Avon Discusses Direct Selling in China (AVP)

From Avon's (ticker: AVP) Q4 2005 earnings conference call with analysts:

Andrea Jung, Chairman and Chief Executive Officer, Chairman

Turning to Asia-Pacific, revenue declines in Japan and China, again contributed to an overall revenue decrease in the region of 7% to $281 million, or down 5% on local currency. Both units and active representatives were 4% lower in the quarter.

We spoke last quarter about Japan’s transition to a more traditional dealer-centric direct selling model from a customer-centric model, that transition continued to impact the country’s and region’s fourth quarter performances.

China’s fourth quarter local currency revenue declined 24%, compared with 46% growth in the prior year quarter. While revenue reflected a year-over-year reduction in average order from the boutique, average order has now shown sequential improvement for two quarters since disruption in last year’s second quarter. So some of that improvement is due to seasonality.

In the fourth quarter, boutique order activity rate continued to be high around 90% and inline with year-ago level. In addition, we saw solid orders for those products, which were advertised or promoted. We did apply for a direct selling license in early December, when Beijing began accepting applications. We are not predicting when we might receive approval or what that approval might look like, but we do believe that national approval is the first step towards country-wide approval.

In the meantime, we continue to move forward with our preparations for the opening of direct selling. Our work right now is focused on readying a large force of field supervisors to recruit representatives when we were granted a license. We have new direct selling talent to the areas to mobilize this effort, and additionally we are continuing our comprehensive communication program with our China Beauty Boutique dealers.

Asia-pacific’s fourth quarter operating profit was impacted by the lower revenues in China and Japan, and particularly by $22 million of cost to implement restructuring initiative in the region, primarily the Indonesia closing. Reflecting that, operating profit decreased 72% to $16 million and operating margin was 5.6%, compared with 18.6% in 2004’s fourth quarter. Global expenses rose 18%, largely due to $11 million of cost for organization downsizing under the restructuring’s initiative.

Q - Chris Ferrara

....and then just finally can you talk a little bit more about what you have said on rep activity in China and how I guess things look better....

A - Susan Kropf, President, Chief Operating Officer

Chris, if we look at the average size of their order sequentially we saw improvement in the fourth quarter from where we were in the third quarter, which was sequentially better than the second quarter. And obviously they are still down year-over- year, but we, that is what we are seeing on that front. Their participation in ordering remains on par with where it was a year ago at around 90%. And just qualitatively and quantitatively we were over there when we made the tour around the world right coming out of the box on January 3rd there was a large group of beauty boutique dealers in Hong Kong as we were launching the fourth quarter line etc. First 2006 program and I would say that the morale is very good in talking to some of the top dealers, I think there was a feeling that deep down they felt good about the program and the communication from management.

Q - Laura Lieberman

I just want to spend a little bit more time on China as I understand it there is kind of – you guys have eluded to sort of a hybrid model in the test market so far with how direct selling as to interacting with boutique owners and if you could just give us all a little bit detail on how that compensation and relationship between the two is working, some of the details of that?

A - Andrea Jung

Okay, well I think the most important thing is that are our planned hybrid model is the right one for us. It’s really hard to talk about how the hybrid model is working, because technically that is not something that we are — we are doing anymore than a small test as it relates to a couple of provinces and that test is intact in terms of numbers. I think — well we believe is that the way we have structured the going forward hybrid between direct selling -- once we can start recruiting as well as the repositions that we have for beauty boutiques, we will be able to talk more about that after we do get the license. We feel that we have a solid plan for a hybrid model that can coexist very well in the future, that’s where we are.

Q - Laura Lieberman

So there is a, – is there a reason then you cannot talk specifically about compensation levels for boutique owners versus direct selling representatives and the relationship between two right now in the existing market?

A - Andrea Jung

It would really be premature to discuss that before we have the approval to direct sell in the market on a broad basis.

Comment: Full Avon conference call transcript here.