Strong growth by Natura Latam and improving fundamentals at Avon International; solid improvement of 430 bps in gross margin in the quarter
SÃO PAULO, Aug. 15, 2023 /PRNewswire/ -- Natura &Co (NYSE – NTCO; B3 – NTCO3) posted another quarter of sales growth in constant currency in the second quarter of 2023, while also continuing to improve its profit margins.
Natura &Co posted Q2 consolidated net revenue of R$ 7.8 billion, up 1.9% at constant currency (-4.1% in BRL), driven by solid constant currency (CC) growth at Natura &Co Latam. Gross margin was 65.4%, up 430 bps vs Q2-22, and adjusted EBITDA margin was 9.7%, up 230 bps vs the same period last year, reflecting improving margins at all three business units, Natura &Co Latam, Avon International and The Body Shop, as well as a 5.7% drop in corporate expenses. Net income was R$ (732) million, slightly improving over last year's R$ (767) million in the period, while Underlying Net Income was R$ (219) million, also improving from R$ (262) million in Q2-22. The Group ended the quarter with a solid cash position of R$ 3.7 billion.
Fabio Barbosa, Group CEO of Natura &Co, declared: "Natura & Co's second-quarter performance continued to show the improvement already observed in Q1, with low-single digit top line growth at constant currency and a significant improvement in adjusted EBITDA margin. This was mainly driven by gross margin, benefiting from mix effects, partially offset by investments and inflation. Net income was still impacted by high financial expenses, which will be addressed upon closing of the sale of Aesop, expected to occur in Q3-23.
Cash conversion remains our main focus, and this quarter we saw further improvement in operating working capital dynamics, partially offsetting seasonal cash consumption in the quarter. We continue to drive our cash conversion improvement, mainly through working capital and net Capex optimization, among others, and we still see more opportunities to be captured on these fronts, although we might face volatility from quarter to quarter.
Q2 23 was also a landmark quarter for us, as we kicked off Wave 2 of the Natura-Avon integration in Latin America, beginning with Peru and Colombia, with quite compelling initial results. In both markets, we saw a meaningful acceleration of cross-selling between brands, and more importantly, significant CFT productivity growth, resulting in greater prosperity for our beauty consultants. As we enter H2, our focus turns to the roll out of Wave 2 in Brazil. We are pleased with the initial learnings from Peru and Colombia, and we are confident that they will support us to deliver strong results for our biggest market in the region and the other ones that will follow.
ESG remains in the forefront of our strategy, and I'm pleased to announce that Natura &Co obtained approval from the Science Based Targets initiative (SBTi) for its ambitious plan to reduce absolute scopes 1, 2 and 3 Greenhouse Gas emissions by 42% by 2030 from a 2020 base year. Our target is in line with the 1.5°C trajectory required by the Paris Agreement.
Our results improved in H1 23, but we are still not satisfied with them. We look forward to delivering our strategy, continuing to position Natura &Co on the course towards strong profitability and low leverage, allowing us to pursue meaningful and sustainable growth in the future. Closing the sale of Aesop, implementing Wave 2 in Latam, further work on simplifying and turning around our international assets while delivering our ESG agenda are fundamental steps that will help us achieve our ambition."
Performance by business unit:
Natura &Co Latam's net sales were up by 5.8% in constant currency ("CC") and down 1.7% in BRL. CC growth was driven by double-digit growth at the Natura brand (+19.5% at CC and +17.3% in BRL). The Natura brand posted strong momentum, with growth of 14.7% in Brazil, supported by price increases and better mix, as well as 12.5% growth in consultant productivity and an outstanding retail performance, notably marked by excellent Mother's Day and Valentine's Day campaigns. In Hispanic Latam, net revenue was up 30% at constant currency (+7.7% in BRL) despite a challenging situation in several countries, driven by Peru and Colombia. The Avon brand posted a sales decrease of 4% in CC in the Beauty segment. In Brazil, revenue in the Beauty segment was down 1.8%, while Home & Style (formerly known as Fashion and Home) was down 28.5% in Brazil, in line with our portfolio optimization strategy. In Hispanic markets, net revenue in the Beauty category was down 5.6% at CC (-20.3% in BRL excluding Argentina), while Home & Style decreased 39.9% amid the roll-out of Wave 2 of integration. Adjusted EBITDA margin was up by a solid 250 basis points to 13.3%. Margin benefited from strong gross margin improvement, notably at the Avon brand in Brazil, even as the Natura brand continued to invest in marketing and innovation.
Avon International's revenue was down 1.3% at CC (-8.1% in BRL.) The TMEA and CEE regions posted year-on-year growth. The Beauty category posted growth of 3%, driven by fragrance and color. Digitalization is progressing and the use of digital tools reached 30.6%. Adjusted EBITDA margin was 4.4%, up 110bps, driven by gross margin expansion of 460 bps thanks to price increases and product mix.
The Body Shop's Q2 net revenue declined by 12.5% at constant currency (-12% in BRL.) Combined sales of core distribution channels (stores, e-commerce and franchise) showed a mid-single digit decline in CC while The Body Shop at Home continued its steep decline. Adjusted EBITDA margin showed an improvement by 210 basis points to 5.4%, thanks to another quarter of gross margin growth, up 30 bps to 77.8%, combined with strict cost control. The Body Shop continues to focus on structural cost reduction as it works to improve margin and cash generation.
Aesop has been classified as discontinued activities pending the closing of the sale to L'Oréal. The Q2 numbers exclude its operating performance and the comparable 2022 numbers have been restated accordingly, but net income in both periods also includes discontinued activities.
About Natura &Co
Natura &Co is a global, purpose-driven, multi-channel and multi-brand cosmetics group which includes Avon, Natura, The Body Shop and Aesop. Natura &Co posted net revenues of R$36.3 billion in 2022. The four companies that form the group are committed to generating positive economic, social and environmental impact. For 136 years Avon has stood for women: providing innovative, quality beauty products which are primarily sold to women, through women. Founded in 1969, Natura is a Brazilian multinational in the cosmetics and personal care segment, leader in direct sales. Founded in 1976 in Brighton, England, by Anita Roddick, The Body Shop is a global beauty brand that seeks to make a positive difference in the world. The Australian beauty brand Aesop was established in 1987 with a quest to create a range of superlative products for skin, hair and the body.
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