Natura &Co Holding S.A. (NTCO) Q1 2023 Earnings Call Transcript

Natura &Co Holding S.A. (NYSE:NTCO) Q1 2023 Results Conference Call May 9, 2023 9:00 AM ET

Company Participants

Fabio Barbosa - Chief Executive Officer

Guilherme Castellan - Chief Financial Officer

Joao Paulo Ferreira - Chief Executive Officer of Natura &Co Latin America

Conference Call Participants

Danniela Eiger - XP Investimentos

Joao Soares - Citi Group

Joseph Giordano - JP Morgan

Irma Sgarz - Goldman Sachs

Eric Huang - Santander

Robert Ford - Bank of America

Andrew Ruben - Morgan Stanley

Operator

Good morning. Welcome to Natura &Co's First Quarter Earnings. 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 they will be referring to during this call is available on the Natura &Co Investor Relations website.

I will now hand the call over to Fabio Barbosa. Please go ahead.

Fabio Barbosa

Good morning or good afternoon to all of you, and thank you for joining us today. I'm very happy to be with you again. Natura &Co's performance in the first quarter is in line with our plan and previous communication. This is reflected in our Q1 numbers with a solid improvement both in gross margin and adjusted EBITDA margin.

In this meanwhile, the company continues to put in action important structural change in its portfolio, focusing on simplifying its structure, and improving its capital structure. Excluding Aesop Q1 '23 showed a strong profitability improvement, mainly driven by gross margin expansion across all business units and continuous cost control that were partially offset by sales deleverage at The Body Shop and Avon and Latam.

This quarter's gross margin is driven by price increases carryover and more favorable mix, more than offsetting the inflationary environment we continue to experience. As per the normal seasonality of the business, cash consumption in Q1 was high as planned, and working capital management was impacted by a buildup of inventories for Q2, and change related to the continued integration of the Natura and Avon brands in Latam.

From a revenue standpoint, the highlight remains the Natura brand, which continued its strong momentum from last year with Natura Brazil's sales growing 25% along with volume and productivity growths. Shortly after the close of the quarter, Natura &Co announced the size with strategic steps.

First of all, the group announced it has entered into a binding agreement to sell Aesop to L’Oreal for an enterprise value of $2.525 billion. The transaction is still subject to customer regulatory approvals and is expected to close in quarter three, 2023. The proceeds from the say of Aesop will strengthen and deleverage Natura &Company's balance sheet, freeing up resource and to sharpen our focus on strategic priorities with discipline. Notably implementing the second wave of integration of our brands in Latin America. Further optimizing Avon's international footprint and accelerating the body shop's transformational agenda to generate sustainable and profitable growth.

On the second wave in Latin America, we launched full integration Peru, and initial KPIs are encouraging. Finally, the Body Shop announced it was entering its next chapter with Ian Bickley taking over as interim Chief Executive after David Boynton step now. Our ESG agenda continues to advance and I'm very proud of the progress we made on our commitment to life 2030 sustainability vision.

We made further progress on the share of renewable or natural ingredients as well as on biodegradable formulas. Natura &Co also released its third-party equity report, which also looks at gender balance across 73 markets. We maintain our target of equal representation with 52.7% of women in leadership roles, Director and above at Natura &Co.

With that, let me now hand over to Guil, to comment on our Q1 performance in greater detail. Guil?

Guilherme Castellan

Thank you, Fabio, and hello to everyone. I'll start with Natura &Co consolidated revenue on Slide 5, which stood at just over BRL8 billion and grew by 3.4% in constant currency, improving sequentially despite the challenging macro environment. In reais, sales were down 2.8% reflecting the depreciation of some operating currencies versus the real.

We look at the performance by BU shortly, but in a nutshell, we post a solid constant currency growth in Natura &Co Latam with a very strong performance by the Natura brand, notably in Brazil with growth in the mid-20%s.

Furthermore, Avon, Brazil, and international were impulsive territory in the beauty category. Avon internationals fundamentals improved, but performance was still impacted by the war in Ukraine. The body shop ran a difficult quarter with trends quite similar to the previous quarters in core channels while the body shop at home continues its steep decline. Aesop also continued to grow by double digits following the trends of the previous quarters.

As you know, Aesop is now classified under discontinue activities pending the closing of the transaction with L’Oreal, excluding Aesop Natura &Co Q1 ‘23 consolidator net revenues is to the BRL7.3 billion up 2.2% in constant currency and down 3.8% in reais. We turn to adjusted EBITDA margins Slide 6, which stood the 10.5% in Q1 marking a strong improvement of 330 bps year-on-year. This reflected different moving parts and business union dynamics. The main positive impacts were first a strong margin expansion and Natura &Co Latam up 400 bps, many driven by higher gross margin.

Second, an improving margin EBITDA international up 170 bps also boosted by gross margin improvement, transformational initiatives, and phase of expenses partially offset by sales deleverage investments in lead markets and inflation increase on fixed expenses.

Finally, an improvement of holding expenses down 36% year-on-year. This is the result of our efforts to create a linear and simple organization that we started last year. These were partially offset by two factors. First is light margin pressure at the body shop, many due to sales leverage, partially offset by strict financial discipline and some gross margin expansion, and also continue investments that Aesop the letter drop of 320 bps in each margin. Excluding Aesop, adjusted EBITDA margin was 9.7% up 370 bps year on year.

On Slide 7, we focus on net income and underlying that income. Net income in Q1 was a negative BRL652 million, broadly in line with a net loss of BRL642 million in Q1 of last year, and sequential improvement over the last quarter. Higher EBIDA was more than offset by higher net financial expenses, which should be addressed by the ease of transaction and by higher losses from its continued operations.

Q1 ‘23 Underlying net income, which is net income, excluding transformational costs, restructuring costs, discontinue operations, and PPA effect was a loss of BRL372 million. This compares to a loss of BRL155 million in the same period in 2022. You see the bridge on these lights, with the main impacts coming from restructuring costs, discontinue operations, and other effects for BRL115 million PPA effect for BRL82 million and transformation integration costs for BRL83 million.

In Q1 ’23, free cash flow from continuing operations was an outflow of BRL1,813 million compared to an outflow of BRL2,140 million in the previous year. Despite the positive impact from that income in the year, cash flow from continuing operations was slightly worse to minus BRL1,542 million from minus BRL1,425 million given working capital dynamics.

Working capital increase in the term supporting the strong growth in the Natura brand, offset by improvements across the body shop enabled international as a percentage of net rapidness, as we continue to prioritize cash generation and working capital management.

Furthermore, Latam increase was driven by inventory buildup for Q2 ‘23 and accounts receivable, which is primarily due to the strong growth of the Natura brand and adjustments to Avon 10 representative payment terms in several regions to be more aligned with Natura in anticipation of wave two.

These effects were partially offset by continued working capital management activities, particularly in accounts payable as discussed in prior quarters, and other assets and liabilities including recoverable taxes. As mentioned as quarter, we continue our discipline, resource, and location efforts, which resulted in lower CapEx in Q1 ‘23, an outflow BRL258 million 8% lower year-on-year, while still investing our priorities to maintain a sustainable and healthy operating company.

As planned, cash consumption in Q1 was high following the normal seasonality of the business, and working capital management was impacted by the buildup of inventories for Q2 and changes related to the continued integration of Natura, and Avon brands in Latam. Our priorities remain the same and we continue to expect improvements in cash conversion on a full-year basis, though we may experience some volatility between the quarters.

On Slide 9. We look at our liquidity profile. We ended the quarter with a cash position of approximately BRL4 billion. Our net debt at the end of the quarter was BRL9.4 billion and the net debt-to-EBITDA ratio stood at 3.96 times, up from 3.49 times at the end of the year and 2.13 times, one year ago.

Despite improving EBITDA year-on-year, the BRL2 billion increase in net debt versus the previous quarter was mainly due to seasonal cash consumption combined with increases in inventory and accounts receivable, mainly due to the strong growth of the Natura brand.

As you know, the sale of Aesop, which expect to close in Q3, will bring sufficient proceeds that will allow us to largely eliminate our debt and put us in a net cash position. As you see on the second chart, our cash position of BRL4 billion is higher than total of our debt payments through 2027. The average maturity of our debt is 6.5 years. And we face limited debt repayments until 2028.

Let's turn now to our performance by business unit, beginning on Slide 11, with Natura &Co Latam, which posted a solid performance this quarter. Total net sales were up by 9% in constant currency and 2.4% in reais. This was driven by solid double-digit growth at the Natura brand which grew by 25.1% at constant currency. While the Avon brand was down 9.8% in constant currency, but saw growth in the Beauty category.

The Natura brand posted strong momentum with year-on-year growth of 24.9% in Brazil. Growth was supported by volume, but also price increases and mix effect, which led to a strong 20.4% growth in consultant productivity. Retail also had an excellent performance this quarter, in line with our channel diversification strategy. The average available consultant base was up 3.6% year-on-year, but slightly down versus the previous quarter, given normal seasonality of the business. This is aligned with our ongoing strategy, of focusing on increasing productivity, with a more stable consultant base.

In Hispanic Latam, net revenue was up by strong 25.5% at constant currency. Despite the challenging situation in several countries in the region, notably Argentina and Chile, revenue was up 6.7% in reais. Growth was mainly driven by acceleration in Argentina and Colombia, boosted by channel and productivity gains. Excluding Argentina, sales in Hispanic markets were up in mid-single-digit at constant currency, despite a decrease in Chile. At the Avon branding Latam, net revenue was down 9.8% at constant currency, a deterioration versus the previous quarter.

In Brazil, revenue was broadly flat at minus 0.6% slowing down from the 7.5% growth in the previous quarter, but against a stronger comparison base. The beauty segment continued to grow by 5.6%, while fashion home was down 18% in line with our portfolio optimization strategy. The beauty segment in Brazil, again saw a high single-digit gain in consultant productivity. In Hispanic markets, the total number of available representatives decreased 25.4% year-on-year as expected amid the rollout of Waves 1 and preparation for Wave 2 in some countries.

In addition, in preparation for this rollout, adjustments to commercial incentives, minimum order tickets increase, and fashion home portfolio adjustments were made in several regions to move towards integration, which also impacted number of total representatives.

In such context, net revenue was down 14.8% in constant currency and down 22% in reais, impacted by a decrease in Mexico, which has higher exposure to the fashion home category. As well as in Chile, which were affected by political economic relativity. The beauty category was broadly stable in constant currency, but beauty productivity per representative is up more than 20% year-on-year.

As Fabio mentioned, we began the full integration of Natura Latam in Peru, and while still early days we're seeing encouraging first results in terms of increasing cross-sale activity level and consultant productivity. On Slide 12, we turn to Natura &Co Latam Q1 adjusted EBITDA and margin. As shown the graph, adjusted EBITDA grew by strong 47.6% to BRL633 million from BRL429 million in the same period in the last year. Adjusted EBITDA margin was up by a solid 400 bps to 13%.

The margin expansion was driven by a 450 bps improvement in gross margin, benefiting from price increases, richer category mix, and marketing efforts, but still partially impacted by input prices and effects dynamics. It's important to highlight the Q1 ‘23 benefits from full price increase carryover from the previous year as most of the price increases last year happened Q2 onwards.

Also, there were additional price increases in some countries during Q1 ‘23 related to expected commodity and effects pressure to arise in the upcoming quarters. While we expect to continue to see year-on-year gross margin expansion in the next few quarters, it won't be of the same magnitude as in the first quarter of this year. We also benefited from SG&A efficiencies by the Avon brand in Brazil, while the Natura brand continues to make investments enable Hispanic show operational deleverage amid the rollout of Wave 2.

Let's now move to Avon International on Slide 14, revenue was down 7.5%, a constant currency, and 12.8% in reais. This drop continues to reflect the war in Ukraine, excluding that sales were down by a more limited 3.7% at constant currency. Net revenues were also impacted by the earthquake in Turkey, which we estimated had a negative effect of 1 percentage point.

The beauty category entered positive territory growing low single digits in constant currency excluding Russia and Ukraine driven by fragrance and color categories. Fashion at home decreased by 21% in constant currency in line with our strategy to focus on beauty.

The EMEA region show year on year growth while Western Europe posted softer, but improving performance. As expected, the number of representatives is still down 19% amid a new commercial model rollout and the footprint optimization impact. Digitalization is showing good progress and the use of digital tools, which 30.4%, while other KPIs such as units per Rep and activity rate are also improving.

Adjusted EBITDA margin was 6.1%, up 170 bps year on year. The gross margin expansion of 480 bps and continue focus on transformational savings were partially offset by sales, de-leverage brand investments in markets, and inflation on fixed expenses. It is worth highlighting that the comments made for Natura &Co Latam gross margin are also applicable for Avon International.

On Slide 16, we now move to the Body Shop. Q1 net revenue decline by 9.4% at constant currency and 16.5% in reais. Combined sales of core business distribution channels, in other words, stores, e-commerce, and franchisees show a long single-digit decline in constant currency in line with the trend observed in the previous quarter, but on a softer comparable base. This reflects a macroenvironment in the UK and Europe that remain challenging, impacting retail sales.

Revenue was also impacted by a decrease in the Body Shop at home, which continued its steep decline, gross margin, showed inflection point expanding 50 bps year-on-year to 78.6%. This was mainly driven by mix and pricing, partially offset by continued high inflation. Despite the operational deleverage, adjusted EBITDA margins to that 6.1%, down 30 bps year-on-year, given this light cross-margin expansion and street cost control in line with the previous quarter.

As Fabio mentioned, Ian Bickley assume as interim CEO. Jointly with the executive leadership team, he'll be working to refine the Body Shop's current business plan and transformational agenda, while continuing to prioritize profitability and cash conversion.

On that note, as mentioned last quarter, management already took some important steps to improve long-term profitability. This includes the announcement in January of the closure of the at home business in the US, enough dedicated distribution center in the UK. And in February, we announce a restructuring of our global management structure, reducing leadership positions by 25% as well as a 12% reduction in the rest of global overhead staffing. The benefits of this restructuring will accelerate throughout the year.

On Slide 18, we turn to Aesop, which has mentioned is now classified as discontinue operations. Aesop again recorded a solid performance with another quarter of double-digit growth in constant currency up 16.8%. Revenue reais was up 9.2%. Our regions deliver double-digit growth despite the challenging environment. Retail and wholesale show solid growth partially offset by a software e-commerce performance reflecting post-COVID normalization of consumer behavior.

Gross margin was 86% down 30 bps versus the same period last year. It was many driven by price increase, but still impacted by inflationary cost pressure, many higher freight costs, and unfavorable channel mix. Adjusted EBITDA margin was 18.5%, down 320 bps year-on-year, still pressure by planning investments to deliver sustainable future growth, mainly technology and supply chain enhancements and Aesop's China market entry.

Let me now hand it back to Fabio Barbosa.

Fabio Barbosa

Thank you, Guil. I will conclude now on Slide 20 with our key takeaways. First, strategic actions are underway across the Group to improve our performance. These include accelerating the integration of Natura and Avon in Latin America, optimization of Avon International's footprint and continuing to right-size The Body Shop. At group level, we are simplifying the structure and improving our capital structure. Second, the sale of Aesop, which we expect to close in the third quarter, as I said, will enable significantly de-leveraging and free up resources to invest with discipline in our strategic priority and unlocking value for our shareholders.

Third, Natura &Co continues to focus on profitability and cash conversion. This is our priority that we have set already, since mid-last year. And fourth, while 2023 will likely be another challenging year, our strategic priorities are clear and the first results give us confidence that, we are on the right track. We expect a continuous improvement in full-year adjusted EBITDA and cash flow, though we may see some volatility from one quarter to the next. Thank you very much for your attention and Guil, JP and I are now happy to take our questions.

Question-And-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from Danniela Eiger with XP Investimentos.

Danniela Eiger

Hi. Good morning. Thank you for taking my question. I have two from our side. The first one on margin dynamics. Can we think about this margin expansion that you posted, especially on the gross margin level, as a structural one going forward, obviously, respecting seasonality? And also, are there any more levers to be used on the gross margin levels or should we see margin gains coming from more on SG&A efficiency in the coming quarters?

And my second one is regarding Wave 2. I know you mentioned it's too early to reach more final conclusions, but it would be interesting to hear if the rollout has been evolving according to the plan in Peru, or if you already mapped some adjustments needed and also what we could expect in terms of next moves in the coming quarters, including the timing of the rollout in Brazil? Thank you.

Fabio Barbosa

Guil, you can take the first question, JP, you will take the second one. Guil go on.

Guilherme Castellan

Okay. Thank you, Danniela. Thanks for your question. Thanks for listening to the call. I'm going to talk a little bit about the margin dynamic, as a question, and of course, the delivers of EBITDA margin expansion going forward. So, look, I think strong quarter in terms of gross margin expansion, right, on a consolidated basis is more than 350 bps. Latam itself delivering 400 bps, even internationally with 450 bps of margin -- gross margin expansion.

It has been a focus for the team. And of course, especially in the last 12 months, as we have been followed a very disciplined strategy of price increases to mitigate the challenging inflationary environment that we experience today. And of course, additional effects, pressures that comes with it.

So, having said that, I think that it is important to highlight that Q1 has the full carryover of price increases from 2022, because most of the price increases last year it happened in Q2 onwards, right? So, we have the full carryover in Q1. In addition to that, the teams acted strategically in some countries in some categories with additional price increases in the beginning of this year to have the full impact in the year, and of course to protect the margin going forward versus expected inflationary pressures that we may see coming up in our P&L in the rest of the year, especially in the second half.

So, we, I think we were clear, and I repeat what it is in the release that we are expecting to see gross margin expansion, a year ago on the quarters. However, given again, the full carryover of this of the 2022 price increases and the anticipation of price increases in the Q1 of this year most likely it won't be to the same magnitude as we are looking ahead, right as we saw in Q1 compared to what we're looking ahead.

So, having said that, moving to your second question, I don't think that we're done in gross margin to be quite honest at you, that the teams, they have done fantastic job in the last 24 months expanding gross margin. If you look at the trajectory of even international, if you look at the trajectory of Latam term specifically, those two, right? It has been really an effort of not only pricing increases, but really focusing on the right mix, right?

The strategy of deprioritizing fashion home and prioritizing. CFT plays a big role on that. Even within CFT, there is a very strong revenue management strategy to focus on the right categories and of course the products with better mix. So, I think that there are room of course, for their room for expansions of gross margin going forward.

However, of course given potential seasonality of inflationary pressures that may not be linear every single quarter, but definitely there are room for us to see more gross margin flowing into EBITDA. And you're right, there is a lot of them in SG&A, right? And I think, there's no particular anyone off for us to highlight this quarter. As you can see, so in the case of Latam most of the EBITDA margin expansion is coming from gross margin. There is of course additional efficiency for us to seek with the Wave 2 and join the team. They're pretty much a 100% focused on that, and we can talk a little bit more about that later.

And in the case of the internationalist, as you probably saw, the main impact for not seeing the full flow -- the full flow through of the gross margin EBITDA margin was the operational leverage. And I invited you to think about sales stabilization of able international, right? When's that going to happen? Because operational leverage has been one of the main detractors, right, for EBITDA margin because the effort that the team has done on the transformational savings it's really visible. And by the way, it's really protecting the P&L and it's one of the reasons why we continue to see a good not only gross margin, but a good EBITDA margin extension in Avon International for this choir as well. So, I hope helps.

I'm going to pass now to Joao, so he can talk more about the Wave 2.

Joao Paulo Ferreira

So, as regards the full Natura Wave 2 integration, we have just gone live in Peru. We haven't yet closed the first campaign. However, as mentioned before, the first results are encouraging. We are pleased with the cross penetration of both brands into the combined new network of consultants with its consequent productivity gains. And it looks like the activity level is pretty healthy.

So, I need to be cautious, but the first results are encouraging. I'm also pleased with the fact that from an operational standpoint, systems, IT infrastructure, logistics, all work pretty well without any major incident, which in combination gives us the confidence to roll this initiative out to Colombia, Columbia in by around the middle of the year.

Danniela Eiger

Okay. And just on the rollout for Brazil, d does that depend on how Columbia evolved?

Joao Paulo Ferreira

Well, it's planned for the second half of the year as previously announced, so we are sticking to that plan unless any unplanned news arise.

Danniela Eiger

Perfect. Thank you.

Operator

Our next question comes from Joao Soares with Citi Group.

Joao Soares

Hi, good morning, everybody. Thanks for taking my questions. I have two questions as well. The first one is, Brazil -- Natura performing very well, gaining market share and macro and growing at 20 plus percent versus Avon's beauty category going in single digit. So, I was wondering if we could elaborate the dynamics behind the performance of these units. What explains such a big outperformance of Natura in Brazil? Is it the price increase, the comps? Is it demand for fragrances and soaps that are far outperforming the core beauty categories of Avon?

And the second question is on the Body Shop. You're carrying out a big structural cost reduction as you pointed out in the release, and so I just wanted to understand the timing, right? When should we start to see this big margin expansion coming in, right? And the timing of these restructuring costs. Thanks.

Fabio Barbosa

It's just coordinating here. JP, take the first one. Guil take the second. Just say one thing -- we are in Sao Paulo. Gui is United States, so we are trying to coordinate this via -- why I'm saying here all the time. So, JP, please.

Joao Paulo Ferreira

Ladies and gentlemen Yes. Thanks for the question. So, Natura is actually performing well for several quarters already, reflecting the strength of its brand, its multiple channels, where it acts, and also the digitization of its sales force. So, what you see there is, as a consequence of all those elements combined, which is not yet the case for Avon. As you know, we are adjusting the portfolio. We are optimizing the number of Avon reps. And that has a relative weaker effect than what you saw in Natura. That's basically it. Guil?

Guilherme Castellan

Yes. Thank you, Jean, for your question. I'm going to talk a little bit about The Body Shop. I think look the way to think about it is the team, as you mentioned, they have done -- and they are still doing by the way, right? It's not complete. A lot of work on transformational of the company, especially focus in SG&A. As you saw also in the Q1 results right? We changed the trend in gross margin in the last few quarters. We were seeing gross margin contraction.

Now we are seeing gross margin expansion and one of the reasons for that, I think the discipline on the discounts, right, and the price increases flowing in full into the results, which is very important for us. And again, we have said is, one of the pillars for The Body Shop transformation is L'Oreal, right?

But the way to think a little bit about the future is, as you mentioned, the main lever for EBITDA margin expansion coming from SG&A in The Body Shop case. And especially coming in the second half of this year, where again most of the transformational actions will be taken by them.

It is important to highlight that, the revenues of The Body Shop they remain under pressure, right? And they should remain under pressure in the near future. And again, we are at this point expecting revenues to stabilize more towards the second half of this year. And I think it's the same rationale that I explain for even international in the previous question, right, the sales deleverage is playing and is making The Body Shop an important role in terms of EBITDA margin, because there is inflationary pressure in the SG&A.

So, it is very important for us to basically stabilize the revenues. And again, we expect that to happen for the second half of this year. Also, there is a channel mix story there that is important to highlight, right? So, we expect increase of sales from stores and franchisees specifically, which from a mix perspective, should benefit more the EBITDA.

And again, I think that mix will again be more visible in the second half of this year. So, I hope it helps. But glad's taking a follow-up on that.

Fabio Barbosa

Yes, Guil. I just want to add to what Guil said here talking about the gross margin and saying how much this has to do with the strategy we have been following, which is, as I said, to give priority and incentivize margins and cash generation rather than sales. So, we increase the prices we gain gross margin. Of course, we are working on the brand so that we do not have to work as much on discounts as it was the case.

And some stores have already been renewed or rejuvenated, if you will, so that we can work on that with better margins, less complex SKUs portfolio, and so on. So that was the strategy. And then some of the results are showing up, on the difficult economic scenario in main countries like UK, which is the one of the key for TBS. But that, that's just to get the context. Thank you.

Operator

Our next question comes from Joseph Giordano with JP Morgan. Please go ahead.

Joseph Giordano

Hi, good morning, everyone. Thanks for taking my question. Actually, have a few ones. So, the first one, looking into Latin America, we do see like sales at Avon being rationalized with a significant impact on the sales rev base. So here, like, I would like to understand what's the marginal profitability of those sales reps that are leaving the base? Because it looks like, that there -- that those sales were right, highly unprofitable when looking at the bigger scheme of things.

And then the second one goes into the working capital, right? So, we had higher sales and apparently, we are about to see a very good modern-day season ahead.

So, my question to you, when we should be seeing some working capital normalization. And last but not least, on the holding structure, we do see the structure shrinking significantly over the past quarter. So, my question to you is if we should see further gains from this front. Thank you, very much.

Fabio Barbosa

J.P. you got the first two ones. I got the third one.

Joao Paulo Ferreira

Sure. Joseph, as the restructuring in the optimizations we are doing Avon in Latin America. They're meant to deliver a more profitable and healthier business and channels. So, for instance, we have been increasing minimal order, we have been reducing the portfolio on non-profitable items and lower ticket items. We've been reducing incentives and pushing the turn down.

So overall, the goal is to remain with the most productive reps on the base, which then prepares that base for the full integration with Natura. So, all that we are doing is to try and improve the health and the profitability of the Avon business immediately.

Fabio Barbosa

In terms of the holding, I mean, we have made -- from the beginning when I started here, maybe I think it was June, about 10 months ago, something like that, we had important reductions and we keep on working on that. Okay? So, we cannot, I mean, give any guidance on what is going to happen, but the idea is we -- it's an ongoing effort that we will continue focusing on. Joe.

Guilherme Castellan

Joe. You get the three of us now in the same answer. So, I'm going to talk a little bit about the working cap up. Because I think that that was your second question, right? So, you're right. You think that the dynamic of the first quarter was an increase in inventories and increase from accounts receivable. There is, again, nothing unusual in those numbers. I think that the inventory, of course, is mainly driven by the big performance of the Natura brand in the region.

Of course, preparation for Mother's Day, preparation for Valentine's Day in the second quarter, which are important events for us. And the increasing accounts receivable was also due to the increasing in revenues, especially in Latin term, especially in Natura in Brazil that arrives, of course, accounts receivable higher and some normalization from accounts receivables receivable terms in other countries.

But the main impact coming from Brazil. So, we still expect to see working capital pressure in the next quarter. But as we were clearing the release, we're looking at this on a 12-month basis. And when we look at the full year ‘23, we expect to see significant cash conversions improvement, not only in Latam term, but in all the use, right? Naval International as well, and the Body Shop.

And of course, that's flowing full to the holding even the point that you raise of the lower holding expenses in the year, right? So, we still expect to see a significant cash conversion improvement on a full-year basis, though we may expect some productivity in between some quarters.

Joseph Giordano

You find, if I may ask about like this inventory normalization, can you add any comments around like what you're seeing around Mother's Day? Thank you.

Fabio Barbosa

Gui, you want to talk about the Mother's Day? In Latam I think it's --

Guilherme Castellan

Well, without saying much, I'm pleased with our performance for the Mother's Day campaign.

Operator

Our next question comes from Irma Sgarz with Goldman Sachs.

Irma Sgarz

Just very quick follow-up on Natura Brazil, obviously, quite strong growth, which is I think quite a lot of questions are focused on this. I think, I'd love to understand just how the sellout was. Obviously, we're seeing sell-in being strong and the sum sellout also in the number because of the retail component. But I'd love to hear on the level of the reps, how much grows of that grows also came from sellout and if you, things that the inventory levels in the channel are very healthy at this point.

And then on logistics integration between Avon Natura in Brazil, if you could just spend a minute on just updating us where that is and what the next biggest steps are in that integration process. And the third question, briefly, gross margin for the Avon brand in Latin America. How much of the gap that you currently have to the Natura brand, do you believe you can close?

Fabio Barbosa

A lot of questions. So, there's no indication that our reps are overstocked so far. And so, we keep we keep continuous tracking of that, so it seems to be okay. Having said that, I think that consumption in general in Latin America, including Brazil is getting softer towards the rest of the year. Well, but that's no news. We follow your reports as well. And if the macroeconomic environment stays challenging, I think we will end up paying a price.

Having said that, there is no indication that our consultants are overstock at this point in time. The second one has to do with logistics integration in Brazil between Avon and Natura. Well, basically we keep integrating distribution centers and manufacturing capabilities, and that continues. And that will be even more important as we entered Wave 2 full integration towards the end of the year.

And finally, on gross margin, we are bridging that gap, so we are not there yet between Avon and Natura. But we are making a much stricter selection of the portfolio, both in terms of Fashion Home, and Beauty. And we -- you probably noticed that we have been pricing products accordingly. Some of them are still below their ideal price tiers. And, of course, that with further manufacturing logistics integration that will end up delivering additional benefits, also to the gross margin. So, the gap is being bridged that's as much as I think I should comment at this point in time.

Irma Sgarz

Thank you very much.

Operator

Our next question comes from Eric Huang with Santander.

Eric Huang

Good morning. Thank you for taking over question. A very brief question from our side. Looking specifically at capital structure. Since we announced the last update of que as management seen or have seen an updated view on its optional capital structure going forward. And any update on this side?

Fabio Barbosa

Thank you. I'll pass it on to Guil in a second. Just will make the comment that I mean, we are very committed to have this discipline on the allocation, utilization of the capital. Guil will talk a little bit about -- I mean, what we think in terms of capital structure. But I have been reassuring internally and externally that, we are being very disciplined in terms of financial returns that we can have on backing up investments in each one of our three deals, okay? This is something that we have been very proud of being very reached on the last year.

And Guil talk a little bit about what are your thoughts about capital structure itself.

Guilherme Castellan

Okay. Thank you, Eric, for the question. Look, I think that, this thought on capital structure, it is something that, we have discussed a little bit with the markets in the previous quarters, right? And I'm going to repeat a little bit what was said. I think that the thinking about optimal capital structure, and the percentage of debt that we should have in our total capital.

I think that this conversation makes a lot of sense, when the company is operating net profit, right? Because then of course you can use your expectations accordingly and try to maximize the value of your discount rate, and therefore maximize the value of the firm. So, the focus in the short-term and of course that as we mentioned, right? Part of just that the ease of proceeds will put the company on a net cash position.

So, the focus in the short term is for us to continue to work on profitability, right? And profitability of course in the gross margin, profitability in the EBITDA margin, and profit profitability in net profit as well, right? So, we continue in that route in the short term to maximize our bottom line.

Having said that, right, and again, as we have mentioned before, once that we have the -- I think that the right capital structure in place, and of course we are back in operating in net profit, we expect that the optimal capital structure for this company will be in something approximately 1.5 times. But of course, there is a dynamic exercise. It moves as the company continues to deliver improved results. And again, in the short term I repeat, we are focused not only in the right capital structure, we're focusing to make sure that we have the right capital structure, but also the right of stability in the P&L.

Operator

Our next question comes from Bob Ford with Bank of America.

Robert Ford

Good morning, everybody. J.P. if I understand correctly, you're intentionally driving a further contraction in the seller base in Wave 2. How abrupt is that transition and how do you expect productivity and network growth to play out following the implementation? And then how much of Avon lad a sales is stack at home today, and how should we think about the pace and magnitude of that wind-down? And then why was there a need to build up inventory ahead of inventory Avon integration in Latam? How much of that is transitory, if any? How big was the effect in reais, and how exactly have the Avon receivables terms changed? And again, what's that impact in reais?

And then lastly, Ian's been on the board for a few years now and is very familiar with the body shop. What's his assessment of what's broken and what are his KPIs? Thank you very much.

Joao Paulo Ferreira

Bob, J.P. here. I felt I need to show you the entire business plan with your questions. but I'll try my best. Anyway, well look as regards the channel contraction. The first point of your questions. I suggest you look at our Avon Brazilian operation, because that's where we implemented all of the structural changes altogether around May, June, last year, right? And you saw the level of contraction around 20% of the channel. So right now, we are contracting fashion and home beyond what we did at that time.

But if you want to, to use general figures, I think this is a reasonable one. As said, fashion home is bigger in some other Hispanic countries. More than 50% of revenues say in Mexico for instance. So, it puts additional pressure on that. But with the accumulated experience, we are trying to do to contain that contraction around similar levels we saw before. Then if I'm not wrong, you ask about inventory building. Is that correct, Bob?

Robert Ford

Yeah. Inventory building. And it's transitory kind of a one-time effect as you consolidate some of the manufacturing. That's what it sounds like. And I was just wondering what that impact was in -- and also on the receivable side, how much did the actual receivables terms change with Avon and I guess more likely occurring,

Joao Paulo Ferreira

So, there is no structural inventory change. So, everything that we are observing right now is temporary. So, no structural reason for increasing the inventory. And as regards payment terms, they'll be aligned with Natura payment terms, which always comes with higher productivity. So, we only give credit to more productive consultants anyway. So, the net effect should be all those effects should be netted in the medium term. I hope it helps, Bob.

Robert Ford

Absolutely. And just one question on the Body Shop, right? The assessment of what's broken -- the KPIs, please.

Fabio Barbosa

Gui, we want to compliment something.

Guilherme Castellan

Yeah, no, Bob, if I just may say, I think that one was extremely clear. I just want to reinforce I think that the first question, right, which is that you should expect to see as we mentioned last quarter, and we continue to repeat this quarter, right? Avon Hispanic sales into significant compression the next quarters, right? And I think, as you all mentioned in the previous quarter, the main focus is going to be at the EBITDA margin, right? And again, it's going to meet, of course, for the profitability of the channel to improve significantly, right?

So, you should expect to see that trend to continue with a softer weaker revenue, especially in Hispanic, Latin. But of course, in the media long term with a significant improvement coming from EBITDA margin. Right?

Robert Ford

I don’t like to interrupt, but as you do that, Gui, can you help us understand the brand equity evolution, because we're going to be looking at some pretty negative numbers probably in terms of the network and sales consolidated. We won't be able to see the breakdown of sales that you see, but whatever you can help us to do that can the brand equity dynamics in the most important markets in Liam would be super helpful.

Guilherme Castellan

Thanks for the feedback, Bob, we'll take that into consideration and of course, share what we think it's necessary for the market to have the right visibility going forward.

On the Body Shop, Bob, because that was your last question, I'm going to let Fabio talk a little bit more about Ian's first day all I can say that his KPIs remain very strong focus on the profitability and cash flow for the body shop. And again, and we should expect to see strong results coming from those two lines already this year.

So, I'm going to pass to Fabio a little bit to talk about the first days of Ian role.

Fabio Barbosa

Thank you, Bob, for your question. -- has been there for something like 20 years -- 20 days. So, but I have been there with him. We went there, he was very enthusiastic and I am having almost daily calls with him and he's excited. He loves the brand. I mean, he has been working on that for a long time. His background, he was a CEO of coach and he was within the board. The person responsible for what we call the TBS committee and in other words, people, which were foxing on one of the different views, one Foxing TBS.

So, we have some knowledge there. And his first impression is just happening. There are lots of things to be done. Some of things, which are being done are in the right direction like reducing SKUs, like rejuvenating the brand, like working on stores and so on, working with the head franchisees.

So, he is excited about that. But we have to accelerate that. So, Dave has done a job, has put some things into place. But all we need is to accelerate and focus on profitability. This has been my mantra since day one here, which has increase margins and improve cash generation and that's what his focus will be. But probably at the next call within there for 90 days, we will be able to talk more. But for the time being, I mean his first insights are there are quick wins to be made and his team is behind him and he will be working on that. Thank you, Robert.

Robert Ford

No, thank you, Fabio. All of that self-funded, correct?

Fabio Barbosa

All of that self-funded, yes. We are not at this point in time, but we do not have any new project. As I said, discipline and capital allocation is the name of the game. And on what TBS was doing, there was a budget for this year. We haven't changed that. So, there are only minor investments in some stores, but only to the magnitude that could be self-funded by TBS. Yes.

Robert Ford

Thank you very much.

Operator

Thank you. Our next question comes from Andrew Ruben with Morgan Stanley.

Andrew Ruben

Hi. Thanks very much. Most of my questions have been answered. Just one quick follow-up. On the inflation environment, called out again as a headwind on the gross margin side, curious if you have any visibility on when inflation might ease and potentially become a tailwind. Any view on the progression would be very helpful. Thank you.

Fabio Barbosa

You're saying about Brazil, or about worldwide?

Andrew Ruben

Worldwide, any pockets and any color you can have in aggregate would be helpful.

Fabio Barbosa

Guil, go ahead.

Guilherme Castellan

Andrew, thanks for the question. Look, the way that we are looking at this right now is that, we are not expecting, let's say, the inflationary pressure to significant improve in the next quarters, right? That's why, again, I mentioned in the beginning of the call, we took actions in terms of our price increases, also in Q1, right, to mitigate part of again those potential pressures that can arise in the remaining of the year, right? So, I think we follow our strategy even though. Again, we don't expect to see inflationary pressures to ease it significantly. Of course, we may have some quarters with better comps, but we expect this trend to continue in the short-term at least until the end of 2023.

But I think we follow our strategy of, of course, giving prices, but with different dynamics between brands, categories, and counselors, right? So, I think it's also important to highlight that. So, I think that I don't know, Joel want to compliment anything for Latam, but I think in Latam and Brazil follows the same standard here as I mentioned before.

Andrew Ruben

No. No further comments, Guil.

Guilherme Castellan

Okay. Just before the operator passes to Fabio, I just wanted to say that unfortunately, the time is almost up for a call. There are several questions that unfortunately we didn't get to answer, but of course, the IR team will get back to you with the respective answers.

Operator

Thank you. This concludes today's question-and-answer session. I would like to invite Fabio Barbosa to proceed with his closing statements. Please go ahead.

Fabio Barbosa

Thank you. I just want to stress what you said at Investor Relations team is at that disposal. There are many questions to be answered. We are ready to, I mean, it's our obligation, but it's our pleasure to, and that thank you very much for being with us today. As you saw from the presentation, we are operating in a challenging environment, but we have clearly defined priorities and are mobilized to deliver them. We see the first results coming. We are happy with it. Thanks for your attention and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation for Natura &Co. You may now disconnect your lines.