Natura Cosméticos S.A. (NATU3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining us today. Welcome to Natura's Second Quarter 2025 Earnings Call. [Operator Instructions]. Joining us today are Mr. Joao Paulo Ferreira, our Chief Executive Officer; and Silvia Vilas Boas, our Chief Financial Officer. The slide presentation for today's call is already available on our Investor Relations website. I'll turn the call over to Mr. Joao Paulo Ferreira. Please go ahead, sir.

Good morning, everyone. Thank you for being with us this morning to review our second quarter 2025 results. Let me start with an update on the progress of our restructuring journey, which began in mid-2022. Since our last earnings call, we have completed the merger of Natura &Co into Natura Cosmeticos. We now have assets held for sale. After the Chapter 11, a dedicated team with the support of our legal and financial teams resumed the separation or the sale of these businesses. This initiative moved on substantially in recent months. Our auditors have rectified as held for sale, given the high likelihood of concluding these processes in up to 12 months. On top of that, we are now consolidating the merger of Natura &Co into Natura Cosméticos. On July 1, we now have a simplified structure in the holding company, such as our Board of Directors and Investor Relations. What does that mean? From this point forward, our continuing operations, meaning our P&L, cash flow and balance sheet will reflect only our core business. In other words, LatAm and the remaining corporate functions. That said, once the deconsolidation of assets held for sale is finalized, we may still see some nonoperational, nonrecurring accounting impacts. Moving now to our operating highlights for the quarter. During this period, we took another step in Wave 2, the integration of Avon and Natura in Latin America. We're now nearing the end of this long and important journey, which is expected to wrap up by year-end. In May, we completed the integration in Mexico and moved ahead with preparations in Argentina, which went live in July. We still see some volatility in both markets, in line with our planning activities. Moving on to [indiscernible]. Our health indicators remain healthy throughout Latin America. And Natura brand grew substantially in previously integrated markets, notably in Brazil, which increased double digits, offsetting the Avon impacts. As we said during our Investor Day, Avon will go through some repositioning. Its innovation pipeline is being rebuilt, significant positive effects are expected to come only in 2026. Moving on to our channels. Our digital operation increased above the consolidated numbers due to the modernization efforts in 2024, the strengthening of our teams and new sales models such as [ Body ] Shops and marketplaces. Our retail operations also maintained that consistent increase in productivity and efficiency. Amid all these developments, we kept recurring EBITDA margin at 14.7% in Latin America and 14% consolidated, delivering positive cash generation for the firm and net income of BRL 445 million for continuing operations in the quarter. On the ESG front, we earned an A score from the Carbon Disclosure Project for climate and supplier engagement, both of which reinforce the strength of our net zero road map and our deep commitment to our entire value chain. More importantly, we also published our 2050 vision and took a transformative step moving beyond sustainability to a regeneration-focused approach. By mid-century, our goal is to be a fully regenerative company, promoting life and generating positive impact across 4 capitals: financial, natural, social and human at the same time. I'll now hand it over to Silvia, who will walk you through the quarter's financials, and I'll return later with my closing remarks. Over to you, Silvia.

Thank you, JP. Good morning, everyone. It's a pleasure to be here with you again, and thank you for coming. Before I start talking about the financial results, I'd like to reinforce the point that JP made in his opening remarks. Given the classification of Avon International and CARD for available-for-sale assets and discontinued operations, this presentation will focus on Natura in LatAm, which is our core business. When we refer to continuing operations, we're always talking about the LatAm operation and the holding. We know that these changes are relevant and have an impact on the -- on your analysis. And in order to make things easier, we've detailed the explanations in the release and included the reconciliation for the first quarter in the appendix. All the figures for the second quarter and the first half of the year are comparable. With that being said, let's start with revenue. In the second quarter of 2025, revenue grew by 5.5% year-on-year in constant currency and by 2% excluding Argentina. Speaking of the Natura brand in Brazil, the 10% growth was driven by the productivity gains of our consultants with a better mix, price gains and stable volumes. This also reinforces our commitment to market share gains this year, which has already been boosted by the above-market expansion that the brand posted in the first half of 2025. It's worth noting though that we already felt a strong slowdown in the Brazilian macroeconomic scenario starting in June, which also impacted the cosmetics market as a whole. Moving on to the performance of the Natura brand in Hispana, we also saw an increase in revenue, up 17.8% in constant currency or low single digits when excluding Argentina. This was a healthy growth, but with a significant slowdown when compared to the year-on-year performance we had in the first quarter of the year. This was an expected slowdown as we reinforced during Natura Day, given the implementation of Wave 2 in Mexico and the preparation in Argentina. Now looking at the Avon brand, which in line with what we said in the first quarter earnings call, continued to suffer with the effects of less innovation in the portfolio and thus showed a 12.9% drop in revenue in Brazil. In addition, similarly to Natura, but to a greater extent, the brand is also suffering from the evolution of Wave 2 in Mexico and Argentina, which is why we see a 13.6% drop in Avon's revenue in the Hispanic region. It's also worth noting that in this second quarter in Argentina, Avon completely discontinued the use of physical magazines and made the transition to fully digital magazines, something that had already been done by the Natura brand and which leads to expected and important impact on revenue in the country. Finally, revenue from the Home & Style category grew by 2.8% in Brazil as a result of a successful opportunistic campaign in line with the strategy we commented for this category during Natura Day. In the Hispanic region, revenue fell by 25.6% -- excuse me, 25.9%, also impacted by the evolution of Wave 2. It's worth remembering here that especially in Mexico, this is a more significant impact, the greater exposure of this category in the country's total revenue. Now continuing with the profitability slide. You can see in the graph that we went from a recurring EBITDA margin of 13.2% in the consolidated figures for the second quarter of '24 to 14% this quarter. One of the effects of 8 -- 80 basis points year-on-year is the reduction in holding, as JP explained, which now represents 70 basis points of total revenue versus 150 in the same period last year. In addition, LatAm maintained its recurring profitability of 14.7%, leveraged by a gross margin that evolved 80 bps year-on-year and which was driven by the expansion of gross margin in all countries that are more advanced with brand integration. EBITDA margin -- this EBITDA margin also reflects an improvement in selling expenses, which also benefited from the efficiencies obtained with Wave 2 and Natura's growth in Brazil. On the other hand, administrative expenses showed an increase of 180 bps year-on-year, explained mainly by greater investments in innovation such as those we're making in the Avon brand and in systems, especially the new integrated planning process, which is very relevant to increasing the company's structural efficiencies and which we shared with you in more detail during Natura Day. In addition to that, administrative expenses were also impacted by the expected deleveraging in the Hispanic region given the volatility of revenue amid the integration in both Mexico and Argentina. After a long journey, it's now time to return to the company's net profit, net income. On this slide, you can see how profitability benefited our net income, which reached BRL 445 million in continuing operations during the second quarter of '25 and BRL 195 million when we include assets for sale. This recurring EBITDA of BRL 796 million was partially offset by adjustments of BRL 138 million, which include BRL 88 million in integration costs for Wave 2 and BRL 46 million relating to the holding strategic projects. When we exclude nonoperational effects such as discontinued operations of BRL 250 million, the PPA and these EBITDA adjustments I've just mentioned, our adjusted or recurring net income is BRL 564 million. It's important to note that in calculating this, we included the benefits that the adjustments generate in income tax at an illustrative rate of 25%, as explained in the earnings release. Moving on to cash flow. Here, we see the cash flow from continuing operations for the first half of the year. As we see in the smaller orange bar in the first half of 2025, we saw a cash flow for continuing operations of BRL 290 million. This was benefited mainly from lower working capital use. This lower use especially reflects the accounts receivable line, which had better dynamics than the typical seasonal pattern for this period, given tighter credit restrictions this year versus 2024. The company's cash flow of BRL 290 million is split between BRL 408 million generation in LatAm and a use of BRL 118 million at the holding. When we include the expected impact of financial expenses, BRL 299 million related to the company's leverage, we have a negative free cash flow from continuing operations of BRL 9 million -- negative BRL 9 million. Now we have to explain how we got from a negative cash flow from continuing operations to a change in cash and cash equivalents of BRL 2.1 billion. We'll see this on the next slide. To make it clearer to you, here, we are showing our net debt. You can see that it went from BRL 2.4 billion at the end of 2024 to BRL 4 billion at the end of the first half of 2025. This increase in indebtedness is mainly explained by discontinued operations, which have more than offset the positive benefit of approximately BRL 500 million from our U.S. dollar-denominated bonds given the appreciation of the Brazilian real. But what were the main effects that impacted these operations? The 2 most significant effects are: first, the reclassification of BRL 735 million of cash from Avon International and CARD, which are no longer consolidated with the company's cash and now are included in the assets held for sale line and the cash consumption of these assets, which totaled BRL 1 billion and is split into approximately BRL 700 million of expected operating consumption due to the expected seasonal pattern in this period and the remainder is mostly explained by unfavorable exchange rate effects, which totaled BRL 1.8 billion. In addition to that, we also had effects related to the share buyback program announced in March 2025, which to date has totaled BRL 140 million also exchange rate effects of BRL 200 million and as mentioned previously, financial expenses of nearly BRL 300 million. All of these factors brought our net debt-to-EBITDA ratio to 2.18x at the end of the second quarter. It's worth emphasizing that this in no way changes our view of the optimal capital structure for continuing operations, which varies between 1 and 1.5x. And we're always looking at the end of the fiscal year to discuss leverage given the cash profile between quarters, which for us and other consumer companies tends to concentrate cash generation in the fourth quarter of the year. Finally, as mentioned on Natura Day, our amortization schedule remains very comfortable with the next major maturity only expected in 2028. Since we're talking about Natura Day before I conclude, I'd like to emphasize that this will be the last quarter that you will see the release in its current form. From the third quarter onwards, we will share a new disclosure presented at the end of the event, which goes into more details about operational KPIs and the operating income statement for Brazil and the Hispanic region. I'll now hand the floor over to JP for his closing remarks, and I'll return for the Q&A. Thank you.

Thank you, Silvia. Before we move to Q&A, I'd like to wrap up with a few closing remarks. Cash consumption offsets the good performance in Latin America. The conclusion of strategic efforts for becoming international, it's an absolute priority for both the executive team and the Board of Directors. We have moved along substantially in Q2, but there's still -- we have plenty of work ahead in 2025. Wave 2 is on track to finish this year. And to get there, we still need to complete certain system simplifications and fully transition production from our Interlagos facility to Cajamar. The macro backdrop in Latin America remain choppier than usual. We continue to strive for better EBITDA margins, focusing on operational expenses. We remain confident given the strength of our business as we've seen in Natura Day. This is based on 5 pillars: strong brands, strong markets. And again, we point out that we have brand equity indicators showing that our brands are very healthy in Latin America, and we grew above market average with the Natura brand despite having a lot of work to do with the Avon brand, the single distribution model, which we master, and we have proven that whenever the integration is mature, direct sales are maintained, remain to gain traction in productivity and nondirect sales keep on growing above the company's average. Our innovation capacity is second to none. We innovate to protect our leadership as we've seen in the Aura Alba introduction, strengthening the perfume category. We are now the #1 player in Latin America. And again, building market share with introduction of products for hair, a category that we are growing the double of the company's average. And of course, new introductions, new launches that will help us in our pipeline, a very attractive economics background. We've seen margins getting better and better, driven by markets in which the integration is mature and improved profitability, cash generation and net income. And finally, we can make a difference with our people. We have improvements in results. We can handle major changes, including the holding corporation and the reclassifications of our assets as held for sale. In summary, we are, at the same time, simplifying and building our future. Looking forward, the business scenario is less favorable. Consumption is slowing down and under a lot of pressure in Mexico and on top of the FX changes in Argentina. But simplifying things with the right capacity make us feel confident to capture opportunities and face possible challenges. That's it for me. Thank you very much, and we'll now have the Q&A session.

[Operator Instructions] Our first question comes from Rodrigo Gastim from Itau BBA.

I have 2 questions from my side. The first is specifically about Avon International. I'd just like to understand, from a technical standpoint, what are the strategic alternatives that would make the consultancy comfortable in moving this in assets -- to assets for sale? Secondly, Silvia, you've talked about the deceleration of Natura Brazil in June. So did you feel anything in sell-in in your channel with the consultants? And do you have any perceptions of sellout if there's also a slowdown there? That's my first question. That's my question.

Okay. So let me start by answering your second question. So yes, we have a detailed model, and we can feel movements in the consumer market from -- based on our consultants' activities. So we were able to detect a slowdown at the end of June and their activities. I'll let Silvia explain this technically about the reclassification to available for sale.

Gastim, thank you for your question. So about discontinuing operations with Avon International and CARD, as we mentioned, this was made available for sale. What we can share right now is that as we've said from the first quarter and on Natura Day, this process has the company's full dedication. We're moving fast, and we're assessing all of the assets combined in this operation. I can't go into further detail about the evidence that we have, but none of them have triggered a material fact or any communications to the market. And we will do that when the moment comes.

The next question comes from Vinicius Strano from UBS.

My question is about gross margin, 80 bps in LatAm. Can you help us identify any impacts on pricing, product mix, geographies, what the sales are -- what sales are in all these markets? Let me go back to Avon International. Can you elaborate on the exit strategy in deficient geographies? What's the status of that plan? And what about cash consumption looking forward?

Well, very good. Let me start with gross margin. I'll ask Silvia to explain that further. But let me say that combined operations have seen gross margins improved -- improvements. Silvia?

Thank you for your question, Vinicius. Well, let me address gross margin. As JP said, we've had expansions in all countries that are mature with the exception of Mexico that in Q2, it was impacted by nonrecurring transactions in our gross margin. We expect this to stabilize from now on as it happened, as it has happened in all combined countries. Solid margins in Brazil impacted by a richer product mix and good price management strategies. Argentina that you also mentioned, had healthy gross margin in the first half. Gross margins in Argentina are usually below the total average for the region. Again, Wave 2 is proving itself in helping gross margins in the region. Let me address your third question now about cash consumption in Avon International. As you've seen in this half of the year, cash consumption was BRL 700 million, slightly above what we had last year, about BRL 500 million related to operation consumption per se. And the difference accounting for transformation costs. Let me remind you that these transformation costs are nonrecurring. We made investments in Q2. We're about to make some more investments in Q3. But down the road, we don't see -- we don't expect cash consumption at the same level in our continuing operations for Avon International. Consumption this year is expected to be smaller than that of last year. And the restructuring moving on according to plan will contribute in that sense even unlocking some value for the [indiscernible]. And the other question is about the status of Avon International. As I said before, the process is moving along according to expectations, but it's gaining traction.

The next question will be asked by Danny Eiger from XP.

I have 2, and they're both related to Wave 2. So my first question is about the challenges you've been having in Mexico, that transition of the magazine in Argentina and the opportunity that comes with flexible orders from both brands starting in the second quarter of 2025. I'd like to ask how this is currently doing. Are you still facing challenges in Mexico according to your consultants feedback? And the same question for the magazine. So have you been doing trainings, what has been mitigated? And with flexible orders, will this be implemented in all of Brazil or only on the regions where it was already being performed? My second question is about your gross margins. You expanded in all mature countries. Silvia mentioned now that margins in Mexico are close to being stable. But I'd just like to understand when we will start seeing effective gains, especially from Mexico, if you are starting to see that in the third quarter, the expected gains from Wave 2.

So the implementation of Wave 2, during the implementation itself, there's always a level of instability, and we haven't been surprised by anything. This was basically in line with what we had already been planning. So with that being said, Mexico had a much smoother relationship with sales forces than we had expected, but we had more trouble in logistics than we expected. So we had to change transportation companies, close a distribution center and the mix changed significantly. The demand for Natura products changed significantly, and this will take a while to settle. But I am foreseeing that throughout the Q3 operations in Mexico will have reached stability. And I'd like to make a side note that gross margins in Mexico dropped in Q2 due to nonrecurring effects, which will not happen in Q3. In Argentina, it was the opposite to a certain extent. Logistics have been much easier, we were able to predict some of the effects we saw from Mexico. But in sales, we're seeing more noise because changes are more significant, such as the magazine. When we implemented the digital magazine in Natura years ago, we saw that this took about 6 months to be completely settled with our sales force. And we're referring to a part of our sales force that started with Avon. So I think we'll still see some turbulence in Argentina until the end of the year. What we call [ multiflag ] orders. So effects from one brand that allow a second brand to have an easier entry point are being implemented, and they will provide significant productivity gains. At the same time, we're making adjustments to our commercial model to facilitate the activity of the smaller consultants. So all of this combined will give more energy to direct sales to our consultants' networks and the first signs have been very positive.

On gross margins, we do expect to see more stable gross margins. And as a consequence, we will capture more benefits from Wave 2 starting in Q3, but this is a gradual process after combining the businesses. What we expect in gross margin for the second half is for it to remain healthy across the region. Obviously, we are paying close attention to Argentina because that can generate unforeseen impacts in this journey given the exchange rate fluctuations.

João Pedro from Citi asks the next question.

I'm sorry, but I would like to go back to the previous point. What has changed when compared to first quarter? Why wasn't this asset held for sale in Q1? What was the reason behind it? Is the plan improved? Can you elaborate as to why that asset was not held for sale in Q1? And a question to you, Silvia. What does that mean to the premium whether you can capture some tax savings? And a question about operations, JP. Do you believe you have to adjust the deadlines or the extensions for consultants? Are you gaining market share? And how are you going to position? Do you believe there's a need for any adjustments?

João, as to Avon International, what happened between Q1 and Q2 is that the process simply evolved. There are many steps taken along the way to restructure all these operations. We have to conduct market surveys in the -- and that moved along and they detect the consultants deem that the likelihood is very high to happen to be finalized in 12 months. That's what happened. That is much as I can tell you. Let me address the operational and then Silvia will take or answer the next question. Well, consumption is slowing down in Brazil across the board. I've seen reports from other consumption companies. That seems to be a trend. And we've been monitoring relative performance and that we have results that indicate we are gaining market share. We believe that the second half will bring slower consumptions, and that's why we have to make operational adjustments. We are controlling credit. Delinquency rates are very low, but we have to adjust the mix. And the mix will have to be moved more towards daily consumption products and a little less on beauty products that are more discretionary in nature. We have gained experience in the recent past, and we make adjustments in our offers so that we can maintain our productivity. In other words, we have to navigate these waters according to the market waves, and we are well prepared to do so.

João, thank you for your question. Let me address tax benefits from the reverse incorporation. We keep on assessing every possibility, and we're going to include those that make sense, but we're still in that consideration phase.

The next question will be asked by Ruben Couto from Santander.

I'd like to ask about G&A expenses and R&D for the rest of the year. I think that was impacted from the reclassification from IT to OpEx, but I think there's still a lot of investments to be made in innovation and other things. I'd just like to understand if your expected -- excuse me, if you expect expenses to grow closer to the second quarter's level? Or should we expect that for the rest of the year?