Natura and Avon Integration in Latam Continuing to Drive Healthier Profitability

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May 14, 2024, 06:38 ET

Strong performance of Natura Brand in Brazil combined with solid margin results from the Wave 2-implemented countries led to YoY profitability evolution and more than offset Avon International's margin contraction amid sales deleverage

SÃO PAULO, May 14, 2024 /PRNewswire/ -- Natura &Co's (B3: NTCO3) first quarter 2024 financial results (Q1-24), released today, showed increased profitability driven by solid results from Natura &Co Latam, which is benefiting from the integration of Natura and Avon in the region (referred to as 'Wave 2'), coupled with richer country and brand mix. This more than offset the margin contraction at Avon International amid sales deleveraging. Natura &Co's consolidated net revenue reached BRL 6.1 billion in Q1-24, up 1.1% vs Q1-23 in constant currency (CC) and down 5.7% year-on-year (YoY) in Brazilian Reais (BRL).

At Natura &Co Latam, Q1-24 revenues grew 3.1% YoY in CC. Natura Brazil was again the highlight, reporting an 11.3% YoY increase in Q1-24 revenues, attesting strong momentum despite the tough comparative base from Q1-23 when the brand had achieved a 25% YoY growth rate in the region. This performance includes retail sales which showed robust growth in the country, fueled by solid same-store sales and a still strong pace of store openings. The brand opened 132 stores in the last twelve months (13 own and 113 franchised), reaching a total network of 896 stores (115 own and 781 franchised). The results were also boosted by the successful launch of a fragrance sales campaign called "Perfumada", which contributed to a richer product mix.

This strong result in Natura Brazil was offset by Avon Latam, which is still delivering soft top-line, with revenues down 11.3% in Brazil and 11.8% in Hispanic Latam, as a result of the impacts in the regions where Wave 2 was already implemented, including a smaller number of representatives in the base. Worth noting that Avon Brazil already showed improving top-line trends throughout the quarter.

Avon International had a slow start in Q1 in terms of revenue, down by 4.7% YoY in CC. Despite a decrease in revenue, primarily attributed to challenges in the direct selling channel, Avon showed resilience in other areas. Efforts to strengthen Gross Margin and streamline operations led to only a slight decrease in Adjusted EBITDA margin of -60 bps YoY (ex TBS) despite sales deleverage. The company is also actively exploring opportunities from other distribution channels, including retailers. Avon is already being sold in the UK via Superdrug, in Italy via Naima stores and in Turkey via representative's retail franchise stores.

Improved consolidated profitability is principally attributed to the expansion of gross margin that reached 65.2% in Q1-24, up 90 bps vs. Q1-23 driven by the strong gross margin expansion from Latam (+170 bps). Adjusted EBITDA reached BRL 683 million, and adjusted EBITDA margin expanded 110 bps YoY.

Q1-24 reported net loss was BRL 935 million, compared to a net loss of BRL 652 million in Q1-23, impacted by discontinued operations, higher taxes from country mix and FX losses and hyperinflation accounting impacts. The Underlying Net Income, which is net income excluding transformation costs, restructuring costs, discontinued operations and PPA effects, was BRL 116 million (vs. a loss of BRL 373 million in Q1-23 or BRL 260 million excluding TBS and Aesop). Excluding the one-off of BRL 137 million of losses related to transferring cash out from Argentina, Underlying Net Income would be a profit of BRL 21 million in the quarter.

Fabio Barbosa, Group CEO of Natura &Co, commented: "We are encouraged that the first quarter of the year showed positive recurring results with a consolidated margin expansion of 110 bps vs previous year, driven by solid results from Natura &Co Latam, benefiting from the Natura and Avon integration in the region, coupled with richer country and brand mix. This more than offset the margin contraction at Avon International amid sales deleveraging. From a cash conversion perspective, seasonal cash consumption also improved on a YoY basis to BRL-1.0 billion (excluding one-off discontinued operations tax payments), compared to a pro-forma (excluding TBS) of BRL -1.4 billion in the same period last year or BRL -1.8 billion reported in Q1-23.

The ongoing roll-out of Wave 2 is a pivotal step in our transformational process, and although we have experienced expected and unexpected challenges in its implementation, we continue to see sustainable improvements in key metrics such as productivity, cross selling, and better portfolio mix, resulting in gross margin improvement in all countries where Wave 2 was implemented. In Brazil, Avon still experienced headwinds impacting the top-line, but with an improving trend month over month, and we expect Avon's top-line to stabilize in the second half of the year. We also saw significant margin expansion in Peru and Colombia as Wave 2 results start to impact the P&L in full while investments in channel and other one-offs start to fade away.

As expected, our integration initiative is driving improved savings in both G&A and selling expenses, although the latter is being offset by higher marketing investments and other initiatives focused on improving service levels. The solid start to the year gives us confidence that the initiatives we are implementing are beginning to deliver the expected results and we are extremely confident with the potential of the integration of both brands in Latam.

Avon International had a slow start of the year, following a solid Q4 2023 profitability performance. The new management team took office in January and is working on simplifying the market, focusing on key countries, and enhancing our portfolio with superior promotional execution. We believe these steps are crucial to stabilize revenues and keep us on track to improve profitability.

We are also continuing to study a possible separation of Avon and Natura, as we announced in February, in line with our goal of simplifying our corporate structure and giving more autonomy to the business units. We will inform the market as soon as we have news on this subject.

Lastly, but certainly not least, our hearts go out to all those affected by the devastating floods in the Rio Grande do Sul region of Brazil. We are closely monitoring the situation and extending our support to our vast network of nearly 100,000 people in the area, including Beauty Consultants, colleagues and partners. Through telemedicine and our Social Center, we are providing critical medical, social and psychological support. In addition, Natura &Co Latam will replenish lost inventory, forgive debts, defer payments for affected consultants and franchisees, and has designated two spaces as donation hubs for several companies to facilitate logistics. All these initiatives already exceed the amount of BRL 10 million.

With the aim of engaging our network to continue supporting those most affected, we have launched a matching funds initiative to help consultants most affected by the floods to rebuild their homes. For every real donated, Natura commits to matching it with another real. We expect to reach one million reais by May 30th."

The full earning report and financial statements can be accessed at https://ri.naturaeco.com/en/.

About Natura &Co

Natura &Co is a global purpose-driven group uniting Natura and Avon brands. We connect more than 200 million clients worldwide, engaging them through 7 million dedicated Consultants and Representatives, 900 stores and franchises, and 22,000 employees.

We believe in promoting real positive economic, social, and environmental impact. We believe that the world does not need another big company. The world needs symbols of change capable of blazing new trails and inspiring others to follow. We believe in the power of cooperation, co-creation, and collaboration for a better way of living and doing business.

We are Natura &Co.

SOURCE Natura &Co