turn the call over to Andrea.

Andrea Jung

Thanks Amy, good morning everyone. We feel great about the performance of the business in the first quarter, with 14% growth, 8% in constant dollars, as well as healthy operating margin expansion on an adjusted basis. We started the year off with strong momentum. In fact this was the second quarter in a row where Latin America and Europe combined grew at a constant dollar sales rate of 15%.

That’s an exceptional performance across 70% of our portfolio given the continuing economic uncertainty around the globe. As you saw this morning beauty sales and active representatives were also both up nicely. So we anticipate this will be another quarter of market share gains for Avon.

So we came out of the gate very strongly as we start the year and Charles will give you full details about the first quarter performance in a minute. However I just wanted to begin my remarks this morning with some comments about China, which I know is top of mind for many of you.

I’ll talk specifically about our business performance but first I just want to share my perspective on our FCPA investigation in that market. Given that this is an ongoing investigation and the facts are still under review we’re limited as you well know in what we can say but I want to be as responsive as I can and recap the status of our investigation to the extent possible.

Avon disclosed in October, 2008 that an allegation had been made about possible FCPA violations in our China business relating to travel, entertainment, and other expenses. The allegation came in the form of a letter written directly to me. As you would expect I immediately turned the information over for proper handling and we began an internal investigation under the oversight of our audit committee and conducted by outside counsel.

Most importantly we voluntarily self-reported the allegation to the United States Securities and Exchange Commission as well as the Department of Justice and again this was voluntary. China is a unique and highly regulated market with its own specific requirements. Nevertheless as a company that holds leadership positions in developing and emerging markets we are also conducting compliance reviews related to FCPA in additional countries.

We disclosed this in July, 2009. I want to clarify that we are conducting these compliance reviews in a selection of markets representing each of our four international business units outside of China. I also want to emphasize again that the allegation that triggered our investigation was in China only. Conducting compliance reviews in these additional markets is the appropriate thing to do in investigations of this type and as we stated, we’ve been cooperating with both governmental agencies.

Three weeks ago as you know four associates were placed on administrative leave specifically in connection with the China investigation. The decision to put people on administrative leave does not reflect any outcome from the investigation. Given this, and given that the associates are not senior executive level officers of the company, we did not file a disclosure and name the names. So that’s where we are in terms of FCPA.

No conclusions can be drawn at this time and as I said the investigation has been going on since 2008. We’ve seen very little management distraction and I’m pleased that from what I can see everyone all around the world is focused on running the business as we want them to be.

So with that now I just want to turn a discussion of our business in China because this was our challenging performance in what was otherwise a stellar quarter. You saw in the press release that we had significant sales decline in this market in the quarter as well as a decline in active representatives.

The effectiveness of incentives was a factor but the larger issue relates to fundamental challenges in our hybrid model. Managing the inherently conflicting needs of retail and direct selling has ultimately constrained both. Over the past year as we’ve shared with you, we’ve begun the complex evolution towards direct selling. Our 2010 results will continue to reflect our decision to significantly accelerate the pace of this transformation.

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