Avon 2003 Annual Report Download - page 17

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
management’s discussion
Segment Review – 2003 Compared to 2002
Latin America
%/Point Change
Local
2003 2002 US $ Currency
Net sales $1,747.2 $1,654.9 6% 15%
Operating profit 406.3 361.6 12 21
Operating margin 23.2% 21.8% 1.4 1.4
Units sold 2%
Active Representatives 12%
Net sales increased in U.S. dollars and local currencies in 2003 most signifi-
cantly in the following markets:
• In Argentina, Net sales in U.S. dollars and local currency increased sub-
stantially, primarily driven by significant growth in active Representatives
and successful new product launches.
• In Brazil, Net sales in U.S. dollars and local currency increased, reflecting
growth in active Representatives and a shift in product mix towards
higher priced products. Although local currency sales increased, units
declined due to the shift in product mix towards higher priced products.
• In Mexico, Net sales increased in U.S. dollars and local currency,
benefiting from growth in active Representatives, and new product
launches, as well as sales promotion offers which drove unit growth
in this market.
• In Venezuela, Net sales increased in U.S. dollars and local currency
driven by growth in active Representatives and units, and Avon’s ability
to provide good service to its Representatives despite external factors
such as the national strike that lasted until February 2003 and the
exchange rate control imposed by the Venezuelan government in
February 2003.
The increase in operating margin in Latin America in 2003 was most signifi-
cantly impacted by the following markets:
• In Mexico, operating margin increased (which increased segment margin
by 1.3 points) due to a lower expense ratio, reflecting savings associated
with Business Transformation initiatives, including a gain from the sale of
property in Mexico City, as the Company transitioned to a new distribu-
tion center in Celaya, partially offset by an increase in consumer and
strategic investments such as spending on advertising and the brochure.
Operating margin also benefited from an improvement in gross margin
resulting from the introduction of products with higher margins, a favor-
able mix of products sold, and supply chain savings associated with
Business Transformation initiatives.
• In Argentina, operating margin increased (which increased segment
margin by .5 point) primarily due to an improvement in the expense ratio
driven by a significant increase in local currency sales and lower logisti-
cal costs. Additionally, gross margin improved due to pricing strategies
and savings associated with supply chain Business Transformation ini-
tiatives.
• In Venezuela, operating margin increased (which increased segment
margin by .1 point) due to an increase in gross margin resulting from
pricing strategies, a favorable mix of products sold and supply chain
savings related to Business Transformation initiatives.
• In Brazil, operating margin decreased (which decreased segment mar-
gin by .5 point) primarily due to an increase in the expense ratio result-
ing from overhead under absorption due to a unit shortfall, which more
than offset the growth in gross margin resulting from the sale of higher
priced Beauty products.
36