Avon Products (AVP) Q2 2019 Earnings Call Transcript

Avon Products (AVP)
Q2 2019 Earnings Call
Aug 01, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Avon's second-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 following 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 the 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 investor relations website and in the company's SEC filings. I'll now turn the conference over to Amy Greene, chief communications officer and head of IR. Ms.

Greene, you may begin your conference.

Amy Greene -- Chief Communications Officer and Head of Investor Relations

Good morning, and thank you for joining us to review Avon's second-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 second-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.

Jan Zijderveld -- Chief Executive Officer

Thanks, Amy. Good morning, everyone, and thank you for joining us today. We will start with an update of the quarter two financial results with Gustavo. Then Miguel will give an update on our representatives and markets.

And I will close with an update on our open up transformation. Before I hand over to Gustavo, let's take a look at our strategy which we have been executing against over the past year. Moving to Slide 5. This chart outlines our three focus areas.

In 2018, we began to reset this business, restore our competitiveness and modernize the core business model. We took decisive actions where we identified clear opportunities and a need for change, all while transforming our culture, injecting new talent, becoming more agile and more external. In other words, we opened up. In 2019 has been all about executing the plan.

We are making steady progress as we improve productivity, strengthen brand relevance and value, become simpler and much more cost competitive as we move forward, the transformational deal we have announced with Natura & Co. On the right, you can see the outline of our Avon formula. In terms of pool, we are strengthening the brand to be more relevant and own trend, and thereby restoring the value and the pricing power of Avon. And there is a push.

We are improving the productivity of our beauty entrepreneurs and making it easier for them to earn money with Avon. We are unlocking digital so that she can shop anytime, anywhere and our representatives are having an improved experience with a better digital tools and trainings we are providing them. We are simplifying the business, driving efficiencies and cost competitiveness while improving cash delivery. Finally, we have reenergized our purpose to empower women and make a positive impact in the lives of our beauty entrepreneurs, their families and their communities.

I'll provide a more detailed update on our strategy later in the call. Now I would like to turn to Gustavo, who will take us through the numbers.

Gustavo Arnal -- Chief Financial Officer

Thank you, Jan. I will provide perspective on second-quarter results. Let me start by sharing highlights on our three key financial metrics: revenue, margin and cash flow. In terms of revenue, while down 4.6% in constant currency, we see these as part of our intentionality to improve productivity.

Price mix expansion of 9% and average representative sales increase of 5% are leading to a more efficient P&L and higher revenue per representative. There is a short-term impact on volume as we drive productivity, which takes time to stabilize. That said, we believe we're on the right path to optimize our business. We plan to remain focused on driving representative productivity and the quality of our revenue.

In terms of margin, adjusted operating margin is up sequentially versus the first quarter, and also up 190 basis points versus last year on the back of pricing and cost savings. This margin improvement was delivered despite unfavorable FX, which is expected to ease in the back half of the year. In terms of cash, we generated 26 million in free cash flow, which was a significant improvement versus the prior year when it was negative. As planned, we deliver positive cash flow operations and continue to self-fund our restructuring investments.

As mentioned, constant dollar revenue from reportable segments declined by 4.6% in Q2, while productivity improved. Productivity was driven by a 9% improvement in price mix, and an increasing average rep sales of 5%. We believe that we can drive pricing in a sustainable way, which is imperative to enhance representative earnings while improving margins. The unit's decline in the second quarter came primarily from SKUs in the lower price points and lower margin items.

We're focusing more on the higher ticket items across portfolios. We are reducing discounts and driving innovation. While active reps are down from the prior year, they're fairly stable versus Q1, and more importantly, they're selling more. We believe that higher average sales should lead to higher representative satisfaction and improve retention, as well as improve quality of earnings.

We boosted training efforts and strong focus on innovation. So revenue for skin care was flat, and we only saw a small decline in fragrance. The decline came primarily outside of skin and fragrance. In fact, in skin care we saw positive results in many of the top markets, aided by the rollout and notable success of a new vitamin C.

Adjusted operating margin of 7.6% was significantly better than Q1 and 190 basis points higher than Q2 last year, driven by our focus on productivity, and again, despite unfavorable FX. Through the first half of the year, adjusted operating margin is up 130 basis points above last year. You can see the key drivers on the bottom of the page, namely, price mix, FX and cost savings, which I will discuss in more detail shortly. As I just mentioned, our adjusted operating margin of 7.6% was up 190 basis points from last year.

Pricing and mix improvement added 230 basis points to margin, enabled by lower discounts, more effective pricing and more favorable mix. This is an ongoing effort in managing a revenue growth, which will continue throughout 2019. FX impact over 160 basis points continued to pressure margin. As comparison eased in the back half of the year, we should see less drag from this.

Importantly, we continue to invest in our representative with various levels of incentives to improve experience and supplement our income. Finally, cost savings and other items provided 190 basis points of benefit to adjusted operating margin during the second quarter. As mentioned, FX pressure continued in the second quarter, with 150 basis points negative impact to adjusted operating margin, primarily coming from Brazil, Argentina and Turkey. Q2 FX impact to revenue was 8% compared to the prior year, and was down from 11% last quarter.

In the mean term, we still expect to have negative currency impact. That said, given spot rate, this impact should continue to lessen over the back half of the year. Cost savings provided 67 million of benefit during Q2, and 89 million year to date. These savings are more than three times the level of the prior year.

Savings are largely from supply chain initiatives, less bad debt and headcount reductions as we optimize for a lean organization. We're working on reducing our material costs, which will deliver savings to our cost of goods and help to contain inflation. Free cash flow was solid this quarter with a 60 million improvement year over year from a negative 33 million last year to a positive 26 million this year. Year to date, we are 66 million better than last year.

During the second quarter, we generated positive cash from operations in spite of incremental restructuring investments. This was enabled by improvements in earnings and working capital. Additionally, we generated cash from asset disposals of 30 million coming from the sales of a Malaysia and Hawaii facilities. We remain on track for positive cash flow in 2019, as we continue delivering profit improvement, working capital efficiencies, and monetizing underutilized noncore assets, while self-funding the transformational plan.

In late June, Avon priced an offering of 400 million 6.5% senior secured notes due in 2022, which closed on July 3rd. The terms of the notes are substantially similar to the terms of the existing 2022 notes. Some of the proceeds were used to complete a tender offer for 275 million of existing senior notes due in 2020 in July. We intend to repay the remaining 112 million of bonds later in the year.

We were really pleased by the market reception to the deal. Our structure and operational changes should continue to drive reductions to our annualized adjusted tax rate. Looking ahead for 2019, we continue to expect further reductions in the range of 10 to 15% for the year. Additionally, we have been reducing cash taxes over the past few years and we expect 2019 to see continue reductions.

Most importantly, we remain comfortable with our 624 million of liquidity. And we expect positive free cash flow even after funding restructuring and capital investments. Finally, adjusted diluted EPS from continuing operations was $0.06, as compared to a loss of $0.03 last year. Now over to Miguel.

Miguel Fernandez -- Global President

Thank you Gustavo. Picking up on Slide 16, representatives are the key to our business, and must always be our top priority. As we have discussed for several quarters, we're focused on reengaging our representatives, improving their productivity and creating brand pool. Our active representative had declined 9.5% since last year, where we have been driving productivity.

We're being more selective with appointment, focusing on reps that are joining to earn money and build businesses. One of our primary goals continues to be providing her the tools and training to improve her earnings which increases retention. Small changes from first to second quarters proved that these efforts are making a difference and helping to stabilize our rep-base as we continue to make progress on getting her to the meaningful income territory. More importantly, looking at the overall representative productivity, the training and tools that we've been deploying in the markets around the world are helping her to make more money.

This is demonstrated by a 5% increase in our average representative sales in the quarter. Implementing more sustainable sales practices and improvements to credit policies covers this bad debt in this year, and are also helping to maintain a healthier and happy rep-base. This is a long-term journey to improve the key metrics of our business. Moving to Slide 17.

Turning to the performance of our top markets, in the second quarter, we saw constant dollar revenue growth in three out of the top five markets and some improving trends in Russia. In Brazil, constant dollar revenue improved by 0.2%. The Brazil improvement was largely due to the focus on better fundamentals and service, lower bad debt, improved pricing, new brochure and a new advertising strategy along with the digitization of entire business. Mexico second-quarter constant dollar revenue decreased by 4.9%, with tougher market conditions and a lower number of sales leaders negatively impacting our appointments.

Russia's constant dollar revenue declined by 12% and has continued to be a challenged market for us. Last quarter, we mentioned Russia is in full reset mode, with new management and initiative to restart and reignite the market. This quarter, we're seeing clearly signs of recovery, driven by targeted incentives, increased training, better communication and more leadership engagement. In the Philippines, revenue grew roughly 1% in constant dollars over prior year.

Third-party delivery issues and a notable impact in the timing of Easter impacted negatively in our growth. Argentina strong growth continues, it was up 31.2% in constant dollar. Productivity is improving through increases of minimum order and segmented rep-base in addition to a new onboarding program and ambassador training programs. These efforts are all helping to maximize activity behind our aggressive price increases.

Moving to Slide 18. As we provided updates on a few of our key market, you will notice that our focus areas are consistent, reengaging reps, improving productivity and creating brand pool. In Brazil, we're starting to see signs of stabilization as revenue trends continue to improve. Our Brazilian business has a very clear agenda and we're making progress in each of the areas.

Reengaging the reps is also a top priority and begins with a significant increase in campaign meetings as a forum to energize the field. Also, we made a huge step change in service resulting in a 50% fewer calls into our call center. We're developing agility and addicted to solve field problems instantly, assisted by a launch of a digital tool, including real time ordering tracking technology that reduces representative times and back office work and help them to focus on sales and prospecting. Creating brand pool, it's about leveraging the strength of the Avon brand to drive market excitement.

The field has begun to see enabling brand that is becoming more relevant again. Marta, the Brazilian soccer star, help us reinforce these new trendier Avon brand, as well as a better looking brochure. Having Marta's validation and support in the Power Stay lipstick lasting throughout the World Cup soccer game and beyond has been tremendous for us. In terms of productivity, the focuses on fixing fundamental to drive efficiency and improved costs our efforts behind revenue growth management continue to bear fruit.

On a year-over-year basis, price mix in Brazil improved more than 20% on a growth price management. More importantly, the field ops, the new Avon app that gives them access to key Avon services such as rep registrations and ordering. Now Slide 19. Mexico is focused on increasing recruitment of business builders and improving overall representative productivity.

Reengaging and reenergizing a representative-base is vital to returning to growth. The national brochure will act as a catalyst for Mexico to reenergize their field using a new narrative to attract people that are interested in business building. In addition, we're using segmented incentive to mobilize the entire sales force. Our primary goal is to improve earnings, which as we have said leads to increased productivity and retention.

In Mexico, the most effective training tool has been the Stellar Circle, where we see average rep sales improvement of over 20% in those that participate. We're actively working to exponentially increase the number of representatives that participate in this program. Another key aspect of increasing average rep sales performance is to improve pricing, specifically in color. To this we're leveraging our brand through innovation such as mark prismatic, and mark tattoo supported by product training, visual assets and brochures, digital amplification and bloggers.

To increase the participation in the Stellar Circle, we've first got to develop a larger pipeline of representatives being trained and building business. We're expanding our face-to-face training programs with a focus on the first 90-day program. It starts with appointing representatives that want to earn money, followed by the right training to help her get there. Let's move to Slide 20.

In Russia, we began reset efforts in our first quarter of 2019 by executing repeatable business models from other markets, and we're starting to see improvements in some of the underlying business trends. We're deploying a 360-degree representative engagement strategy by investing in segmented incentives to attract and retain productive reps. We're targeting younger audiences by holding programs at venues like music events with trendier and more relevant innovation to share. We launched Beauty Festival 2019, a large recruiting event where we held master classes with educational materials and Instagram challenges.

We're also continuing to take actions to improve the overall perception of the Avon brand by upgrading the brochure, driving own trend products, including OK beauty, the tattoo range and higher-end fragrances. Launching more and better digital tools for the market is also a part of improving our image and relevancy. As we strive to attract younger trendier representatives, we have to give them the types of product tools and experience that they are expecting. In terms of improving productivity in Russia, we have begun to leverage our digital training platform.

We have expanded our blogger training to drive more content from micro influencers. In this training, we had 26,000 participants, which resulted in 660,000 views of our participant posts and over 3.8 million followers. We're also layering training to our beauty centers so representatives can pick up deliveries and save on postage cost, as well as providing the convenience of getting additional training within the same beauty centers. As we know, today's consumer expects to get the product much faster, so we're continuing to expand our direct delivery service in key areas like Moscow while driving product mix by better leveraging trendy innovation.

All of this has helped to gain traction and making improvements during Q2. We know it's going to take time, but we're encouraged by the early progress. Now let me hand it over to Jan.

Jan Zijderveld -- Chief Executive Officer

Thank you Miguel. Turning to Slide 22, I would like to give an update on our open up strategy for Avon and the four core value creation levers: To improve brand relevance and value, improve our representative productivity, step change access to the brand by digitizing Avo, and finally dramatically simplify and drive down cost. You see the four drivers for each of our breakout strategies and in green our quarter two results. First, to strengthen our brand value and improve the Avon brand equity on the vertical axis.

In quarter two we improved our price mix by 9%. We achieved this through more innovation of higher price points and of a higher margin, by modernizing the brand, driving mix to higher value categories and of course a little bit less discounting. Second, we will continue to improve the productivity of our beauty entrepreneurs. This quarter we saw average rep sales increased by 5%.

Third, we will increase access to Avon and expand our consumer-base through doubling our e-commerce sales. And fourth, we're becoming more simple, leaner and faster, focusing our assets, organizing activities to ensure they are fit for purpose, more cost-competitive and able to meet the realities of our business today. As Gustavo mentioned, we had 67 million of cost savings this quarter which is three times that our quarter one. Now let me unpack each of these a little bit more.

On Slide 23, you can see our significant and ongoing improvements in price mix. The company's lack of pricing over many years led to the margin erosion and productivity issues we are facing and working on today. Pricing has been and will continue to be a key driver to expand margin. In quarter two, we saw more progress in pricing with year-on-year price mix growth of 9% as we continue to implement our revenue growth management toolbox across the company.

During the quarter, the key drivers for better price mix were optimizing promotions and more clever and effective pricing and contributing roughly half of the improvement. We are getting better at reducing the debt and frequency of discounts and optimizing the return on investment on all our promotions. This quarter, the percentage of discounted products declined from 98 to 93%. In addition, we have been more deliberate about pricing effectively on innovations and driving mix to more premium categories and brands without losing the critical value for money entry price point brands.

Our continuing progress on pricing is important, while balancing the impact on units remains a key priority for the remaining of the year. Moving to Slide 24, we are making progress in modernizing our brands. Our brochures are improving with a more modern and trendy look and feel, designed to target and engage the next generation of beauty entrepreneurs and consumers. We are attracting the next generation also with trendier innovations, new digital strategies and tools, as well as specific programs to build what we call digi reps as our new Avon digital influencers.

We have been creating more digital content and install-ready material so she can share the new innovative products across her choice of social media platforms. We're also activating new popup stores in key mall locations, at music festivals and events and always on social media strategy. And finally, we are generating more brand excitement and better PR, not only through our new innovations, but also with the influences and celebrities that are using our products. Slide 25.

The most important thing we can do to create brand value and grow and engage our network of beauty entrepreneurs is to have a strong pipeline of innovations. We have 20% more sales from innovations with a 30% higher price point adding 230 basis points to our margin. We are driving our big innovations to more countries in order to increase their scale. To do this we are focusing on quarterly own-trend main shops where we are leveraging key assets to drive energy and engagement.

As you may recall, we launched vitamin C at the end of quarter one, priced at a premium price and delivering more gross margin than the average face category average. In fragrance, attraction sensation which was launched this quarter was priced more than two times the average fragrance product and delivered more than 500 basis points in additional margin to the fragrance average margin. We have several new product launches for both quarter three and quarter four. Distillery and a new pollution protect which expand us in new high-growth categories and opens Avon up to new consumers.

In the fourth quarter, we are launching distillery, a new product range from Avon which celebrates clean beauty without compromising using the highest concentration of active ingredients and less unnecessary fillers. This range of nine strong skin and makeup products combines high performance, vegan-friendly ingredients and beautiful textures and premium, environmentally conscious packaging with an ethical mindset. In the fourth quarter, we are launching a powerful duo of pollution protection products to defend and purify your skin. These products were designed to protect consumers from the impact of a more urban lifestyle.

They have powerful antioxidants to defend against invisible threats like pollution and UV that can damage and cause skin to age prematurely. On Slide 26, finally on pricing, over the past years, we have allowed discounting to become the norm. We drove purchase frequency through a heavy reliance on promotions as the main lever. This dependence is something we know we must slowly wean our consumers and representative off as we modernize the brand and strengthen our business.

In the second quarter, we decreased the depth of our discount by 500 basis points from 98 to 93%. We are making a difference through strengthening the brand, driving mix, training our representatives to sell regimes and bundles coupled with better marketing and more education to help improve her business. Bundles on regimes allow us to increase prices in a more sophisticated way, as well as helping our representatives to earn more money and increase her basket-size. A critical part of the new Avon model we are starting to reinvest and rebuild our training muscle.

We know expanding our training capabilities is critical to help us succeed and there is nothing more important to help her grow her earnings. We are providing more product education tools and training that covers product benefits and selling points to enable her to up-sell to her consumers, justifying a slightly higher premium price and of course less discounts. Now that we have the tools, it is critical to drive adoption to more of our beauty entrepreneurs and our new digital training tool is a key enabler for this. Beyond expanding digital training capabilities, we're also holding more face-to-face training in our key markets.

We know that representative training -- going through the training increases the earnings significantly. So it is an imperative to get representatives trained. We must become more focused and even more targeted in our training content and approach. In Argentina, we held training sessions in Anew with attendees selling more than 100% after they attended the training.

It also improved retention by 14% versus those that were not trained. Also in Argentina, we launched a beauty ambassador program to develop trainees in each zone to maximize product training by reaching more representatives with a primary focus on new representatives. Moving to Slide 27. As we have said since I joined Avon, to improve productivity we must improve service.

And we have shown significant improvements in delivering in time and in full with levels reaching 85% during the first half of 2019. This is up 6% from 2018 level of 79%, and a significant improvement from 2017 where we started up 76%. This is all about focusing on the basics, day in and day out. Turning to Slide 28.

To further improve productivity, we have a new suite of digital tools to make it easier for her to run her business and focus on what's the most important to her, her consumers. This has helped drive the 5% improvement in average representative sales. A new Avon own app, now at 18 markets is an end-to-end tool to help the representative manage her business. It's 100% mobile tool and incorporates all the services in one convenient place to simplify both running and growing her business.

When I was in Brazil a few weeks ago, I heard great things about the new order tracking feature that was incorporated in their app. Our representatives loved it. Now we are focusing on driving adoptions of these new tools. We are continuing to strengthen our digital tools.

My Avon Store, now in 27 markets, is a place for our representatives to grow her online business with her own Avon store. As part of this, we're also expanding direct delivery options to the final consumer, which will again help attract a new type of consumer. My Avon Business is a mobile platform that replaces our legacy system. And My Avon Office provides representatives with new customer insights, again helping her run a better business.

And finally, the Avon Learning Hub is a new digital learning platform providing productivity tools and product training now available in seven markets. It is expanding our reach and access of training, while maintaining consistency across markets. Key now is to drive the adoption of all these new digital tools for our representatives. On Slide 29, all of these deliberate actions have contributed to doubling our online e-commerce sales.

Last quarter, we mentioned the newly created digital business unit that we started in each of our top market, all reporting to the local general managers. These units are solely focused on growing e-commerce sales. These e-commerce business units have completely separated the website from the brochure, enabling a different set of offers that are aligned with the needs of e-commerce business solely as the key focus. Moving to Slide 30.

Finally, we are becoming more simple and leaner, underpinning all of our actions to reshape at Avon. On this slide, you can see we are making continued focus to simplify our business and take out cost. We have made significant progress in designing a leaner organization. In 2018, we had an 8% reduction of headcount.

And we continued that this year in the first half in 2019, with a further 12% reduction across all levels of employees, delivering 23 million of saving in this quarter alone. So we are well on track to meet our goal of a 10% reduction headcount this year. We have reduced the overall workforce from 25,000 people in 2018 to below 20,000 people this year. We have also reduced the number of SKUs or size of line by 23%, again, well on our way toward our goal of a 25% reduction this year.

We continue to manage our inventory more tightly with a reduction of inventory value of 26 million year to date. And lastly, we're very focused on delivering more cash, as well as monetizing non-fit for purpose assets with 100 million target for the year. Year to date, we have driven 77 million already through cash sales from our China manufacturing facility, the Malaysian office and Rio office. And with the proceeds of the new Avon LG transaction to come in the second half, we are well on our way to achieve this target.

Shifting gears now on Slide 31. Avon has been championing and supporting women for more than 130 years. Earlier this year, we launched Stand4her, our plan, which aims to positively impact the lives of women around the world. It is a promise to the woman who work for us and with Avon to create a better world for women.

Our purpose is to help end the violence against women and girls is gaining traction and making a real difference. We received the Cannes Lions award for the You're Not Alone campaign in Brazil. This campaign got over 20 million impressions, and is helping more than 6 million women victims of domestic violence. We can also make a difference by helping our beauty entrepreneurs through training and support.

Through the Avon Foundation's global scholarship program, we are opening up learning opportunities for representatives and their families. This year, we've doubled our funding to $400,000 with nearly 200 representatives in more than 20 countries winning scholarship grants for themselves, their children and their grandchildren. We're also committed to establishing and challenging the barriers that women -- that hold women back in reaching their full potentials in all areas of their life. In November 2018, Avon announced its support for the UN charter of conduct of business to tackle discriminations against lesbian, gay, bi and trans intersexual people as part of the commitment to diversity and inclusion.

In March this year, Avon in U.K. became the first beauty company to sign up to the charity Changing Faces Pledge to feature people with visible differences in more campaigns. These are just a few of the examples of the many ways in which Avon is championing women causes today. Moving to Slide 32.

During the second quarter, we announced that we entered into a merger agreement with Natura. The parties expect closing to occur early 2020 and we have been doing the necessary work to satisfy the customer in closing conditions, which include shareholder approval and the approval of antitrust authorities, especially in certain jurisdictions like Brazil. We are excited to help to create the fourth largest pure-play beauty group and a leader in direct selling channel. Avon is committed to delivering significant value for our shareholders by executing the opening up strategy and preserving liquidity ahead of the early 2020 closing targets.

On Slide 33, we believe this transaction -- this transformational transaction will accelerate our opening up strategy. We will create a leading direct-to-consumer global beauty company. The combined business will have more brand power and value with a bigger and more premium portfolio of brands, supported with more innovation and R&D muscle. The business will have an expanded global footprint and scale presence across 100 countries, with a combined revenue around $10 billion.

The new company will be able to accelerate the digital agenda and scale e-commerce and step change advanced analytics to truly build the digital social selling business for the future. And finally, we are targeting the additional synergies of between 150 and $250 million. On Slide 34 -- and as a reminder, you can see that 2019 is the year of execution. We are taking deliberate and intentional actions and are making clear progress.

While it's always going to take time to turn around Avon, we hold ourselves accountable for the milestones that we set out and delivered the continued improvements along the way. We will stem the decline through our efforts to reboot direct selling and improve productivity of our representatives, as well as modernize the brand. We will expand our margin through pricing, cost management and simplification. We will drive our cash delivery by growing operating margin, working capital improvements, divestment of noncore assets, and improving cash tax.

You see some of these measure operational metrics that we are tracking to monitor our progress and measure our success. And finally on Slide 35, in closing, our strategy is clear and unchanged. We are making progress through intentional strategic executional choices and trade-offs and with a keen focus on productivity and sequencing our activities and priorities over time. We are restoring our brand relevance and value, underpinning our improved price mix of 9%.

We are improving representative productivity and quality with average representative sales increasing by 5%. We are accelerating the digitization of our business with online sales doubling and launching a whole suite of new digital tools. And we are simplifying to drive down cost, improve margin and cash with a 67 million in cost savings. We are continuing our ongoing efforts to build our talent and develop new capability and reenergize our purpose.

We are determined to return Avon to health and return value to our shareholders. Thank you for joining us today. Amy, back to you.

Amy Greene -- Chief Communications Officer and Head of Investor Relations

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

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Stephanie Wissink from Jefferies. Go ahead please.

Ashley Helgans -- Jefferies -- Analyst

Hi, this is Ashley Helgans on for Steph Wissink. Thanks for taking our question. We wanted to unpack the 9% increase in price mix. How much was related to SKU reduction and the rationalization of promotional patterns versus new innovation?

Gustavo Arnal -- Chief Financial Officer

Hi, this is Gustavo here. Roughly the 9% improvement we saw in price mix, half of it came from pricing new innovation and half of it from reduction and the depth of discount. As Jan explained we saw the depth of discount going from 98 to 93%, so we picked up there about five points.

Ashley Helgans -- Jefferies -- Analyst

Great. And if we could just throw in one more, any further context on the weakness in Brazil?

Gustavo Arnal -- Chief Financial Officer

On the -- can you repeat that please?

Ashley Helgans -- Jefferies -- Analyst

Any further context on the weakness in Brazil?

Gustavo Arnal -- Chief Financial Officer

I think the weakness in Brazil is -- what we're seeing is the underlying improvements in the quality of the business and the quality of the results. So the full agenda that we've talked about is all landing in Brazil. The first is to really eliminate and reduce the unsustainable sales practice that we were doing in the past. And there were many things that we talked about in the past in terms of -- one was the sort of unsustainable sales push.

We used to sell -- literally send products to consumers, fragrances unasked -- unordered for them to sell. We've stopped that. We've stopped late ordering from campaigns. We reduced over-promotion in a second representative brochure.

So there were many things that were just unhealthy in the business that we're reducing. And we're compensating that with pricing, better innovation, better -- more training and obviously a better and tighter credit policy as well because you see there a reduction in bad debt in our numbers. A lot of that is coming from Brazil. So we're rebalancing, resetting the health of a business to build a more sustainable, more profitable business in Brazil.

So all those fundamentals are working and we're actually reasonably happy with the balance that we're getting there.

Ashley Helgans -- Jefferies -- Analyst

Great. Thank you.

Operator

Your next question comes from Ali Dibadj from Bernstein. Go ahead, please.

Ali Dibadj -- Sanford C. Bernstein -- Analyst

Hey, guys. I have a couple of questions. One is, if I were a Natura shareholder, how would you expect me to look at this quarter in terms of margins up so much, productivity that's good, but top line much lower? And I totally understand the transformation, I get the focus on profitable sales, getting rid of bad habits. But wouldn't a Natura shareholder want to see more investment into the business? I don't think they're actually giving you better returns to ensure that the Avon brand isn't further damaged or maybe even irreparably damaged before they take it on?

Jan Zijderveld -- Chief Executive Officer

I think that the key is that the Natura shareholder, but it would be aligned with any shareholder, is that we're resetting the business and rebuilding the fundamentals. And it is partly money, but it's above all the activity streams that we're putting in place. So first of all, we're investing strongly in the brand. If you think of what we're doing to modernize the brand, to make the brand more attractive and easier to sell in terms of the look and feel of our brochures, in many countries, bigger brochures, better broaches, better photography, better look and feel, a significant step up in the level of innovation in terms of the level of innovation, 20% more, in terms of the quantity of innovation, but also and more importantly in terms of the quality of innovations.Again, talking to the sales leaders and zone managers when I travel again, they are all of them seeing without fail a real step up in the quality of the brand and the quality of the execution and the quality of the innovation coming through.

So that is exactly the sort of things that I think any shareholder would want to see, so a deliberate strengthening of the brand. The second one is the digitization of the business. So we're putting and rebuilding the fundamentals to give her the tool, the training, the better technology for her to run a better business. And that suite of new tools that I talked about is now being rolled out to more and more countries.

And of course we've got to drive the adoption, but at least we're putting in place all the fundamentals to build a stronger, better business for her. And then probably the third point is the investment in training. And there's real, deliberate investment in training, the quality of training, the more segmented training, so whether it's face-to-face to the full-time rep or the part-time rep; more digital training to the fans and to the wider population. So these are all activity streams that strengthen the brand, drive productivity and drive -- and reset and reboot direct selling.

And as part of that because we're doing that we can reduce and wean off of some of the unsustainable sales practice that we were doing, the unhealthy way of driving this business forward. And Miguel can talk about many examples as I can that we're really trying to wean off and get that balance right to build a better and stronger business. And then the fourth thing obviously we work up, we build a more efficient machine. We have really worked hard to reduce SKUs and not just reduce SKUs, but build the portfolio with a clearer brand hierarchy of differentiated pricing, build brands that are filling the different segments and build a destination portfolio for each of our subcategories.

So we're not only taking out cost, reducing complexity, but we're also building a better sort of destination portfolio to get to it. So, Ali, it's more than numbers, it's really rebuilding the fundamentals of the business to build a healthier and stronger, more sustainable company.

Miguel Fernandez -- Global President

And it's all about that point of sustainability. Our margins where they were in the past and our cash flow generation where it was in the past, it's not sustainable going forward. So part of the reset, you're seeing the implications of pricing and the implications on unit. Just to give you a sense, 85% of the unit loss we saw in the quarter was from lower-priced items and below average margin items.

So it is painful when you look at it functioning this quarter, but looking forward as a shareholder, and as Jan said any shareholder, it's a much more sustainable and healthier business.

Ali Dibadj -- Sanford C. Bernstein -- Analyst

So it's a very helpful explanation. If you permit me to push a little bit on it, I'm not arguing that you're not making some of the right investments for sure, in terms of digitization and in terms of elevating the brand. My argument is perhaps that you should be doing more and more quickly, i.e., don't push as much on margins going up and push more on the investment. And maybe let's take that just last point on price mix for a moment.

The company has been trying to elevate the price mix for quite some time with innovation. They don't expect you guys to -- this new team to talk about all the ills of the past. But the volumes for the company, the units for the company have been flat to down for a remarkably long time, basically since 2011 as I was looking at the model as you were answering the question. The 2011 volumes for Avon International have been down or flat since 2011 as pricing was trying to go up.

So it suggests that the demand elasticity isn't very good. It suggests that the brand, exactly as you described, needs some rejuvenation. So it's not just a one quarter down 14%, volume up, 9% price mix, it's a long, long, long, long time. So I guess I am onboard with the sustainability question, but I just wonder whether you should be doing more in terms of the investment today now this past quarter particularly if you handed off to Natura so that they could do their own synergies and cost savings, everything else that they do and actually try to resuscitate more quickly? Does that concern resonate with you?

Jan Zijderveld -- Chief Executive Officer

So I first of all I think what our pricing model and our pricing work and what we're calling our revenue might -- revenue growth toolbox is much more sophisticated than I would argue in the past. And it is about doing bigger and better innovation which allow you to price up a little bit more, which we're doing. We're pricing about 37% higher because our innovations are better driving mix in a much more deliberate way, so driving the fragrance category harder, driving the skin category harder and in fact that's what's happening as well. Nuancing and simplifying some of the promotional mechanisms.

We were just layering promotion over promotion. And so it is a much more holistic, sophisticated way of looking at pricing. So I don't think that over time certainly that pricing is the direct driver of the unit losses. I mean we're losing some of the units partly because we lost some reps because of the unsustainable quality recruiting that we did.

And maybe there's some level of elasticity, but I am of the school that the better we get at really driving this price mix that actually the volume trade-off isn't there. And that is a core belief that I have. But it is a holistic way of managing that, which we are starting to get right, which is the muscle that we are building. I don't think it is as linear, you increase price, you lose volume, no.

If you do it properly with all the levers we're talking about, that should move in the right direction and strengthen the brand.

Miguel Fernandez -- Global President

So, Ali, this is Miguel. Let me just add a little bit of color. So the previous recruiting narrative that we had in the company for many years was come to Avon because you're going to get great products at the best price. So in many cases, we were recruiting the consumer that was looking for a discount.

A lot of what you're seeing in this healthier business, intentional business practices change, is a changing narrative for -- to recruit someone that is interested in business -- in building a business. So we are going to be -- we gradually were stepping away from that discount-seeker into a more business-builder. So our model is going to be more resistant to price changes the more we train them and the more we team up as an entity between that rep that is trying to make a business and us. And that's how we're going to be working much better together and that's how you're going -- we're going to start depending less on that elasticity that you referred to.

And we continue investing in the business, Ali. There's no doubt on that and our business plan is being looked at jointly with Natura and it will be more and more so as we're getting to integration planning, etc.

Jan Zijderveld -- Chief Executive Officer

Yeah, I think the only thing that -- the qualitative comment is you know I travel a lot and I'm getting amazing feedback of people, literally people said compared to a year ago this company feels different, this brand feels different. We see on digital, we see cool events, we see you in shopping malls, that brochure looks cleaner and better, the photography is looking younger. We're getting --- the markets are saying, wow, we're getting so much innovation that how do we in fact manage it all? So that is such a different machine that allows us then to price, that allows people to sell the products based on something more than just its own promotion or it's cheap. And I think that mood is starting to really ooze through the company.

And so I'm confident that that model is the right model. Obviously as we go along we'll get better and better at it. But you start sensing that is making a huge difference, Ali.

Ali Dibadj -- Sanford C. Bernstein -- Analyst

I appreciate that. And if I could just ask one more. At your investor day, I think this year was the year you said you're going to stabilize the business, stable revenue, I think that means flattish organic sales growth, margin improvement is how you termed stabilized. Are you still of the belief that that can happen this year?

Jan Zijderveld -- Chief Executive Officer

So what we said last time last call we were going to stem the decline. So I think this is all about a really careful balancing act and we want to improve the product -- the profitability. We do want to improve the margins, but through strengthening our brand and improving the quality of our sales machine. This is a careful balancing act and that's where we're I think making steady progress.

And at the same time we continue to drive productivity, so we stem the decline, improve the margins, improve the profitability and get the right balancing of the KPIs that we set out in quarter one as well.

Miguel Fernandez -- Global President

But Ali, I wouldn't be surprised if in Q3 and Q4 revenue were still down.

Ali Dibadj -- Sanford C. Bernstein -- Analyst

OK. Thanks very much, guys.

Operator

[Operator instructions] There are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Jan Zijderveld -- Chief Executive Officer

So I think -- again, thanks everyone for calling in. I think we continue to drive the execution of our opening up strategy as we drive to improve profitability, as we continue to drive productivity and continue to focus on operating margin and free cash flow. And at the same time of course, as we're preparing for the transformational deal that we've announced with Natura. So thanks a lot for your support and we look forward to the next quarter.

Thank you.

Duration: 77 minutes

Call participants:

Amy Greene -- Chief Communications Officer and Head of Investor Relations

Jan Zijderveld -- Chief Executive Officer

Gustavo Arnal -- Chief Financial Officer

Miguel Fernandez -- Global President

Ashley Helgans -- Jefferies -- Analyst

Ali Dibadj -- Sanford C. Bernstein -- Analyst

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