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Andrea Jung CEO AVON

Avon 2011 revenue up 4% to $11.3 billion

NEW YORK, Feb. 14, 2012 /PRNewswire/ — Avon Products, Inc. (NYSE: AVP) today reported fourth-quarter and full-year 2011 results. Andrea Jung, Avon's Chairman and Chief Executive Officer said: Despite a challenging fourth quarter, 2011 revenue was up 4% (1% in constant dollars) to $11.3 billion. Adjusted operating profit for the year was $1.16 billion and cash from operations was $656 million. While 2012 is a year of transition and we are not planning for margin recovery, our priorities are to improve top-line performance, cost management, and cash generation. Additionally, the company plans to maintain its annual $0.92 dividend in 2012. As previously announced, the company is conducting an operational and financial assessment of the business. We will update investors at the appropriate time after a new CEO is on board.

Fourth-Quarter 2011 (compared to fourth-quarter 2010)

Total revenue of $3.0 billion decreased 4% or 1% in constant dollars. Total units declined 2%, while price/mix was a benefit of 1% during the quarter. Active Representatives were down 3%.

Fourth-quarter 2011 gross margin was 61.1%, 70 basis points lower than the prior-year quarter primarily due to an inventory-related charge in Brazil and commodity cost pressures.

Selling, general and administrative expense in the quarter increased as a percent of revenue by 2% versus fourth-quarter 2010, and increased 3% on an adjusted non-GAAP basis due to higher distribution costs, bad debt expense, and investments in Representative Value Proposition (RVP). Avon invested an incremental $35 million in RVP in the fourth quarter of 2011 in Sales Leadership and higher incentives. This more than offset a $21 million decline in advertising, which was down 23% to $71 million.

Fourth-quarter 2011 costs associated with the company's 2005 and 2009 restructuring programs were $9 million pre-tax, down from $58 million pre-tax, or $0.01 and $0.09 per diluted share, respectively.

During the quarter, the Company took a non-cash charge of $263 million, or $0.38 per diluted share, to adjust goodwill and an intangible asset related to the acquisition of Silpada Designs, Inc. (Silpada). This non-cash impairment charge was largely driven by the rise in silver prices since the acquisition and the negative impact on Silpada's revenues and margins.

Operating profit was $13 million in the quarter and operating margin was 0.4%, significantly impacted by the Silpada impairment charge. Adjusted non-GAAP operating profit was down 31%, and adjusted non-GAAP operating margin was 9.4%, down 360 basis points from a year ago due to higher field and distribution costs in Brazil, higher investments in RVP in the U.S., and lower gross margin.

Fourth-quarter 2011's effective tax rate was 101.7%, compared with 34.0% in the year-ago quarter. Excluding the impact of restructuring costs and the Silpada impairment charge, the fourth-quarter 2011 adjusted non-GAAP tax rate was 32.2% versus 34.0% in fourth-quarter 2010.

Income from continuing operations in the fourth quarter of 2011 was $0.3 million or zero cents per diluted share, significantly impacted by the Silpada impairment charge. Excluding the impact of restructuring costs and the impairment charge, adjusted non-GAAP income from continuing operations was $172 million, or $0.39 per diluted share.

Fourth-Quarter 2011 Regional Results (compared to fourth-quarter 2010)

Latin America's fourth-quarter 2011 revenue was up 2% year over year, or up 6% in constant dollars. Brazil was down 6%, or down 1% in constant dollars. Strong growth continued in Mexico, which was up 2%, or up 12% in constant dollars. The region's Active Representatives were flat and units sold increased 4%. Fourth-quarter operating profit was down 33%. Operating margin was 9.9%, or 10.4% on an adjusted non-GAAP basis. The decline in operating margin was due to a $16 million inventory-related charge and the field and distribution costs associated with Brazil's continued service challenge. The final quarter of dual distribution costs were also a factor.

Fourth-quarter revenue in North America was down 7% on both a reported and constant-dollar basis. Avon's core U.S. business, which excludes Silpada, was down 5%, as recent product portfolio enhancements of giftables and smart-value offerings within Beauty resulted in positive average order growth for the quarter, partially offsetting a decline in Active Representatives. Silpada sales were down double digits, negatively impacted by recent price increases. The region's Active Representatives were down 8% and units sold were flat. North America reported a fourth-quarter operating loss of $241 million, compared with an operating profit of $46 million in the year-ago quarter, due to the Silpada impairment charge. Excluding restructuring charges and the Silpada impairment charge, adjusted non-GAAP operating profit was down 69%, with an adjusted non-GAAP operating margin of 3.6%. The decline in adjusted non-GAAP operating margin reflects fixed overhead costs with lower revenues and costs related to the One Simple Sales Model implementation.

In Central & Eastern Europe, fourth-quarter revenue was down 9%, or down 8% in constant dollars. The region's results were pressured by a challenging beauty market as well as aggressive competitive pricing. Russia was down 11%, or down 10% in constant dollars. The region's Active Representatives and units sold were down 3% and 12%, respectively. Operating profit was down 10%. The region's operating margin was 19.4%, or 19.8% on an adjusted non-GAAP basis, as gains in gross margin were offset by investments in brochure and the impact of fixed overhead costs on lower revenues.

Western Europe, Middle East & Africa's fourth-quarter revenue decreased 9% or down 3% in constant dollars. The region's results reflect continued weakness in macroeconomic conditions and weaker performance in the Fashion & Home categories. The region's Active Representatives and units sold were down 3% and 5%, respectively. Operating profit was down 23% versus the prior-year quarter. Operating margin was 11.0% and adjusted non-GAAP operating margin was 10.9%, primarily due to lower gross margin, negatively impacted by foreign exchange and fixed overhead costs with lower revenues.

Asia Pacific's fourth-quarter revenue was down 6% year over year, or down 7% in constant dollars. The region's Active Representatives and units sold declined 7% and 6%, respectively. Operating profit was down 24%. Operating margin was 9.5% and adjusted non-GAAP operating margin was 9.6%. The decline was due to fixed overhead costs with lower revenues and higher investments in RVP.

Full-Year 2011 Results (compared to full-year 2010)

Total revenue of $11.3 billion increased 4% or up 1% in constant dollars. Acquisitions contributed 1% to revenue growth during the year. Total Beauty sales were up 5%, or 2% on a constant-dollar basis. Active Representatives declined 1% and units sold were down by 2%.

Operating profit of $855 million decreased 20% and operating margin was 7.6%, down 230 basis points. Excluding the impact of restructuring costs and the Silpada impairment charge, adjusted non-GAAP operating profit was $1.2 billion, down 6%, and adjusted non-GAAP operating margin was 10.3%, down 110 basis points from a year ago.

Full-year income from continuing operations was $526 million, or $1.20 per diluted share, compared with $595 million, or $1.36 per diluted share last year. Adjusted non-GAAP income from continuing operations was $719 million, or $1.64 per diluted share, compared with $786 million, or $1.80 per diluted share.

Cash flow from operations was $656 million in 2011, $33 million lower, primarily due to a $75 million pension contribution, a $36 million payment associated with a long-term incentive compensation plan, and higher restructuring payments during the year. Partially offsetting these items were higher cash net income from operations and higher recovery of value added taxes in Brazil. Avon's net debt (total debt less cash) at year-end 2011 was $2.1 billion, up $107 million from the prior-year period. Capital expenditures were $277 million for the year.

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