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Avon Products Inc  (NYSE:AVP)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to Avon's Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

The company will use slides to support today's prepared remarks. The slides will be visible via the webcast available on the company's Investor Relations website. A downloadable PDF of the presentation will be made available at the end of the call.

During the call today, the company will reference certain non-GAAP financial measures, which they believe to be useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. As a reminder, the company prospectively adopted the new revenue recognition accounting standard during the first quarter. To provide a fair comparison, information will be shared excluding the impact of the standard. This information is labeled like-for-like.

A reconciliation of these non-GAAP financial measures to their comparable GAAP measures is included in the appendix of this webcast and in the company's earnings release. Both are located on the Investor Relations section of the company's website.

The call will also contain forward-looking statements that concern the company's business and financial strategies. These statements involve risks and uncertainties, which are detailed in the cautionary statement available in today's slides on the company's Investors Relations website and in the company's SEC filings.

I will now turn the conference over to Amy Greene, Investor Relations. Ms. Greene, you may begin your conference.

Amy Greene -- Vice President, Investor Relations

Thank you, Dorothy. Good morning and thank you for joining us to review Avon's third quarter 2018 results. I'm here with Jan Zijderveld, Avon's CEO; Jamie Wilson, CFO; and Miguel Fernandez, Avon's President. Jan, Jamie and Miguel will take us through our progress and our third quarter results, and then we will move to a Q&A session.

Slide three has this morning's agenda. I'll now hand the call over to Jan.

Jan Zijderveld -- Chief Executive Officer

Thanks Amy. Good morning and thank you for joining us today. Today I want to cover four areas. First, I will start with the highlights. Next, Jamie will share the quarter three financial results, and given our focus on rebooting social selling at Avon, I've ask Miguel to join us today to discuss the progress we are making in this critical area of our business. And finally, I will share our progress on the transformation journey.

Let me start with a quick discussion of the quarter. It was about six weeks ago when we presented our Open Up Avon strategy at our Investor Day. At that point in time, we were two weeks from closing out the third quarter, and I've described Avon as the patient on the operating table. We are not satisfied with the financials this quarter. Where we have made lots of progress against some of the key levers and initiatives that we discussed during the Investor Day. And after Jamie goes through the results, Miguel and I will update you on some of those initiatives and strategies.

While we are starting to see improvements in many areas of the business, they are not yet big enough to move the financial needle. But we are changing and building a new Avon. As I said before, the reset of our business will take time to come through the results. But we are excited that we are beginning to see some improvements, while we are working hard to fix the leaks, focus on building our new big growth drivers and importantly, we are building to globalize repeatable models that are going well.

As I said before, it will take time. But first, now Jamie, for the details of the results of quarter three. Jamie, over to you.

Jamie Wilson -- Chief Financial Officer

Thanks, Jan and good morning. I will start on slide five. As a reminder, starting on January 1st, we adopted the new revenue recognition standard, which is reflected in our third quarter results and outlined in our press release. Once again, we are providing a like-for-like or LFL results. Like-for-like provides a useful comparison of year-over-year figures that exclude the impact of the adoption of the new accounting standard on revenue recognition and all non-GAAP adjustments.

I would like to point out that this quarter, we reported a large non-GAAP adjustment for the non-recurring reversal of the Brazilian IPI tax provision, which is described in our press release. For convenience, you can find a table providing reconciliation of the like-for-like and adjusted non-GAAP, and reported information in the press release and in the appendix to this presentation.

As a reminder, any discussions of revenue during today's call will be in constant dollars and our results are using like-for-like information in this presentation, unless otherwise stated.

Turning to slide six. Brazil's performance continues to negatively impact our overall results. The revenue decline represented more than 80% of the overall revenue decline in reportable segments. The competitive environment in Brazil continues to intensify with many direct selling companies innovating and making enhancements to the representative experience.

Excluding Brazil, Avon's revenue would have declined by less than 1%. Markets like Brazil and Russia with experienced new General Managers are working to implement the necessary actions to reset their businesses, while injecting fresh perspectives and needed changes. Volatility in periods of dramatic change is not unusual. We expect to experience more volatility in these markets as the turnaround proceeds. That said, there are other top markets that are further along and are working to improve the growth trends.

Despite a 4% decline in revenue, adjusted gross margin improved by 10 basis points, because of the favorable net impact of price and mix, partially offset by higher supply chain costs. Adjusted operating margin declined by 280 basis points. As we outlined during our recent Investor Day, we have made a conscious effort to invest in representatives and field expense, particularly to recover activity levels disrupted by Brazil's National Transportation Strike in the second quarter of 2018 as well as adjustments to advertising.

We're still in the relationship with our representatives in Brazil is imperative. These are another investments are key to resetting the foundation for future success to turn around this market and the store growth.

Moving to slide seven. As I mentioned, third quarter revenue from reportable segments declined 4%. On a constant dollar basis, driven by decline in Brazil. Active Representatives declined 5% and average order improved by 1%. As we shared at Investor Day, shifting our focus more toward improved representatives productivity remains a priority.

Avon's reset phase has begun. We are making necessary and in some case dramatic changes in many of our largest markets, which may create volatility, but are necessary to move forward. We are working to do our representative base and to improve their productivity and earning power. This is fundamental to improve competitiveness and growth. And you'll hear more about these efforts from Miguel.

Total Beauty sales fell 5%, largely driven by Color, where performance was again impacted by softness in Brazil. Sales to new innovations are encouraging with multiple success for Avon's Ultra Mascara brand refresh. Mark performed well, while Color Trend was impacted by increased competition, particularly in LatAm.

Of note, we are starting to see improvements in both fragrance and skin care. Importantly, Fragrance had two noticeable brand refreshes, Far Away Rebel and Eve Discovery collection. Most recently during Paris Fashion Week in the beginning of October, we launched the new Avon Life Color, our newest fragrance designed by Kenzo Takada.

Fashion & Home grew by 2%, largely on improvements in Home category with (inaudible) driven by sales in LatAm.

In Mexico, sales in the Home category were particularly strong. And that segment is a significant portion of the overall Fashion & Home business. Fashion saw notable success in the Philippines, aided by intimate apparel. 2% improvement in price/mix is being driven by our revenue growth management initiative, an integrated approach to pricing, promotional efficiency and product mix management.

We expect to see continued improvement in our overall price volume mix as we offer more innovative products, bundles and regimes and trainer representatives to create demand while increasing her earnings.

Moving to slide eight. Adjusted operating margin decreased by 280 basis points, driven by investments made in the Representative experience. Gross margin improved by 10 basis points on a 4% decline in revenue, primarily from inflationary pricing and mix. Adjusted SG&A, as a percentage of revenue increased 290 basis points. The increase was driven by investments and Representative's field and goods expenses, primarily in Brazil.

Also contributing was the impact of higher advertising to support new product launches in Mexico and also foreign exchange. During the third quarter, we had a total cost savings of approximately $40 million before taxes, approximately half of this is attributable to the Open Up Avon and the other half is attributable to the Transformation Plan. We completed the restructuring actions associated with Transformation Plan and we'll exit 2018 with a run-rate saving of $350 million as targeted.

Turning to slide nine. Our adjusted income tax provision was $1 million, a decrease of approximately $35 million compared to the previous year. We believe that our structural and operational changes will result in an annualized tax rate of approximately 65% for 2018. Looking ahead for 2019, we expect to see further reductions over the course of the year.

Cash flow from operations for the three-months period was $32 million. Our cash from operations was positively impacted by $68 million in cash related to the return of our Brazilian IPI tax deposit. And it was negatively impacted by approximately $34 million due to timing of an indirect tax payments that we had subsequently recovered in October.

Our year-to-date cash conversion has been lower than anticipated. While we have made some good progress in reducing our inventory balances, it has been slower than expected. We've appointed a new Head of Sales and Operational Planning and he is putting into place an integrated process, focused on improving demand forecasting, strategies and controls around flowing excess inventory.

Turning to slide 10. Currency headwinds negatively impacted Q3. Adjusted operating profit by $20 million or 100 basis points, a negative 10% of adjusted revenue. This has increased from the first half of the year, primarily due to dramatic declines in Argentina and Turkey, along with ongoing volatility in Brazil.

Price headwind in Q4 is likely to be similar to the third quarter. We are taking pricing actions to help mitigate the devaluations and working to localize productions in markets like Turkey, Russia and Argentina. We believe that foreign exchange headwinds will continue to impact the business throughout 2019. We will continue to monitor and aim to mitigate the impact through pricing.

In summary, we are in the reset phase of our journey. Where we are taking the basics with accelerated sense of urgency. We expect to enhance our focus on revenue growth management, as well as generating efficiencies and managing costs to fund our plans for future growth. This effort, coupled with the work that has been done to strengthen our balance sheet, provides us with the ability to make these investments while meeting our ongoing financial commitments.

And now, I'll turn it over to Miguel.

Miguel Fernandez -- Global President

Thank you, Jamie. Starting on slide 12. Good morning. Let me begin by reviewing results in our top markets. In the third quarter, we saw continued revenue growth in three of our top five markets; Mexico, Argentina and Philippines. Building on Mexico's second quarter, third quarter revenue increased 7.2%. In a quarter benefit -- benefited from the initiatives we have previously talked about, plus an increased focus on trading.

Mexico is implementing the segmentation model, focusing on the top earners. This included enhanced training incentives and service. These efforts resulted in an improved revenue performance among this group and contributed to the overall success in the quarter. Finally, the successful launch of the color and fragrance innovations helped drive an 8% increase in Mexico's average order. Argentina's strong growth continuing up 18.7%, based on pricing to offset the valuation.

While ending(ph) reps increased 4% in the quarter, we are also seeing the adoption and usage of our e-commerce platform. The Philippines revenue grew 3.7% over the prior year as a result of the market focus on growing skincare and improvements in service. We believe this success was supported by the use of the larger scale recruiting meetings, along with a clear and focused message about the benefits of becoming an able representative.

Jose Vicente Marino, Brazil's new General Manager joining Avon in mid-September. He and his team have begun taking actions to shore up as we build the Brazilian business. We're anxious to see Brazil recover. It will take time, but we believe we're investing the energy and the resources to make it happen. We believe the market can begin deliver sequential improvements during 2019.

And finally, Russia is highly competitive for shrinking beauty market, our trends got softer. But we saw increasing beauty market share during the quarter, led by the success of fragrance.

Now on slide 13. During our recent Investor Day, we had learned the three critical elements to turn around our business regaining competitive position in the global beauty market, modernize the core of our business, implement strategic breakouts and transform the culture. I'm going to speak to the first couple of points.

Turning to slide 14. Our top priority is building our direct selling model. This starts by providing our representatives with the right tools, training, incentives and service to enable her to grow her customer base, while becoming a trusted beauty advisors. This is a catalyst to our turnaround. We believe that we understand what must be done and we are taking the right actions.

We're taking steps in markets around the world to identify share and scale best practices that attract, train and motivate representatives, improve their end-to-end experience, increase perpetuity and maximize their earning potential. Let me highlight a few of our key initiatives being implemented across the markets.

Turning to slide 15. First, we are implementing significant changes in our approach to recruiting and training of our representatives. Improving her effectiveness and empowering her to recruit her. Leveraging the programs in APAC, we're showing and scaling best practices from Philippines and India, where we're successfully hosting large-scale recruiting events.

In the quarter, in this recruitment program resulted in a record appointment with over 27,000 new recruits joining Avon which is more in one period than we've ever recruited during a single period of our 22-year history in the market. We also experienced our highest ever lead count, up over 40% and active rep growth over 30% compared to our previous year. The majority of our top 10 markets are working to localize these another best practices as part of their 2019 recruiting plans.

We're also refining the naive about why you want to become an Avon representative? By engaging prospective reps quickly with a clear narrative and value proposition, supported by the benefits turning to set them to build their business -- their Avon business. We set the right foundation for their success. Avon's compelling direct-selling value proposition enables women to become successful part-time or full-time entrepreneurs, and independent learners.

We're making the necessary improvements to support her success. We also note that if we start training her immediately, helping her get to what she believes are relevant earnings, she's more likely to stay with Avon and continue to grow her business. So, we have launched in Mexico, 90-day training plan that outlines activity that any Representative should follow each state to enable them to earn more money earlier in their time with us. We have moved away from our historical one side (inaudible) approaching to training, marketing and incentives. To a segmented model, the more directly addresses her goals and motivations and sets her up for success.

The UK has led the way with executing segmentation by providing kits and training with intend and other countries will follow their lead. Launching similar initiatives throughout 2019.

Repeatable scalable business methods are key to our future success. We're identifying and building under successful programs initiatives and then globalized them and localized them. Slide 16, recruiting alone is not enough. We need to arm our representative with the right kind of training, we call that training with intent. And our goal was to train over half a million representatives in the second half of 2018. We have substantially exceeded our goal this quarter. We have approximately 800,000 representatives trained along with an additional 190,000 representatives taken advantage of online training. We have accelerated our training efforts with plans to double these numbers in the fourth quarter.

As I mentioned in the Investor Day, about five years ago, a decision was made to cut representative training out of many countries including Brazil. Reinstating training program is vital to drive retention and helping her become a better advisor to her clients. Another example from Mexico, they launch training events across other division this quarter. Sending 24 sales managers and 24 makeup artist into the field to provide hands on training.

Training the trained empowers our sales leaders to then train their organizations and customers. We already seen the benefits of these programs. Their representatives who attended are delivering improved sales performance and higher average orders compared to those yet to be trained.

As a matter of fact, in Mexico, people who were trying to improve their earnings by 8% to 10%. Establish and empower is a training culture is an ongoing integral part of Avon's direct selling model. The UK and Mexico have been out front working toward building an army of trainees within our representative leadership and all the key markets are going to follow their lead.

Slide 17 highlights the key strategic breakout designed to help our representatives deliver more value and increase their earnings. As we discussed in Investor Day we're providing a representative with more enough of its bundles and regimens as of premium skincare and fragrances options. Their introduction supported by training programs are designed to enable our representative to broaden the relationship with the customers and improve her earnings. Owing to these introducing bundles that addressed many different mix. For example, in some economically challenged markets we're creating value bundles. This offer provides a strong value incentive for customers to purchase groupings of products, package together rather than in a single item.

A great skincare sample is our new mission while premiums skincare line in launch in APAC and Central Europe for the holiday season. These new lines can command premium pricing that is as much as 10 times higher than the traditional Avon products. And in the case of (inaudible) why? Additional trainings required before representative can sell the line. Our early success within selection of new fragrances such as Eve Discovery and Far Away Rebel are being sold as gift sets at a higher price points and -- than the single products.

We're providing her with high priced premium fragrance options, including the Avon Life Color developed in partnership with Kenzo Takada, Segno for Men(ph), Little Black Dress in China. For example, Little Black Dress was launched with a very popular actor in China. This announcement of the partnership through 26 million (inaudible) account and has become the top sold fragrance in China based on units.

Slide 18. In summary, our goal is to rebuild the power of our direct selling model. We have several key initiatives being implemented in different stages across the globe. While some markets are further along than others and already gaining traction, we have plans to expand our efforts to build and scale our recruiting and training capabilities across all markets in 2019.

Well, it will take time for our model to reach its full potential and there are other changes to be implemented. We're beginning to see some fruits of our labors including those highlighted today.

Now back to Jan.

Jan Zijderveld -- Chief Executive Officer

Thanks, Miguel. Now, turning to slide 20 and I will focus now on the strategic breakouts. The second component of our strategy is to accelerate our strategic breakout as opportunities for significant growth. I will touch on a few examples in each of the areas to show how we are making progress, and setting the stage for future growth.

Moving to slide 21, creating more value. We have a number of ways to increase our earnings. First is to improve the effectiveness of our promotion and price management. We have seen positive results of this over the last two quarters already. Next, we have been innovating to reach higher price points and price up for our new products. A few examples from Q3 are, Lip tattoo and Gold Mask which are both price at $9 and Segno our new men's fragrance up $17 which is helping us to drive more value and improve on our average price per item, which currently is only around $3.

Next is to win at all price points, launching more and new premium products provides more opportunities for earnings for the year and we're working to add more premium products to play in all price tiers going forward.

Finally bundles, which again increases each transaction value. This will take up approximately 20% of our innovation and brochures coverage in the fourth quarter. We have a wide variety of bundles as Miguel said, not only for the holiday season like Christmas, but also ongoing Evergreen bundles and regime's all at higher price points that will also require, of course, training.

Moving to slide 22. Increasing access through digital and the important e-commerce. We need to move beyond the physical brochure to provide Avon Products, anywhere, anytime, including attracting new and also younger more urban consumers. We have launched My Avon store now in 20 markets giving our representatives the capability to sell online to anyone, anywhere.

We expect to be in all markets by the end of this year. We have already spoken a lot about our E-brochure and we are currently in 50 markets. Key is adoption and training. In Brazil, after training, we saw significant uplift in sales by the e-brochure and as you may have seen from the press release last week, we're also introducing new assistant selling tools like our 21-day make over app that was launched in the UK and this should help our beauty consultants to become real personal beauty advisors.

Second, is to help with digital tools to make her business better, easier and faster to run. We have created My Avon Office to do just that. This is a new tool allowing her to do everything from an online dashboard, in addition, we also launched a new app to allow anyone to appoint themselves as a new representative online.

And finally, we need to build the capability to move faster and deploy them everywhere with speed. To give you an example, we have gone from one country in six-months to six countries in one month. To get the real traction and the adoption with the representatives we again need training.

We see clearly after training, sales from the E-brochure or My Avon Store increased significantly, demonstrating that the focus on training and development is critical to drive the adoption to future growth.

Moving to slide 23. There are more opportunities. If we look at the APAC region, we are very under representative in Asia today. The region accounts for only 10% of our total revenue. And if we exclude our strong and successful Philippine business, the region only accounts for 3% of our sales. We all know, Asia is a big opportunity. It is where the majority of the world's population live. The middle class is growing and both the beauty, as well as the direct selling market are very big and also growing.

In Asia, we have a big brand, but a small business. We therefore see a tremendous opportunity as a result we have agreed an aggressive five-year growth plan for both China and India.

In India, people excited and want to do business with Avon, but historically we have not been able to earn enough money with them. Helping them increase their earnings, reenergizing this market is key to unlock the growth potential. Avon opportunity meetings have been very successful to generate new interest. There have been approximately 3500 recruiting and training academies to date. Resulting in more than doubled the number of representatives per month since July. Current training initiatives focused on how to increase earnings and shared tools to make it easier for her to be a representative.

We recently also announced a new General Manager for India and looking for 25% growth in the second half of this year because of our new focus and recruitment and training effort. I was in China last week and was very impressed with the strength of the brand, we have there. We have a very big brand, but a very small business. With our new approach, we have made decision to shift our focus on three different channels, a multi-channel approach.

Firstly, our Avon Beauty boutiques, secondly retail distribution and finally, and very importantly e-commerce. To start, we are rebuilding our relationship with retailers to resurrect our retail channel. We have already increased our retail distribution to 6,500 stores and will continue to expand on this.

We are also beginning to grow our e-commerce business in skincare care and fragrance and now we start to add Color as a totally new category. We are very excited with Avon's Little Black Dress fragrance, our fragrance brand for China. Currently, this has become the number one online fragrance sold in units in China.

As Miguel mentioned, this brand was launched on T-Mobile with a celebrity endorsement of (inaudible) a young TV actor. Finally, we are upgrading our Avon Beauty boutiques. With a more focused portfolio and moving them toward more brand experience centers. This is a great location for getting advice and training, sampling and assisted selling ideas.

Explaining uniqueness of our products and our innovation and the breadth of our regimes and bundles is a great place to do that in our new beauty boutiques.

Moving to slide 24. Becoming more open, opening up Avon. Another opportunity for us is to create more demand for her. We'd be very focused on more speed and more innovation to drive the amount. First, we focused on more and bigger global innovation like the recent launch of Avon life Color, designed by Kenzo Takada or our new eye booster in the skincare category.

On the flip side, we also worked on more local innovation with examples like Far Away Rebel just for Europe. Which was 20% -- 26% better than the last fragrance launch. At the same time in Europe, we've also launched with success the global Eve Discovery fragrance, highlighting the value of having products of higher priced tiers and with strong global support packages.

Next is using digital and Influencer as a strategy to influence and create demand and capture young consumers. A good example of this is the launch of the Aura fragrance in the Mexican market in less than 20 weeks. Partnering with a famous local vlog and influencer. This enabled Avon to be in the front of the trends while also driving this via digital marketing. This approach helped us to capture the attention of new younger users and helps us modernize the Avon brand.

Finally, we are focusing on growing on-trend innovations to increase demand and excitement to help to grow her business. In quarter four, we will launch, more than 300 new products, 16% more than quarter three and 100 more than last year in Q4. We continue to work on accelerating our speed to market, leveraging both our external partners for innovation as well as our internal teams.

We will have four times the number of externally sourced innovations this year versus last year. We shared the Lip tattoo product last quarter highlighting that we were able to bring this new Lip tattoo to the market in just 23 weeks about half the time it used to take. This product was also the best -- the third best Lip launch ever in the UK, and we're now rolling this out across Europe and into LatAm at the end of this year.

Next slide 25. I've talked about the need for cultural transformation. To a culture, the non-fresh(ph) as the new and is more open in the way of thinking and the way of working. We've made great progress over the last several months in many areas, but as we know culture triumphs strategy. Unless we change this the turnaround will not happen. This includes fresh thinking as we evaluate ways to become simpler, leaner, faster and with assets and facilities that are fit for purpose.

Turning to slide 26. Let me share how we are thinking differently. We have reorganized to get much closer to the markets. This is critical to become more agile and increase our speed and drive new initiatives that are more meaningful to her locally. To do this, we have reorganized marketing and research in development to become closer to our big markets and put resources in our factories and our markets due to do better.

As well as adopted a new more end-to-end approach in supply chain and really cut down the silos in our organization. We have also created a new global marketing communities through improved connectivity, drive big initiatives and share ideas and best practices across all markets. We know we need to simplify and become more agile to support our 6 million beauty entrepreneurs. We have started that effort by reducing complexity in our processes and become more open to external solutions. You saw this in our improved speed to market with on-trend innovations.

We continue to reduce complexity in our internal infrastructure, resulting in our ability to operate with a leaner team and working to reduce spans and layers. Another obvious opportunity for us was to launch an SKU reduction target of minus 25%. The SKUs with the lowest sales activities amount to a very small part of our sales less than 5%. Reducing this sale will help make demand management easier, improved surface to her and reduce the cost embedding of storing all the same inventory.

The third area is fit for purpose assets and the infrastructure. We evaluated how to better leverage our underutilized facilities and have announced the intention to sell our Rye, New York facility as well as our Chinese manufacturing facility. In addition, we recently engaged in a number of new agreements to support third party operations through our distribution centers, again to improve utilization and we have entered into an outsourcing agreement for our IT data centers.

While we look to streamline our resources and to optimize our assets we also needed to inject and blend talents. To enable the pace of change that we only, but -- that we all know we need. We added more new hires in quarter three. And now, almost half of our top 33 leaders are new and helping to lead and build a new performance culture with rigor and speed. We have becoming simpler, leaner, faster and more externally orientated all with a focus on her, our real boss.

Moving to slide 27. We have made a lot of progress during the quarter. We shared this slide during the Investor Day, sharing our goals and activities for the second half of 2018. We said we would train half a million representatives for the second half. We already did twice that this quarter, we said we would add 200 new products, we have developed 300 new products rolling out in quarter three. We have completed the actions related to our old cost saving programs and have already started to generate cost savings to fuel our growth further. Shared our improvements on pricing and mix management and this has turned positive over the last two quarters. I also shared that 45% of our senior managers are new, we doubled our investment in training over the last quarter versus last year and we have E-brochures now in 50 markets. The only item on this page that in the process is the brand relaunch, we have done a lot of great work on our brand relaunch in testing and validating it for the rest of the year, likely to be rolled out early next year.

Turning to slide 28, turnarounds do take time and above all perseverance. We started by finding our strategy, we shared this with you in September in the Investor Day. We are now building a new Avon formula for success. Starting with the core to reboot our model of social selling, to make it easier for Her to do business with us and earn money.

Next is the Pull, creating the demand for building a modern accessible trendy, beauty brands. Next, we are working to unlock digital and e-commerce to increase access and make Avon available anywhere, anytime. And finally, to open up and simplify and focus our business by reenergizing, reorganizing and live our purpose to improve Her life.

As I said, we are in the reset phase, restoring the basics, injecting new talent, build a performance culture with rigor, while we roll out our new repeatable models. In some cases, this means making very significant changes.

Next we will move into the stabilization phase and then accelerate and grow. But as I said, this will take time. Thank you for joining us today, now we would like to take your questions.

First, let me turn over back to Amy to start this process.

Amy Greene -- Vice President, Investor Relations

Thank you, before I turn things over to Dorothy to begin the Q&A session. We want to have plenty of time to accommodate everyone and to ensure that we can thoughtfully answer as many questions as possible, so please keep that in mind as we go to the Q&A session.

Dorothy, can you please open.

Questions and Answers:

Operator

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Lauren Lieberman. Please state your affiliation, then pose your question.

Lauren Rae Lieberman -- Barclays Bank PLC -- Analyst

Great, thank you. It's Barclays. That was a great, it was really helpful, again to get some color on what's going on, sort of beneath the P&L, the things that we can't see in the financial results at this point, but knowing that there are external stakeholders and it is a public company, it would be helpful if there's anything you could offer Jan or Jamie that you would suggest as maybe metrics that we should be trying to keep track of, to gauge progress from an external standpoint. I mean, what will we be able to see that we can say, Okay, check mark, things are moving in the right direction, while we go through this, this reset work that you've embarked upon. Thank you.

Jan Zijderveld -- Chief Executive Officer

Yeah, thanks, Lauren, it's really good to hear you again. And first start with your question, that's really good. I think in the end, internally we are shifting really a lot of focus to productivity of our representatives and increasing our earnings and in the end, that is all of about Rep retention. So we are pretty good recruitment machine, but what we really need to add to it, is a retention machine and the core of the retention is really about earnings, and earnings is really driven by training and it's as simple as that and that's the essence of the rebooting of the direct selling that Miguel talked about.

Operator

Your next question comes from the line of Wendy Nicholson, please state your affiliation, then pose your question.

Wendy Nicholson -- Citigroup Inc -- Analyst

Hi, I'm with Citigroup. I guess my question as I listen to a very, very long and broad list of initiatives is just the sense of I guess are you trying to do too much all at once, and part of that I think is a question about the number of new hires, you have. So can you just speak to kind of the, the organizational complexity and Jan maybe how you spend your time? And Miguel you too I mean, how can you make sure that everybody is prioritizing the right projects, the ones that will have the most impact just -- I mean it all sounds great. It's so exciting, but it just sounds like, oh my gosh, a huge amount of work. Thanks.

Jan Zijderveld -- Chief Executive Officer

Wendy, thanks. That's right, I mean, to turn around the company obviously requires quite a lot of interventions, but I think what we do have is a very clear focus and prioritization of what to do and it starts with the absolute fundamentals, which is about rebooting our direct selling experience, and as I said just to Lauren as well a real focus on making sure that we don't just recruiting machine that become a retention machine to improve earnings through and creating more value and creating more training for her, in the end, that is the essence of the machine. Then a spot of that we got to see how we can create and refresh the brands to be able to create more value for her, and the second -- so in marketing, we are focusing really on training bundles and higher value products, which go hand-in-hand with Her to make more money and that's really the second thing that we are, that we're doing.

And then the third thing is really simplifying the business. Its really making other things go away that clogged up the complex processes, the overly siloed organization to make us faster and leaner and that starts with the dramatic SKU reduction processes, the simplification of processes and to some extent decentralizing the business closer to the markets and closer to the actions, so if you boil it all down it's about those three things -- it really about rebooting direct selling, creating more value for the brand with high value items, so she can make more money and they're really trying to simplify the business.

Now as part of that we felt we needed to inject new talent in a number of places. A little bit, you know, the team that got us here won't get us there, and that's a careful blending of really good Avon people that we are promoting, that we are supporting and that we are really coaching and then injecting with some new talent, whether that's new talent that really knows direct selling against that we took quite a few people from our existing direct selling, companies and inject them back into the company to really understand the sort of rebooting of direct selling and the last hiring Her in Central America is a guy that used to be in direct selling is another example of that, but also injecting talent where we need to build new capabilities, if, whether it's in IT and e-commerce and of course (inaudible) is building his team there.

So, I think we've got a really careful plan to boost the people that we have -- we really support them and reteach them, I think the fundamentals of direct selling, injecting new talent where we think we need to lift up and building new capabilities, where we, where we think we don't have enough for them. And then where do we spend our time which is your third one.

Well really in the markets, every week I'm somewhere else. I was in China last week and every week, I'm actually in another market, Miguel is also in another market really teaching, coaching and resetting the model of what we're talking about.

Miguel, do you need anything to add from you?

Miguel Fernandez -- Global President

No, I think think as Jan was saying that training is the biggest priority for the market, this is a muscle that in some parts of the world, we lost, and this is the key differentiator between a good direct seller and not good direct seller, we have to relearn in some parts of our markets and get much, much better in training. So when we're prioritizing priorities training is one that has no downside, we have to be much better and this is how we can beat many, many competitors.

Operator

Your next question comes from the line of Ali Dibadj, please state your affiliation, then pose your question.

Ali Dibadj -- Sanford C. Bernstein & Co -- Analyst

Hey, guys. I'm from Bernstein. I had a couple, just in terms of one just leading up your last comment about competition, talk a little bit about what's happening from a competitive perspective, particularly in Brazil you mentioned, it got a little bit more difficult there, one understand where we are on that, how that might turn because look your Brazil number was worse even when you had transportation issues, so if it's competitive why is it going to get better. And then similarly, from a Rep perspective, the Rep growth declined continues and if you could just elaborate a little bit on the receptivity of the training and of the increased productivity that you're hoping for relative to what you're seeing in terms of the Rep Counts to get us a little bit more comfortable that things might actually to your words stabilize in 2019 if that's still the goal.

Jan Zijderveld -- Chief Executive Officer

Yeah, thanks, Ali, so you're right about Brazil and now Brazil has that -- had a disproportionate effect on our results this quarter. Of our 48 million declined, 40 million alone comes from Brazil, so that's 80% of the decline. That's in revenue, but also a Rep Count. So, over 5% decline in total Rep Count you exclude Brazil it's 3%. So Brazil is definitely on the operating table and we all know that the Brazilian market is not an easy market at the moment with all the volatility, but it's clear that we have a lot of work to be done in Brazil, and what are we doing. So Brazil, if the Q3 results which is minus 12 which is significant as a number of components and the first is we still have a hangover from the Brazil strike and we lost a lot of representatives in the Brazil strike because we weren't important enough to them. So what we did to reengage them is first and foremost really focused on securing our biggest and our top reps and that was -- we invest in that, we invested in terms of training, but also in centers but also a better service and the motto was losing zero of our top reps and in fact that happened. And that's going very, very well.

But we invested the money and we have lost none of our biggest and top reps. The trick now is to improve the productivity exactly like we're doing in Mexico and that's now the focus that we've started to make sure that we only need to retain them, but they start to earn more money and to start to become more productive.

And that is therefore walking to the (inaudible) is a real huge pickup in Brazil as well around training. We have about 12,000 sales leaders who have all been trained now at the end of Q3 and going into Q4 and in fact, the target is to touch 1 million of our 1.4 million-1.3 million reps before the end of the year with some form of training to improve their earnings and especially the part-time earnest to get them to BRL1,000 for every campaign and that is really the focus on the training that Miguel talked about also lending in Brazil using our 12,000 sales leaders to touch 1 million people and above all the part-time earners to see how we get them as quickly as possible to BRL1,000 to improve the productivity of those ones.

The third thing we're doing is getting some of those reps the small reps that we've lost. We've lost a significant amount of small reps, getting them back and that is about the new scaled recruitment repeatable model from APAC. So we sent a bunch of the Brazilian team to APAC to build, to learn and teach from how we do better quality and scales recruitment effecting in campaign 17 in Brazil, we're going to recruit 70,000 new people.

So we're really trying to see how we also get more people back into the fold and then also make them more productive and that's a little bit, the power of the repeatable models that we talked about, we don't only sent -- we haven't sent only the Brazilians to APAC new recruitment meetings. We also send the Russians and the South Africans to learn how to recruit quality with scale again.

And then the fourth point that the Brazilian team and Jose is working on is really simplifying this business. This business has become overly sort out, overly complicated and there is a dramatic program to simplify our business, give you an example there, we had 5,800 SKUs and before the end of the year we'll get down to 3,500 SKUs. So over a third reduction in SKUs to make the business simpler and more focused on the core, off the core and really driving that harder.

So it's a similar recipe that we're doing everywhere else, but we are a little bit behind and I think it's also fair to say that the Brazilian market is a competitive and tough markets. Now, moving to your second question in terms of the overall rep decline, but maybe Miguel you can give a bit better or more flavor to that.

Miguel Fernandez -- Global President

Yes, it's -- the whole concept about training and the first that we need to take is to understand what kind of person we're dealing with. If a person is primary interest is the product, then the trainee has to be adopted to their interests. I want to highlight an example that we did it in Mexico. We identified people that wanted to earn money with us. In the very first campaign. We created a segmented approach on training, service, follow-up with them. And we saw a spectacular results within group and that was the reason behind of the great results that we got in Mexico.

Obviously, this is the first time we do it and we're still learning how to do it a bit more, even more effectively and this is a program that we're launching around the world in Q4. And this is just the first step of a very segmented approach in training. So we're going to be continuously tracking what is better -- what works better and this is the whole concept of training with an intent. We want people in the first 90 days to get to certain level of income that becomes relevant to them, meaningful to them, so they stay with us.

So the whole concept is identify who's actually really, really want to make money with us, we train them and giving the tools and the services and that's how we're going to be tracking the progress of all of them.

Jan Zijderveld -- Chief Executive Officer

Obviously, you know as it related to the other question. The key factor we going to be measuring these people is that average order the productivity of each of those reps until they say and reach certain threshold that we know the chance for them to stay with us or else retaining them are much higher.

Operator

Your next question comes from Linda Bolton Weiser. Please state your affiliation then pose your question.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Hi Jan and Wilson. So, Jan in your first sort of quarters, and talking about the performance you really focused a lot on fixing the service issues and you started to give certain numbers and metrics to illustrate that the service levels were improving. So, is it that service, can you give us some update on that? I mean, if service continuing to improve first of all.

And then secondly, after service, if you had to just name one thing that would be the second most important thing to attack after service. What would be that second thing? And maybe you can just talk about how you're attacking that second most important thing after the service levels? Thanks.

Jan Zijderveld -- Chief Executive Officer

Yes, thanks to Linda. Now, service is improving. It's not a crisis anymore in the sense of that we had lots of damage products. Remember where we started off that 12% on the boxes had a damage product that is down to 1% or 2% now. The delivery has improved. We created more segmented service. So, we made lots of improvements and taken away some of the biggest issues that we had. Am I totally happy that we are the best service company in the world yet? Not at all.

But is it now a burning platform that was in Q2? No, not quite. So we're making good progress, but there's a lot more to do and we're doing lots of tests to try and differentiate service to give people more optionality and service. That they want to delivered at home, that they want to have delivered it at pickup points, do they want to play for it, don't want to pay for it. So this is really where we're moving from almost fixing the crisis issues to really thinking how we become a better service company.

As part of that, we are also looking at new more open solutions can we partner with other people, our teams are talking to many, many other suppliers also to see how we can improve our service? Do we need to do it all ourselves? Probably not. Can we work with people who can do it better than us probably? Can we find a different solutions? So we're working hard to go, if you say fixing the real issues to really becoming a best-in-class service company. So I would call it, they are on the journey.

The second one on your second question, what's the second most important priority? Well, that's really, really simple. It's training, it's training, it's training, it's training. We've got -- the 6 million ladies are the heart of our business. If she believes in our product, if she believes in our brand, if she gets thought how to make more money? How to get to a meaningful earnings? if she feels that she has being recognized and rewarded for her efforts? If she feels that doing business with us is easier then she will really go for that and that is of the heart of any direct selling company. And I must say that is what we forgotten in Avon for the last -- whatever period of time, you want to say we've got many of these things and we're putting all of that back.

So it is all about really making sure that she becomes a trained beauty advisor versus this discount sales lady that she is at the moment. She's really selling discounted products from a brochure and turn into trained beauty advisor, that knows about our products, knows about our brands can sell bundles and regimes and can buy loyalty and increasing in becoming this assisted selling lady. You've got to invest in training. But training from the center, but also train the trainer the whole organization has got to become and especially our sales leaders have got to become business developers and that is the reset that we're doing and the good thing is that where we see that its starting to happen? We see results. We talked about the Mexican example, but there is evidence in many, many countries now that soon as we do this famous training with intent. We see uplifts of those people that have trained and non- trained between 20% and 30% whether that's in Argentina, whether it's in Brazil, whether it's in Hungary. It is pretty consistent picture. When you invest in training? When you invest in the sales pickup? So that's really the second big priority and that's why we called out, we're going to train half a million people in the second half. In fact, we've almost trained a million people in Q3 and we're going to continue to drive that further and we need to get better at it. You know what training? How you train? How you follow up? What's the narrative of the training? How do you create different segmented training? How you train in the city is probably different how you train in the rural areas? But the priority really is simple. Fix the service. It continue to improve on that and the second big one is really invest in training to increase earnings.

Operator

Your next question comes from Steph Wissink. Please state your affiliation. Then pose your question.

Stephanie Marie Schiller Wissink -- Jefferies LLC -- Analyst

Thanks from Jefferies. It's a follow-up on your comments on training and just the financial impact in the SG&A. Can you talk a little bit about the step function in the third quarter. Will there be another incremental step function in training expenses in the fourth quarter. And as we look into 2019, should we assume this is a new baseline level or is this an incremental level this year and then you expect to save that down as we progress through 2019? Thank you.

Jan Zijderveld -- Chief Executive Officer

Stephanie, I think you're saying the cost of the training, right. So we invest about $3.5 million I think in training in Q3. We said that we will invest about $10 million in the second half. We've done about $3.5 million in Q3, which is double the rate of the quarter of the same amount of money that we did last year. I don't think that training in the end the key issue is money because what we need to do is obviously build the capability to teach the people, but in the end it is about train to trainer the program and it is really by mobilizing our sales leaders to do the training, to get this cascading and scaling of training around the world and that's where the focus needs to be, so as more the money its building the muscle in that capability again. The second area is really unlocking the power of digital training, which we're really stepping up as well, so it's about a segmented approach were some people, if you want to be part-time or full-time earner you definitely want to have some face to face training.

But if you're beauty fan or consumer you also want to be trained how to get the new look? How to use this product? How to try create this regime or these set of bundles and what we're doing there is creating short little video as you know 60 seconds, 90 seconds, maximum two minutes and distribute them via social media and they then get distributors further throughout the network. So it'll be a combination of face-to-face a lots of digital training and follow up and it's more about capabilities than about money I think at this stage.

Operator

Your next question comes from the line of Doug Lane. Please state your affiliation, then pose your question.

Douglas Lane -- Lane Research -- Analyst

Hi. Thanks. Lane Research. I want to talk about the China you got three distribution routes that you're talking about the beauty boutiques and the retail and now e-commerce. And can you talk a little bit more about the e-commerce part of that, how is that different than direct selling and who do you think you can reach or who you targeting to reach in e-commerce that you wouldn't get through the beauty boutiques or just the retail distribution?

Jan Zijderveld -- Chief Executive Officer

Yes, so first of all as we made a bold decision not to follow the direct selling model in China anymore because we feel that with the power of our brand. I remember, I said also in the Investor Conference that Avon's brand recognition and in fact likability in (inaudible) in China is phenomenal. We've got a brand awareness, not just in the urban centers, but actually in Tier 2 and 3 and 4 cities of 70%. And as I said I was there last week, you talk to any one from the first you check into a hotel, to the people you meet as consumers, most people know our brand, its phenomenal.

And that is obviously a huge opportunity for us to unlock. So it's about building distribution through the more traditional channels and that is, first and foremost retail, so getting back into retail and making our products available into through all those retail channels that we have and that is building and going fast, but we also know that the most developed and biggest e-commerce market in the world for consumer goods and in fact most goods is e-commerce and they've got phenomenal platforms that we're now driving hard to build our business from and when you have a brand that's already known and then start leveraging on those big e-commerce platforms of China, you can really build a business very, very fast and you see the growth rates that have already unlocking by really recommitting to China and starting to drive e-commerce.

Our Little Black Dress example is of course a great example. It's a great fragrance brand, we activated it in a new way with the local Chinese star drove a quite a good digital activation program around it and to become the number one fragrance sold in terms of units in China over e-commerce year-to-date. I think is really encouraging and very, very powerful. So it's a bold move to say, we're not going to do direct selling, we're going to leverage the brand power that we have through a multi-channel approach whether it's normal retail, whether it's absolutely e-commerce and whether it's about the 1,100, 1,200 Avon boutiques that we have and upgrading them to really improve the value of our brand and create that sort of physical place where people can see touch and feel the brand and where we have those trained franchisees who then can tell them about Avon, the innovations, the regimes and the products and then people can then buy it there or in the shop next door or over e-commerce is really the unlock.

And the final thing we're going to do this in a new way, a different way as you know, we have a very big and big factory out there, but that was totally underutilized. So we've now put that up for sale and we're going to find a partner to buy that and them to actually build China together and therefore the partner is going to fill the factory, put new lines in, put new investments in, put new capabilities in hopefully and drive that together. So, I think the China example is a nice microcosm of the new Avon, open Avon and Avon that's thinking differently and Avon that's on the front foot and its building a new business in China.

Operator

Your last question comes from the line of Carla Casella. Please state your affiliation and then pose your question.

Carla Casella -- J.P. Morgan Securities LLC -- Analyst

Hi, I'm with JP Morgan. I have a couple of questions here, one on the -- you mentioned the structural and operational changes that are going to improve your tax rate. Any changes to the capital structure as well on that front you have talked in the past about moving more of your liabilities outside of the US where -- to match, better match your revenue?

Jan Zijderveld -- Chief Executive Officer

Yes, well we, I mean we've obviously this year -- if we done -- almost on nearest debt of bonds. So we paid up to $40 million of debt in the second quarter. And that leaves our debt (inaudible) starting the next one in 2020, so we will look at that. And yes, what we've said in the past is clearly there is a mismatch between raising debt and dollars when our income flow is predominantly overseas. So as we go through to continue to manage the debt on the balance sheet we will look at where that gets, and where that gets raised and it's unlikely that would be in dollars, (inaudible) raise it and a currency we were earning, that currency by way of our sales. So it's likely to be overseas.

Carla Casella -- J.P. Morgan Securities LLC -- Analyst

Okay. And then is there any way to track when you're losing reps are they typically going to a competitor or dropping out of the market or is it different by market, any more color you can give us there?

Jamie Wilson -- Chief Financial Officer

So it's hard to say because it depends by market. But most of the reps that are -- that we're losing is because we are creating an expectation to them that we are not fulfilling and that comes back to what Jan was saying about the narrative. We have to make sure that we are more clear in the narrative and that we absolutely train them to get to what we offer them which is that meaningful part-time opportunity for them. So basically, I wouldn't say that they're going somewhere else, but they still, these are people that are still need that income. So they're going to go anywhere where they can find that income. So we have to be that place for them.

Carla Casella -- J.P. Morgan Securities LLC -- Analyst

Okay, great. Thanks.

Amy Greene -- Vice President, Investor Relations

Thank you for joining today's call. As a reminder, the webcast, replay and materials are available on our Investor Relations website. And we look forward to speaking with you again after the fourth quarter. Now, I'll let Jan close out the call with a few quick comments.

Jan Zijderveld -- Chief Executive Officer

So, thanks everyone for the interest and great questions. And as you can feel and here there's a lots going on, but also actually there's a real focus plan and the focus plan is really around four things. One and most importantly is about rebooting our direct selling and that's really becoming a retention machine and increasing -- improving Her productivity and to do that we really got to drive up and step up trading. And to be honest, it is a simple as that really making sure that they improve Her productivity through training and making it easier to do business with us and that's the first and most important priority to stabilize our business.

The second one is creating more value in our brand. Our average unit transaction cost is only $3, which is half the next player. So, we got to strengthen our brands and tear it up and provide it with the bubble of bundles, so she can have a higher value item, so it's easier for her to earn money. That's the second priority we're doing in terms of marketing, increasing the value of our transaction, so it builds up to improving and -- her ability to make money. So that's the second thing we're focusing on.

The third thing of course is creating more access is really turning us into an e-commerce and digital company because that's a huge new opportunity for us as well as unlocking one new geography called Asia. And then finally, to do all that we want to take away all the collateral, all the mess and really open this up, simplify our business, taking out SKUs, getting closer to the marketplace, simplifying our processes and reenergizing the team. So that in the end is the agenda that we're really focusing on.

Underneath it there are lots of activities, but it's those four big themes rebooting direct selling, creating value in our brand to create more value for Her, unlocking e-commerce in Asia and then really opening up and simplifying our business. To be honest its just simple as that. This are those four themes that we really driving as a theme and the good thing is in all of those we starting to see examples and areas, which are working and we are then trying to lock those down and make repeatable models out of those and then say, OK it's working there, how do we replicate that in another area. So, thanks a lot for everyone for joining the call and being an Avon supporter. That's it.

Operator

That's it. Thank you and we'll look forward speaking with you again soon.

Duration: 70 minutes

Call participants:

Amy Greene -- Vice President, Investor Relations

Jan Zijderveld -- Chief Executive Officer

Jamie Wilson -- Chief Financial Officer

Miguel Fernandez -- Global President

Lauren Rae Lieberman -- Barclays Bank PLC -- Analyst

Wendy Nicholson -- Citigroup Inc -- Analyst

Ali Dibadj -- Sanford C. Bernstein & Co -- Analyst

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Stephanie Marie Schiller Wissink -- Jefferies LLC -- Analyst

Douglas Lane -- Lane Research -- Analyst

Carla Casella -- J.P. Morgan Securities LLC -- Analyst

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