Natura & Co Holding SA
BOVESPA:NTCO3
Earnings Call Analysis
Q4-2023 Analysis
Natura & Co Holding SA
The company has undergone significant restructuring over the past year, focusing on streamlining business operations, prioritizing cash conversion and margins over sheer revenue growth, and advancing structural projects. One major change was divesting two subsidiaries, Aesop and The Body Shop. The company is also considering splitting its Latin American Natura &Co and Avon brands, though this potential separation remains in early stages and subject to approval.
Financially, the company has improved its margins and cash flow, transitioning into a net cash position by the end of the year. These strong results have enabled a shift towards a more optimal capital structure and the declaration of a BRL 979 million dividend for the year, signaling a more favorable financial stance.
Natura &Co reported a consolidated revenue increase by 4.5% in constant currency, though sales in reals saw a decline of 17.4%, mainly due to currency devaluation and hyperinflation accounting, particularly affecting the Avon brand's performance. The Natura brand itself posted growth in Brazil, offsetting some challenges from the Latin American markets.
The adjusted EBITDA margin for the latest quarter saw a notable year-over-year expansion from 6.4% to 10.1%, indicating robust quarterly improvement and a trend of margin increase throughout the year. Despite a reported quarterly net loss mainly due to capital loss from divestments and non-cash goodwill impairments, the underlying net income for the year was positive at BRL 3 billion.
Operational optimizations, including reducing general and administrative expenses, contributed to improved cash flow. Free cash flow turned positive at BRL 59 million, and work on improving capital structure continued. The company ended the quarter with a solid cash balance of BRL 7.8 billion.
The past year marked a pivotal point for the company, with a focus on continuing to evolve strategies for the short term, emphasizing margins and cash, and paving the way for further investment in brand development and technology. Capital allocation will remain a key focus for value creation, with expectations of continued top-line volatility.
Argentina, a key market with historically high EBITDA margins due to strong brand presence, has faced significant currency devaluation impacting overall results. Although the country's economic volatility continues, the company projects an expectation of margin improvements and a reducing impact of Argentina on the overall business mix.
Efforts to bolster cross-selling have proven successful, particularly in Andean countries such as Peru and Colombia, and now with a recent launch in Chile. Plans are in motion for further commercial integration and order simplification in Brazil anticipated by the middle of the year, indicating progression toward a more cohesive sales structure across the brand's operations.
Commitment to cost control and margin improvement remains strong, with significant progress made in managing transformational and restructuring costs. While such costs will continue into the near future as part of the 'Wave 2' initiative in Latin America, they are expected to be reduced in magnitude when compared to the previous year, with a trend towards diminishing these expenses significantly by 2025.
The company acknowledges its commitment to the market and plans to return with more definitive information on the potential separation of business units and future strategies. While the future holds uncertainties, the management emphasizes their dedication to operational excellence and financial discipline.
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Good morning, everyone. Thank you for waiting, and welcome to the Natura &Co's Fourth Quarter and Full Year 2023 Earnings Conference Call. It's important to point out that we have a simultaneous translation tool available on the platform. To access it, just click on the interpretation button through the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. For those who are listening to the video conference in Portuguese, there is the option to mute the regional audio in English by clicking on mute regional audio. On this call today are Fabio Barbosa, CEO of Natura &Co; and Guilherme Castellan, CFO of Natura &Co. Joao Paulo Ferreira, CEO of Natura &Co Latin America, will join for the Q&A session. The presentation that we will refer to during this call is available on the Natura &Co Investor Relations website. I will now hand it over to Fabio Barbosa. Please, sir, go ahead.
Thank you, and good morning, everyone. We greatly appreciate your participation today. 2023 was a year of key advancements in our strategy operations, financial performance and enhanced overall financial position. I'm encouraged that we delivered solid results in the fourth quarter and for the full year, marking significant process in our transformation. I would like to start with a quick overview of what drove our 2023 performance and contributor to our success. The past year was driven by 3 key enablers that we had established back in June 2022. They were; streamline our business, focus on profitability and cash conversion versus revenue growth, and advance structure projects. Beginning with simplification. We closed the sales of both Aesop and The Body Shop in the second half of the year. We also continue to optimize the holding structure by giving more autonomy and accountability to the business units. Then earlier this year, we announced the listing of our ADR from the New York Stock Exchange. And last month, we released a material fact in for middle market, our plans for assessing a potential separation of Natura &Co Lat Am and Avon. As you all know, we are still in the very early stage of this process. And of note, there can be no assurance at this time that the separation will be approved by the Board. We will keep you and the market posted with any relevant updates on this process. Next, financials. We are pleased that our business is moving in the right direction. We strengthened our margins, improved our cash flow and deleveraged to be in the net cash position at year-end. The positive free cash flow to funds, alongside our much stronger balance sheet, allow us to start moving to a more optimal capital structure and to announce a BRL 979 million dividend payment for this year. Moving to the structured projects. In Brazil, Wave 2 already led to a fourth quarter, where we saw enhanced productivity, cross-selling and recovery of the distribution channel activity. Furthermore, the initial challenge mentioned in the last earnings call showed improvements. At Avon International, I would highlight that the entire business is already being managed from 2 lead regions, down from the previous 4 mid ones, showing further simplification of the business model. Last, our strategic focus and investment in our ESG goals has been and will always be a priority for us and our key stakeholders and is totally embedded in our business strategy. In this sense, I want to highlight important initiatives from this year that we are very proud of, which have to be to do with our people. We not only met our goals to ensure a living wage for all Natura &Co employees, but also reaffirmed our commitment to eradicating the gender pay gap across the organization. With that, I will turn the call over to Gui, who will provide more details on our 2023 financial results. Gui?
Thank you, Fabio, and hello, everyone. I'll start on Slide 6 with consolidated revenue from Natura &Co, which stood at BRL 6.6 billion, up 4.5% in constant currency. In reals, sales were down 17.4%, reflecting depreciation of some currencies in the countries in which we operate versus the real and the impact of hyperinflation accounting. Excluding Argentina, this decline was 5.1%. We look at the performance review shortly. But in a nutshell, we posted constant currency growth in Natura brand, which was up 8.5%, but down 4.7% excluding Argentina, mainly driven by solid Natura Brazil performance, offset by the Avon brand. At Avon Lat Am, we saw an expected decrease given the rollout on Wave 2, which included planned reduction in reps, coupled with portfolio optimization, especially in the home and style category. On a positive note, we could see improvement in the downward trend in Brazil when we compare Q4 to Q3. The changes implemented in the home style category were also responsible for most of the decline seen at Avon International. Now turning to Slide 7. The adjusted EBITDA margin was 10.1% in Q4, expanding 370 bps year-over-year from 6.4% in Q4 '22, and marking another strong quarterly improvement with solid expansion across all businesses. Excluding the hyperinflation accounting impact, the expansion would have been 510 bps year-over-year. This reflects improved results at Avon International with margin expansion of 550 bps year-over-year, driven by both higher gross margin and transformational savings being implemented along with the strong impact from SG&A savings. Natura &Co Lat Am also registered solid margin expansion of 250 bps year-over-year, also driven by higher gross margin and improving G&A expenses. It is important to note that we saw expansion of our EBITDA margin in every quarter during 2023. We're particularly pleased with the trend in corporate expenses, which have declined approximately 40% in over 2 years. As Fabio also mentioned, the improvement in our cost structure is a big contributor to our improved adjusted EBITDA margin. Moving to Slide 8. Let's now look at our bottom line. The reported net loss in Q4 '23 was BRL 2.7 billion compared to a net loss of BRL 890 million in the same period last year. This is mainly explained by discontinued operations. which includes the capital loss due to The Body Shop divestment, and Avon international noncash goodwill impairment of BRL 664 million. When we look at the underlying net income, which excludes transformational costs, restructuring costs, discontinued operations and PPA effects from net income, we get to a net loss of BRL 506 million versus a loss of BRL 49 million in Q4 last year, as higher adjusted EBITDA was more than offset by higher net financial expenses mainly related to the payer devaluation, hyperinflation accounting and also tax expenses given the mix of profitable and unprofitable countries. In the year, reported net income was positive BRL 3 billion, an improvement from the loss of BRL 2.8 billion reported in 2022. In full year '23, free cash flow from continued operations was minus EUR 2.8 billion, mainly impacted by the BRL 1.5 billion settlement of the derivatives related to liability management exercise we executed in the second half of the year and a higher working capital consumption. Free cash flow to firm in the same period was positive BRL 59 million, adding back the FX and interest on debt and derivative lines, versus negative BRL 561 million reported in full year 2022. Working capital was impacted by accounts receivables, given higher revenue sales from Natura Brazil that is exposed to the longest receivable terms and inventories impacted by write-offs as a consequence of portfolio optimization in Lat Am Wave 2. On Slide 10, you can see our liquidity profile. We ended the quarter with a cash balance of BRL 7.8 billion, up from BRL 6 billion a year ago as a direct result of the sale of [indiscernible]. The proceeds from the sale allow us to pay down most of our debt in the second half, becoming cash positive in BRL 1.7 billion and reaching a negative net debt-to-EBITDA ratio of minus 0.79x. During the quarter, we also concluded the tender offer of $880 million related to the bonds maturing in May '28 and April '29. The average maturity of our debt now is 4.7 years. Our balance sheet is strong and sufficient to support our investments in growing the business. And combined with a positive free cash flow, allow us to move to our optimal capital structure. And we are announcing BRL 980 million in dividends payment for this year. We will maintain a balanced and disciplined approach to capital allocation with respect to our strategic priorities. Before turning to our performance by business unit, let me update you on our Wave 2 progress. The rollouts continue to evolve with a solid performance from the Natura brand in Brazil and a recovering trend from Avon. We continue to see enhanced productivity and cross-selling, coupled with a recovering distribution channel activity in Brazil during Q4. We're also already noticing improving trends related to some of the issues that we disclosed last quarter. In Brazil, more specifically, most of the backlog of delayed deliveries was resolved in the beginning of the year, restoring on-time delivery and lead times for both brands to their [indiscernible]. The efforts to reorganize sales leadership are already showing signs of stabilization, and the performance indicators are already aligning with historical norms. The level of inventory short term has seen improvements on a quarter-over-quarter basis despite the seasonal strong demand in Q4. It is worth noting that these adjustments are ongoing as we speak as we get to better understand the new levels of demand from the combined business. In Hispanic Lat Am, the level of service in Peru and Colombia is also better, and we saw improved satisfaction from our consultants. With the experience gather and lessons learned since the first rollout of Wave 2 in August, we're able to implement a smoother integration process of Natura in Avon, Chile in the beginning of this year. Let's now look at performance by business unit, starting with Natura &Co Lat Am. Excluding Argentina, revenue was down 4.7% in reals. The Natura brand continued to post strong momentum with year-on-year growth of 8.6% in the quarter in Brazil in constant currency, demonstrating solid performance despite the operational challenges related to the Wave 2 roll out that I just mentioned. Still, this result was fueled by nondirect selling channels, including retail and digital, which we saw significant growth contributing to a larger share of total revenues and improving contribution margins. In Hispanic Lat Am, excluding Argentina, revenues were broadly stable year-over-year. Mexico faced challenges to the adjustments in its commercial model, while Chile experienced a dip in performance as we prepare for the early '24 Wave 2 rollout. Now the Avon brand in Lat Am, net revenue in the [indiscernible] was down 5% in constant currency, mainly impacted by the 12% drop in Brazil, still impacted by the wave 2 rollout. Although it is still in negative territory, this was an improvement from the 25% decline reported in Q3. In Hispanic markets, net revenue was broadly stable in constant currency. But down 19% excluding Argentina, reflecting ongoing challenges and similar trends to Q3, particularly related to the preparation and execution of Wave 2. Finally, the home and style category recorded a 31% revenue decrease in constant currency year-over-year, directly related to the portfolio optimization strategy we announced before. We'll now turn to Natura &Co Lat Am profitability figures. The adjusted EBITDA was BRL 557 million, and adjusted EBITDA margin was up by 250 bps to 11.4%. Excluding hyperinflation accounting impact, margin expansion would have been 510 bps year-on-year. Natura &Co was again a solid performer in terms of profitability, driven by a strong performance from Natura Brazil and evolution of the performance of Avon in the region. We saw gross margin expansion of 380 bps, mainly by Avon Hispanic, which was boosted by commercial adjustments. Although we are pleased with the progress to date, Avon is not yet where it needs to be. Overall, the improved profitability in Natura &Co Lat Am was due to gross margin expansion driven by effective pricing strategies, product mix enhancements, portfolio optimizations and reductions in G&A expenses. These gains were partially balanced by planned increase in marketing. Now let's turn to the performance of Avon International. Now moving to Slide 16. Avon International Q4 revenue was down 6.1% year-over-year in constant currency and 16.9% in reals, an underperformance when compared to the last couple of quarters when was broadly stable. The main impact here is the home and style category, while beauty revenue was down 2.6%. Avon International is also improving digital sales penetration, which increased by 2.2 percentage points year-over-year to 8.3% of total revenue. Profitability in turn show an important evolution with adjusted EBITDA margin reaching 11.3%, an expansion of 550 bps year-on-year. The expansion reflects gross margin improvement, coupled with a decline in selling and G&A expenses. The year-over-year comparison base was easier as Q4 '22 was significantly impacted by phasing of expenses, which helped Q4 '23 margin expansion despite sales deleverage. I will now turn the call back to Fabio for his closing remarks.
Thank you, Gui. 2023 marked a pivotal chapter in the company's history, setting the stage for the ambitious horizons we aim to reach in 2024 and onwards. We are encouraged with the positive results from the strategy set approximately 18 months ago, but we must continue evolving our strategy as margins and cash remain as a priority in the short term, paving the way for additional investments in brands and technology.
During 2024, resource allocation will continue to be a critical driver for future value creation with a focus on investments in key growth markets and projects. We continue to expect volatility in top line, but with margin improvements in the full year, particularly excluding Argentina. I'm excited to build upon the success of the past year and deleveraging on our long-term objectives. We are now available to take your questions.
Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions] Our first question comes from Joao Pedro Soares, Citi.
Appreciate it, and good morning Fabio. Good morning, everybody. A couple on my side. The first one, I just want to understand capital structure going forward after the dividend payment and looking into the first quarter, where you have a seasonally worse cash cycle, right, and as well as I think looking -- I think just to point that we want to get is what would be the optimal capital structure now in looking at specific leverage, right? The second point that I wanted to discuss in Brazil, I understand that you already sold the delivery -- the delayed deliveries, but we still see some issues with the inventory management, right, the inventory shortfall in the fourth quarter. So I want to understand if this is fixed, right, if you should expect other effects? And also wanted to discuss in terms of the rep base, right? We still see a decline in the rep base in the fourth quarter. Where are we exactly in that cycle, right, when we should see a reversion in terms of the rep or rep base? And lastly, if I may, sorry about that. But lastly, if I may, just what would be the recurring EBITDA and the recurring earnings excluding the effect of Argentina, the ARS depreciation that is.
Thank you for the question. I hope everything is well. So I'm going to take the first question here on capital structure. I'm going to pass the ball to Joao, so he can explain a little bit more on Brazil and your questions on inventory. And then we can talk a little bit about the last one. But yes, so on capital structure, let's remind everybody that this is something that we have been talking to the market since we closed the Aesop transaction back in the second half of last year, right? And there are basically 2 drivers now that allow us to move to a more optimal capital structure, right? Those drivers are the first one, the strong balance sheet position. As you can see, we finished the year with BRL 1.7 billion in cash. And the second one is the strong free cash flow to firm generation, right? As you probably -- I remember as one we have been consuming cash on an annual basis, mainly driven by, yes, free cash flow preparations, but also due to the high interest expense that we had on an annual basis. And now with the liability management, with our cash position, that number is much better, of course, right? It's not impacting us negatively as before. Plus, the confidence that we have in the plan that show us that again, we are in a very good position to go back to strong cash flow generation in the upcoming years. Even keeping in mind that in 2024, we have potential one-offs, such as continued transformation costs and tax expenses related to capital gains of 2023. But having said that, again, we're comfortable on the plan and we believe that, that allows us to announce a BRL 979 million in dividend for 2023, which is the maximum of our profit reserves and also allow us to move from more optimum capital transactions as we have been disclosing to the market should be around 1x to 1.5x leverage, which is not going to happen overnight, okay? I'm going to reiterate that point is not something that we're going to move immediately. But of course, we're going to be targeting that level as the business progress. With that, I'm going to pass the word to Joao.
Thank you, Gui. As regards to our Brazilian operation, indeed, deliveries have been sorted out at the end of the year, and it's now back to normality. As regards product shortages, we experienced a very high figure throughout Q4 as we started stabilizing and learning more about the combined demand of Natura and Avon, and currently,is operating at a much lower number than we experienced in Q4, although higher than our historical levels. So we are still learning from this new combined portfolio and also learning from the improving trend of our business in Brazil. Gui, I think the next one goes to you on the recurring margins accounting.
Yes. So Joao, I think you probably had a chance to look at the release where we put a table there, indicating what is the impacting of the hyperinflation. I reaffirm here that even though we should expect big macro volatility in the country. Argentina continues to be a paramount region for us to win. And by the way, one that we have done extremely well in the last 3 years. And we'll continue, of course, to be focused in the region. Of course, there's a hyperinflation impact, which as you probably saw on the table, impact negatively the Latin America, the Latin America margin expansion. And again, we should continue to expect somewhat of that type during in '24. Having said that, it's very important for us to reaffirm and recording what Fabio said here, right? That we are expecting to see margin improvements in Latin America, particularly excluding Argentina. It's very difficult to predict what is happening in Argentina, what will happen in Argentina, especially in the scenario of consumer constraint. But we are confident that the plan is working. And of course, with that, it will result in continued margin expansion. So I hope that the table helps. And of course, if you have any other questions on that, we can take it offline. Thank you.
Our next question comes from Joseph Giordano, JPMorgan.
There are a few ones actually here. So the first one goes into the Lat Am perimeter. Those are maybe a simple question. So we still have the way it should be implemented in Brazil. But in the fourth quarter, we did see some acceleration in the shrinkage of sales reps in Brazil. So the question here is like when we should be seeing that normalizing? The second one in Latin America, is what Gui was commenting now. Just trying to like exclude the Noise from Argentina. So if you could share what is the margin level in Latin America, excluding Argentina. And why do we ask that because like when we look at a constant currency basis or anything like that, we still have some inflationary gains on inventories that tend to distort the reported margin figures. Then moving to Avon International. I have 2 questions on this front. So we do see like, okay, top line still contracting, but a much, much healthier EBITDA margin level. So the question here is, one, how far are we from having this operation at our cash flow neutral stance? And the second one is if you have any updates on the potential it's been of this operation. Thank you very much.
Joao, sorry, just before the question, the spinoff, what was your other question? I'm sorry I missed that.
On Avon International, it's related to like the cash flow neutral stance and the operations. So top line is contracting, but margin is quite healthy.
So I think Joao is going to kick off with Lat Am and then I'll take the other one.
Joseph, basically, our rep account base has stabilized at the end of the year. So -- and that happened also in Peru and Colombia. So it's now stable and the operation is progressively back to normal regular standards. And I want to call your attention, of course, that the productivity gains have been huge, especially in Brazil. So as of Q1, you will see sort of regular trends progressing. Gui?
May I just add to that. Our objective has been to clean up a little bit the basis and going for the consultants, which are active operating and thus, Joao Paulo emphasize here that the productivity goes up. So it's not -- of course, there is a limit on what I'm saying here. But the idea of more than going for more and more consultants is to make sure that we have consultants, which are active and very productive. And that's what Joao Paulo is working on, which, by the way, is also the case in Argentina.
Indeed, Fabio. And by the way, Joseph, let me call your attention to the fact that if you look at Brazil, Q4, Natura brand grew in the Avon brand, which was minus BRL 24 in Q3 is now minus BRL 11 in Q4, and that is the ongoing trend, very positive trend going forward. So we are focusing on the productivity gains, as Fabio just highlighted. Gui?
Thanks Joao. So thanks for the question. So I'm going to start talking a little bit more about Argentina and again, making a link to what I say to draw on the first question, right? And I apologize, if I didn't understand your question correctly, but I think I can answer both right now. Argentina has historically a very high EBITDA margin. Let's start with that, right, especially driven by the Natura brand and of course, especially driven by the high market share that Natura has in particular. But of course, both Natura and Avon have in the country. Now we don't disclose debt margin, but you should expect debt margin to be above the average of Lat Am, especially driven again by Argentina. Now if I can flag a couple of things related to Argentina, right? I keep saying Joao can expand more, that Argentina remains a key country for us, right? It's a country that we have a huge market share. It's a country that Natura brand has a huge brand equity and is performing extremely well. And yes, we operate in Latin American and we face countries that are volatility. But again, we remain very much focused on winning in Argentina even amid this short-term volatility. Having said that, Argentina, which in the past represented almost 15% of our results. Now as you can see in the financial release, you're going to see that represents less than 8%, right? So of course, the devaluation of the country -- devaluation of the currency has an impact on the total weight. So even though Argentina has a very strong margin. And by the way, the margin in 2023 was impacted by the macro volatility there. So it's not as strong as before. But even though Argentina has a very good margin above the average of the country, we should expect the Argentina weight in the total mix of things to diminish, right? So that's all I can say as we don't disclose margin by country. Now moving to Avon, right? Avon has been on a journey. It has been 3 years since the acquisition. I think that in the last 3 years, we have been mainly focusing on stabilizing the business. And I think the team there, led by Angela and now, of course, Christoph and the team has done a fantastic job in being able to stabilize the business. The results they speak for itself, right? When we talk about improvements. When you compare the results of Avon International 2023 compared to 2021 and even 2022, not only, Joe, you see a margin expansion, but you also see a big improvement in the way the cash has been management, right? Now there is still a small cash consumption coming from Avon, but the improvement has been tremendous. And again, and we expect to see Avon printing positive cash in the upcoming years. So we're very excited to see the plan evolving in the right way even though, again, there are some uncertainty, of course, related as well to the countries that we operate, and we may expect to see some volatility in top line as we have disclosed in the release. Now this links to your next question, which is the studies on the potential separation. And just to be clear, right, of course, that at the end of the day, we're aiming to unlock shareholder value, right, with those studies, if that's the decision from the Board. But at the end of the day, we're all in a position to announce something like that because of the work that Avon has done in the last years, right? Because what we're trying to do as well in the end of the day is to seek the best outcome for both Avon and Natura brand right, which as we have basically disclosed in the past, are our core assets, right? And that at the end of the day, we're only able to announce this result because of the results that we are there today. The results, they were announced, basically, as we mentioned before, because we don't see a lot of synergies between the 2 regions. It's the continuation of what Fabio has announced back in the mid of 2022 of simplification of the business, giving more autonomy to the BUs and lending, of course, the BUs have flexibility on their investment capacity. And of course, again, at the end of the day, we see that we are in a potential position that we can announce something like that. And of course, if the Board approves executed. But as Fabio mentioned, we are in early stages. We don't have anything else to announce at this point. I know that the market gets sanctions and curious, but we don't have anything else on to announce at this point. We'll continue. It's not something simple as you can imagine, there's a lot of things they have to be carefully analyzed. We'll continue to study. And of course, we understand that we have a commitment to the market to return soon with a position on that, and that's what we're going to do.
Our next question comes from Gustavo Senday, XP.
I have 2. The first one, I think it's more towards Guilherme. Looking at Wave 2. In the release, you mentioned that cross-selling has evolved, right, in the quarter. But you could provide more details in terms of categories being cross sold? And what is the percentage of Avon's base that is already cross-selling with Natura? And how that trend compares by country? And also that given that the operational challenges were adjusted in Q4, can we continue to expect the logistic integration of both brands to take place in Q2 in Brazil? Or that plan has been slightly postponed? And the second question, I think it's more to Gui. So gene control was a positive surprise in the quarter. Just wanted to understand if you can expect further gains going forward or the main adjustments has already been made?
Joao here. So as regards to cross-selling, I think we mentioned in previous occasions that is extremely high, extremely high in the Andean countries, Peru and Colombia, where we first started. And in Brazil, is not as high because as you noticed, logistics have not been integrated. So there some additional barriers to placing combined orders in Brazil. Having said that, the number is much higher than we expected, although lower than what you see in the Andean countries, where that has already been integrated. By the way, we have just launched Chile, where we see the same very high cross-selling numbers that we saw in the first countries and now with no operational issues whatsoever. So back to Brazil. Yes, we are working to integrate logistics. The distribution centers in the Northeast part of the country have already been physically integrated. The ones in the south, southeast will take longer. Having said that, we are preparing another round of commercial integration and order simplification by mid this year between June and July.
Thank you, Gustavo, for the question. Great to hear from you. So yes, I think as we have been telling the markets, cost control has been one of our priorities in the last few months, right, since basically 2022, second half of 2022, alongside, of course, margin and cash conversion. It's very important to mention that we'll continue to evolve in this agenda. I think a lot has done. You can see the results as we disclose on the holdings side. But you can also see the results on the BUs, right, especially there, especially in Lat Am and of course, in Avon International. Now, it is important that as we have disclosed one year ago, it's important for us to be clear as well that we benefit from an easy comparable in that sense as well, giving phase of expenses that happened in Q4 of 2022. But even without that and even without the relocation of the lines between sales and marketing and G&A in Lat Am, we have been able to deliver significant gains in G&A in the year. And this is something that the market needs to put us in check, right? Because as we have been disclosing, we are investing a lot in transformational costs. We're investing a lot in restructuring costs. As you can see in the release in 2023, both in Avon and Lat Am, there were significant expenses related to those transformational costs. And of course, they have to pay you, right? It's, of course, not all those numbers that we have disclose here, they are cash related. There are some noncash impacts there. But most of them, they have to play yield either to optimize the structure of the business or to generate more efficiencies in our technology. But they have to play yield, and this is something that the market should ask us on a continued basis because of our commitment to continue to work on costs and continue to work on margins going forward.
Our next question comes from Ruben Couto, Santander.
Actually, I want to do a couple of follow-ups, Gui, particularly on these what you just mentioned about nonrecurring expenses in 2024. Can you share a bit about how much you're expecting for the year and how you're working to reduce these going forward? And a second one is still on Natura Brazil sales. Can you guys quantify how much sales growth would actually have been if not for the inventory shortages that you faced in the quarter? And a little bit on the competitive environment in Brazil, how you're competitors reacting to the adjustments at Avon, falling sales at Avon? Are you seeing some moves to try to capitalize on that, how you're seeing this competitive environment evolving throughout the year as well?
Ruben, thanks for the question. I'm going to start with the first one, and then I'm going to pass to Joao so he can talk about Brazil. But yes. Look, we -- I think that the best source for that will be the presentation that we did to the market on Wave 2 back in August, right, where again we mentioned a little bit about the transformational cost that we have in Lat Am there. Most of the transmission actually, I could say that if not all, are basically almost all of the transformational costs that we have in Lat Am is related to Avon to the Wave 2 integration in the short term. So as we disclosed about that in the past, you should still expect to see those recurring expenses high in 2024. However, not in the same magnitude of 2023, just to be clear, right? And basically, in 2025, that number has to be significantly smaller. Of course, the situation is fluid. And we can decide to accelerate, of course, postpone projects depending on how things evolve. But that is the plan that we have right now, is to continue with those transformational costs, which are purely related to all Wave 2 in Lat Am. But if not, I repeat, not in the same magnitude of what we had in 2023. And related to Avon, right? Avon has been in this journey for 3 years. You've seen transformational costs, especially related to what we call here the central costs of Avon, right? And of course, as Latin America continued to progress on Avon, we should continue to see a reduction in central costs from Avon International as well. And of course, that will incur expenses in the short term. So we're not expecting to see significant deviations in terms of transformational costs, especially compared to the past. But again, I repeat as well, right? As Fabio has mentioned, the capital allocation will continue to be key for us in the short term. Especially in Avon, there are going to be some key bets in specific countries for us to win. And of course, that may indeed generating those transformation costs in a single quarter. But the expectation is this, on a recurring basis, for us to still see significant costs in 2024, but diminishing significantly in 2025. Not in the same magnitude of 2023, though. Thank you, Ruben.
22:39 Ruben, Joao here. So as regards to the shortages in Brazil during Q4, I can tell you that the effects on top line were not marginal or else, we would have seen significant top line uplift if were not for those shortages.
As regards to the competitive environment, we are not seeing anything different from previous quarters. The market as a whole is not showing significant volume increases, but still benefiting from price increases in general, and we are monitoring price competitiveness very close.
Next question comes from Andrew Ruben, Morgan Stanley.
Curious if you could dig in a bit more on the gross margins. In Lat Am, we saw expansion through the year. You've mentioned the pricing pass-through, the mix, the commercial adjustments. So I'm curious how much more room to run there is on these initiatives? You talked about the 2024 outlook. I mentioned some margin improvement on a full year basis. So trying to get a sense how much of that could be gross margin driven still.
Andrew, I'm going to pass the word to Joao. He can talk a little bit more about the term, and then I can talk a little bit more consolidated. Is that okay?
Well, yes. So Andrew, as Gui mentioned before, we are still looking ahead. We still see room for margin expansion in Lat Am, including gross margin. There's a mix of countries. Remember that second half of last year, we basically were implementing Avon in a few countries. So we are not yet stable now. We are getting into stability in half of the countries, more than half of the revenue. So that should reflect somehow. We still face more challenges with the standalone Avon operations in Mexico, Central America, Argentina, where we've been building more efficient solutions going forward. So as regards to pricing, as I mentioned before, we keep an eye on the competitive landscape, and we are pricing accordingly. So overall, I mean, we do see still some room for gross margin improvement, as Gui mentioned before.
Yes. And I think the same thing can be said about the overall consolidated numbers, right? We're benefiting from a mix impact here as well. Of course, mix of regions, but especially mix of categories as we continue to deprioritize Fashion & Home as well, both in Avon Lat Am and in Avon International. And again, as we mentioned in the last quarter, right, we continue to analyze price increases, and we're going to be more tactical on that, depending on the category, depending on the country, depending on the situation -- the macro situation of the country. But I think overall, comparing apples-to-apples, we definitely see space for us to continue to expand gross margin, even though it is important to mention that we're seeing some pressure in costs coming from a few places.
I just want to add, if allow me, that, I mean, in both cases, Natura brand and Avon brand, we have been working on price. And I would say that given the strength of the Natura brand, I mean, I would say well accepted. I mean we did not have the major decline just because we were recuperating margins. In the case of Avon, likewise, to a smaller extent, of course. But we are working also on strikes in the brand so that you can [indiscernible] prices and it's kind of being competitive just because of price strategy or something like that. So we're very glad to see that the reaction of the market and also that is in line with what we said from the beginning that instead of focusing on the major increase in sales, we are focusing much more on increasing margins, okay? And of course, having an eye on sales all the time. But we are very happy that we are implementing that strategy successfully.
Our next question comes from Irma Sgarz, Goldman Sachs.
So a quick question on the working capital. I know in the fourth quarter, there was obviously many moving parts with Brazil taking more share in the overall revenue mix, and there's obviously some impact from deconsolidation year-over-year. But I was hoping you could just provide us a little bit more color on how we should think about this working capital dynamic going forward, what are some of the opportunities that you're working on? And yes, when should we start seeing a more normalized or stabilized trend? And just maybe -- yes, just on the restructuring expenses. Could you just provide a little bit of some examples, some color on where these are cash expenses, obviously, like very clear where restructuring or transformation expenses are related to write-downs, right, a separate. But where these are cash related expenses. Could you just provide a little bit more -- I mean, I probably think there's some rightsizing of maybe sales of employee or headcount. But other than that, what type of expenses go through there? I assume the Natura brand support expenses are not going through that line. But yes, if you just could provide a couple of examples of what goes through that line and then provide also an outlook for the Natura brand support expenses that you highlighted in the press release and that you did in the second half of the year. How should we think about that into 2024? Is that something you foresee to put continued investments behind?
Thank you for the question. I'm going to answer it and pass to Joao, of course, and Fabio, if they want to add anything. But I'm going to kick off here. And I'm going to start with the working capital.
It's very difficult in this stage, of course, that we are and the very good performance of Natura Brazil for us to offset the mix impact on receivables, right? So let's start with that, right? Natura Brazil is where we have the highest receivables. Terms is basically where we have no debt provisions, by the way, where we manage very well those loans historically. And of course, it is a country that we need credits, right, for the consumers, for the consultants to make the business prosper, right? Different, for example, than other regions where you have much smaller receivable terms and where again most of the transactions sometimes are even paid directly upfront. So it is important to highlight that. Having said that, we are far from where we want to be in working capital. So that's on us. I think that we have still a long way to progress when we decided to work on cash conversion, when we decided to focus on cash conversion a couple of years ago with that specific focus on working capital, cash tax rates and CapEx on the investment side. We have made some important evolutions on working capital, but not to the extent that where we want to be. And I think, as I mentioned before, on the receivable side, it's very difficult to offset the impact the mix, the country mix impact there. But on payables and inventories, I do believe that we ended the year not where we wanted to be at. And that raise is, of course, a big yellow fact for us to act on that. And this is something that we'll continue to work in 2024 with the aim of finishing the year, reducing working capital as a percentage of net revenues, especially when you take aside the mix impact caused by receivables in Brazil. Now on the restructuring side, Lat Am specifically in the release, we talk about the breakdown of those transformational costs. So basically, there's 30%. There are several costs. Of course, you can assume that most of that, if not all, is cash related. There is 20% that we say there are write-offs of some Avon assets, which are related, by the way, to the Wave 2 integration, right? Most of that are noncash items, right, just to be clear, right? And you still see some IT investments and other OpEx investments, which are cash related. So there is again, the majority, of course, are linked to cash expenses, especially related to severance and '19 investments. But there are more or less 20% of the equation there. There, you should assume at least for 2023, they are noncash related. And the same thing for Avon. We don't produce that breakdown for Avon in terms of transformational costs, but we should assume that the vast majority for Avon there are cash-related expenses. I'm going to pass the word to Joao if he wants to add anything to that point on Brazil and Lat Am.
Yes. Irma, still on inventory optimization. Just wanted to call your attention to 3 potential levers for that optimization going forward. First is the harmonization of Avon's portfolio across the region. We are slightly halfway through, give or take, and that will help optimizing inventories. The second lever is the increase in local production. We are pushing more volume into the Mexican factory, the Argentinian factory and the third-party manufacturer in Colombia. And finally, the third lever is to do with demand planning systems, where we are trying new AI-based demand planning algorithms that could help us optimizing inventory as well. You also asked about the level of support to the brands, and we remain committed to increasing the support for both brands, Avon and Natura going forward. We publicly announced new support for the Natura brand that was seen on TV. And we do want to reinvest part of the new efficiencies into both brands going forward. We have a very strong innovation pipeline behind the 2 brands this year, and we want our consumers to know that. And the reaction so far have been very positive. We are tracking the return on those investments. And I know that there is important room to increase those investments with expected returns in top line.
And I'll take the advantage, although that was not your specific question, but also because Gui mentioned a lot of the noncash items. Just to highlight what we did on the fourth quarter, which was the sale of TBS, which carried upwards and lost, vis-a-vis, what was in the book, but also cleaning up the balance sheet. We looked into the impairment of Avon International -- of Avon, sorry. We did an impairment. So the idea is to streamline this and move forward so that it can pave the way for us to get into a new life, cash situation. We had lots of cash one-offs this year. So we cleaned up everything, but these were noncash events. That's the impact at the end on what could be paid as dividends, okay, because of these noncash items. But we thought we have to be transparent and clean the balance sheet as much as we can. And that's what we did in the first quarter. That's the loss that you guys see on net profit. I think it's an important highlight to be made here. Thank you.
This concludes today's Q&A session. I would like to invite Fabio Barbosa to proceed with his closing remarks. Please, sir, go ahead.
Well, thank you, everybody. Of course, we will be at your disposal. And I mean we, Elena, Gui and everybody, and myself too, if necessary, will be at your disposal. Thanks very much for your attention, and let's stay in touch. Thank you.
This earnings conference call is now concluded. The Investor Relations department is available to address any further doubts and questions. Thank you very much for your participation, and have an excellent day.