Avon Products, Inc. (AVP)

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Avon Products (AVP)

Q4 2010 Earnings Call

February 08, 2011 9:00 am ET


Amy Low Chasen -

Charles Cramb - Vice Chairman and Chief Finance & Strategy Officer

Andrea Jung - Chairman of the Board and Chief Executive Officer


Dara Mohsenian - Morgan Stanley

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Alice Longley - Buckingham Research Group, Inc.

Ali Dibadj - Bernstein Research

Richard Lyall

Mark Astrachan - Stifel Nicolaus & Company, Inc.

Jason Gere - RBC Capital Markets, LLC

William Schmitz - Deutsche Bank AG

Douglas Lane - Jefferies & Company, Inc.

Wendy Nicholson - Citigroup Inc

Linda Weiser - Caris & Company

Christopher Ferrara - BofA Merrill Lynch



Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Fourth Quarter and Full Year 2010 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. Good morning. Thank you for joining us to discuss Avon's fourth quarter and full year 2010 earnings 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 on the call, we'll only focus on adjusted non-GAAP financial measures.

You will hear from Andrea in a minute that we're handling today's call a bit differently. As a result, our usual slides that review regional and P&L results will be available on our website.

With that, I'll hand this over to Andrea.

Andrea Jung

Thanks, Amy. Good morning, everybody. As Amy said, given this quarter's disappointing results, I’ve just decided to handle this call a little bit differently this morning. In anticipating your questions, we're going to really focus our comments on three key areas, our revenue in Brazil and Russia and overall company operating margin.

So let me just start with kind of an overview of where we are in 2010 as we’ve close the year and what we're looking at in 2011. 2010 was a tale of two halves for the company. We had a very strong first half, and that was offset by a disappointing second half with the weakness we started to see in third quarter continuing into the fourth quarter.

In the first half, we delivered meaningful operating margin expansion as our strong business performance offset costs related to the FCPA investigation and the Venezuelan devaluation. However, as our revenue growth softened unexpectedly in the second half, operating margin was pressured for the balance of the year, so clearly, disappointing. Our issues were executional rather than structural challenges, and they drove the majority of our second half performance deceleration in Brazil and Russia, and I'll get into that in a minute. But just a quick comment on 2011, and then both Chuck and I will spend more time on this. We are squarely, squarely focused on execution against two priorities, restoring growth in these key geographies and delivering meaningful operating margin expansion in the year.

If you look at this chart, as I said, on the top line 2010 was a year of two halves, driven by Brazil and Russia. So if you look on the left, for the total year, the company delivered, without acquisitions, 5% growth in constant dollars. And that was led by 7% first half, which decelerated to 3% in the second half. When you look at Brazil and Russia, Brazil had a 13% first half and a 4% of second half; and Russia, a 14% first half coming down to a 2% second half, and those two markets drove the lion's share of the deceleration of the company between the two halves. So obviously, the key questions are, for Brazil and Russia, why did our sales decelerate? What are we doing to fix these challenges? How long will it take? Was it structural? Is it secular competition, or is it executional? Let me try to answer these questions.

So when I look at Brazil’s sales, the deceleration was driven by service outages. Just a little context for everyone, Avon Brazil's growth, between 2007 and 2010, outpaced our expectations and our infrastructure plans. Our local currency sales were up 70% between 2006 and 2010. Our orders were up 30% versus the 2007 level as they've reached a 6 million order that was shipped out in Q4 of 2010. So this order scale had started to push our system capacity as our growth outpaced our planned infrastructure investments, and you'll hear in a minute that we have started to really put plans in place, whether it was distribution with new Cabreúva facilities, manufacturing capacity enhancements and some systems. So that had been in the works. However, government-imposed e-invoicing changes in June of 2010 exacerbated the order processing issues for us in the second half. So the system's instability led to service delays for our representatives and then outages of product shortage, and it also reduced our flexibility. So this amplifies some of our demand forecasting misses while it resulted in product shorts at three times our historic norms in this market. So we had lost sales from unfilled orders. We had lost demand as representatives became annoyed. They were still placing their orders but less units per order as they started to receive less than they ordered in previous campaigns and higher returns in this period due to shorts and service delays than the typical norm for Brazil.

When you look at service disruptions, and on this chart you'll see that they created approximately an eight point sales drag in the second half. So in the third quarter, as you can see, we had about four points of sales lost due to incremental shorts, about two points of sales in the third quarter due to again representatives being annoyed and not placing the same kind of demand and then higher returns than normal at about 1.5%. Okay, when you look at the fourth quarter, again, still lost sales due to incremental shorts, a little bit more on the representative annoyance factor going from 2% of sales to about 4% of sales impact and then returns slightly better than the third quarter at about 1% higher than the norm.

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