NTCO - Natura &Co Holding S.A. (NTCO) CEO Fábio Barbosa on Q2 2022 Results - Earnings Call Transcript
Natura &Co Holding S.A. (NTCO)
Q2 2022 Earnings Conference Call
August 12, 2022 09:00 a.m. ET
Company Representatives
Fábio Barbosa - Chief Executive Officer
Guilherme Castellan - Chief Financial Officer
Jao Paulo Ferreira - Chief Executive Officer of Natura &Co Latin America
Conference Call Participants
Robert Ford - Bank of America
Joseph Giordano - JP Morgan
Thiago Macruz - Itaú
Stephanie Wissink - Jefferies
João Soares - Citibank
Irma Sgarz - Goldman Sachs
Richard Cathcart - Bradesco
Danniela Eiger - XP Investimentos
Presentation
Operator
Welcome to Natura &Co.’s Second Quarter 2022 Earnings. On this call today are Fábio Barbosa, CEO of Natura &Co and Guilherme Castellan, CFO of Natura &Co. Jao Paulo Ferreira, CEO of Natura &Co Latin America will join for the Q&A session.
The presentation they will be referring to during this call is available on the Natura &Co Investor Relations website. Please limit yourself to one question each in the Q&A session, so we can allow more people to ask questions. Thank you for your understanding and cooperation on this.
I will now hand over to Fábio Barbosa.
Fábio Barbosa
Good morning or good afternoon to all of you and thank you for joining us today. Very happy to be with you for my first quarterly earnings call since becoming CEO of Natura &Co less than two months ago. Guil, the CFO will comment on the results shortly, so I will limit myself to a more qualitative commentary.
Q2 was a difficult quarter marked by high inflation, lower consumer spending, continues supply chain disruption and of course the macroeconomic and geopolitical uncertainty that results from the war in Ukraine. Our performance in the quarter of course reflects this challenging environment. Let's be clear, it also reflects the structural issues we see in our group, that we have clearly identified and that we are now addressing.
As you know, when I was appointed CEO we also announced that I would head up a streamlined transition committee, and I am pleased to report that we are making good headway in redefining the respective roles of the holding company and the business units in order to make our group less complex, leaner and more decentralized, so that each BUs can get on with the business of improving its performance, getting the support its needs, but also the latitude it needs. We want to preserve what makes Natura &Co strong and unique, notably its culture and commitment to sustainability, but the BU’s need to have the agility to react quickly to their market and strategic chance.
In my first few weeks, I have thoughts on two main priorities within the transition committee. The first is delivering a lighter and leaner organization structure, one that combines autonomy and accountability. I’m happy to announce today that we have already identified significant savings in corporate expenses, which are implementing as we speak.
To give you an idea of the magnitude, the same as we already identified would represent at least 40% of 2021 corporate expenses if the new structure was already in place last year. That's as a reference of what you're doing.
The second is reviewing the governance model, and new ways of working within Natura &Co. The idea is to have a concentrated and streamlined holding company structure, focused on a few key priorities, defining KPIs monitoring the performance of more autonomous brands and capital allocation.
We are advancing well and I confirm today that the transition committee, which is by nature transitory will have concluded its work before the end of the year. At the same time of course we'll continue our ongoing work to improve the fundamentals of our brands and business, and notably the underperforming ones, which we’ll regard as our principal challenge, but also our main upside driver.
We expect the environment to continue to be challenging in the second half and we'll continue to see headwinds. Revenue trends should improve in the second half. We want to say that revenues should improve, but margins should – I mean the revenues should improve, but margins should continue to be pressured in the short term.
In this context, our priority is very clear. We are strongly focused on improving margins and generating cash flows. This is the guideline for every single business units and they are all mobilized and incentivized accordingly to achieve these goals.
With that, let me now hand over to Guil to comment on our Q2 performance in greater detail. Guil.
Guilherme Castellan
Thank you, Fábio, and hello to everyone. I'll start with entering close consolidated revenue on slide five, which stabilizing constant currency in the quarter amid a challenging macro environment. This stabilization came on the back of our high comparable base as sales in Q2 of last year were up 31.7% at constant currency. In reais, sales were down 8.6%.
We'll look at the performance by BU shortly, but in a nutshell we posted solid growth in Natura &Co Latam with a strong performance by the Natura brand and Aesop continues to post double digit growth at constant currency. Avon International’s performance was impacted by the war in Russia, but trends improved in most of other markets. The Body Shop had a difficult quarter from challenging macro and has low retail recovery, which could not offset the decrease in the Body Shop at home and the commerce.
On slide six, we zoom in more specifically on our digital sales. Digitally enabled sales which include both online sales from e-commerce and social selling, as well as relationships selling using our main digital apps held versus last year at nearly 50% despite the reopening of retail past lockdowns. They remain significantly above pre-pandemic levels.
The slide shows you a few key highlights. First, our digital payments platform and copay continues to grow. The number of accounts at Natura Brazil grew to 457,000 from approximately 390,000 in the previous quarter, and total payment volume reached R$7.5 billion in the first half. As all direct selling and e-commerce payments at Natura Brazil already captured and processed through the platform. Natura Consultants who use the platform general records higher activity levels and lower payment defaults.
Second, relationships selling using apps continues to progress. At Natura Latam the average number of consultants sharing content reached 28% this quarter compared to 24% in Q2, 2021. At Avon International, penetration of the Avon On app reached 23% in Q2, 7 percentage points more than in the same period of last year. And third our online sales are above pre-pandemic levels at all our brands, with strong growth notably at Natura and Avon.
We turn to adjusted EBITDA margins slide seven, which was resilient at 8% in Q2, down 50 bps compared to the same period last year. As shown on these slides, the major unfavorable impacts were on gross margin. We managed to partially offset them through improvements in SG&A in Latam and a reduction in corporate expenses.
The main unfavorable impacts on EBITDA were first 750 bps from inflationary and FX pressure and second, impacts of the war in Ukraine and others. These were partially offset by two positive impacts, 550 bps of synergies and revenue management and other efficiencies, cost containment and one-offs which improved margin by approximately 200 bps. This includes corporate expense savings of R$60 million, of which R$20 million is cost containment and facing the facts of expense.
On slide eight we focus on underlying net income. This slide shows you the bridge from net income, which was a negative R$767 million to underlying net income, which was a negative R$262 million. The difference between the two comes from transformation costs for R$282 million, R$66 million from discontinued operations and the PPA effect from the acquisition of Avon for R$158 million.
On slide nine we look at our balance sheet and liquidity profile. We ended the quarter with a cash position of R$4.3 billion. This cash position comes after free cash flow, outflow of R$586.5 million in Q2. Management is strongly focused on optimizing cash conversion in the short to medium term, and while we cannot be satisfied with our second quarter performance, it is an improvement of nearly R$736 million over Q2 of last year.
This was notably driven by improved inventory levels as the business is focused more on managing inventory, great discipline in CapEx and favorable exchange rate variation. Our net debt to EBITDA ratio stood at 2.46x at quarter end, up from 2.13x in Q1 and 1.43x in Q2 of last year. The leverage ratio reflects cash consumption and lower EBITDA.
As you see on the second graph, our cash position of R$4.3 billion is higher than the total for our debt payments through 2027. The average maturity of our debt is 6.3 years and we face limited debt repayments until 2028. Note that this does not include the July 2022 issue by Natura Cosméticos of R$826 million in debentures maturing in 2027. These debentures partially replace the ‘22 and ‘24 issues, further expanding our average debt maturity to 6.5 years as part of our continued liability management.
Let's turn now to our performance by business unit, beginning on slide 11 with Natura &Co Latam, which returned to growth in the quarter. Total net sales were up 5.6% in constant currency. This was driven by double digit growth at the Natura brand, which grew by nearly 15% at constant currency, partially offset by a decline in Avon brands, although trends have been improving since Q3 of 2021, particularly in beauty.
The Natura brand gained momentum over the previous quarter and posted year-on-year growth of 14.3% in Brazil, supported by an acceleration in consultant productivity, up by 17.5% in Q2. In Hispanic Latam net revenue was up 15.5% at constant currency, an 8.8% in reais.
Growth was mainly driven by Argentina and Colombia. Excluding Argentina, growth in Hispanic markets was still up in low single digits at constant currency, despite the very strong comparable base in Q2 of last year. Another highlight of the period was that the Natura brand was again ranked as the strongest cosmetics brands in the world by Brand Finance.
At the Avon brand in Latam, net revenue was down 5.1% at constant currency. In Brazil trends are improving every quarter in recent periods. In Q2 net revenues showed the lowest revenue decline since Q3 ‘21 at minus 10.7%. It’s important to highlights that the beauty segment actually grew by 5%, which was offset by a 31% sales contraction Fashion & Home.
The beauty segment in Brazil saw double digit gains in consultant productive. In Hispanic markets, net revenue was down 2.8% at constant currency and 13.9% in reais. Here too the two are dropping Fashion & Home. The new commercial model is showing significant progress in Ecuador and Colombia with sales growth and the sequential improvement in the number of representatives’ activity and productivity.
Rep productivity in the beauty segment was positive across most markets compared to last year and also improved sequentially. The total number of available representatives was stable versus Q1 of 2022, driven by Ecuador in Colombia, while the churn ratio improving in Ecuador and Colombia and Central America.
On slide 12 we turn to Natura &Co Latam’s Q2 adjusted EBITDA margin. As shown on the graph, EBITDA was up slightly, by 70 bps, while margin at 10.8% was stable versus last year. This performance was supported by synergies, revenue management and strict financial discipline, which offset by the impact of sales deleverage of Avon, raw material inflation and FX headwinds. The Natura brands margin remains very strong despite high cost pressures. Avon was impacted by the continuing effects on the transformational plan, higher inflations and logistic expenses too.
Let’s now move to Avon International on slide 14. Revenue was down 11.4% at constant currency and 25.4% in reais. This drop was strongly impacted by the situation in Ukraine. Excluding Russia and Ukraine markets, sales were down 5.8% at constant currency and improved sequentially versus the previous quarter. Sales also reflected lower purchasing power in Europe, but this drop was partially mitigated with an aggressive revenue management plan across all markets.
Fundamentals continue to show improvement, and the new commercial model, now implemented in 60 markets resulted in better rep productivity and activity and a reduction in churn ratio.
Q2 adjusted EBITDA margin stood at 3.3%, down 100 bps versus the same period last year. This was due to substantially higher cross pressures; the impact of the war in Ukraine and lower volumes mainly in European markets. These were partially offset by an effective revenue management strategy across markets and cost reduction, resulting from strict financial discipline and a leaner operating model.
On slide 16, we now move to The Body Shop. Q2 net revenues declined 11.8% at constant currency and 25.3% in reais. This reflects falling consumer confidence, but also post-lockdown channel rebalancing. Store revenues were up versus last year and improved versus Q1 ’22, with growing footfall, but they remain below their pre-pandemic levels.
This progressive retail recovery was outpaced by a decreasing sales in other channels, The Body Shop At Home and e-commerce, although they remain above the pre-pandemic levels. Sales to franchisees also pose a decline in Q2, but are showing increased retail sales month-on-month, further reducing franchisees inventory as they recover from lockdowns.
Q2 adjusted EBITDA margin was 3.3%, down 970 bips versus Q2 ’21, driven by lower volumes and channel mix as a result of decrease At Home and e-commerce and lower selling to franchisee partners. In order to address these challenges through H2, management has been focused on actions to drive margin improvement. This includes leveraging recent investments to drive store and consultant productivity, especially in the critical fourth quarter. The continuation of the store footprint optimization; margin improvement from the continuing focus on product mix and a detailed revenue of SG&A costs.
On slide 18, Aesop again recorded a maximum performance with another quarter of double digit growth in constant currency, up 25.4% despite a challenging comparable base. Revenue in reais was up 5.7%.
All regions delivered double digit growth led by North America and Asian Pacific. Aesop continues to consistently post superior sales growth on a like-for-like basis, while continuing to roll out new stores in existing and new cities. Aesop is also continuing to see channel rebalancing, but online sales at 23% to the total are still more than twice above the pre-pandemic level.
China entry plans are on track for launch by year end 2022, including investments in digital platforms in the quarter. Q2 adjusted EBITDA margin of 16.2% was down 480 bips compared to Q2’21. This reflects planned higher investments in digital categories, geographies notability China and human resources to continue driving future sustainable growth.
Let me now hand back to Fábio.
Fábio Barbosa
Thank you, Guil. I will conclude now on slide 21 with our key takeaways, basically reinforcing what I said at the opening here.
So first, the Transition Committee work is progressing according to plan and we fully expect to have completed its work before the end of the year.
Second, the work of the Transition Committee is clearly aimed at delivering a leaner, less complex and more decentralized organization, giving our BU’s autonomy but also more accountability for holding structure that is clearly focused on monitoring performance, tracking the right KPIs and a location capital to well defined priorities.
Third, we believe that headwinds will continue in the second half. Sales trends should improve as we cycle over weaker comps, but margins will remain under pressure in the short term. And fourth, in this context our immediate focus and that of all our business units is on defending margins and generating cash flow. The whole organization is mobilized and incentivized to achieve this goal. This is part of our ongoing focus on improving the fundamentals of our under-performed business, which we view both as our principal challenge and why we remain upside driver.
Thank you very much for your attention and Guil, JP and myself are happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question will come from Robert Ford of Bank of America. Please go ahead.
Robert Ford
Hey! Good morning everybody. This is Bob Ford at BofA and thanks for taking my question. Fabio, I’d like to ask a question about governance. As you review governance structures, incentives and KPIs, what are some of the early takeaways in terms of misalignments or flaws and what does that mean for senior management scorecards moving forward. And what kind of tracking and monitoring were in place for more autonomous brands in regions? Were those – did you have reliable brand health indicators in place or measures of competitive dynamics that you could understand? What do you feel is needed to better understand those businesses? Thank you.
Fabio Barbosa
Lots of things here. Yes, we have the KPIs. KPI’s not only in terms of, let's say working capital, but also KPI’s in terms of brand soundness, aspiration and we are going to track many of the things in terms of expense control and everything.
In terms of the incentives, what we are doing now, especially for the second half is giving a lot more focus on margins and cash generation, and little less on growth, at least in the short term, these are the priorities we are having. And the idea, when you give more latitude to the brand, to the business units, of course I mean you have to have the accountability.
So basically when we talk about the role of the company here, of the holding company, it’s not to again – we will maybe continue to find synergies, but that's not going to be the driving force here. The driving force is more to give autonomy and say, okay these are things that we believe are necessary, again in terms of performance, in terms of brand, in terms of sales force and in terms of the sustainability, something that we keep on.
So the KPIs will be monthly tracked and that’s the way we will be able to make sure that the guard rails which are sending to the people, right now have sent already to the various business units, that they will be followed and will be tracking any deviation we have from there. So it's a lot closer monitoring of KPIs, without going to the details of each ones decision, given the specificity that we are dealing with on different brands, different markets, different realities and different kind of problems that you're facing in our views. Okay.
Robert Ford
Fabio, I think – it sounded like you thought there was an overemphasis on synergies before. Was there – were there other flaws in terms of the incentive structure that was in place, in your opinion.
Fabio Barbosa
No flaws. I think as a matter the incentives are designed to give a sense of priority for that period of time, and the sense of priority that we are giving now – like if we had ended a cycle where we are looking for synergies is saying listen, for this point in time, I mean given also inflation and all the pressures we are having on raw materials and everything, is to make sure that they could take good care of the margins, that they take good care of the cash flow generation which has to do with working capital and so on. And that we'd give less emphasis at this point in time to grow sales, especially in a difficult market with rising costs. So these are the ideas, and there’s no flaws. It’s another cycle that we're going through, but the incentives are aligned now for this, for the priorities we defined.
Robert Ford
Thank you very much.
Operator
The next question comes from Joseph Giordano of JP Morgan. Please go ahead.
Joseph Giordano
Hi! Good morning everyone and thanks for taking my question. So my question goes into the streamlining strategy of the business. Well, this is a very challenging environment on Avon International. So I don't know like if you guys are evaluating any kind of change there, particularly now that we have this sad situation between Russia and Ukraine. So maybe you would be considering discontinuing some of those operations, so that’s my first question.
And the second question goes I think to JP. So it seems that like even in Brazil it was not just synergies, but we also had some savings there. So my question to you is like, if you still see some like low hanging fruit on the expense side, to make like the company a little bit linear and faster, do the market dynamics in Brazil.
And lastly, like when we start to look at the store strategy, how should we be thinking about the franchise model and accelerate that to really change the dynamics of the channel. Thank you very much.
Guilherme Castellan
Joe, Guil here. Great to hear from you. Just to be clear, and your third question is about The Body Shop?
Joseph Giordano
No, it’s not of Brazil, sorry.
Guilherme Castellan
Okay, perfect. So I'm going to take the first one and then I'm going to pass the word to JP, so he can expand on the other questions right. But I think to your first question Joe, we are always looking of course at optimizing our footprints right, and we’ll continue to do so, especially in those markets that we're not able to generate profits and especially in the short term, not able to generate cash flow, right.
So we’re doing that as we speak, we’ll continue to do that throughout the second half. And if we have to exit, if we have to put any markets into another operating model, we’ll act in the sense that as Fabio mentioned the short term priority is very much focused on EBITDA margin expansion and cash flow. And if we have to close markets or exit markets to improve that in the short term, we’ll do that right, with a sustainable long term view of course.
Having said that, I think it's important for us to highlight a few things in Avon International, right. First is, excluding the two markets of Russia and Ukraine, the trend is significantly better than before. We're posting minus 5.8% compare to double digit decline in other quarters right. Not only that, but we're seeing some advances due to the change in the commercial models. So activity is up in most of the markets and more important, productivity is very helpful, right. And the team has done a good job of course to offset part of the commodity pressure and the inflation pressure with revenue management.
So that our gross margin pressure that we see in Avon International, that would have been much worse, the team wouldn't have reacted fast on the revenue management side. And it’s very important that even with the operational deleverage that we have in Avon International, and with the gross margin pressure, which was significant in this quarter, you see that the team was able, basically to offset part of that decrease in SG&A, right.
So the EBITDA margin, for the period was only one percentage point. That is still at very low levels, and of course we cannot be satisfied with that, and we're working to improve that towards the second half of the year, especially in the very critical Q4, which has of course big penalty impacts, not only for Avon International but for all our brands, but it’s a key priority for us to continue to work on SG&A as well to improve profitability.
So yes, exiting the market seems to be, if that's the case, revisiting some markets, if that's the case, but also continue our organic commercial model expansion and thorough revision of SG&A. With that, I’m going to pass the word to JP, so he can comment on autonomy.
Jao Paulo Ferreira
Hi Joseph, JP here. So your fist question was to do with additional synergies or opportunities, and the answer is, yes. There are – I'd like to remind you that we are not through the entire integration program just to start with, so there’s that. But move over as we see Avon trending through stabilization in the region, we will accelerate business combination opportunities which was roughly know as Wave 2, and that will bring additional opportunities also on SG&A. So we are pushing in that direction going forwards, no doubt.
The second question was to do with our retail franchise stores for Natura. Well, retail for Natura is doing extremely well, not only in terms of additional storage, but same-store sales is performing extremely well. So that model will continue to expand very cautiously, where we think there are opportunities to expand our presence, but we are very happy with that and that we will expand.
Joseph Giordano
Terrific! Thank you.
Operator
The next question comes from Thiago Macruz of Itaú. Please go ahead.
Thiago Macruz
Hi guys! Good morning. My question is regarding The Body Shop. Is it fair to say that you guys have tried to increase prices to offset the inflationary pressures and saw significant demand sensitivity, or are you still deciding on whether to pursue that? Well then, on that topic, can you give us more color on the inventory levels of the franchisees? How far are we today from the highs? Those are my two questions on the Body Shop. Thank you.
A - Guilherme Castellan
Thank you, Macruz. Yeah look, I think the story on The Body Shop this quarter is a story in which the retail recovery of course has improved year-over-year right, given the COVID last year, but of course hasn't offset the decline, the big decline in The Body Shop At Home, right.
The issue there is that the retail even though is improving year-over-year, is still down compared to 2019, right. When we look basically at the overall public information that we have on the retail in the U.K., which is our main market right, we get a sense that the footfall is down basically double digits right, compared to 2019, which is a significant right and especially in the mass MST retail segments that we see in the country.
However, in order to of course to offset that footfall, the main action in revenue management for The Body Shop hasn't been in price increase in the first half of the year. It has been mainly on the category mix right, with a big focus on innovation and a big focus on some categories like skincare, which has a better margin in the end of the day, right.
Now with the retail footfall improving, which by the way it has improved on a monthly basis. When we look at the trends in the last few months, month-over-month is better. It’s just again a little bit is lower than our expectations. We intend to of course look at other ways of revenue management such as price increases for The Body Shop in Q4 and especially in 2023. But just to mention that in the sense of discounts, right, which was a big problem for The Body Shop a few years ago, we have improved significantly, even though again in some period of times and some countries we may be tactical about giving discounts to the inventory level.
Your question on franchisees, franchisees of course is a channel very important as it drives significantly higher margin at the end of the day. It has been lackluster in the first quarter of the year and it follows the same trend in the second quarter of the year. Even though to your point the inventory level has improved, right, so when we look at the inventory level by the end of June and compare the inventory level by the beginning to right end of March or April, that level has improved in most of the countries that we operate through franchisees right.
So on looking at a consolidated basis, inventory level is certainly better. However, just to be clear, it remains still at a higher level than what we had estimated, right, so we continue to be cautious, especially in Q3 with the retail recovering some of the countries about franchisees. But we do expect that at least to achieve better levels in the very critical Q4 for The Body Shop.
Thiago Macruz
Perfect! Thank you very much.
Operator
The next question comes from Stephanie Wissink of Jefferies. Please go ahead.
Stephanie Wissink
Thank you for taking our question. We have a two part question related to gross margins. If you could talk a little bit about your current inventory position and maybe across your major brands, I know you just talked about Body Shop on the franchisee side, but just at the more global level, if you could talk about inventory by brand.
And then on price strategy, which brands have you implemented price to help offset inflation, which brand do you still need to implement price and are you finding that consumers are receiving price without significant elasticity? Thank you.
Guilherme Castellan
Thanks Stephanie, thanks for the question. Great to hear from you. Yeah look, gross margin was significantly impacted this quarter, right. So we look at basically Avon International we had almost 300 points impacting gross margin. We look at The Body Shop with 250 bips approximately and Latam was 160 bips of impact, right. So basically all our views going back to that gross margin as we had of course a big inflationary pressure and FX headwinds basically in all of them, right. So we saw almost 600 bips of negative impact in inflation and in FX right.
Just to give an example, I think we wrote about that in the release. Palm oil has increased almost 50% when compared to the same period of last year and pulp/paper double digits as well with the increase of 10%, right. So we’re still seeing big commodities inflation in basically our raw materials and we expect to continue to see that in the short term right.
To your point on inventories, basically I think inventories, it really depends on a BU basis. But on a consolidated basis though we are improving the way that we're managing inventory through our better SOP process, we’re still operating with high inventories, right and still there is a lot of room for us to improve. If you look at Latam for example, on a year-to-date basis there is a very significant improvement in inventories in the first half of this year compared to the second – compared to the first half of the previous year, right, and we continue to intend to do the same thing in H2.
It is also a category story, right, and we see for example inventories in Fashion & Home increasing more than of course the inventories in Beauty as we described before, as Beauty continues to gain momentum our Avon in Latam, with a growth in Brazil of 5%, right. So it really depends also on the category and of course in the country.
But we’re still – look, we're still expecting some supply chain issues, right, and especially for our retail operations, that has an impact especially for the very critical Q4. I repeat right that's for both The Body Shop and Aesop as well, right. So in that very uncertain scenario we may see inventories for their retail increasing a little bit in Q3 for the preparation of Q4, right.
So it’s again, a fluid situation. We’re improving a lot of our process. Again, even though potentially at our lower and is lower paced than what we were expecting, but we are already seeing some improvements in our inventory management process and we continue to intend to do so, even with all the external pressures throughout the second half of the year.
Did I miss anything Stephanie? I think you had a question as well about overall pricing, right?
Stephanie Wissink
Yes, please. Thank you.
A - Guilherme Castellan
Perfect! I'm going to talk about our three BU’s and then I'm going to pass it to JP to talk about pricing in Latam, right. But look, I think with the exception of The Body Shop, I think both Aesop and Avon International has best prices through H1. Of course in different proportions, different categories and different locations, right.
Avon International as I mentioned before in my previous question, we have been able to best prices aggressively, actually most of the countries that we operate and again, we’re seeing good part of TBT [ph] coming from revenue management in that sense in most of the countries, right.
The Body Shop as I mentioned, we haven’t been super active on price increase. Our attention has been more of course on managing discounts in the short term, given of course the footfall decrease compared to pre-pandemic levels in some of the markets. But I repeat, as it recovers, it would tend of course to continue our revenue management, not only through category mix in The Body Shop, but also potentially through some price increases in a few markets, right.
So with that, I’m going to pass the word to JP, so he can comment a little bit on the Latam situation.
Jao Paulo Ferreira
Hi Stephanie! As regards to the markets where we operate, what we are seeing across Latin America is that the industry is being increasing prices and volumes remain relatively flat up to now, right. Within that context, we haven't shied away from increasing our own prices and we – so we already have and will continue to try and protect our gross margins. If trends change, of course we will make sure that our offerings to continue competitive against our main competitors in the ridge. Thanks.
Stephanie Wissink
Very helpful. Thank you.
Operator
The next question comes from João Soares of Citibank. Please go ahead.
João Soares
Thanks, thanks for the question. I just wanted to hear about Avon, Brazil. I mean you’ve already seen improvement in terms of the beauty line. So you’re just hoping to see, when should we see this overall productivity improving. I know you have been reducing the Fashion & Home, so I don't know if there's any additional adjustments to be made there. And just wanted to hear about the initial, the cross selling right, the initial effects of the cross selling. How are you on that front?
And lastly about China, in the last call you mentioned that you're visiting certain growth strategies and of course you're now focused on margins and cash flow. Just hoping to see where we are at that strategy. Thanks.
A - Guilherme Castellan
João, can you repeat the last question please?
João Soares
Sure Guil. No, just on China, on China expansion, so how are the plans for China? Have they been completely postponed?
A - Guilherme Castellan
Thank you, João. JP is going to start here and then I'll answer the other questions.
Jao Paulo Ferreira
So João, we are confident on the trends coming from Avon. If you look at the trends quarter-on-quarter, you see that it's trending towards stabilization as I mentioned before, so that trend should continue and driven by Beauty, which was a deliberate choice.
As regards Fashion & Home, we have simplified the portfolio. We are working towards targeting more – a more profitable business and sync our business there, so that should remain somewhat negative in terms of productivity, but – so that we can focus on Beauty, and that’s what you're seeing there. And if you extrapolate the data points, I think you can estimate when we should reach stabilization.
As regards to cross selling, we are aiming to see a significant acceleration of the cross selling initiatives towards the end of this year. We do think we are now better prepared to do that.
Guil, should you complete the second.
A - Guilherme Castellan
Yeah, I will. Thank you, Jao. We're super excited about the entry of Aesop in China in Q4, right. We remain infused about that, Aesop already has a pretty good brand awareness and brand equity in China, even though it hasn't operated there within retail, and again all the indications that we have is that basically the consumers are going to be also very much into the Aesop proposition through the experiences that – difference experiences that Aesop offers, right, especially compared to other luxury brands right.
So the plan for China is one, just to be super clear, in the short term these are Aesop plans, right. We're still expecting to launch two stores into the end of the year in Q4. We already have basically decided on the retail location. We're working on that and again we feel commit here with the Q4 entry at least in two start locations in Shanghai, with a plan to continue to expand that in 2023, right. But in the short term that plan will be mainly focused around the Aesop brand and again, we're very infused about that story in China Mainland.
João Soares
Very helpful Guil and JP, thanks.
Operator
The next question comes from Irma Sgarz of Goldman Sachs. Please go ahead.
Irma Sgarz
Yes hi! Thanks for taking my question. I was hoping to get a little bit more detail on the integration cost line, which I think was primarily coming from Natura & Co Latam this quarter, as well as the group restructuring costs of I think about 150 million. I mean obviously you've talked about a little bit of what you are doing in terms of group restructuring. But I was hoping to get a little bit more details, exactly what is in those lines and also how you’re thinking about the forward for those lines. Should we think about those lines to recur for a couple more quarters, what sort of magnitude, any sort of indication that would be useful.
And then also about guidance, you had revised guidance, the previous management had revised guidance in May if I recall correctly, and especially for the leverage targets that you had pushed out to 2024. I was just curious if your maintaining those targets. Thank you.
A - Guilherme Castellan
Thank you, Irma. Good to hear from you. Thanks for the question. Yeah look, we continue to deliver basically on our transformation costs, namely for Avon International and the integration costs in Latam, right. And you're right, in Q2 of this year we had approximately R$100 million coming from integration in Latam, right. And of course, that is efficiencies that we find with the Avon / Natura combination. Part of that of course is related to people as the transformation costs of Avon is related to people as well.
So it was a big impact in Q2. We should expect to continue to see some impacts in the second half of the year as we continue to find efficiencies, sustainable efficiencies for our business going forward.
And you're right, look there is group restriction cost, where they impact this Q2l; that was basically the decisions that we took in the last quarter. So basically what Fábio had mentioned in the beginning of his presentation, that there is basically a cost savings mapped around 40%, that if we had implemented that in the base of 2021, not necessarily that number is the impact in Q2. That number we're going to see that, especially in Q3, but mainly in the second half of the year. So you should estimate to see more, let's say expenses are coming from the group restructuring the short term, to drive of course recurring savings in our group as we move towards a more leaner and lighter structure as Fábio mentioned.
Then the second question sorry was about.
Fábio Barbosa
Guidance.
Guilherme Castellan
Guidance, so thanks Irma, yes. No look, we're not commenting on guidance at this point. I mean as we discussed before right, the transition committee continues to analyze this structure and the new governance model, which we know that there will be a potential impacting in our financial forecasts, right, and again the idea of that is not only looking for savings in the group structure, but also to improve the governance. It gives more autonomy in account for the BU’s, so we can be a little bit more agile in reacting to the market challenges, right.
So we’re continuing to review our strategy, especially in the very important Q3 and of course assuming there is any change related to that topic, we’ll make a formal communication to the market, but at this point there is absolutely nothing to comment on the changing guidance.
Irma Sgarz
Okay, thank you.
Operator
The next question comes from Richard Cathcart of Bradesco. Please go ahead.
Richard Cathcart
Hi everyone! Good morning. Thanks for taking my question. Just a quick one here. I mean both Fabio and Guil, you talked about improving cash generation you know this quarter, so a pretty large consumption of cash flow. I was just hoping that you could take us through a little bit of the detail about what has driven that in the second quarter. Thanks very much.
Guilherme Castellan
Richard, thank you for the question. So just to be clear, the question is about the cash flow in the second quarter and the main drivers, is that correct?
Richard Cathcart
That's correct, yes.
Guilherme Castellan
Yeah okay, perfect. Now look, again I think we already said that – I don’t want to be repetitive, but I'm going to say again, right. Cash flow has become I think the top priority for the company right in terms of focus, especially in the short term, right. And very important as Fabio mentioned, the BU’s incentivized to deliver that as well of course as the holding is, right. So it is very important for the firm to continue to focus on cash generation right.
We are not happy with the Q2 results, right. We understand that there are of course some one-offs there and some catch up to do in Q3 and Q4, but we are not happy on that. Even though again, we already see some better results as I mentioned, especially on the inventory – on the inventory management level in terms of working capital, and on the return investment as we do a more diligent and thorough CapEx revenue of the projects in the short term, right.
As I mentioned before Richard, the three priorities for us, when we look at cash conversion, right, we'll continue to be working capital. We’ll continue to be on the inventory management which we believe it's one of the biggest alternatives that we have there. We continue to be on payables and we understand that the results in the second quarter of the year on payables, they were not satisfactory and we expect to catch up especially in Q4 in that sense. And of course receivables; even though again we continue to see an in bad debt, in most of the countries that we operate in, of course we’ll continue to be diligent in that sense as well.
CapEx is also another lever as we have seen in Q2 and H1, right, and continuing to be by the way in H2, even with some investments as I mentioned for Natura and for Aesop especially geography and category for Aesop. But that will continue to see a lever of improvements, especially when we look at the percentage of net revenues. And finally cash tax rates, especially in the second half of the year, where again we see a better profitability coming from the markets and we’ll continue to evolve in our tax planning side.
It’s very important to highlight through, right, and again I want to be very clear that we are not happy with cash flow, but I think very important to highlight that historically the business has a big seasonality in terms of cash consumption in H1 and cash generation in H2, especially in the very critical Q4 right, which again is basically a seasonal quarter for the BUs and basically a huge cash generation quarter for Natura &Co right. So we remain very much focused on delivering this, the cash flow in H2 and as I said in the beginning of my answer, all the BUs are mobilizing, more important incentivized to deliver on that front.
Thiago Macruz
Okay, thanks very much Guil.
Operator
The next question comes from Danniela Eiger of XP Investimentos. Please go ahead.
Danniela Eiger
Hi! Thank you for taking my question. The first one is a follow up on the restructuring expenses. You mentioned Guil that this was mainly related about the adjustments made on Q4. Just wanted to know if we should expect that to continue in the coming quarters? I know that the transformation and integration expenses should continue, but just on this particular line.
And my second one is actually regarding the tone of the speech in the release regarding the second half of the year. I understood it as more cautious on profitability, those two constructive of the top line and obviously very focused on cash generation. I just wanted to understand it that's correct or if maybe you could provide a little bit more color on how you are thinking about the margin dynamics for second half of the year across brands.
And my last one if I may is regarding leverage. Given that there is a lot of headwind, both on the macro front under the restructuring of the businesses. How you're feeling about that in going forward? I know that again you're very focused on cash generation, but just wanted to have a greater view on how you are thinking about this going forward? Thank you.
Guilherme Castellan
Thank you, Danniela. I’m going to try to cover the, all of your three questions. If I forget anything, let me know, but…
I think the first one is related to corporate expenses. We saw a decrease in the corporate expense in the quarter, basically from more than R$150 million reais in Q2 of the previous year to R$88 million in the Q2 of 2022, right.
Just to be clear, as we stated in the release, there's approximately R$20 million that was driven mainly by cost containment and phasing of expenses, right, in Q2 of this year and of course there are savings that are going to stick. There are savings that as we discussed before, they were related already to the actions announced in Q2.
Now, we expect more savings to come as Fabio mentioned in the beginning of the call, as of course we continue to deliver these leaner and lighter structure at the holding level, even though again we are not giving any type of guidance about corporate expenses for the short term or for the medium term. But we do expect significant savings to continue to flow into the bottom line coming from a leaner structure, and especially the announcements that we have made and we’ll continue to make throughout the Q3.
The second question, I think was related to the tone and to the H2 outlook right. Look, the situation is very fluid right, and I think again you can get a sense as per our results about some good news coming from a few places, other places are still showing a little bit of a challenging environment and so on, right. So we're being cautious, yes, about the H2.
We are still expecting to see basically commodities and inflationary pressure to play a role in our gross margin. We’ll continue to offset that through revenue management, right, not only pricing increases and discount management, but also through basically a mix of categories right, which has been a focus for us in most of our views. And we are expecting of course, as we saw in H2 – sorry, as we saw in the second quarter in Q2, we expect our revenues to trend better and we are seeing basically our BU’s trending better, Q2 versus Q1, and we continue cautiously of course, expecting to see that trend to flow into the H2.
But in terms of margins, I think you're right, we're still expecting the commodities to play a role, in the short term. We are working thorough on the margin side. As I think one example of that is the corporate expenses in the holding that you just saw. But not only that, all the BU’s are very much focused on delivering margin in H2, even with the challenges scenario that some are experiencing.
So it's – I think it's a yes, given the – how the situation is fluid and how the situation is certain and how we are still being impacted by geopolitical tensions and inflation in most of the markets. We are cautious about the second half, even though again I repeat we're not providing any type of guidance in terms of margins for the second half of the year.
But keep in mind that as cash flow margins also have a seasonality, right. And of course we - I repeat that, that Q4 is the critical quarter for us to deliver a good margin in terms of results, right. So when we say that we're being cautious on margin, not necessarily we are comparing to H1, but we are comparing to the margins of the previous year.
And I think that the third question was related to leverage. Yes, I think look, on that a couple of things impacted our leverage. The first one is all the transformations that we see in our P&L either through the transformations of Avon or integration costs of Latam and the corporate restructuring of course that has an impact in the reported EBITDA right.
Though again, those savings there, they are supposed to be recovering, so we should have again the benefit of those actions supporting bottom line in the future. And cash is a priority, right. Both cash and margins are priority. Cash is a priority for us as we discussed and we continue to of course attract more into results of the BU’s and of the holding very closely, and incentivizing them according, right.
From a financial perspective, I think you saw the – and you are aware of course of the chart in terms of debt level maturity. We are comfortable with that, but that doesn't mean that we shouldn't focus on leverage in the short term and is again a priority for us as you were correct.
Danniela Eiger
That’s typical. Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Fabio Barbosa for any closing remarks.
Fabio Barbosa
Thank you very much, for being with us today. As it was extensively discussed here and is widely known, we are all operating in a challenging environment. But to have a clearly defined priority and we are more likely to deliver again, how? This is the strategy. First, by allowing BU’s to increasingly focus on their specificities. And two, by setting the right guard rails on incentives from the holding for the people which are close to the action, who go in the direction that we all believe we need to go.
So thank you for your attention and have a great weekend! Good bye!
Operator
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Natura &Co Holding S.A. (NTCO) CEO Fábio Barbosa on Q2 2022 Results - Earnings Call Transcript