Q2 2019 Earnings Call
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The Avon products earnings.
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Hi era.
Please we now thank you.
Today.
Q.
We will start with an update of the quarter to financial results with Gustavo that Miguel will give you an update on our representatives end markets and I will close with an update on our open up transformation.
Before I hand over to Gustavo, let's take a look at our strategy, which we have been executing against over the past year.
Moving to slide five.
This chart outlines our three focus areas.
In 2018, we began to reshape this business.
Restore our competitiveness and modernize the coal business model.
We took decisive actions, where we identified clear opportunities and the need for change.
All while transforming our culture injecting new talent, becoming more agile and more external in other words, we opened up.
We're making steady progress as we improved productivity.
Strengthen brand relevance and value become simpler and much more cost competitive as we move forward.
The transformational deal, we have announced with contour Franco.
On the right you can see the outline of our Avon Formula.
In terms of pool, we're strengthening the brand to be more relevant and on trend and thereby restoring the value and the processing power of April .
And this will push.
We are improving the productivity of our beauty entrepreneurs and making it easier for them to earn money with Avon.
We are unlocking digital so that she can shop anytime anywhere and our representatives are having an improved experience with a better digital tools and trainings, we are providing them.
We are simplifying the business driving efficiencies and cost competitiveness, while improving cash delivery.
Finally, we have reenergized, our purpose to empower women and make a positive impact in the lives of our beauty entrepreneurs their families and their communities.
I will provide a more detailed update on our strategy later in the call now I would like to turn to Gustavo who will take us through the numbers.
Thank you John .
I will provide perspective on our second quarter results.
Let me start by sharing highlights on our three key financial metrics revenue margin and cash flow.
In terms of revenue was down 4.6% in constant currency, we see these as part of our intentionality to improve productivity.
Price mix expansion of 9% and average representative sales increase of 5% are leading to a more efficient PNM and higher revenue per representative.
There is a short term impact on volume as we drive productivity, which takes time to stabilize.
That said, we believe we're on the right path to optimize our business. We plan to remain focused on driving representative productivity and the quality of our revenue.
In terms of margin adjusted operating margin is up sequentially versus the first quarter and also up 190 basis points versus last year on the back of pricing and cost savings.
This margin improvement was delivered despite unfavorable FX, which is expected to ease in the back half of the year.
In terms of cash we generated 26 million in free cash flow, which was a significant improvement versus the prior year when it was negative.
As planned we delivered positive cash from operations and continue to self fund our restructuring investments.
Productivity was driven by a 9% improvement in price mix and an increase in average rep sales of 5%.
We believe that we can drive pricing in a sustainable way, which is imperative to enhance a representative earnings while improving margins.
The unit decline in the second quarter came primarily from SK, using the lower price points and lower margin items.
We're focusing more on the higher ticket items across portfolios.
We are reducing discounts and driving innovation.
While active reps are down from the prior year, they're fairly stable versus Q1 and more importantly, they are sending more.
We believe that higher average sales should lead to higher representative satisfaction and improved retention as well as improved quality of earnings.
We boosted training efforts and strong focus on innovation, so revenue foreign skin care was flat and we only saw a small decline in fragrance.
The decline came primarily outside of skin and fragrance.
In fact in skin care, we saw positive results in many of the top markets aided by the rollout and notable success of a new vitamin C.
Adjusted operating margin of 7.6% was significantly better than Q1, and 190 basis points higher than Q2 last year, driven by our focus on productivity and again despite unfavorable FX.
Through the first half of the year adjusted operating margin is up 130 basis points above last year.
You can see the key drivers on the bottom of the page, namely price mix, FX and cost savings, which I will discuss in more detail shortly.
As I just mentioned our adjusted operating margin of 7.6% was up 190 basis points from last year.
Pricing and mix improvement added 230 basis points to margin enabled by lower discounts more effective pricing and more favorable mix. This is an ongoing effort in managing a revenue growth, which will continue throughout 2019.
FX impact of 160 basis points continue to pressure margins.
As comparisons ease in the back half of the year, we should see less drag from this.
Importantly, we continue to invest in a representative with various levels of incentives to improve experience and supplementary income.
Finally cost savings and other items provided 190 basis points of benefits to adjusted operating margin during the second quarter.
As mentioned FX pressure continued in the second quarter with a 160 basis points negative impact to adjusted operating margin, primarily coming from Brazil, Argentina and Turkey.
Q2, FX impact to revenue was 8% compared to the prior year and was down from 11% last quarter.
In the medium term, we still expect to have negative currency impact that said given spot rates. This impact should continue to lessen over the back half of the year.
Cost savings provide $67 million of benefit during Q2, and 89 million year to date.
These savings are more than three times the level of the prior year.
Savings are largely from supply chain initiatives less bad debt and head count reductions as we optimize for lean organization.
We're working on reducing our material costs, which will deliver savings to our cost of goods and helped to contain inflation.
Free cash flow was solid this quarter with a $60 million improvement year over year from a negative 33 million last year to a positive $26 million this year.
Year to date, we are 66 million better than last year.
During the second quarter, we generated positive cash from operations in spite of incremental restructuring investments.
This was enabled by improvements in earnings and working capital.
Additionally, we generated cash from asset disposals of $30 million coming from the sales of the Malaysia and ride facilities.
We remain on track for positive cash flow in 2019, as we continued delivering profit improvement working capital efficiencies and monetizing on the Reutilize noncore assets, while self funding the transformational plan.
In late June Oeyvind price, an offering of 400 million, 6.5% senior secured notes due in 2022, which closed on July threerd.
The terms of the notes are substantially similar to the terms of the existing 2020 two notes.
Some of the proceeds were used to complete a tender offer for $275 million of existing senior notes due in 2020 in July .
We intend to repay the remaining $112 million of bonds later in the year.
We were really pleased by the market reception to the deal.
Our structural and operational changes should continue to drive reductions to our annualized.
Adjusted tax rate.
Looking ahead for 2019, we continue to expect further reductions in the range of 10% to 15% for the year.
Additionally, we have been reducing cash taxes over the past few years, and we expect 2019 to see continued reductions.
Most importantly, we remain comfortable with our $624 million of liquidity and we expect positive free cash flow, even after funding restructuring and capital investments.
Finally, adjusted diluted EPS from continuing operations was six cents as compared to a loss of three cents last year.
Now over to Miguel.
Thank you Gustavo picking up on slide 16 Representatives are the key to our business and must always be our top priority.
As we have discussed for several quarters, we're focused on Reengaging, our representatives, improving their productivity and creating brand pool.
Our active representative had declined 9.5% since last year, while we have been driving productivity.
We're being more selective with appointments focusing of reps that are joining to our money and build businesses. One of our primary goals continues to be providing her the tools and training to improve earnings which increases retention.
Smaller changes from first to second quarters prove that these efforts are making a difference and helping to stabilize our rep base as we continue to make progress on getting to the meaningful income territory.
More importantly, looking at the overall representative productivity the training and tools that we've been deploying in the markets around the world our herpes occur to make more money.
This is demonstrated by a 5% increase in our average representative sales in the quarter.
Implementing more sustainable sales practices and improvements to credit policies coverages bad debt in this year.
And are also helping to maintain a healthier and happier rep base.
This is a long term journey to improve the key metrics of our business.
Moving to slide 17.
Turning to the performance of our top markets in the second quarter. We saw constant dollar revenue growth in three out of the top five markets and some improving trends in Russia.
In Brazil constant dollar revenue improved by 0.2% that Brazilian improvement was largely due to the focus on better fundamentals and service lower bad debt improve pricing neuber sure and a new advertising strategy, along with the digitization of entire business.
Mexico's second quarter constant dollar revenue decreased by 4.9% with tougher market conditions, and a lower number of sales leaders negatively impacting our appointments.
Russia's constant dollar revenue declined by 12% and has continued to be a challenged market for us.
Last quarter, we mentioned, Russia is in full reset mode.
With new management and initiative to restart and reignite the market. This quarter, we're seeing clearly signs of recovery.
Driven by targeting incentives increased training better communication on more leadership engagement.
In the Philippines revenue grew roughly 1% in constant dollars over prior year third party delivery issues and an unfavorable impacting the timing of Easter impacted negatively in our growth.
Argentina strong growth continues it was up 31.2% in constant dollar productivity is improving through increases of many more other and segmented rep pits.
In addition to our new Onboarding program and a better training programs. This air force are all helping to maximize activity behind our aggressive price increases.
Moving to slide 18, as we provided updates on a few of our key markets you will notice that our focus areas are consistent reengaging reps, improving productivity and creating brand Paul.
In Brazil, we are starting to see signs of stabilization as revenue trends continued to improve.
Our Brazilian business has a very clear agenda, and we're making progress in each of their choice.
Reengaging. The reps is also a top priority and begins with a significant increase.
Campaign meetings as a forum to energize the field.
Also we made a huge step change in service, resulting in a 50% fewer calls into our call center.
Were developing agility and additive to solve real problems instantly.
Assisted by a launch of our digital tools, including real time ordering tracking technology that reduces representative time spend on back office work on helps them to focus on sales and perspective.
Creating brand pool, it's about leveraging the strength of the Agrium brand to drive market exciting.
The fuel has begun to see enabling brand that is becoming more relevant again.
Marta the Brazilian soccer Star help us reinforce these new trendier Ava brand as well as a better looking for sure.
Having martus validation and support in the power stay lipstick lasting throughout the World Cup soccer game and beyond has been tremendous for us.
In terms of productivity that focuses on fixing fundamental to drive efficiency and improve costs. Our efforts behind revenue growth management continue to bear fruit.
On a year over year basis price mix in Brazil improved more than 20% on a ground zero price management more importantly, the feel of the new wave one app that gives them.
Access to key Avon services, such as registrations and ordering.
Now on slide 19.
Mexico is focused on increasing recruitment.
Of business builders and improving overall representative productivity.
Reengaging and Reenergizing, our representative base is vital to returning to growth.
The National Grocer will act as a catalyst for Mexico to re energize their field.
Using a new narrative to attract people that are interested in business building. In addition, we're using segmented incentive to mobilize the entire sales force.
Our primary goal is to improve earnings, which as we have said leased to increase some productivity and retention.
In Mexico. The most effective training tool has been the stellar circle, where we see average rep sales improvement of over 20% in those that participate.
We are actively working to exponentially increase the number of representatives that participate in this program.
Another key aspect of increasing adverse rep sales performance is to improve pricing specifically in color.
Two of these were leveraging our brand through innovation, such as Marc prismatic and market to supported by product training Vishal assets and brochures, DHL amplification and blowers.
To increase our participation in the seller circle, we first got to develop a larger pipeline of representatives being trained and building business.
We're expanding our face to face training programs with a focus on the first 90 day program.
It starts with a poignant representatives that one to our marni.
Followed by the right training to help her get there.
Let's move to slide 20 in Russia, we began reset efforts in our first quarter of 2019 by executing repairable business models from other markets, we're starting to see improvements in some of the underlying business trends.
We are deploying at 360 degree representative engagement strategy by investing in segmented incentives to attract and retain productive reps.
We're targeting younger audiences by holding programs at venues like music events with trendier and more relevant innovation to share.
We launched Beauty Festival 2019, a large recruiting event, where we held masterclasses with educational materials on Instagram challenges.
We're also continuing to take actions to improve the overall perception of labor and brand by upgrading that ratio driving on trend products, including K beauty that had two range and higher end fragrances.
Launching more and better data tools for the market is also part of improving our image and relevancy.
As we start to attract younger trendier representatives, we have to given the types of products tools and experience of their expected.
In terms of improving productivity in Russia, we have begun to leverage our days of training platform.
We have expanded our blogger training.
To drive more content from micro Influencers in this training, we had 26000 participants which resulted in 660000 views of our participant post and over 3.8 million followers.
We're also layering training to our beauty centers. So representatives can pick up deliveries and save on postage costs as well as providing the convenience of getting additional training within the same beauty centers.
As we know today's consumer expects to get their product much faster. So we're continuing to expand our direct delivery service in key areas.
Let me go.
Turning to slide 22.
I would like to give an update on our open up strategy for April and the four core value creation leavis.
To improve brand relevance and value.
Improve our representative productivity step change access to the brand by digitizing April and finally dramatically simplify and drive down costs.
You see the four drivers for each of our breakout strategies and in Green our quarter two results.
First to strengthen our brand value and improve the Avon brand equity on the vertical excess in quarter, two we improved our price mix by 9%.
We achieved this through more innovation of higher price points and other higher margin.
By modernizing the brand.
Driving mix to higher value categories and of course, a little bit less discounting.
Second we will continue to improve the productivity of our beauty entrepreneurs. This quarter, we saw average rep sales increased by 5%.
Third we will increase access to April .
And expand our core consumer base through doubling our ecommerce sales and fourth we are becoming more simple leaner and faster focusing our assets organizing and activities to ensure they are fit for purpose more cost competitive and able to meet the realities of our business today.
As Gustavo mentioned, we had 67 million of cost savings this quarter, which is three times that of quarter one.
Now, let me unpack each of these a little bit more.
On slide 23, you can see our significant and ongoing improvements in price mix.
The companys lack of pricing over many years led to the margin erosion and productivity issues, we are facing and working on today.
Pricing has been and will continue to be a key driver to expand margin.
In quarter, two we show more progress in pricing with year on year price mix growth of 9% as we continue to implement our revenue growth management toolbox across the company.
During the quarter the key drivers for better purchase price mix were optimizing promotions and more clever and effective pricing.
And contributing roughly half of the improvements.
We are getting better at reducing the depth and frequency of discounts and optimizing the return on investment on all our promotions.
This quarter the percentage of discounted products declined from 98% to 93%.
In addition, we have been more deliberate abroad pricing effectively on innovations and driving mix to more premium categories and brands without losing the critical value for money entry price points brands.
Our continuing progress on pricing is important while balancing the impact on units remains a key priority for the remaining of the year.
Moving to slide 24, we are making progress in modernizing our brands.
Our brochures are improving with a more modern and trendy look and feel design to target engage the next generation of beauty entrepreneurs and consumers.
We are attracting the next generation also with trendier innovations, new digital strategies and tools as well as specific programs to build what we call digi reps as our new Avon digital Influencers.
We have been creating more digital content and instyle ready material. She can share the new innovative products across hill choice of social media platforms.
We're also activating new pop up stores and key mall locations at music festivals and events and always on social media strategy.
And finally, we are generating more brand excitement and better PR not only through our new innovations, but also with the influencers and celebrities that are using our products.
Slide 25, the most important thing we can do to create brand value and grow and engage our network of beauty entrepreneurs is to have a strong pipeline of innovations.
We have 20% more sales from innovations.
With a 30% higher price point, adding 230 basis points to our margin.
We are driving our big innovations to more countries in order to increase their scale.
To do this we are focusing on quarterly own trend Moon shots. We are we are leveraging key assets to drive energy and engagements.
As you May recall, we launched vitamin C. at the end of quarter, one priced at a premium price and delivering more gross margin than the average face category average.
In fragrance attraction sensations.
Which was launched this quarter was price more than two times, the average fragrance product and delivered more than 500 basis points in additional margin to the fragrance average margin.
We have several new product launches for both quarter, three and quarter four.
Distillery and a new pollution protect which expand us in new high growth categories and opens Avon up to new consumers.
In the third quarter, we are launching distillery.
A new product range from Avon, which celebrates clean beauty without compromising using the highest concentration of active ingredients and less unnecessary fillers.
This range of nine strong skin and makeup products combines high performance vigen friendly ingredients and beautiful textures and premium environmentally conscious packaging with an ethical mindset.
In the fourth quarter, we are launching a powerful duo of pollution protection products due to event and purify your skin.
These products were designed to protect consumers from the impact of a more urban lifestyle.
They have powerful antioxidants to defend against invisible threats like pollution, and you'll see that can damage and cool skin H skin to age prematurely.
On slide 26.
Finally on pricing.
Over the past years, we have allowed discounting to become the norm.
We we drove purchase frequency through a heavy reliance on promotions as their main lever.
This dependence is something we know we must slowly wean, our consumers and representatives off.
As we modernize the brand and strengthen our business.
In the second quarter, we decreased the depth of our discount by 500 basis points from 98% to 93%.
We are making a difference through strengthening the brands driving mix training, our representatives to sell regimes and bundles, coupled with better marketing and more education to help improve her business.
Bundles on regimes allow us to increase prices in a more sophisticated way.
As well as helping our representatives to earn more money and increased her basket size.
A critical part of the New April model, we are starting to reinvest and rebuild our training muscle.
We know expanding our training capabilities is critical to helping us succeed.
And there is nothing more important to help grow earnings.
We are providing more product education tools and training that covers product benefits and selling points to enable her to up sell to hit consumers justifying a slightly higher premium price and of course less discounts.
Now that we have the tools. It is critical to drive adoption to more of our beauty entrepreneurs and our new digital training tool is a key enabler for this.
Beyond the expanding our digital training capabilities, we're also holding more face to face training in our key markets.
We know that representative training going through the training increases the earnings significantly.
So it is an imperative to get representatives trained.
We must become more focused and even more targeted in our training content and approach.
In Argentina.
We held training sessions in a new with attendees selling more than 100%. After they attended the training.
It also improved retention by 14% versus those that were not trains.
Also in Argentina, we launched the beauty ambassador program to develop trainers in each zone to maximize product training by reaching more representatives with a primary focus on new representatives.
Moving to slide 27.
As we have said since I joined Avon to improve improve productivity, we must improve service.
And we are showing significant improvements in delivering in time and old in full with levels, reaching 85% during the first half of 2019.
This is up 6% from 920 18 level of 79% and a significant improvement from 2017, where we started up 76%.
This is all about focusing on the basics day in and day out.
Turning to slide 28.
To further improve productivity, we have a new suite of digital tools to make it easier for him to run her business and focus on what's the most important to hear her consumers.
This has helped drive the 5% improvement in average representative sales.
Our new April NAPW Avon own App now at 18 market is an end to end tool to help the representative managed business.
It's a 100% mobile tool and incorporates all the services in one convenient place to simplify both running and growing our business.
When I was in Brazil, a few weeks ago I heard great things about the new order tracking feature that was incorporated in their app.
Our representatives loved it.
Now we are focusing on driving adoption of these new tools.
We are continuing to strengthen our digital tools My Avon store now in 27 markets is a place for our representatives to grow here online business with their own Avon store.
As part of this we're also expanding direct delivery options to the final consumer which will again help attract a new type of consumer.
My Avon business is a mobile platform that replaces our legacy system.
And my Avon Office provides representatives with new customer insights again, helping her run a better business and finally, the Avon learning hop is a new digital learning platform, providing productivity tools and product training now available seven markets.
As it is expanding our reach and access of training, while maintaining consistency across markets.
Key now is to drive the adoption of all these new digital tools for our representatives.
On slide 29.
All of these deliberate actions have contributed to doubling our online e-commerce sales.
Last quarter, we mentioned the newly created digital business unit that we started in each of our top markets all reporting to the local general managers.
These units are solely focused on growing ecommerce sales.
These e-commerce business units have completely separated the website from the brochure, enabling a different set of offers that are aligned with the needs of ecommerce business solely as the key focus.
Moving to slide 30.
Finally, we are becoming more simple and Lena.
Underpinning all of our actions to Rochette Avon.
On this slide you can see we are making continued focus to simplified our business and take out cost.
We have made significant progress in designing a leaner organization.
In 2018, we had an 8% reduction in headcount.
And we continued that this year in the first half in 2019 with the third a 12% reduction across all levels of employees delivering 23 million of savings in this quarter alone.
Sure. So we are well on track to meet our goal of a 10% reduction headcount this year.
We have reduced the overall workforce from 25 people and 2018 to below 20000 people this year.
We have also reduced the number of SK usual size of line by 23% again, well on our way towards our goal of a 25% reduction this year.
We continue to manage our inventory more tightly with the reduction of inventory value of 26 million year to date.
And lastly, we are very focused on delivering more cash.
As well as monetizing non fit for purpose as sites with a 100 million target for the year.
Year to date, we have driven 77 million already through cash sales from our China manufacturing facility, the Malaysia office and Ryan office.
And with the proceeds of the new Avon LG transaction to come in the second half we are well on our way to achieve this target.
Shifting gears now on slide 31.
April has been championing and supporting woman for more than a 130 years.
Earlier this year, we launched stand for here.
Our plan, which aims to positively impact the lives of woman around the world.
It is a promise to the woman who work for us and with April to create a better world for women.
Our purpose is to help and the violence against women and girls is gaining traction and making a real difference.
We received the comes line award for the you are not alone campaign in Brazil.
This campaign got over 20 million impressions.
And it's helping more than 6 million women victims of domestic violence.
We can also make a difference by helping our beauty entrepreneurs through training and support.
Through the Avon Foundation's Global scholarship program, we are opening up learning opportunities for representatives and their families.
This year, we've doubled our funding to $400000.
With nearly 200 representatives in more than 20 countries, winning scholarship grants for themselves that children and grandchildren.
We're also committed to establishing and challenging the barriers that woman that hold woman back in reaching the full potentials in all areas of their lives.
In November 2018, Avon announced its support for the UN charter of conduct of business to tackle discriminations against lesbian gay buy at trends into sexual people.
As part of the commitment to diversity and inclusion.
In March this year eight on the new Kay became the first beauty company to sign up to the charity changing faces pledge to feature people with visible differences in more campaigns.
These are just a few of the examples of the many ways in which Avon is jumping lumen scores us today.
Moving to slide 32.
During the second quarter, we announced that we entered into a merger agreement when the tour.
The parties expect closing to occur early 2020 and we have been doing the necessary work to satisfy the customary closing conditions, which include shareholder approval and the approval of anti trust authorities, especially in certain jurisdictions like Brazil.
We are excited to help to create the fourth largest pure play beauty group and a leader in direct selling channel.
Avon is committed to delivering significant value for our shareholders by executing the opening up strategy and preserving liquidity ahead of the early 2020 closing targets.
On slide 33.
We believe this transaction this transformational transaction will accelerate our opening up strategy.
We will create a leading direct to consumer global beauty company.
The combined business will have more brand power and value with a bigger and more premium portfolio of brands supported with more innovation and R&D muscle.
The business will have an expanded global footprint and scale presence across 100 countries, where the combined revenue around $10 billion.
The new company will be able to accelerate the digital agenda and scale the coal minute E Commerce and step change advanced analytics to truly bill the digital social selling business for the future.
And finally, we are targeting the additional synergies of between 150 and $250 million.
On slide 34 doesn't and as a reminder, you can see that 2019 is the year of execution, we're taking deliberate and intentional actions and are making clear progress.
While it's always going to take time to turn around Avon, we hold ourselves accountable for the milestones that we set out and delivered the continue improvement along the way.
We will stem the decline through our efforts to reboot direct selling and improved productivity of our representatives as well as modernize the brands.
We will expand our margin through pricing cost management and simplification.
We will drive our cash delivery by growing operating margin working capital improvements divestment of non core assets and improving cash tax.
You see some of these measure operational metrics that we are tracking to monitor our progress and measure our success.
And finally on slide 35 in closing our strategy is clear and unchanged.
We are making progress through intentional strategic executional choices and trade offs.
And with a keen focus on productivity and sequencing our activities and the priorities overtime.
We are restoring our brand relevance and value underpinning our improved price mix of 9%.
We are improving representative profit productivity and quality with average representative sales increasing by 5%.
We are accelerating the digitization of our business with online sales doubling and launching a whole suite of new digital tools.
And we are simplifying to drive down costs improved margin and cash with the 67 million cost savings.
We are continuing our ongoing efforts to build our talent and develop new capability and re energize our purpose.
We are determined to return able to health and return value to our shareholders. Thank you for joining us today Amy back to you.
Thank you John we will now begin the Q and a session. Operator can you. Please open the queue and.
Thank you.
We will now be conducting a question and answer session.
If you would like to ask a question. Please press Star then one on your telephone keypad.
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One moment Folly poll for questions.
Thank you. Your first question comes from Stephanie Wissink.
From Jefferies go ahead. Please.
Hi, This is actually Hogan bumper stuff would think thanks for taking our question. We wanted to unpack the 9% increase in price mix, how much was related to skew reduction and the rationalization of promotional pattern first new innovation.
Thanks.
Hi, This is just awful here.
Roughly the 9% improvement, we selling price mix half of that came from pricing viewing innovation and half of it from.
Reduction on the depth of discount as John explained we saw the depth of discount going from 98% to 93%. So we pick up there about.
Five point.
Great. Thanks, and if we could just throw in one more any further context on the weekends in Brazil.
On Doug can you repeat that please.
Any further context on the weakness in Brazil.
But I think the big does in Brazil is.
Hi, what we're seeing is the underlying improvements in the quality of the business and the quality of the results for the full agenda that we've talked about this whole lending in in in Brazil.
The first is to really.
Eliminate and reduce the on sustainable sales practice that we were doing in the past and there were many things that we talked about in the past in terms of one was the sort of unsustainable sales push we used to sell literally shen products to consumers fragrances announced that on the orders.
Two for them to sell we've stopped that we've stopped.
Late ordering from campaigns, we reduced over promotion in a second representative roshe. So there were many things that we're just unhealthy in the business that we are reducing and the goldman citing that with pricing better innovation.
Better more training and obviously, a buyer and tighter credit policy as well because you see there.
A reduction in bad debts in our numbers a lot of that is coming from Brazil. So we're rebalancing resetting the health of the business to build a more sustainable more profitable.
Business in Brazil, So all those fundamentals are working and we're actually reasonably happy with the balance that we're getting there.
Great. Thank you.
Thank you. Your next question comes from Ali Dibadj from Bernstein go ahead. Please.
Hey, guys.
I have a couple of questions one is.
If I were a net charge shareholder.
How would you expect me to look at this quarter.
In terms of margins up so much no productivity thats, good, but topline much lower and I totally understand the transformation I get the focus on on profitable sales.
Getting rid of bad habits.
But but wouldn't in mature shareholder want to see more investment into the business.
On things that are actually giving you better returns to ensure that the Avon brand isn't.
Further damaged or maybe even irreparably damaged before they take it on.
Okay. Thanks.
I think that the key is that they're not to a shareholder but it will be aligned with any shareholder is that we are resetting the business and rebuilding the fundamentals and thats. It is partly money, but is above all the activity streams that we're putting in place. So first and foremost we're investing strongly in the brand. If you think of what we're doing to modernize the brand to make the brand more attractive and easier to sell and deliver the look and feel of our brochures in many countries Big approach is better brochures, better photography, better look and feel a significant step up in the level of innovation in terms of the level of innovation, 20% more in terms of the quantity of innovation, but also and more importantly, because of the quality of innovations again talking to these sales need has its own management when I travel again, they are all of them seeing without fail, a real step up in the quality of the brand and the quality of the execution and the quality of the innovation coming through so that is exactly the sort of things that I'll think any shareholder.
We would want to see show a deliberate strengthening of the brand. The second one is the digitization of the business. So we're putting and rebuilding the fundamentals to give us the tools the training the better technology for her to run a better business.
And that you know suite of new tools that are talks about is now being rolled out to more and more countries and of course, we're going to drive the adoption, but at least we're putting in place all the fundamentals to build a stronger better business for him and then probably the third point is the investment in training and there is real.
Deliberate investment in.
In training the quality of training the the more segmented trainings or whether its face to face through the full time Rep will the popped on rep more digital training to the fans and to the wider population. So these are all activity streams that strengthen the brand drive productivity and drive.
And resets a reboot direct selling.
And as part of that because were doing that we can reduce and wean off of some of the unsustainable sales practices that we were doing the unhealthy no way of driving this business forward and Miguel can talk about many examples of sky, Ken that we really trying to wean off and get that get that balance right to build a better and stronger business.
And then the whole thing obviously, we work as we build a more efficient machine. We've really worked hard to reduce SK use and not just reduce SK used to build a portfolio with the clear a brand hierarchy of differentiated pricing build brands that have filling the different segments.
And bill the destination portfolio for each of our sub categories. So we're not only taking out cost reducing complexity, but we're also building a.
Betta sort of destination portfolio to to get to it so.
Ali it's more the numbers, it's really rebuilding the fundamentals of the business to build a healthier and stronger more sustainable company.
And it.
At its own about that point of sustainability, our margins, where they are willing to pass on our cash flow generation, where it was in the past, it's not sustainable going forward.
So part of the reset you've seen the.
Implications of pricing and the implications on unit just to give you a sense, 85% of the unit loss, we saw in the quarter was from lower priced items and below.
Average margin items.
So it is painful when you look at it function in this quarter, but looking forward as a shareholder and as Dan said any shareholder it's a much more sustainable and healthier.
Business.
So it's a very helpful explanation, if you permit me to push a little bit on it.
I'm not arguing that you are not making some the right investments for sure in terms of the Digitization in terms of.
Elevating the brand my argument is perhaps that you should be doing more and more quickly I see.
Don't push as much on margins going up and push more on the investment and maybe let's take that just last point on on price mix for a moment.
Hi.
The company's been trying to elevate the price mix for quite some time with innovation and don't expect you guys to this new team to talk about all the ills of the past, but but the volumes for the company. The units for the company have been flat to down for a remarkably long time basis. Since 2011 as I was just looking at the model as you're answering the question. So 2011 volumes for Avon International have been down or flat since 2011.
As pricing was trying to go up so suggest that demand elasticity isn't very good as suggested that brand exactly as you describe need some rejuvenation.
So it's not just a one quarter down 14 volume up nine price mix. It's a long long long long time, So I guess I'm on board with the sustainability question, but I just wonder whether you should be doing more.
In terms of the investment today now this past quarter.
Particularly the handed off to mature.
So that they can do that on synergies and cost savings have announced that they do and actually try to.
Resuscitate more quickly that concern resonate with you.
So I first and foremost I think.
I think what our pricing model and our pricing work and what we call our revenue might revenue growth a toolbox is much more sophisticated and I would argue in the past.
And it is about not doing bigger and better innovation, which allow you to price up a little bit more which we were doing weve repricing about 37% higher because our innovations are better driving mix in a much more deliberate way so driving the fragrance category, how to driving to skin category hotter and in fact, thats whats happening as well.
Nuancing and.
Simplifying some of the promotional mechanisms, we would just layering promotion over promotion.
And so it is a much more holistic sophisticated way of looking at pricing. So I don't think that.
Overtime, certainly that pricing is the direct driver of the unit loss or something we losing some of the units partly because we lost some reps because of the unsustainable quality recruiting that we did and maybe there is some level of elasticities I am I am of the school that the better we get a really driving this price mix that action is volume trade off isn't there.
And that is a core belief that I have but it is a holistic way off of managing that which we are starting to get right, which is a muscle that we are building I don't think it is as linear increased price release volume no. If you do it properly with all the leaves were talking about that that.
That should move in the right direction and strengthen the brand. So Ali Let's me I'll, Let me just add a little bit of color. So the previous recruiting narrative that we had in the company for many years loss come to able to because you're going to get great products at the best price.
So in many cases, we were recruiting consumer there was looking for a discount.
A lot of what you've seen in these healthier business intentional business practices change is it changing narrative.
Four to recruit someone that is interested in business in building a business. So we are going to be we gradually were stepping away from that these counter seeker into a more a bit was build there. So our model is going to be more resistant to price.
To price changes the more we train them and the more we team up to.
As an entity between that Rep that is trying to make a business on us.
And that's how we're going to be working much better together and that's how you're going to we're going to start no depending less on data, let's DC that you referred to.
And we continue investing in the business I think there's no doubt on that and.
Our business plan.
Is being looked at.
Jointly with our tour any will be more and more so as we get into integration planning et cetera.
Yes, I think the only thing that the qualitative comment there's I've been not you know I travel a lot.
You know I am getting amazing feedback of people literally people compared to a year ago. This company feels different this brand feels different we see on digital we see cool events. We see you in shopping malls that brochure looks cleaner better. The photography is looking young that we're getting the markets are saying Wow, we're getting so much innovation how do we how do we in fact manageable. So that is such a different machine that allows US then to price that allows people to sell the products based on something more than just it's on promotion or it's cheap and I think that mood is starting to really use through the company.
And so im confident that model is the right model, obviously as we go along we will get better and better at it but we stopped sensing that is making a huge difference Ali.
I appreciate that and if I could just ask one more.
At your Investor Day, I think this year was the year, you said, you're going to stabilize the business stable revenue and I think that means flat ish organic sales growth margin improvement as how you termed stabilize are you still of the belief that that can happen this year.
So what we said last time last quarter, we are going to stem. The decline. So I think this is all about really careful balancing act and we want to improve the product the profitability, we do want to improve the margins, but troops strengthening our brand and improving the quality of our sales machine.
This is a careful balancing act and that's where we I think making steady progress and at the same time, we continue to drive productivity. So we stemmed the decline improved the margins improve the profitability and get.
The right balancing.
All of the capabilities that we set out in quarter, one as well, but Ali I wouldn't be surprising if in Q3 and Q4 revenue were still down.
Okay. Thanks, very much guys.
Thank you.
I would like to take the opportunity to remind everyone to press Star then one on your telephone keypad to register for a question.
I will just keep sharper on price.
Thank you there are no further questions at this time I would like to turn the floor back over to management for closing remarks.
So I think that again, thanks, everyone for calling in Oh, they react we we continue to drive the execution of our opening up strategy.
As we drive to improve <unk> profitability as we continue to drive productivity and continue to focus on operating margin and free cash flow and at the same time of course as we are preparing for the transformational deal that we've announced with no tool. So thanks, a lot for your support and we look forward to the next quarter. Thank you.
Hello.