Avon 2008 Annual Report Download - page 35

in Mexico and 3% in Colombia. Revenue growth in Brazil was
driven by higher average order, growth in Active Representatives
and the impact of foreign exchange. Revenue growth in Ven-
ezuela was driven by higher average order, while revenue in
Mexico benefited from growth in Active Representatives. We
have experienced a deceleration of growth in Colombia during
the second half of 2008 due to economic conditions as well as
competition.
The increase in operating margin in Latin America for 2008 was
primarily due to the impact of higher revenues, increased pricing,
lower inventory obsolescence expense, and lower costs to im-
plement restructuring initiatives. These benefits to margin were
partially offset by higher investments in RVP. Operating margin
for 2007 benefited from the recognition of unclaimed sales-
related tax credits.
Currency restrictions enacted by the Venezuelan government in
2003 have impacted the ability of our subsidiary in Venezuela
(“Avon Venezuela”) to obtain foreign currency at the official rate
to pay for imported products. 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 non-government sources
where the exchange rate is less favorable than the official rate.
At December 31, 2008, Avon Venezuela had cash balances of
approximately $120, primarily denominated in bolivars. During
2007, Avon Venezuela remitted dividends of approximately $40
at the official exchange rate. Avon Venezuela continues to
receive official foreign exchange for some of its imports and
other remittances. We continue to use the official rate to
translate the financial statements of Avon Venezuela into U.S.
dollars. During 2008, Avon Venezuela’s revenue and operating
profit represented approximately 4% and 8% of consolidated
revenue and consolidated operating profit, respectively.
Inflation in Venezuela has continued to increase over the past
few years and it is possible that Venezuela will be designated as
a highly inflationary economy during 2009. Gains and losses
resulting from the translation of the financial statements of sub-
sidiaries operating in highly inflationary economies are recorded
in earnings. If Venezuela is designated as a highly inflationary
economy and there is a devaluation of the official rate, earnings
will be negatively impacted. For example, based on the balance
sheet of our Venezuelan subsidiary at December 31, 2008, if
Venezuela is designated as a highly inflationary economy and
there is a 20% devaluation, our pre-tax earnings would be neg-
atively impacted by approximately $30. Additionally, revenue
and operating profit on an ongoing basis would be impacted by
the devaluation.
Latin America – 2007 Compared to 2006
%/Point Change
2007 2006 US$
Local
Currency
Total revenue $3,298.9 $2,743.4 20% 13%
Operating profit 483.1 424.0 14% 3%
Operating margin 14.6% 15.5% (.9) (1.3)
Units sold 9%
Active Representatives 8%
Total revenue increased during 2007, driven by growth in Active
Representatives, reflecting significant investments in advertising
and RVP, and a larger average order, as well as favorable foreign
exchange. Revenue for 2007 benefited from growth in most
markets, particularly from growth of approximately 30% in each
of Brazil, Colombia and Venezuela.
Revenue growth in Brazil for 2007 was driven by increases in
both average order and Active Representatives, primarily due
to significant investments in advertising and RVP, recruiting
advertising and field incentives, as well as favorable foreign
exchange. Revenue in Mexico was flat in 2007, as a mid-single
digit increase in Active Representatives was offset by a lower
average order. The increase in Active Representatives in Mexico
primarily reflects strengthened training and incentives and the
retraining of our zone managers in field fundamentals. The
lower average order was mainly due to product mix and a higher
share of sales from new Representatives.
The decrease in operating margin for 2007 was primarily driven
by higher spending on advertising and RVP and an unfavorable
mix of products sold. These higher costs were partially offset by
the impact of higher revenue, lower costs to implement restruc-
turing initiatives, which positively impacted operating margin by
.8 point, savings associated with position eliminations resulting
from restructuring initiatives, and the recognition of unclaimed
sales-related tax credits.
A V O N 2008 29