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Avon Reports Record Second Quarter Results; E.P.S. Up 12%, Exceeding Expectations

PRNewswire
Jul 19, 2002

        Sales in Local Currencies Climb 10% on Unit Growth of 12%;
                       All Regions Post Solid Gains

            Significant Gains from Currency Hedging Strategies

        Quarterly Cash Flow up $39 Million to Record $205 Million

NEW YORK, July 19 /PRNewswire-FirstCall/ -- Avon Products, Inc. (NYSE: AVP) today reported record sales, earnings and cash flow in the second quarter of 2002. Earnings per share of $.64 exceeded the $.63 consensus estimate among Wall Street analysts. The company also said it was comfortable with the consensus estimate of $.47 per share for the third quarter and reaffirmed that it is on track to achieve its full-year target of $2.30 per share.

In the second quarter, earnings per share increased 12% to $.64, versus $.57 in the second quarter of 2001. Net income in the quarter rose 12% to $154.9 million, versus $137.7 million in the year-ago period.

Sales in the quarter increased 4% to a record $1.51 billion, compared with $1.46 billion in the second quarter last year. Excluding the impact of foreign currency translation, sales were up 10%, driven by a 12% increase in units and a 10% gain in the number of active Representatives. The second quarter sales increase represents accelerating growth from the first quarter, when sales increased 2% in dollars and 8% in local currencies over the prior year.

Operating margin of 15.9% was down slightly from last year's record level of 16.1%. Lower margins in Latin America and increased strategic spending on consumer marketing initiatives were offset by significant margin improvement from Avon's Business Transformation initiatives, including supply chain improvements and overhead reductions.

Cash flow from operations was at a record level of $205 million, up $39 million from the second quarter of last year, due largely to a strong cash flow increase in the U.S., which has begun to benefit from its recent initiatives to improve supply chain efficiency.

Avon said the quarterly earnings increase was driven by continued outstanding operating performance in the U.S. and Europe. In addition, significant non-cash gains from the translation of U.S. dollar-denominated assets, mainly in Argentina and Venezuela, helped to offset the negative impact of weaker Latin American currencies on operating results in the region.

Commenting on the quarter, Andrea Jung, Avon's chairman and chief executive officer, said, "We're very pleased with the continued momentum in our global direct selling operations, especially against the backdrop of the economic crisis in Argentina and the challenging comparisons we had against a strong second quarter of 2001, when sales and E.P.S. grew 5% and 10%, respectively.

"Our strategies to enhance Avon's brand image and strengthen the direct selling channel are producing excellent local currency sales and unit growth around the world. The U.S. again delivered a stellar performance, with sales up 6% and profits up double digits, while all international regions generated double-digit sales growth in local currencies.

"In addition, our Business Transformation initiatives are on track to help us deliver a 50 basis-point improvement in operating margin this year, and 100 basis-point gains in both 2003 and 2004. Business Transformation also is freeing-up resources for reinvestment to spur further top-line growth.

"Looking ahead, we are confident that the fundamental strength of our business will continue. We anticipate further local currency sales growth acceleration in the second half of the year as well as higher dollar operating profit growth, and we remain on track to achieve our stated target of double-digit earnings growth, before unusual items, for the third consecutive year."

REGIONAL HIGHLIGHTS

In the U.S., Avon's largest market, sales in the second quarter rose 6% on top of the 6% sales gain recorded in the second quarter of 2001. Units increased 8% and the number of active Representatives grew 2%. Sales in the quarter benefited from high single-digit gains in color cosmetics and personal care products, while sales of jewelry rose in the high teens and apparel and accessories climbed over 20%. In addition, Avon Wellness generated sales growth in excess of 25% as Avon successfully anniversaried the launch of the new line in last year's second quarter. Operating profit in the U.S. increased 11%, and operating margin expanded by 100 basis points to a record 21.7%.

Europe continued on its impressive growth track, with sales up 20% in dollars and 18% in local currencies, driven by a 24% increase in units and a 22% increase in active Representatives. The markets of Central and Eastern Europe generated sales growth approaching 50%, including Russia, which nearly doubled its sales versus the year-ago period. The U.K. also contributed to the region's growth with a 6% sales gain. Europe's operating profit grew 21% and operating margin improved by 20 basis points to 18.3%.

In Latin America, sales in the quarter declined 8%, but excluding the impact of foreign currency exchange, were up 10%, driven by an 11% increase in units and an 8% increase in the number of active Representatives. All major markets in the region -- including Argentina -- posted local currency sales increases, with double-digit gains generated by several markets, including Brazil and Mexico, the two largest markets in the region. In Argentina, sales and operating profit fell significantly as expected, but in local currency terms, sales rose slightly, reflecting a 13% increase in the number of active Representatives. Latin America's operating profit was down 11%, and operating margin declined 60 basis points to 22.7%.

In the Pacific region, Avon said growth in the second quarter accelerated year-over-year, compared with the first quarter, with sales up 11% in dollars and local currencies, driven by unit growth of 8% and a 9% increase in the number of active Representatives. All major markets contributed to the gains, with particular strength in China, Australia and Taiwan. The region's operating profit grew 18%, and operating margin expanded by 100 basis points to 16.2%.

FIRST-HALF RESULTS

For the first six months of 2002, Avon reported earnings per share of $1.04, up 14% from $.91 in the first six months of 2001. Net income in the first half increased 14% to $251.1 million, versus $219.4 million in the year-ago period.

Sales in the first half were up 3% to $2.89 billion, compared with $2.80 billion in the year-ago period. Excluding the impact of foreign currency exchange, sales rose 9% over prior-year.

Avon will conduct a conference call today at 10:00 am New York time to discuss the results for the quarter and the outlook for the rest of the year. The conference call will be webcast live and can be accessed through the Investor section of the company's website, http://www.avon.com/ .

Avon is the world's leading direct seller of beauty and related products, with approximately $6.0 billion in annual revenues. Avon markets to women in 143 markets through 3.5 million independent sales Representatives. Avon product lines include such recognizable brands as Avon Color, Anew, Skin-So-Soft, Advance Techniques Hair Care, beComing and Avon Wellness. Avon also markets an extensive line of fashion jewelry and apparel. More information about Avon and its products can be found on the company's web site http://www.avon.com/ .

Cautionary Statement under the Private Securities Litigation Reform Act of 1995

Statements in this release, which are not historical facts or information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Such forward-looking statements involve risks, uncertainties and other important factors which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Such important factors include, among others, the following: general economic and business conditions in the Company's markets including economic and political uncertainties in Latin America; the Company's ability to implement its business strategy and its Business Transformation initiatives including "clustering" of its markets; the Company's ability to achieve anticipated cost savings and profitability targets; the impact of substantial currency exchange fluctuations in the Company's principal foreign markets and the success of the Company's foreign currency hedging strategies; the impact of possible pension funding obligations on the Company's cash flow; and the effect of legal and regulatory proceedings and restrictions imposed on the Company or its operations by foreign governments. Additional information identifying such important factors is contained in the Company's Form 10-K report for the year ended December 31, 2001, filed with the S.E.C. The Company undertakes no obligation to update any such forward-looking statements.

                             AVON PRODUCTS, INC.
                      CONSOLIDATED STATEMENTS OF INCOME
                    (In millions, except per share data)

                            Three months ended        Six months ended
                                June 30     Percent       June 30    Percent
                            2002      2001  Change    2002      2001  Change

  Net sales             $1,513.5  $1,457.0    4%  $2,885.6  $2,803.4    3%
  Other revenue             13.7      10.2            25.2      20.8
   Total revenue         1,527.2   1,467.2    4%   2,910.8   2,824.2    3%

  Cost of sales (1)        565.3     535.7         1,083.8   1,048.2
  Marketing, distribution
   and administrative
   expenses (1)            718.9     695.7         1,429.9   1,394.4
  Operating profit         243.0     235.8    3%     397.1     381.6    4%

  Interest expense          12.9      18.9            26.3      38.6
  Interest income           (4.0)     (4.2)           (8.5)     (6.2)
  Other (income)
   expense, net (2)         (7.3)      7.3           (11.4)      8.9
  Total other expenses       1.6      22.0             6.4      41.3
  Income from continuing
   operations before taxes,
   minority interest
   and cumulative effect
   of accounting change    241.4     213.8   13%     390.7     340.3   15%
  Income taxes              84.0      74.6           136.0     119.1

  Income from continuing
   operations before
   minority interest and
   cumulative effect of
   accounting change       157.4     139.2   13%     254.7     221.2   15%
  Minority interest         (2.5)     (1.5)           (3.6)     (1.5)
  Income from continuing
   operations before
   cumulative effect
   of accounting change    154.9     137.7   12%     251.1     219.7   14%
  Cumulative effect of
   accounting change,
   net of tax                 --        --             0.0       (.3)
  Net income              $154.9    $137.7   12%    $251.1    $219.4   14%

  Earnings per share:

  Basic earnings per
   share: (4)
   Continuing
    operations              $.66      $.58   14%     $1.06      $.92   15%
   Cumulative effect of
    accounting change         --        --              --     (0.00)
                            $.66      $.58   14%     $1.06      $.92   15%

  Diluted earnings per
   share: (3) & (4)
    Continuing operations   $.64      $.57   12%     $1.04      $.91   14%
    Cumulative effect of
     accounting change        --        --              --     (0.00)
                            $.64      $.57   12%     $1.04      $.91   14%

  Average shares
   outstanding:
   Basic                  236.43    236.74          236.57    237.32
   Diluted                246.28    245.80          246.30    246.28


  Notes:

(1) Effective January 1, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-14, "Accounting for Certain Sales Incentives", which requires that the costs of certain products used in Avon's promotional activities, previously reported in Marketing, distribution and administrative expenses, be classified in Cost of sales. For comparison purposes, the prior periods were restated to reflect the adoption of EITF 00-14.

(2) For the three months ended June 30, Other (income) expense, net includes foreign exchange (gains) losses of ($9.2) and $6.3 in 2002 and 2001, respectively. For the six months ended June 30, Other (income) expense, net includes foreign exchange (gains) losses of ($16.7) and $6.1 in 2002 and 2001, respectively. The three and six months ended June 30, 2002 include foreign exchange gains of ($12.9) and ($26.3), respectively, related to U.S. dollar denominated assets, mainly in Argentina and Venezuela.

(3) For purposes of calculating diluted earnings per share for the three months ended June 30, 2002 and 2001, after tax interest expense of $2.6 and $2.5, respectively, applicable to convertible debt was added back to net income. For the six months ended June 30, 2002 and 2001, after tax interest expense of $5.2 and $5.0, respectively, applicable to convertible debt was added back to net income.

(4) Restated financial statements, related to the recently announced SEC settlement, will be filed within the next several weeks. Those restatements will not change reported Basic or Diluted earnings per share for the three and six months ended June 30, 2001.

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SOURCE: Avon

CONTACT: Victor Beaudet, Media, +1-212-282-5344, or Renee Johansen,
Investor, +1-212-282-5320, both of Avon

Web site: http://www.avon.com/

Company News On-Call: http://www.prnewswire.com/comp/079575.html

 
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