Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Avon Products (AVP)
Q1 2019 Earnings Call
May. 02, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, and welcome to Avon's first-quarter earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. 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. 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 and on the company's Investor Relations website and in the company's SEC filings, I will now turn the conference over to Amy Greene, vice president of investor and stakeholder relations. Ms. Greene, you may begin your conference.

Amy Greene -- Vice President of Investor and Stakeholder Relations

Good morning, and thank you for joining us to review Avon's first-quarter 2019 results. I'm here with Jan Zijderveld, Avon's CEO; Gustavo Arnal, Avon's CFO; and Miguel Fernandez, Avon's global president. Jan, Gustavo and Miguel will take you through our progress and our first-quarter results, and then we will move to a Q&A session. Slide 4 has this morning's agenda.

I will now hand the call over to Jan.

10 stocks we like better than Avon Products
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Avon Products wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Jan Zijdervel -- Chief Executive Officer

Thanks, Amy. Good morning, everyone, and thanks for joining us today. We will start with an update on quarter one financial results from our new CFO Gustavo Arnal. Then Miguel will give an update on our markets and representatives.

And I will close with an update on our Open Up strategy that we launched in September last year. Before I hand over to Gustavo, I want to reiterate some key points. Moving to Slide 5. Our strategy is clear and remains unchanged, and we're making steady progress against it.

Many of you are familiar with the chart on the left that we laid out at our investor day last September, showing our three focus areas to drive shareholder value and return Avon to growth. It starts with restoring competitiveness in our core, executing our new repeatable models and driving our strategic breakouts, all with a new culture of performance and speed. And 2019 is our year of execution to stem the decline and stabilize our revenue, deliver improved margins and step up cash generation. In the first quarter, we are pleased with the progress we made both financially and in deploying our Open Up strategy.

Although total revenue is down, we see improvements in many areas, especially the better underlying trends in Brazil and continuing good performance in Mexico; however, we did deteriorate in Russia. We are focusing on improved representative productivity. We have stepped up pricing and mix management and significantly reduced our cost and headcounts. On the right, you see the outline of our Avon formula.

We are building repeatable models to reboot direct selling, to make it easier for her to earn money and do business with us. We're creating demand by strengthening the value of our brands, making it more on trend with scaled innovation and attracting the next generations. We are unlocking e-commerce so that Avon is available anytime and anywhere. And we are digitizing our representatives' experience with digital tools and digital training.

We continue to be very proud of our purpose to improve people's lives and promote projects and initiatives that are important to her and that empower women. Before I hand over, let me take a minute to introduce our new CFO, Gustavo. I'm very pleased that he's joining us to cover our financial results. A warm welcome to him and great to having joint our team.

I will now hand over to Gustavo.

Gustavo Arnal -- Chief Financial Officer

Thank you, Jan. It's great to be in this call. While yesterday was my first day on the job, I did not want to miss the opportunity to speak with you today. During the past few weeks, I was able to start onboarding and learning the business.

I am beginning to form an opinion of where I can help accelerate shareholder value creation. I am looking forward to work closely with Jan and the management team to continue driving the Open Up turnaround strategy. Now I will share some perspective on the results for the quarter. As a reminder, starting January 1, 2018, the new revenue recognition standard was adopted.

With a year of history behind, there is no longer a need for like-for-like results. The pages in this presentation use comparisons and constant revenue and adjusted non-GAAP information. For your convenience, you can find the table in the appendix of this presentation providing a reconciliation of adjusted non-GAAP and reported information and also on the Avon's website. Turning to Slide 7.

Let me start by sharing highlights on three key financial metrics: revenue, margin and cash. First-quarter constant-currency revenue from reportable segments declined 2.9%. Yet there were some signs of stabilization for the plan for 2019. Revenues were in line or above last year in three of the four geographical segments: Asia Pacific, North and Latin America and South Latin America, but were offset by a steep decline in Europe, Middle East and Africa.

Looking at adjusted operating margin. There was a healthy 50-basis-points expansion versus last year. This is the first time in years with a positive trend in Q1. It was driven by pricing, mix and cost savings behind the fuel-for-growth initiatives and it was delivered despite unfavorable FX impacts.

Plans remain on track for overall margin expansion in 2019, even if there will be some variation across quarters. In terms of cash, Q1 is typically a negative cash quarter due to the seasonality of the business. Overall, free cash flow of minus $117 million was $6 million better than Q1 last year, with a few key drivers worth calling out. First, there were additional restructuring investments to implement transformational activities.

Second, there was a backlog of payables during Q4 due to a vendor processing transition, which started to be corrected during Q1. Third, the benefit from selling the China manufacturing facility. As has been historically, we expect to generate positive cash flow in the upcoming quarters, with the full year being above 2018. During the quarter, a EUR 200 million revolving credit facility was entered and remains unused.

Current liquidity is approximately $620 million and is expected to increase as we progress into the yearly cycle. Moving to Slide 8. As mentioned, during the first quarter, we delivered constant dollar revenue growth in three of the four geographical segments. Asia Pacific grew nearly 7%, driven by the Philippines and double-digit growth in China.

North and Latin America grew, driven by Mexico. South Latin America was slightly positive with double-digit growth in Argentina, fueled by pricing, being partially offset by a slower decline in Brazil. Result in EMEA were disappointing, driven by a significant softening in Russia. Jan and Miguel will speak more about this.

Looking at revenue drivers. While active representatives were down year over year, average representative sales showed positive momentum, up 6%. Further, pricing execution continues to gain traction with an 8% improvement in price/mix during the quarter. We will continue to focus on revenue growth management, while investing in our representatives to improve their experience and help them to earn more.

Moving to Slide 9. Looking at the revenue trends by geographical segment over the past five quarters gives a sense for the progress we made. While it's not smooth yet, there are some signs of positive directional movement. In APAC, the growth was driven by positive momentum in the Philippines and China.

We believe that there is tremendous growth opportunity for Avon in this region as we have strong brand recognition, yet a small footprint. EMEA trends are the results of significant challenges in Russia, a declining beauty market with increased competition and weaker sales leader engagement. NOLA, which is predominantly Mexico, illustrates that the market has stabilized and continues to grow, driven by momentum in face and toiletries despite a competitive landscape in fragrance. And importantly, SOLA contains Brazil, our largest market, which seems to be stemming declines.

At the same time, we continue to see growth in Argentina behind pricing and despite macro economical headwinds. Moving to Slide 10. Adjusted operating margin improvement is positive in Q1 for the first time in several years on a combination of improved pricing and category mix coupled with cost savings. And again, it was delivered despite significant FX drive.

Delivering margin expansion is a key focus for 2019. As we price and take cost out, we will continue to invest in our representatives and in marketing to improve her experience. Strengthening the relationship with our representatives, particularly in large markets, is imperative. Moving to Slide 11.

Adjusted operating margin improved by 50 basis points, largely due to pricing efforts and savings from the fuel-for-growth initiative. Pricing and mix improvements came from lower promotional discounts, more effective incentives and more favorable mix of tiers and categories. This is an ongoing effort in managing our revenue growth, which we expect to continue throughout 2019. Savings from the fuel-for-growth initiative provided more than $20 million savings during Q1.

Total SG&A costs were 10% lower. These savings were largely from headcount reductions and will continue as we cycle through additional actions. Other savings were from improvements in bad debt, through the implementation of tighter and more disciplined credit in some countries. FX pressure continued in Q1, impacting adjusted margin by 210 basis points, largely due to currency devaluation in Brazil, Argentina and Turkey.

I will talk more about that shortly. So turning to Slide 12. As mentioned, Q1 2019 FX pressure continued and negative currency impact was significant during the quarter. We expect FX pressure to remain strong in Q2.

At recent spot rate, we would expect less pressure in the second half of the year as we cycle through the 2018 base and price increases get reflected. Moving to Slide 13. First-quarter cash flow is historically negative due to the seasonality of the business. Free cash flow of minus $117 million was $6 million better than last year, and restructuring investments were self-funded.

A few key drivers are worth mentioning. Working capital was negatively impacted by third-party vendor transition at year-end, which resulted in a payables backlog partially settle in Q1. This was in part offset by inventory reduction on the back of the SKU optimization initiative. Also, there were additional restructuring investments to drive our transformational program.

This restructuring cost will continue throughout 2019. Lastly, we received $46 million of proceeds from the sale of the China manufacturing facility, consistent with our efforts to monetize noncore assets, which will also continue. We believe we're on track with plans for positive cash flow in the upcoming quarters as we continue delivering profit improvement, working capital efficiencies and monetizing underutilized noncore assets. Full year 2019 cash flow generation is expected to be higher than last year.

Finally, on Slide 14. Our adjusted income tax provision was $23 million, which was an improvement of approximately $1 million compared to the prior year. Structural and operational changes from efficient tax planning continue to result in reductions to the annualized adjusted tax rate. Looking ahead to 2019, we continue to expect reductions in the range of 10% to 15% over the course of the year.

We're also focused on plans to reduce cash tax. Lastly, we're comfortable with our liquidity profile. We're constantly monitoring the financial markets and will continue considering all options available to address our upcoming 2020 bond maturity, including using existing liquidity for a refinancing in the euro or U.S. dollar debt capital markets.

Now let me turn it over to Miguel.

Miguel Fernandez -- Global President

Thank you, Gustavo. Speaking up on Slide 16. Turning to the performance of our top markets. In the first quarter, we saw constant ever revenue growth in three out of the top five markets and improving revenue trend in Brazil.

Mexico's first-quarter revenue increased by 2.1%, the fourth consecutive quarter with growth, which was driven by the increased focus on segment representative training and activities. Mexico is in the process for implementing a new compensation model designed to be more easily understood by the field and to help representatives achieve a meaningful income earlier in their time with Avon. Russia's highly competitive beauty market, particularly in direct selling, continued to contract. Where we continue to experience strength in fragrance and beauty during the quarter, we experienced a significant loss of representatives in Russia this quarter.

I will talk about this a little bit more shortly. In the Philippines, revenue grew 12% over prior year as a result of our successful reengagement of the representatives through our activities, including Avon opportunity events, but also benefit from a weaker quarter last year. During the quarter, we also saw growth in average order due to effective pricing. Argentina's strong growth continues, up 44.8% based on adjustments made to the product offering to address the new macroeconomic reality.

Smaller pack sizes at lower price points, value bundles, etc. there are meaningful changes through products and pricing to help offset inflation and the ForEx headwinds. We're also seeing increased adoption and usage of our new e-commerce platform. Finally, in Brazil, we're encouraged by the improved revenue trends on underlying improvement of fundamentals.

Revenue declined by 2.4%. The Brazilian improvement was largely due to the refocusing on the basics, direct selling from active activities, better service on portfolio simplification coupled with lower bad debt. Moving to Slide 17. As we said, Russia has been a challenging market for us.

Russia is in full reset mode. We have a SWAT team on the ground and have just announced a new experienced GM to navigate through this challenging market. Our strategy in Russia is not different than the one we have in other markets. We need to reboot direct selling by focusing on increasing training to drive productivity and thereby increase our earnings.

Some of the tactics being used in the market include segment and sales leader incentives to recruit, train and retain. Segmented training programs such as the blogger school, which is a micro-influencer training program. We will continue to take actions to improve the overall perception of the Avon brand, upgrading the brochures, driving more on-trend products, including K-Beauty and higher-end fragrances. Launching more and better digital tools for the market is also part of improving our image and relevancy.

As we try to track younger trendier representatives, we have to give them the products, tools and experience that they expect. In Russia, nearly 40% of our representatives are millennials with a very different need. In order to retain this younger group, we're deploying direct delivery to consumer, adding more relevant innovation for consumers and becoming more digital. For example, last week we announced to the sales force that we were launching direct delivery throughout Moscow, which we will continue to expand throughout the market.

The younger generation of representatives expect to get their product in a much faster timetable. Russia, like Brazil, will take some time to stabilize and return to growth. We believe that we have the right team and strategies in place, and we'll report back to you as we make progress in the market. Let's move to Slide 18, Brazil.

We are seeing stabilization in the market and improvement in revenue trends. As we discussed last quarter, we have three strategies: reboot direct selling, improve the value of the brand and brand equity and simplifying the business. We're making progress in each of the three areas. Rebooting direct selling, we have developed an obsession to serve mentality focusing on what the representative wants and needs to grow her business.

Perfect order is now approximately 90%, and we also saw 50% drop in service cost of our call center. We're seeing improvements in our Net Promoter Scores, which is 13% higher than a year ago. Brazil was one of the first markets to break out a separate dedicated e-commerce business unit. They are solely focused on e-commerce growth, and as you can see, is gaining traction.

As for improving the value of Avon brand, our efforts behind revenue growth management are bearing fruit. On a year-over-year basis, price/mix in Brazil improved 11% based on our focus on skincare and fragrance. We have also begun running brand advertising on TV, which has been driving increases in brand recall. As for simplifying the Brazilian business, we have been making meaningful progress in reducing our product portfolio, inventory and bad debt.

Our goal is to reduce the overall product portfolio by 30%. And since last August, we have brought it down by 18%. We're improving working capital in the market, as evidenced by a 20 days reduction in inventory days. And importantly, bad debt has improved more than 40% on a year-over-year basis.

Now Slide 19. As we have discussed, one of our primary goals is improving her earnings, which leads to increases in retention. And you can see that we are making progress on getting her meaningful earnings. Looking at overall representative productivity and quality, the training of tools that we have been deploying in the markets around the world are helping her to make more money.

Our global average representative sales in the quarter have increased by 6%, and the increase is broad-based. Many of our key countries are also seeing real increases in average representatives sales. Slide 20. When we look at our training strategy, there are three key areas: digital training to access the whole web base; segmented training that helps her achieve her intended goals; and product training that helps representatives become trusted beauty advisors to their customers.

We know there is nothing more important than helping her earn more money. And we know that training drives productivity. Trained sales leaders earn 50% more money. Training with the intent to helping her increase her earning is one of the most critical elements to retaining our representatives.

Our ability to increase retention, through driving her earnings is the underpinning that support the long-term sustainability of her business. Our 2019 goal is to train at least 50% of our representative base and increase her retention. To support this call, we will leverage digital training tools, which we'll be scaling around the world during the back half of the year. This next-generation learning technology will provide one global solution in seven different languages.

Applying our segmentation methodology to training has helped to drive results, especially productivity in markets like the U.K., Mexico and the Philippines. The U.K. has beauty academies for sales leaders, while the Philippines has increased the cadence of the training academies. Monthly touch points of this training academies in Philippines have been very successful.

We have seen that after completing the second training module, the average sales for the participants increased by 23% and retention increased by 20%. We have many examples to show that each additional training module she takes results in higher sales for her. Our training helps her become a beauty advisor. We know that the more training she takes, the higher her income and the longer she stays.

Representatives trained on more modules have high retention rates. Turning to Slide 21. We're continuing to improve the suite of tools that help our representatives build and manage their business. These digital tools become a critical element in our strategy of attracting and retaining millennials.

Romania went live in Q1, allowing our sales leaders seamless recruiting. And after two campaigns, 20% of our appointments came through that app. While still very early, representatives in Romania who are appointed through the app are showing higher sales levels than those who were signed up after traditional paper-based method. Avon our -- is the new app for representatives to manage their events, CRM and place for us to share content about products, how-tos and promotions, while allowing her to personalize, customize and share content through various social media formats, including the ability to sell on Instagram.

Our new sales tools, My Avon Office, went live in February in Colombia, Peru and Ecuador. This release supports a more seamless integration of the back office with the social media content that we're generating for her use. My Avon Office makes it easier to attract new customers through the reach of social media and her appointments. Early feedback is very good, with 86% saying that it was useful to them and the majority showing daily usage.

Lastly, My Avon business is new ordering platform that is replacing the old legacy very restrictive platform that we had been tied too this new platform was launched at the end of Q1 in Poland and marks another step in our global strategy to deliver direct selling. This new platform allows us to deploy technology to increase her basket through product recommendation tools. This gives her a full mobility of her business and is fully integrated with other My Avon suite tools. Now back to Jan.

Jan Zijdervel -- Chief Executive Officer

Thank you, Miguel. You can see we've been making progress to improve both the training and the productivity of our Avon beauty entrepreneurs. Turning to Slide 23. I want to walk through the Open Up strategy and show you some of the progress we are making to transform Avon.

Starting with rebooting the core. To make our current business more competitive, we took immediate actions last year to reenergize and reengage our representatives, to improve the look and feel of our brochures, to improve service and increase our delivery options to her, to instill a culture of performance and speed and to upscale our talents and capabilities to transform Avon. This includes the latest talent changes with Gustavo joining us just now as our new CFO but also Kay as our new Head of HR and Strategy and Vikram as our new Head of Supply Chain. And today, we also announced a new General Manager for Russia.

We have four strategic breakouts to transform this business. First, we must strengthen and improve the value perception and brand equity of Avon, increasing the average transaction value and improving our price and mix. Second, we will increase access to Avon, make Avon available to more people to buy through new channels like e-commerce and new geographies such as Asia, and finally, attract the new generation of consumers and people. Third, to do this, we will invest in her and step change our training and tools to improve her productivity and equip her with technology to do her job better.

Finally, to enable all this, we must simplify and become leaner and faster. On Slide 24, you see the major drivers for each of the breakout strategies. First, to improve the value and brand equity on the vertical axis. We aim to double the average price we have through more on-trend scaled innovation and higher prices, improving our mix and tiering up our portfolio by growing fragrances, skin and face and with our new focus on bundles and regimes.

Modernizing our brand to attract new generations and compete in the beauty market. And finally, revenue growth management and more effective promotion management and price up where we have pricing power and implement more clever promotions with better ROI. Secondly, we will increase access to Avon and double our consumer base through doubling e-commerce sales and unlocking Asia, and particularly, our new approach in China and India. Finally, we will attract a new generation to Avon by becoming more on-trend, digital and trainer to become a real Avon digital influencer and then build her digital and e-commerce business.

Third, we will improve the productivity of our representatives by a step change in training and equipping her with better tools and technology and make it more easy for her to run her business. And you heard Miguel speak about this. Fourth, we are becoming simpler, leaner and faster, as well as focusing our assets, organization and activities to ensure they're all fit-for-purpose and meet the realities of today's business. Let me back this a little bit more.

Moving to Slide 25. We must improve our brand equity and business system using four levers: on-trend innovation; pricing power; our product mix and portfolio mix and tiering up our portfolio; and optimizing our promotions. We are making very good progress here. In the first quarter, we increased our average price/mix by 8% compared to quarter one last year.

Moving to Slide 26. I want to give you some examples of how we are driving up value through innovation, as well as mix and tiering up our portfolio. We are accelerating innovation in three ways: increasing the rate of innovation. In the important color category, the innovation rate has gone up from 22% in 2017 to 33% last year to around 40% of sales this year.

Second, increasing the speed of innovation to market. Using our new and more open innovation approach, our turnkey innovations with third parties has increased from none in 2017 to more than 25 this year. Finally, increasing the scale of our innovation projects through multiple markets. We have increased the amount of scaled innovations four time.

Examples of winning innovation products, including lip and eye tattoo, K-Beauty, our new masks, our new West Coast Festival product range. Capturing new trends, especially in color, is critical, hence a step up to drive new novelties and seasonal trends, but also to participate in the fast-growing subsegments like brow, bronzing and the new palettes. The second driver is to improve our mix and strengthening our innovation in the higher-value categories like fragrance, skin and face, and of course, our focus on bundles and regimes. We have refocused on our iconic and new brand with our a Vitamin C launch, which is off to a very good start; and also recently, the launch of the new representative and new training toolkit, which is landing well.

We are strengthening our fragrance plan. Our Life Colour by Kenzo Takada fragrance is now in 48 countries and is doing well. Eve Truth is now in 32 countries and our new Attraction fragrance in 36. You will also see much of this reflected in higher-quality brochures look and feel.

As we evolve and strengthen our brand propositions, we can slowly reduce our dependency on promotions. We have seen good early results with an increase in price/mix from minus 1% to plus eight year-on-year. On Slide 27, you can see the actions we are taking to drive more value through pricing. First is to take price where we have pricing power and not just too cheap.

A great example of pricing power is Skin So Soft in the U.K. This iconic product has been underpriced and overpromoted. We know there is demand for this product, and so we were able to take price up from 1.99 to 3.50 while increasing and seeing an increase in sales of 35%. In addition, also in the U.K., we're starting to better optimize our promotions.

One example is removing free gift offers and replacing them with compelling bundle offers. Through a combination of all these activities, we increased price/mix in the U.K. in quarter one by 9%. Moving to Slide 28.

Let's talk about how we're opening up access, so we can reach more people. First, we have an opportunity to grow in Asia. In China, we achieved 29% increase in sales in Q1 and saw growth in all three new channels, with the largest contribution coming from e-commerce and our partnership in T-mall. We're also upgrading our Avon franchise stores to become real experience centers to teach consumers about our brands and our products.

And we are building our retail business through our distributors and steadily increasing retail distribution. E-commerce is a big opportunity for us, and we are making steady progress to increase the percentage of sales we deliver through this channel. We aim to double our e-commerce sales this year. In Q4 last year, we created dedicated e-commerce business units in all key markets.

These dedicated teams will ensure we have the right focus and build the right capabilities to unlock the e-commerce opportunity for Avon. Our My Avon e-commerce store is now in 25 markets and is, as a platform, updated every two weeks. The digital Avon brochure is now available in all our markets and reached 6 million page views. 90% of our representatives think it's easy to use and save them time.

We're also seeing great productivity improvements, with increased conversion rates from 2.5% to 4%. And we have doubled the average order size from our e-commerce sales versus our normal brochure sales. We are training her to use our e-commerce tools to help her build her e-commerce business and become a micro-influencer. Finally, we are attracting a new generation of consultants, with 45% of our new recruits being millennials or under 30.

They are attracted by an improved and increasingly strong digital presence, our new tools, trendier innovation and faster, more flexible delivery options. More to do here, but we're starting to see a change across most of our top markets. Turkey, Brazil and Argentina saw a 5% increase in representatives in this younger age bracket. Finally, to our fourth lever to Open Up Avon.

On Slide 29, you can see our continued focus to simplify our business and take out cost. We've made significant progress on rightsizing our organization in 2018, with an 8% reduction in headcount. And we continued this in Q1 with a further 6% reduction across all levels of employees, driving a $13 million saving in the quarter. We are well on track for our 10% headcount reduction this year on top of the 8% reduction last year.

We continue to manage our inventory more tightly with a reduction in the number of days by 20% -- 20 days compared to prior quarter. We have more work to do and aim to reduce inventory further and our SKUs by 25% by the end of this year. Lastly, we are focused on releasing more cash and monetizing non-fit-for-purpose assets with $100 million-plus target for the year. Actions include the partnership with LG for our China manufacturing facility, our Rye Office sale and the proceeds of the new Avon LG transaction in North America.

And we continue to review all our asset base to sell nonstrategic assets. Before I wrap up, I wanted to take a moment on Slide 30 to talk about our purpose to empower women. It's something I truly believe in, and I'm incredibly proud of Avon. And it's never been more relevant.

Empowering women around the world to be more productive and effectively build successful social selling businesses and generate relevant earnings remains core of our strategy and a key driver for our future success. This quarter, we launched our stand4her initiative, which aims to improve the lives of 100 million women each year by advancing their earnings potential through the power of beauty and their ability to live a life safe and healthy. The global launch campaign reached 2.5 billion impressions. We also recently announced the partnership with Women Startup Competition Europe, a not-for-profit organization set up to inspire, educate and unite female entrepreneurs from around the world.

Through this competition, we will not only be championing a whole a new generation of female start-ups, but also opening up our innovation pipeline to support our fast-beauty strategy. This beauty category -- the beauty category winners will receive a customized mentoring program and the potential for future collaboration in commercializing their ideas, products or brands. We also remain committed to supporting women's health, focusing on breast cancer awareness and violence against women and girls. We are uniquely placed to make a real difference in the lives of 100 million women who work with us and buy from us all around the world.

In conclusion, on Slide 31, you can see that 2019 is the year of execution. I underscore as I started our strategy is clear and remains unchanged. We are focused on execution. And while it's going to take time to return Avon to growth, we need to hold ourselves accountable for milestones that we have set and delivery continuing to improve along the way.

We will stem the decline and stabilize our revenue through our efforts to reboot direct selling and modernize our brands. We will expand our margin through pricing, cost management and simplification. And we will improve our cash flow by improving our operating margin, working capital and tax and divesting noncore assets. You can see some more operational metrics and our expectations that we will be tracking to monitor our progress and measure our success.

We will report on this scorecard as we move through the year. Finally, on Slide 32. I leave you with a reminder of our longer-term plan and reiterate that we are making progress, but it is going to time, perseverance and dedication. We are determined to return Avon to growth and return value to our shareholders.

Thank you all for joining us today. Amy, back to you.

Amy Greene -- Vice President of Investor and Stakeholder Relations

Thank you, Jan. We will now open the Q&A session. Operator, can you please open the queue?

Questions & Answers:


[Operator instructions] Our first question comes from the line of Wendy Nicholson with Citi Research. Please proceed with your question.

Wendy Nicholson -- Citi Research -- Analyst

I actually had two questions, if that's OK. First was on Russia specifically. Can you talk about your confidence that what pressured your business was a market share issue, in other words, people choosing to maybe engage in direct selling elsewhere as opposed to a fundamental slowdown in direct selling? Do you think the direct selling market is still healthy and vibrant in Russia and worth investing in? And then my second question, just generally, it sounds like Brazil is doing great, so congratulations on that. But in the past, one of the things that we struggled with in looking at Avon is that for one quarter or two quarters, one market will go really well and then just as you fix another market, that original market starts to slow.

So it's a little bit -- we call this game a whack-a-mole on that -- that one thing is great and then something else slows. So what's your confidence that the things that are working now in Brazil can sustain and continue to work? And what's your sort of sense of your visibility of that? Will you be able to course correct quickly if Brazil in fact starts to slow?

Miguel Fernandez -- Global President

This is Miguel here. So on your first question around Russia, if it's worth investing or not, the short answer is yes. I think what happened to us in this quarter was, obviously, a little bit of headwinds in the market conditions of beauty, but we made a few tactical changes that were not very well received by the market. The first one was the value proposition for the smaller rep, for the newer rep, it was not as attractive as it used to be.

We made a few changes probably too abruptly. And then another one that caused the sales leaders to be less engaged than what they normally are is that we focus -- we lowered the focus on the recruiting and the recruiting incentives that we normally have in the market. So the combination of those two things impacted the rep count heavily. But on the positive side there, as you saw, we just announced a brand new GM that is coming from New Avon in Canada and he used to run our sales force in Russia for three years.

So he has a lot of experience there. And also we're saying that we're very excited, because we have the ability to set up over 800 training centers around Russia, which are going to be run by the sales leaders that we think is going to be key for us to turn around that market. And also we are being a lot more careful in the way we design incentives in a very targeted way for each group of sales leaders. We're not going to do a shotgun approach as we used to.

Now each group of sales leaders are going to have a specific target and so on and so on. So on Brazil, what we plan in Brazil is, honestly, just fixing the basics. We're still fixing the basics. So we feel confident that even just by fixing the basics, the market is showing us that is responding to that.

So how confident we are in the future? We know that if we run the basics fine and we keep them training and become better and better on the basic things of direct selling, our brand is very strong in Brazil, our management team is very strong in Brazil, and we have all the ingredients to continue to do that. Obviously, no one can predict the future, but we feel a lot better about Brazil right now than when we used to feel, let's say, 12 months ago.

Jan Zijdervel -- Chief Executive Officer

And I think is in terms of the whack-a-mole, in terms of one up, one down, I think the good news is that Mexico, which was probably earlier in terms of the rebooting and the new strategy is holding up and doing well, and we're refining the model. We continue to really work on rebooting direct selling, strengthening our brand and building a more digital company. That is now happening in Brazil. That's exactly the same fundamentals are being put in place in terms of service, more effective training, driving productivity up, driving value up, digitizing the business, getting better talent and you start to see results.

We had a misstep in Russia, and we're fixing it. We've got a SWAT team on the ground. We're appointing new people, and we're working on all the fundamentals. So thanks, Wendy.

Wendy Nicholson -- Citi Research -- Analyst

Thank you.


Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Lauren Lieberman -- Barclays -- Analyst

Great. Thanks. I was hoping you could talk two things also for me. One was just a little bit more color on where things stand in the U.K.

I know there was a brief mention, Jan, in your remarks. But just a little bit of an update on trends there would be helpful, because there wasn't much mention in the release. And then secondly, just have a longer-term question around pricing. The goal of doubling on average price makes sense for a lot of reasons, obviously, but there is long -- for a long time been this risk in the Avon business that this chicken-and-egg question, right, you kind of premiumize, you move up.

But is it in a way that doesn't alienate existing reps, but at the same time premiumizes the brand to make it attractive to new consumers? So how are you working through that balance and making sure that you don't move too quickly on pricing such that this headline number looks great today, but in 12 months, we're worried that we have to go the opposite direction?

Miguel Fernandez -- Global President

Hi, Lauren. This is Miguel again. So I'm going to take the first question on the U.K. The short answer is that we're feeling better, much better, much more positive about the U.K.

We're seeing recruiting numbers going up substantially in Q1 for the first time in years. So that obviously, as you know, in our industry, the relevancy of your proposition and your brand in terms of the business proposition that you put in the market is key to continue or to grow the business. And the biggest and the first sign and leading indicator of a turnaround is when your recruiting numbers are going up and they are going up organically without any, let's say, extra incentives. And that's what we're seeing in the U.K.

So we feel positive about it. So I think in the next few quarters, you're going to start listening to the positive story around the U.K.

Jan Zijdervel -- Chief Executive Officer

Lauren, thanks for the question. I think you picked up on one of the biggest strategic thrusts that we have is to really regain value of our brand and reverse the sort of cycle of erosion of price and value. And I am 100% confident that we can and we will turn this around, and we're building the capability to do so. At the investor conference, we made a strong commitment to improve the value.

You see that starting to come through in Q4 already and in Q1. And I can tell you, it will continue. The trick here is really honestly good strategy and good marketing and really driving all the levers that we've got. The first one and maybe a simple one is start adjusting our mix.

If you think about -- our average price is roughly $3, but if you think about our other categories of fragrance or face care or bundles, those prices are all set in double digits. So if we just shift our mix and start encouraging through training, i.e., the art of selling fragrances or training how to sell anew, we automatically drive up the average price. And rather than selling just the lipstick, please also sell on fragrance or sell Anew jaw or sell Vitamin C. So encouraging and teaching them how to sell higher-value products in bundles or regimes is the first thing that we do.

The second thing is when we innovate, we have an ability to price. So in the past, we used to innovate at the same price or even lower price sometimes. So now there is a discipline returning. When you make a better product with more technology and a better benefit platforms, you can allow it to be priced up a little bit.

Now sometimes you price it up 10%, 20%, 30%. You look a little bit where we can go. And you start seeing the innovations that will be coming through, we price them up a little bit. The third thing, obviously, is to optimize our promotions.

I've said many times, we promote a heck of a lot. So we have a high frequency and a high depth. You slowly take that drag away as you strengthen the other elements and as you strengthen the brand. So this is a very delicate balance, but I'm confident we can do that.

And to do that is about building capabilities. And we're really rebuilding marketing and strategic capabilities in the company. You've seen some of the hiring we've done around that area. We're building repeatable models and pricing workshops are being done in all the countries to really, really get this right.

Because we've got to rebuild the strength of our brand, and that's expressed basically in our pricing power. And I am confident that we'll continue and we will continue to therefore improve her earnings and improve our own margin structure.


Thank you. Our next question comes from the line of Doug Lane with Lane Research. Please proceed with your question.

Doug Lane -- Lane Research -- Analyst

Yes. Hi. Good morning or good afternoon. Just picking on that question, with the more pricing mix that we saw this quarter and a larger decline in unit volumes and the better profits, it sounds like strategically this is right on point and this is the kind of metrics we should see going forward.

In other words, better pricing mix, better profits, lower unit volumes as you weed out the uneconomical SKUs and just stick with it for the next -- whatever, how long it takes to weed them out. Is that fair?

Jan Zijdervel -- Chief Executive Officer

Yes, that's fair. I also think -- yes, that's fair, Doug. That's a good analysis and that's it. So we're driving rep productivity, rep quality and through rep training.

We're increasing the value of the brands. And I do not think that some of the rep losses that we've had has been quite focused like Russia and have not been connected to the price activity that we've been doing. In fact, there's hardly a correlation there at all. So these are two separate issues that we're addressing, and it gives me therefore confidence on Lauren's question that price/mix through marketing and all the things that we're doing are absolutely the right thing to do.

And actually we'll improve our rep base, improve rep earnings and improve the quality of our business.

Gustavo Arnal -- Chief Financial Officer

Doug, this is Gustavo here. The other perspective I would add is, if you look at the drivers and the components of price/mix across each of the four segments, it's a delicate balance, right, across three of the four segments, price/mix offset the unit volume decline. In one, it didn't. So we do want to drive profitability, expand margins, continue driving pricing.

It could come at some extent of unit volume declines, but we want to drive a good volume.


Thank you. Our next question comes from the line of Stephanie Wissink with Jefferies. Please proceed with your question.

Ashley Helgans -- Jefferies -- Analyst

Hi. This is Ashley on for Steph Wissink. I wanted to unpack the cadence of the effective cost saves.

Jan Zijdervel -- Chief Executive Officer

So I think you said -- Stephanie, thanks for the question. The cadence of the cost savings, I think -- I don't think we can answer specifically the cadence of the cost savings. What I think you can look at is the activity streams that we're putting in, and that is many at the moment. The one we've obviously called out is the headcount reduction, which last year was 8%, this quarter was another 6%.

We've committed to 10%. So when you reduce your headcount by 8%, 10% this year, so we're well on track to sort of get close to a 20% headcount reduction that drives it. Other areas of cost savings, obviously, we're looking at the supply chain. We have a fuel-for-growth areas that we're really driving very, very hot.

And there's many things that we can do. And addition of Vikram as our new Head of Supply Chain is opening up many, many opportunities and many, many thoughts to drive further savings in the supply chain in fit-for-purpose, also products and formulations, and there is a new bucket of opportunity that we're going after. And the other area is obviously where we're making great progress is bad debt. That's one of the drivers also in Brazil, but also South Africa.

So we've got better discipline about bad debt and getting that balance right. I think I'm really proud of the work that's being done on our tax. And I think the team have really worked hard to improve our tax rate, but also Gustavo talked about the cash tax improvements that we're looking at, and of course, interest as a whole as well. So honestly, nothing is off-limits at the moment to make us more cost competitive and to drive down the areas of cost that we don't need in our business, including the asset sales that we've done and will generate a significant inflow of cash and all the offset, the noncore assets or non-fit-for-purpose assets that we're looking at to really drive also cash delivery.

Because I think the point maybe I want to make and reiterate here again is our focus on cash is very, very high to make sure our operating margins improve, our working capital improves, our tax rates improve and our cash tax improves, but also that we monetize non-fit-for-purpose assets. So that's high on our agenda, but I can't give you the future cadence. But I can tell you it's high on all our lists, including Gustavo, Vikram and all the general managers in the countries.

Ashley Helgans -- Jefferies -- Analyst

OK. Great. Thank you.


Our next question comes from the line of Ali Dibadj with Bernstein. Please proceed with your question.

Ali Dibadj -- Bernstein -- Analyst

Hey, guys. So I want to go back to the Page 32 objectives over each year, and particularly between '19 ones, just to revisit how you feel about them. So the first one was stabilized revenue and we're in May already, so you may have even incremental thoughts about it than the reported quarter. But to be honest, I have a hard time seeing the stabilization.

Reps are down 10. Organic sales are down three. Argentina itself, as far as -- it's added more than two points to the growth, so you're actually down kind of five, depending how you want to think about Argentina. Funds are down 11.

And this commentary that you made just recently about it will take time, how does that relate to the stabilized revenue target you have for 2019? That's question one. And then similar question, although a little bit of a lighter -- featherlight from the slight margin improvement target for 2019. Clearly, you had better margin improvement in the quarter. But how do you think about balancing that relative to what I just asked about stabilized revenue? Are you going to have to spend a lot more? What indeed have you spent this quarter? Looked like there was a lot of pricing, but what did you spend actually in the quarter to drive the business? And do you think you can still get slight margin improvement and stabilized revenue growth for the year?

Jan Zijdervel -- Chief Executive Officer

Ali, those are good questions and a lot of questions. So let me think through a little bit how we do it. So first thing, obviously, and a key focus is about stemming and stabilizing the top line. And I think we're making progress.

If you look at Latin America and you look at some of the other countries, we are starting to see a level of stabilization and -- or a slower level of decline. The one hiccup, and it's a significant hiccup we had, obviously is Russia, which we'll need to fix. But there is a strong focus on making sure that we start to stem the decline and stabilize the top line business, which is a combination of improving the quality and productivity of the reps, but also making sure we improve the value of what we sell and how we sell, because there's an element of units and there's an element of value. And both of those levers we're playing with to try and stabilize the top line and make it a more solid top line as well.

Then in -- then on terms of margins and profitability, yes, that is really about, again, a combination of driving down costs, improving our productivity in the business, but also investing in the right areas and improving our return on investment, in rep investments, in marketing investments and in new channel investments. So this is the careful balancing act, obviously, that we're trying to do. And I think -- that is why we continue to say that maybe bumpy along the road as we get one thing slightly right, one thing slightly off yet. Brazil, honestly, has gone a little bit better than we expected.

Russia, obviously, is a bit worse than we expected. But for me what's important, are we working on the right fundamentals. And I think you also said that and many of you said that, are you working on the fundamentals, are you working on the right things to strengthen our brands, to improve rep productivity, to digitize our business and use the data that we have, to build the new channel in e-commerce, to unlock new growth pockets, whether that's Asia or e-commerce and attract younger consumers, and while doing all of that, continue to simplify and drive down cost. That's the balancing act.

And we've given you now also some KPIs and deliverables around those things to give you something to say they're working on right agenda, they're making progress on the right issues, and that is how we will turn around a business that has been in decline for almost a decade.

Ali Dibadj -- Bernstein -- Analyst

And just if I could add a slightly different question around M&A. Clearly, we saw what happened in the U.S. with LG. How does that ownership change your board structure? Anything about you about servicing agreements, the R&D facility, anymore detail there would be helpful.

And then secondarily, the M&A discussions of the -- perhaps past, although tells us with Natura and perhaps other options that are out there from a broader M&A perspective?

Jan Zijdervel -- Chief Executive Officer

So Ali, first of all, for the discussion with Natura, there's no update apart from what we announced in March. So we can't give you any further information around that discussion. Regarding New Avon, yes, the setup was that Cerberus owned 80%, we had 20%. It's sold to LG, which is a great partner of us.

So we've had a very good relationship with LG company, who obviously bought -- who brought -- they have the rights for Avon in Japan. They bought our factory in China. And we're looking at really working together in a more structural way. Now they bought the North American business.

And essentially, there's no change. So we're good partners. We work together in the right way, and they've honestly also released some cash for us. So we'll have some net proceeds from that sale.

Ali Dibadj -- Bernstein -- Analyst

OK. Thanks very much.


Thank you. And our final question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

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

Hi. My first question is on cash flow. I just wanted to clarify that you meant that operating cash flow would be up year over year versus in 2018 for the full year. And can you remind what your capex outlook was for 2019? And then secondly, I just wanted to ask about, historically, in addition to this whack-a-mole problem that Wendy referred to, we often see that sometimes you're focused and rightly so on the big markets, but then you have real big decline sometimes in smaller markets that drag down the whole entire performance.

So like in North and Latin America, your Mexico was up 2%, but yet the whole region was up only 1%. So just taking that as an example, were there a bunch of small markets in North and Latin America that dragged down that performance in that region? And if so, do you worry about this or do you just -- because the focus is on the big markets, are there small markets that you actually need to close down at this point?

Gustavo Arnal -- Chief Financial Officer

Thank you, Linda. Gustavo here. So first on cash flow from operations, we do expect cash flow from operations in 2019 to be higher than last year, as I mentioned in the prepared remarks. On your question about capital spending, we won't provide guidance specifically on capital spending, but what I can say is that we also expect free cash flow for 2019 to be above last year.

We remain committed to what was explained in the Open Up strategy in terms of self-funding our Transformation Plan. We will use the monetization of noncore assets to fund some of the additional restructuring investments. So all in all, we feel good about those prospects of cash from operations generation and free cash flow generation.

Jan Zijdervel -- Chief Executive Officer

Yes. So cash has got a high priority for us as a group to make sure that our liquidity and cash position strengthens as we go forward. Then in terms of the smaller markets, maybe Miguel will take --

Miguel Fernandez -- Global President

Yes. I will take it, Linda. So basically, our strategy is the same one in the big markets and the smaller ones. So the question is what is our ability to execute in the smaller markets.

And obviously, we don't give as much flexibility of all the change -- visibility of all the changes in management and people that we do in the smaller markets. But behind the scenes, we've been changing a lot of the leaders in all those smaller markets, so they can drive with little supervision from our side, those initiatives that we're talking about. So for example -- the example that you gave Central America, we brought a very experienced direct seller in -- a few months ago. And he gets the strategy right away, and he is fixing or changing or implementing everything that we spoke about it.

Same case for IMED, which is Italy and Mediterranean and many other key markets, smaller markets that we don't normally give visibility, we are putting -- it's part of our strategy to put the right people with little supervision that can just take it and run with it. And it's -- we're seeing a lot of positive signs and improvement around those smaller markets.

Jan Zijdervel -- Chief Executive Officer

Thanks, Linda. Thanks for all the questions and ongoing interest in Avon. I think if you think about where we are, I think we're on track in terms of clarity of our strategy and now really driving the execution with really making sure that we're stemming and slowing the decline of the top line and start stabilizing that. We're very committed to improving our operating margin and improving our cash delivery.

So these are the output KPIs, and we've given you some further KPIs that we will report back on every quarter from now. And then I think what's important to give you confidence that we're really working on the four elements of our breakout strategy: increasing value through our price mix, and we're making good progress there I feel; improving the productivity of our representatives through training and giving them better tools; digitizing our business, giving our reps and sales leaders new tools and platforms to become more productive; continue to drive our e-commerce business much harder, which is starting to take root with improvement of orders and improvement of effectiveness, but also starting to use that data for improved analytics and driving our segmentation thinking. We've taken the sort of unpacking of our data and segmenting in terms of tenure and rep segments to a new level to improve productivity. And finally, underpinning all of that, we continue to simplify our business, drive out cost and make us easier to work with.

And I think those are the pillars we just keep on working at to strengthen the fundamentals of our business, as well as drive what we feel are the four breakouts to transform Avon. So thank you very much for the call and the questions. And we look forward to seeing many of you again in the near future.


[Operator signoff]

Duration: 66 minutes

Call participants:

Amy Greene -- Vice President of Investor and Stakeholder Relations

Jan Zijdervel -- Chief Executive Officer

Gustavo Arnal -- Chief Financial Officer

Miguel Fernandez -- Global President

Wendy Nicholson -- Citi Research -- Analyst

Lauren Lieberman -- Barclays -- Analyst

Doug Lane -- Lane Research -- Analyst

Ashley Helgans -- Jefferies -- Analyst

Ali Dibadj -- Bernstein -- Analyst

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

More AVP analysis

All earnings call transcripts