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Fitch Affirms Avon’s $700MM Senior Unsecured Notes ‘A’; Outlook Positive

Fitch Affirms Avon’s $700MM Senior Unsecured Notes ‘A’; Outlook Positive

Business Editors


Fitch Ratings has affirmed the ‘A’ rating on Avon Products, Inc.’s (Avon) $700 million senior unsecured debt and $600 million bank credit facility. The company’s commercial paper program also has been affirmed at ‘F1’. The Rating Outlook has been changed to Positive from Stable given Avon’s solid financial performance and the expectation that the company’s credit profile will continue to improve as it executes its business transformation and completes its share repurchase program in a disciplined manner.

The ratings reflect the strength and consistency of Avon’s operating earnings and cash flow, which is derived from its well-recognized global brand franchise. The company maintains a unique position in the beauty market, as the world’s largest direct-to-consumer seller of beauty and related products. The ratings also recognize the company’s historical appetite for debt financed share repurchase activity and competitive operating environment.

From 1997 to the twelve months ended March 31, 2002, Avon’s revenues increased by almost $1 billion to $6.0 billion. This strong growth was due to several factors including a larger number of active Representatives, new product introductions, and increased advertising. Avon’s active Representatives have increased by 1 million Representatives to 3.5 million active Representatives worldwide as the company has implemented programs, such as Sales Leadership, e-Representatives, and Beauty Advisor Training, to attract and retain Representatives. Also leading to the growth in units and revenues has been new product launches, such as the Health and Wellness line, and a 50% increase in advertising support since 1997.

Over the same period, Avon’s operating profitability has grown as the company’s Business Process Redesign program to streamline operations and reduce expenses has been implemented. EBITDA margin increased to 16.0% for the latest twelve months ended March 31, 2002 from 12.1% in fiscal 1997. Avon is now entering the next Business Transformation phase of its restructuring, which the company expects will accelerate its sales and profitability growth. Given the solid operating results, credit measures have remained strong. Leverage, measured by total debt to EBITDA, was 1.4x for the twelve months ended March 31, 2002 and EBITDA coverage of interest was 13.3x over the same period.

Fitch expects revenues and profitability to further improve as Avon continues to execute its growth initiatives and its Business Transformation. Cash flow generation should remain strong given the company’s increased operating profitability and modest capital requirement of new initiatives. In addition, credit protection measures should improve as cash balances are used to repay debt over the next several years.

Of concern is Avon’s historical aggressive share repurchase activity. While a large debt financed share repurchase program is not currently expected, Avon’s significant cash balances and ability to access debt capital markets enable it to execute a program. However, large debt financed share repurchases would delay continued improvement in the company’s credit profile.

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