Avon 2007 Annual Report Download - page 27

benefits of approximately $15 from SSI during 2007. We expect
to realize approximately 50% of total expected benefits by 2008,
with annualized benefits from this initiative in excess of $200 by
the end of 2009, with a full year of benefit in 2010. As a result,
we expect to realize benefits of approximately $100 and $175 in
2008 and 2009, respectively, and in excess of $200 in 2010.
We have also begun implementation of a Sales and Operating
Planning process that is intended to better align demand plans
with our supply capabilities and provide us with earlier visibility
to any potential supply issues.
Zero-Overhead-Growth
We have institutionalized a zero-overhead-growth philosophy
that aims to offset inflation through productivity improvements.
These improvements in productivity will come primarily from SSI
and our restructuring initiatives. We have defined overhead as
fixed expenses such as costs associated with our sales and mar-
keting infrastructure, and management and administrative activ-
ities. Overhead excludes variable expenses within selling, general
and administrative expenses, such as shipping and handling
costs and bonuses to our employees in the sales organization,
and also excludes consumer and strategic investments that are
included in selling, general and administrative expenses, such as
advertising, RVP, research and development and brochure costs.
While overhead expenses increased slightly during 2007, the
increase was due to the negative impact of foreign exchange.
Restructuring Initiatives
In connection with our four-point turnaround plan, in November
2005, we announced a multi-year restructuring plan, under which
we expected to incur total restructuring charges and other costs
to implement our restructuring initiatives in the range of $500
before taxes. During the fourth quarter of 2007, we announced
the final initiatives that are part of our restructuring plan. We now
expect to record total restructuring charges and other costs to
implement our restructuring initiatives of approximately $530
before taxes. We have recorded total costs to implement, net of
adjustments, of $443.6 ($158.3 in 2007, $228.8 in 2006 and
$56.5 in 2005) for actions associated with our restructuring ini-
tiatives under the plan, primarily for employee-related costs,
including severance, pension and other termination benefits, and
professional service fees related to these initiatives. We expect to
record a majority of the remaining costs by the end of 2009,
approximately $70 and $20 in 2008 and 2009, respectively. We
expect our restructuring initiatives to deliver annualized savings of
approximately $430 once all initiatives are fully implemented by
2011-2012, compared to our original estimate of in excess of
$300. We expect the savings to reach approximately $300 by
2009. The actions implemented to date resulted in savings of
approximately $230 in 2007, most of which were associated with
the delayering program that we completed in 2006, as compared
to savings of approximately $100 in 2006.
The costs to implement restructuring initiatives during 2005
through 2007 are associated with specific actions, including:
• organization realignment and downsizing in each region and
global through a process called “delayering,” taking out layers
to bring senior management closer to operations;
• the phased outsourcing of certain services, including certain
finance, information technology, human resource and
customer service processes, and the move of certain services
from markets to lower cost shared service centers;
• the restructure of certain international direct-selling oper-
ations;
• the realignment of certain distribution and manufacturing
operations, including the realignment of certain of our North
America and Latin America distribution operations;
• the automation of certain distribution processes;
• the exit of certain unprofitable operations, including the clo-
sure of the Avon Salon & Spa, the closure of our operations in
Indonesia, the exit of a product line in China and the exit of
the beComing product line in the U.S.; and
• the reorganization of certain functions, primarily sales-related
organizations.
See Note 13, Restructuring Initiatives, on pages F-28 through
F-31 of this 2007 Annual Report on Form 10-K.
Outlook
We expect that our investments in both the brand and the
direct-selling channel will drive sustainable growth. We expect
revenue growth to average mid-single-digits over the long term.
While our operating margin during 2006 and 2007 has been
impacted by the costs associated with our turnaround plan, we
expect our operating margin to be impacted to a much lesser
degree in 2008 by these costs. We expect our incremental
investments in advertising in 2008 to be more in line with revenue
growth and incremental investments in RVP to be slightly ahead
of revenue growth. While full-year operating margin improved
slightly in 2007 to 8.8% from 2006’s level of 8.7%, it is expected
to approach 2005’s level, or approximately 14%, in 2008, due to
the projected benefits from and decreased cost related to PLS,
other gross margin improvements, projected benefits from SSI,
and projected savings from and decreased costs to implement
restructuring. We expect a larger proportion of the benefits from
PLS and SSI and savings from restructuring to be realized in the
second half of the year. As revenues grow and the savings from
restructuring and benefits from PLS and SSI are realized, and we
continue to apply a zero-overhead-growth philosophy, operating
margin is expected to further expand beginning in 2009.
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