Avon CEO Discusses Impressions from Recent China Visit (AVP)

| About: Avon Products, (AVP)

From Avon's (NYSE:AVP) Q2 2006 earnings conference call transcript:

Renee Johansen - Vice President of Investor Relations

China's revenue grew 8% to $48 million in the quarter, including the commencement of direct selling as well as the unfavorable impact of the exit of Company-run beauty counters. Revenue was up 5% in local currency, and units were 4% lower. By the end of the second quarter, we had closed nearly all of the store counters formerly located in department stores, hypermarkets, and Wal-Mart. The beauty boutiques represent our only retail presence in China going forward.

China had an operating loss of $4 million in the second quarter versus an operating loss of $1 million in 2005 quarter. The operating margin was a negative 9%. The quarter's costs included incremental advertising expenses associated with the launch of direct selling and $2 million in costs to implement restructuring initiatives.

Andrea Jung - Chairman and Chief Executive Officer

Before closing, I did want to just mention a few words about China, which is certainly a major area of focus for Avon this year. Second quarter revenues in China were higher than the year ago period for the first time since we announced our direct-selling test last April, 2005.

Two weeks ago, I completed a site visit to China. This is the first time I was back since we received the direct-selling license in March, and it was very exciting to see how much has been accomplished there in just the last four months. You all saw our press release stating that as of June 30, we had certified more than 114,000 licensed sales promoters – that is the official terminology for our representatives in China -- with more than 31,000 additional applicants in various stages of the certification process.

The public response has been far greater than anticipated since we first launched our consumer education program, including national advertising. Our focus now is on processing applications as quickly as we can in strict compliance with the government's regulations and requirements.

In fact, during my visit I actually had the management team take me through the multiple steps of recruiting an appointment as if I were an applicant. It's a very comprehensive, very rigorous process with many steps, including in-depth training followed by a certifying exam that all applicants must undergo.

Despite the lengthy process, we have an enormous queue of applicants waiting to be certified with interest growing daily as we continue our education campaign. So, this obviously gives us an exciting first mover advantage, and we are working hard to capitalize on this unique window of opportunity and build our China field force as quickly as we can.

Turning to our beauty boutiques. As you read in our recent press release, more than 90% of our beauty boutique owners have chosen to participate in direct selling as service centers. So they are taking advantage of the opportunity to earn fees for after-sales services to sales promoters, and that includes fees for order pickups, product return, credits, product trials and billing assistance.

In fact, 65% of our beauty boutique owners have recommended to us for certification at least 20 sales promoters; and in some cases, many more. So clearly, our beauty boutiques are beginning to build their earnings stream as we commence direct selling, while also continuing to earn through their retail opportunity with consumers.

With the vast majority of our 5,700 Avon beauty boutiques now actively engaged in direct selling as service centers, our beauty boutiques now comprise one of the largest service coverage networks in China, which is another great source of competitive advantage.

When I was in Beijing, I had the chance along with some other members of the China senior management team to spend an afternoon with a group of our most successful beauty boutiques from Northern China to hear about their experience in early days with direct selling since we received our license as service center providers. Each of them that we met actually provides service to at least 100 sales promoters. They were a very highly impressive group. We had very detailed discussions about their training needs. We listened carefully to their suggestions for supporting their businesses with various pricing, promotional and incentive programs.

So overall, it certainly has been a lot of months that we've been working on this. I am very pleased that our team in China has formed an open and productive partnership with our beauty boutique owners who truly do understand at this point the opportunity to service the sales promoters through their service centers.

Looking to the rest of the year, we will continue to provide Avon China with a significant level of investment. Going forward, a major focus will be on driving both activity and productivity through significantly increased levels of training as we continue to attract new sales promoters at this level.

To support the expansion of our direct-selling field force later this year, we will be also adding testimonial advertising to our successful I'm Avon consumer education campaign. Of course, we continue to enhance the brand image with continued product advertising as we have in the past. So all-in-all, it's early days but I think we're off to a solid start in China. Just coming back from there, I remain very excited about the opportunity ahead.

So that's a quick snapshot of where we are in that market. We are only two quarters into a multi-year turnaround plan, but I do feel good about how much has been accomplished to date. In addition to China in a couple of recent months, I have traveled to a number of other top markets including the UK, Turkey, Japan. This afternoon, I leave for Latin America where I am deep diving into our business in Mexico as well as Brazil. Later on in the fall, I'm off to Central Eastern Europe and then making an important visit to India.


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