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Original Source: FD (FAIR DISCLOSURE) WIRE
. Andrea Jung, Avon Products Inc., Chairman, CEO . Wendy Nicholson, Smith Barney Citigroup, Analyst . Susan Kropf, Avon Products Inc., President, COO . Bill Schmitz, Deutsche Bank, Analyst . Chuck Cramb, Avon Products Inc., EVP, Finance & Tech, CFO . Bill Pecoriello, Morgan Stanley Dean Witter, Analyst . Chris Ferrara, Merrill Lynch, Analyst
. Amy Chasen, Goldman Sachs, Analyst . Connie Maneaty, Prudential Equity Group, LLC, Analyst . Sandhya Beebee, HSBC, Analyst . Linda Bolton Weiser, Oppenheimer & Co., Analyst . Alice Longley, Fulcrum Global Partners, Analyst . Renee Johansen, Avon Products Inc., VP, IR . Laura Lieberman, Lehman Brothers, Analyst
AVP reported 4Q05 EPS of $0.40 per diluted share, 34% lower than $0.61 in 4Q04.
A. Key Data From Call 1. 4Q05 operating profit = $297m 2. 4Q05 EPS diluted = $0.40 3. 2005 capex = $207m 4. 4Q05 Average shares outstanding = 457m diluted 5. 2005 shares purchased = 23m shares, $728m and average price of $31.75 6. 4Q05 shares purchased = 7m at average price just over $28.00 7. 4Q05 end shares outstanding = 451.7m
S1. AVP Overview (A.J.) 1. Turnaround Plan: 1. With major restructure expect 2006 to be transition plan to transform cost base and simplify organization. 2. 4Q05 impacted by $56m in costs for restructuring, primarily severance driven. 1. Included closure of operations in Indonesia. 1. With revenue under $20m, not significant and losing money for number of years. 2. Included charge for allowance for establishment of European Finance Shared Service Center to reduce transactional costs. 3. Lion's share of charge was salary and benefit related. 1. Aggressively attacked high cost fixed base.
3. In past years, growth outstripped capabilities. 1. To compensate, added people and layers to get work done which in turn slowed information flow and decision making. 1. Streamlining senior management, closer to markets, representatives and consumers. 2. Operating Structure:
1. Highly entrepreneurial company but growing from $5b to $8b
plus, operating complexity increased and operating model which
served well as smaller company needed to evolve with growing
scale. 2. AVP has unique strength as global brand but also as high touch commercial channel with competitive intensity requires focus on brand and commercial aspects of model. 3. AVP has created eight new business units representing both
priority geographies and brand and supply chain functions, all
with equal and shared responsibilities for performance. 4. Increased number of operating business units which remain primary financial reporting units from four to six and have named them commercial business units (CBUs). 1. Under new structure both China and Central and Eastern Europe become own CBUs reflecting critical growth potential for these two important geographies to the co.
2. Others are North America, Latin America, Asia Pacific and Western Europe, Middle East and Africa. 5. Name change to CBU makes statement about role these business units play going forward.
1. Commercial business units own the moment of truth with customers and representatives. 2. Will be 100% dedication to delivering direct sell and merchandising excellence driving share gains to the ground floor. 3. Executives in this role will be monitored and measured specifically against these capabilities. 6. Under new model, six commercial business units will work in partnership with two other equally empowered global business units, Brand Marketing and Global Supply Chain. 1. Both will now become integrated worldwide function staffed with experts with enterprise accountability for brand performance. 2. Realigned all regional marketing and supply chain teams who now report directly to new GBU leaders.
3. As end to end global business units, have shared missions to deliver world class products at world class cost and deliver against AVP iconic brand. 4. With new organizational structure of commercial and global business units, AVP is properly aligned to achieve brand and channel excellence and restore competitive advantage.
7. Established formalized global direct selling function to
protect competitive advantage as world leader in direct selling. 1. Function will set strategy, insure best direct selling
talent around world and very critically oversee accelerated implementation of sales leadership. 8. Still in early days of improving organization effectiveness. 9. AVP had many more layers of management then peers.
10. In process of streamlining organization, cutting number of
layers virtually in half. 1. For example, in Russia, under former structure General Manager of Russia was five layers from top, reporting to head of sales for Central and Eastern Europe cluster the Operating business leader for Europe and Executive Vice President of International. 2. Under new structure, general manager of Russia reports directly to CBU who reports to top of house. 3. Cut layers from six to three. 11. It's not about cost but way to get closer to market, speed information flow and enables better, faster decisions. 1. When effort is completed, anticipate reduced management staff 20-30%. 3. Leadership: 1. Using moment of structural redesign as opportunity to make changes in leadership in key markets. 2. Highly entrepreneurial manager who drove extraordinary early growth in Russia now assumes leadership for next exciting
opportunity, India. 3. New manager in Russia, former Russia head of sales and most recently delivered outstanding results as manager of Ukraine. 4. In Mexico, new manager formerly headed up Andean cluster. 1. Came about a year and half ago with top experience at Clorox and Proctor & Gamble. 5. New leadership in Japan, capable and experienced developed market managers to help steer this market through a challenging period. 6. CBU for Latin America business leader will be retiring at end
of 1Q06 after incredible 37 years of outstanding service to
AVP and will announce successor next month. 7. Actions are about reducing layers, getting right talent and attacking fixed costs. 4. Cost Base: 1. Organizational effectiveness is part of overall restructuring effort for a multi-year period. 2. Other initiatives include: 1. Implementation of global manufacturing.
2. Securing additional supply chain efficiencies in area of procurement and distribution. 3. Streamlining transactional and other services through outsourcing and move to low cost countries.
3. Expect to see implementation cost in nearly every quarter and
nearly every region. 5. Investment Stage: 1. To prepare organization for change, since Jan. 2, Susan and CEO have traveled to speak to managers, touching hundreds of manager level associates.
2. Implementing very comprehensive internal communication program
to talk about major initiatives but also how co. will reinvest
in business. 3. Investment strategy is other critical leg of turnaround plan. 4. Restoring competitiveness of world class beauty brand is highest priority. 5. Encouraged from data from tracking study which measures brand perception and health, done for ten years in top markets. 6. Experienced little deterioration in consumer and representative perception of brand and in some cases showed healthy growth. 7. With new global marketing business unit starting in 2006 ramping up investment in consumer research and analytics and accelerating innovation pipeline.
8. Focus will be on fortifying mid tier brands such as Avon
Solutions, which will be infused with anti-aging trickle down
technology and Avon Color which will receive a 360 degree
brand makeover this year. 6. Advertising: 1. Will ramp up investment level, but will move from launch to a continuity strategy to build awareness and stimulate purchase throughout year. 2. Total advertising spend is anticipated to increase 50% in 2006. 1. U.S. represents largest dollar increase.
2. In 2006, U.S. will quadruple TV advertising with spots airing 42 weeks during year compared with 11 in 2005. 3. Print advertising for general market will run for nine months compared with four months in 2005. 3. Also increasing investments in direct selling channel to drive accelerated roll out established sales leadership.
4. With establishment of global direct selling function, also