Avon 2006 Annual Report Download - page 33

revenues increased 32% due to larger average order and
increased Active Representatives, reflecting new product
launches supported by significant advertising and promotional
activities. The increase in revenue in Brazil and the acquisition
and growth of Colombia more than compensated for continued
declines in Mexico, where revenues decreased 6%, mainly due
to a decline in Active Representatives. The decline in Active
Representatives reflected, in part, challenges related to field
execution caused by a change in the attractiveness of incentives,
including ineffective performance management for our zone
managers. In 2006, we have commenced a number of initiatives
to improve performance in Mexico, including an upgrade of field
talent and investments in incentives and motivation programs,
and we may see improvement by the end of 2007, as we con-
tinue to increase advertising and focus on field execution
through the Representative Value Proposition. We also plan to
continue to focus on our supply chain transition in Mexico.
The decrease in operating margin in Latin America during 2006
was most significantly impacted by increased spending on adver-
tising, incremental inventory obsolescence expense related to our
inventory initiatives, higher allocation of global expenses, and a
2005 gain on the sale of property in Mexico, partially offset by
operating efficiencies due to the revenue increase. Additionally,
incremental costs to implement our restructuring initiatives neg-
atively impacted operating margin by 1.1 points.
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have further impacted
the ability of our subsidiary in Venezuela (“Avon Venezuela”) to
obtain foreign currency at the official rate to pay for imported
products. As a result of this increased difficulty, during 2006,
Avon Venezuela purchased approximately $17.6 in the parallel
market that resulted in a foreign exchange loss of $4.5. Unless
official foreign exchange is made more readily available, Avon
Venezuela’s operations will continue to be negatively impacted
as it will need to obtain more of its foreign currency needs from
the parallel market.
At December 31, 2006, Avon Venezuela had cash balances of
approximately $76.0, primarily denominated in bolivars. During
the year, Avon Venezuela remitted dividends of $26.2 at the
official exchange rate. As a result, we continue to use the official
rate to translate the financial statements of Avon Venezuela into
U.S. dollars. In 2006, Avon Venezuela’s revenue and operating
profit represented approximately 3% and 7% of consolidated
revenue and consolidated operating profit, respectively.
Latin America – 2005 Compared to 2004
%/Point Change
2005 2004 US$
Local
Currency
Total revenue $2,272.6 $1,934.6 17% 10%
Operating profit 453.2 420.7 8% –%
Operating margin 19.9% 21.7% (1.8) (1.9)
Units sold 8%
Active Representatives 11%
Total revenue increased in 2005 with increases in all markets in
the region, except Mexico, reflecting growth in Active Repre-
sentatives, as well as favorable foreign exchange. The purchase
of our licensee in Colombia favorably impacted Latin America’s
revenue and Active Representative growth by 2%. Revenue grew
significantly in Brazil, primarily due to growth in units sold and
Active Representatives, incremental consumer and field incentive
programs, as well as favorable foreign exchange. The revenue
decline in Mexico reflected increased competitive intensity and a
significant decline in non-Beauty product offerings, partially
offset by favorable foreign exchange.
Operating margin declined in Latin America during 2005, mainly
affected by increased fixed expenses, primarily salaries, costs to
implement restructuring initiatives, unfavorable product mix,
pricing investments and incremental inventory obsolescence
expense related to our inventory initiatives, partially offset by
benefits from supply chain efficiencies and a gain on the sale of
property in Mexico.
Western Europe, Middle East & Africa –
2006 Compared to 2005
%/Point Change
2006 2005 US$
Local
Currency
Total revenue $1,123.7 $1,065.1 6% 6%
Operating profit (17.8) 63.7 * *
Operating margin (1.6)% 6.0% (7.6) (7.5)
Units sold 3%
Active Representatives 2%
* Calculation not meaningful
Total revenue increased reflecting growth in Active Representa-
tives and units, with increases in revenues in most markets in the
region, most significantly in Turkey and the U.K. Revenue growth
of 23% in Turkey benefited from the continued strength of
recruiting and field programs, as well as investments in advertis-
ing driving increased order size. Revenue in the U.K increased
A V O N 2006 27