Avon Products, Inc. (AVP)

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Avon Products (AVP)

Q1 2011 Earnings Call

May 03, 2011 9:00 am ET


Amy Low Chasen -

Andrea Jung - Chairman of the Board and Chief Executive Officer

Charles Cramb - Vice Chairman of Developed Market Group and Interim Chief Financial Officer


Javier Escalante - Weeden & Co., LP

Dara Mohsenian - Morgan Stanley

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Alice Longley - Buckingham Research Group, Inc.

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

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

William Schmitz - Deutsche Bank AG

Douglas Lane - Jefferies & Company, Inc.

Wendy Nicholson - Citigroup Inc

Linda Weiser - Caris & Company

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch



Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's First 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

Thank you. Good morning. Thank you for joining us to discuss Avon's first 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 to today's slides and also available on the Investor Relations section of our website. As usual, on the call, we will focus on adjusted non-GAAP financial measures.

With that, I'll hand the call over to Andrea.

Andrea Jung

Thank you, Amy. Good morning, everybody. Just a few quick comments on the quarter. The first quarter is broadly on track. Our constant dollar revenues, as you saw, were up 4% in the quarter, driven by Latin America and WEMEA M&A contributed 2% to this quarter. Our Beauty sales were up 4% in constant dollars. The 2 categories that really drove that were Fragrance and Personal Care. Active Representatives continue to be soft. They were down 1% impacted primarily by China and North America.

Our adjusted gross margin expanded 80 basis points as effective price management and favorable foreign exchange counteracted mix in commodity cost pressures. Adjusted operating margin was up 30 basis points as gross margin expansion and tight cost control offset higher distribution costs. So our adjusted earnings per share from continuing operations was up 12% in the quarter. Our cash flow was down $41 million, impacted by $75 million pension contribution in the quarter and higher inventory.

If I just go back to February and what we outlined at CAGNY in terms of 2011 sales and operating margin goals by half just on the top line, what we said was that we were looking for core revenue to grow in the low single digits in constant dollars in the first half and then accelerate to mid-single digits in the second half for a full year of mid-single-digit growth. In terms of adjusted operating margin, we said back then that we felt the first half would have adjusted operating margin below prior year and then be up significantly in the second half for a full year outlook of 50 to 70 basis points improvement. And we still feel good about the full year outlook, although as you'll see later the adjusted operating margin will be better than what we said in the first half.

So since CAGNY at the end of February, the whole company's focus has been against the key 2011 operating priorities that we laid out, and again, those were just the historic growth in Brazil and Russia throughout the year to stabilize North America, to reignite our Skin Care category and to deliver meaningful operating margin expansion.

So if I just turn to Brazil to start, we've seen some progress on service in the quarter. It's not yet reflected in our top line results. On the left, we are just tracking our percent of deliveries delayed in the quarter, and you could see some of the peaks, where as we came out of the back half of last year some tough percent of representative orders having long delivery delays. That has pretty much restored itself to the historical norm as you can see that we had as we were exiting the first half of last year.

In terms of the order fill rate, the dotted line is the historical norm for the market, which we have been at for many years. We have a disruption in the middle of the year, so you saw particularly as we got down to probably the trough was in that November, December period. And steadily, the order fill rate has been improving. There's been gradual improvement. But it's not yet back to historical norms yet, but we feel good about the steady progress we're making on that front.

But restoring representative confidence, obviously, is key to improving the top line growth. Once the historical service levels are achieved. Annoyance always does lag service recovery. That's what we found in the history of Avon. Generally, it takes a couple of quarters for revenues to improve. Brazil could take a little bit longer just due to the high number of reps also carrying competitive brochures. It's our largest dual rep market. But again, it takes a couple of quarters for revenue to improve after service were already service recovers. So the highest priority for us now going forward is restoring representative confidence and their activity.

Additional bonuses for zone managers and sales leaders are being put in place from the second quarter on to really return representative activity to historical levels. Personal contact has always been a best practice in this market. It's always been important but never more important than now, so all of our zone managers and sales leaders are focused on really enhancing their contact with top sellers to encourage the activity. We've got energy building representative events across the balance of the year. And then importantly, we were offering higher value, higher energy incentives to our representatives for their activities from computers, smartphones, iPads, so high-energy incentives. And as we said in late February, we continue to expect gradual revenue improvement in Brazil throughout the year.

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