Natura Cosméticos S.A. ($NATU3)

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Natura's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Joining us today are Joao Paulo Ferreira and Silvia Vilas Boas, CEO and CFO of Natura Group, respectively. The presentation we'll refer to during this call is already available on the Investor Relations website. I'll now turn the call over to Joao Paulo Ferreiro. Joao, please go ahead.

Good morning to everyone who follows Natura and is joining us on today's call. As you saw in our earnings release, our first quarter results reflect a challenging first quarter, both in revenue and profitability, although, they were broadly in line with our internal expectations. Operationally, our results were weighed down by the slower recovery of Natura brand revenue growth in Brazil. One-off costs tied to the restructuring of our operating model the Argentina business, which was affected by macro headwinds and a slow recovery after Wave 2 and the continued decline of the Avon brand in the region. That said, a number of initiatives already underway give us confidence that we will deliver on our 2026 commitments, especially margin expansion and cash generation. Turning to the main drivers for the quarter. Natura brand revenue in Brazil came in slightly below our projections and was affected by 3 main factors. First, a softer consumer environment given the macro backdrop, especially in the Northeast. Our main direct selling market. Number two, a smaller and less active consultant base than in the prior year. And lastly, service level disruption as we continue to stabilize operations after the closing of the Interlagos plant and the rollout of the new integrated planning system, both completed around year-end. While the macro outlook remains challenging, by quarter end, we saw the previously announced commercial adjustments driving sequential growth and higher activity in the consultant base. On top of that, market tracking data also point to market share gains. with sell-out growth in the first quarter. Although, risks remain, these are encouraging early signs of a potential future improvement in the brand's sell-in revenue. At Avon, the limited innovation pipeline still weighed on most of the quarter as the brand relaunch in Brazil only began in mid-March. So far, we have seen promising progress in brand health indicators and revenue from launches, while still small in the overall mix came in ahead of our expectations. Moving to Hispanic LatAm. We have 2 very different stories. Excluding Argentina, the region continues to post healthy and steady performance gains, although, this is still being overshadowed by Argentina's slow recovery, where channel recovery actions have also been showing gradual improvement. Argentina was also one of the main drags on profitability with a sharply compressed gross margin and operating deleverage, which also affected Brazil. The biggest hit to profitability in the quarter, however, came from one-off expenses related to the new operating model, which was rolled out quickly, and without disruption, with 75% of administrative positions already reduced. This pressure on profitability, combined with losses on the hedge for our U.S. dollar debt led to a loss in the first quarter and resulted in cash consumption, fully explained by one-off severance payments, remaining expenses from the simplification of the former holding company, and the Chapman case payment. Excluding these effects, free cash flow was neutral despite the usual first quarter cash consumption seasonality, underscoring the resilience of our business model. I'll now hand it over to Sylvia, who will walk you through the results in more detail.

Thank you, JP. Good morning, everyone, and thanks for joining us. Before we begin discussing the numbers, I'd like to reiterate a point I mentioned on our last earnings call regarding the comparability of our financial statements. To facilitate your analysis, our earnings release continues to present a pro forma view. In this presentation as well as in the supporting materials available on our IR website, we have provided adjusted and comparable basis. This means that, for the 2025 figures, we have excluded the effect of the simplification initiatives carried out during the year, such as sale of Avon and the reverse merger of the holding. These recurring adjustments do add some complexity, but we are nearing the end of that process. Beginning in Q3, the quarterly basis will be comparable. Let's now move into the financial section. On Slide 5, we detail revenue performance in Brazil. As JP mentioned, the macro challenges in the Northeast, together with disruptions in service levels, reduced both the size of the channel and the activity of lower productivity consultants, leading the Natura brand to a 3% year-over-year decline. Avon's performance also remained under pressure with revenue down 13.8% year-over-year. It's important to highlight that the Avon brand relaunch took place only at the end of the quarter. In other words, we did not yet capture any benefits from the relaunch in Q1 of this year. On a consolidated basis, revenue in Brazil declined 5.5% compared with the same period in '25. On Slide 6, we go into details on the profitability in the Brazil operation. As shown in the chart, EBITDA margin was 13.8%. This result primarily reflects 2 factors, extraordinary reorganization expenses, which are one-off, which impacted margin by 280 basis points and operating deleveraging, which compressed margin by 430 basis points versus Q1 '25. Gross margin in turn remained at a healthy 69.3% level despite a 140 bps contraction year-over-year. As we anticipated on our last earnings call, this quarter was affected by severance costs. while the efficiencies from the new operating model associated with the reduction in positions have not yet been captured. Beginning next quarter, synergies will start to be captured more meaningfully, while one-off expenses will decline substantially. That said, I would emphasize that the full potential of these benefits is still yet to be captured during the course of the second half of the year. On Slide 7, we detail the Hispana region, which posted a 1.1% decline in constant currency and 10.5% in Brazilian reais BRL. As JP mentioned, the slow recovery in Argentina continues to weigh on the region's results. The slowdown in consumption and the FX impact, combined with the decline in the channel following integration in 3Q last year affected the performance of both brands in the country with greater impact on Avon. Meanwhile, Hispana, excluding Argentina, continues to show solid growth in Natura and stability in Avon. It's also worth noting that Mexico is already showing sequential growth in the channel this quarter, as we indicated on our last earnings call. On Slide 8, we detailed profitability in Hispana. As in Brazil, the result was affected by severance costs related to implementation of the new operating model. Expense deleveraging was offset by the benefits of Wave 2 in Mexico and Argentina, which limited the profitability compression to the gross margin line, directly reflecting Argentina's performance. In Argentina, the slowdown in consumption, FX pressure and channel adjustment affected sales and created volume deleveraging at the Moreno plant, which in turn affected fixed cost absorption. In addition, we faced greater hyperinflationary accounting pressure in the year-over-year comparison. To close this section, I would reinforce the same point I made about Brazil. Beginning in the second quarter, the efficiencies from the new model will be more visible, accompanied by a substantial reduction in one-off expenses. On Slide 9, we consolidate our results. Revenue declined 7.7% in BRL and 3.7% in constant currency, reflecting declines of 5.5% in Brazil and 1.1% in Hispana. Reported EBITDA margin was 7.3%. This figure was impacted by 470 basis points of one-off expenses and 320 basis points of operational pressure. These operational effects break down into 160 basis points from gross margin, mainly due to Argentina and another 160 basis points from expense deleveraging in Brazil. It's worth noting that, excluding one-off items, our margin would have been 12%. This is still below our annual commitment to expand on the 14.1% adjusted profitability level posted in '25, but it also does not yet capture any benefit from the new operating model. The benefits from the operating model should flow through administrative expenses. We can think about it this way. Administrative expenses represented 15% of net revenue this quarter. If we exclude D&A and R&D, which will not be reduced as part of the reorganization, administrative expenses represented 12% of net revenue. The expected benefit will come from the 25% reduction in administrative positions that we detailed on our last earnings call. And that does not yet include revenue recovery, which is the company's other profitability lever. Therefore, despite the challenging results in the quarter and as JP will discuss in his closing remarks, we are reaffirming our commitments for 2026. On Slide 10, we detailed net income for the period. We reported a net loss of BRL 445 million compared with a comparable net loss of BRL 50 million in the first quarter of '25. The BRL 395 million increase in net loss is explained by 3 main factors: first, an BRL 86 million reduction in EBIT, excluding one-off items. Second, a BRL 177 million impact on net financial expenses resulting from appreciation of the BRL and its effect on the hedge of our U.S. dollar-denominated debt, including both the carry cost of this transaction and the mark-to-market of our position. These effects were partially offset by an BRL 89 million reduction in taxes. Finally, we add to these factors the largest impact of the quarter, BRL 221 million in extraordinary one-off expenses related to our reorganization. Together, these effects explain the change in our net income versus the same period in 2025. On Slide 11, we analyze free cash flow to the firm. In the first quarter, we recorded cash consumption of BRL 315 million compared with BRL 75 million cash consumption in the first quarter of '25. This increase reflects the pressured profitability in the period with adjusted net income BRL 396 million lower. This effect was partially offset by a BRL 140 million improvement in working capital, driven primarily by inventory optimization. As for one-off disbursements, severance payments were close to the impact recognized in the income statement, namely BRL 240 million, together with the BRL 90 million related to remaining expenses from asset sale projects -- this brought total one-off disbursements to approximately BRL 330 million in the quarter. Therefore, the total cash consumption, BRL 315 million in the period is fully explained by the BRL 330 million in one-off payments that I just detailed. On Slide 12, I'll conclude my presentation by detailing our debt and leverage position. We ended the quarter with net debt of BRL 4 billion, a sequential increase of BRL 565 million. This change is explained by 3 factors: first, BRL 315 million in operating cash consumption, which I just mentioned in detail. Second, the BRL 360 million disbursement related to the Chapman payment -- and third, these effects were partially offset by the cash inflow from the sale of Avon Russia. As a result of this increase in debt and the EBITDA performance in the period, our leverage ratio reached 2.12x. I'll now conclude here and turn the call back to JP for his closing remarks. I'll be right back for the Q&A session. Thank you.

In a market environment that will remain challenging, the newly implemented operating model puts us in a better position to navigate the road ahead with a leaner, more agile and more customer-focused company. We are already seeing this through quick adjustments to our commercial model to bring consultant-based growth back and through faster innovation and communication pipelines, such as the creation of a content and media hub that has gained strong market visibility. Looking ahead, restructuring expenses will come down substantially, and we will begin to capture the benefits of a more efficient organization. We still expect revenue to recover gradually, but I should point out that in June, we will replace one of the SAP systems used in our manufacturing operations. Despite the high level of technical readiness, this may still cause some disruption. With most of the restructuring now behind us, our focus shifts back to speeding up revenue growth, and we remain fully confident in delivering the margin expansion, cash generation and shareholder returns we committed to for 2026. I'll stop here. Thank you very much, and we'll now have the Q&A session.

[Operator Instructions] We'll now begin with a question from Danni Eiger from XP.

I have 2. First, a follow-up about the performance over the second quarter. You mentioned the recovery and -- you actually had indicated some of that in our last call that there were some impacts and results in March from the sales position. I'd like a bit more context, a bit more color. How has that impacted? And what has been the general behavior in the sales results of the consultants. Has that pressured Brazil in terms of increasing incentives? So that's my first question. And my second is with regard to SAP. I think the market as a whole is a bit fearful about changes to SAP. So what do you -- what are you thinking in terms of mitigating that effect? Are you thinking of scheduling that for after June 12, which is Valentine's Day in Brazil or after the World Cup, which tends to be a lukewarm purchasing period? Or what are you thinking?

As to the channel's health, all indicators are positive, both in the number of consultants and their activity. We made adjustments to gain attractiveness and make their lives easier to join our commercial cycles, especially the smaller ones. This has been very positive. We should see some better comparable basis pretty soon. As to SAP, as you put it, we have been working to prepare that transition, but we are subjected to unexpected events. That implementation is supposed to start in early June. We do have some mitigating factors in place, inventory anticipation and the supply of channels to stores, the supply to our DCs. We're doing that ahead of time. We are already running integration tests, and we've done that time and time again, migrating data. Well, we are ready, technically speaking. So we believe we are just as ready as we can possibly be. But given the experience we have in the marketplace, I thought I should let you know. The questions about the margin.

Gross margin in Brazil closed at 68.3%, which is healthy. It's actually above average for this period. Remember, our healthy gross margin is approximately 69% or 70%.

Our next question comes from Joseph Giordano from JPMorgan.

I have 2 questions. First, I'd like to understand the macro situation. For instance, recovery in the Northeast. Do you have anything to point out during this quarter? And what was Mother's Day like, do you know? And I'd like to understand how you see the evolution or deterioration of the company's accounts receivable portfolio. Do you think that, that is likely to change credit policies moving forward? And second, what did we not yet see in this quarter? Because we had a very significant investment, 300 basis points 300 basis points influx in EBITDA -- so what is likely to happen throughout the course of the year? Are we going to see anything already in the next quarter or maybe severance expenses, you mentioned that a percentage has been carried out and the rest is provisioned for, right? I'd like to get more context about the continuity, because the second quarter doesn't seem to have very substantial development compared to the third quarter. Could you comment about that, please?

Joseph, I tried to write down all your questions, but let me know, if I missed something. You talked about the consumption dynamics. There are some indicators showing slightly improved results. As to sellout, it's been not as great as expected, but nothing major, nothing that can be disruptive. The dynamics keep on playing out as usual. The indebtedness, revenue available for consumption or redirecting consumption patterns to different categories. But we have detected marginal consumption improvements. Sellout is improving slightly, but we do not see any major shifts in that behavior. Mother's Day was positive, but nothing radically different. As to leverage, Silvia will field that question.

Now, when we talk about the impact to our credit portfolio, it's important for us to distinguish the 2 portfolios, the pay and Mercantile portfolios. We've already migrated a significant amount and default rates when we look at the first quarter of the year, the spread is essentially looking good for us, when we look at Q4 this year. And also note that, almost half of our portfolio is in the Mercantile entity. We closed at 6.5%. So we are accelerating this migration, and we're going to conclude all of that within the year. The market status still demands a lot of attention. And we are already starting to see the development and evolution of the vintages throughout the year, and what we are seeing is positive.

As for cash expenses, what were your last 2 questions?

One was for the holding expenses. There was a BRL 220 million disbursement in the quarter, BRL 220 million and a 5% execution. So out of the nonrecurring expenses. And those 300 bps, do you think we're going to see that in this quarter?

Thanks, Joseph, okay. We have already executed 75% of a reduction in the positions we are committed to. Remember, the new model is implemented. So we now have a very small portion yet to be executed in the future quarters. So what we had in Q1 in severance, we need to remember there was also a value for some in December, BRL 240 million when we combine Q1 and December. This impact is in line with our cash results. So we did not capture any benefits now in Q1. We're going to start capturing these benefits starting in Q2 very significantly, very much so. The benefits are going to come over the second half. But in Q2, we are already going to start seeing a benefit to that 75% drop that we projected.

Now continuing to the next question comes from Joao Soares from Citi.

I'd like to explore market dynamics. My take on the initial remarks is that the market is challenging. And we have that one-off situation with SAP. But I think you're excited about the sellout and market share outlook. So when we look, we see a 7% roughly increase for Brazil. Do you think that assumption is likely to pay out given that the market is somewhat challenging? And do you think we can expect to see Natura grow and accelerate over the course of the year to become more in line with the rest of the industry? I'd like to get more information on that dynamic? And the second question with regard to EBITDA, you mentioned the benefits of the reduction in overhead. But at the same time, we see higher investments, R&D, which is higher than what I was expecting. And there's the whole Avon brand relationship. So how does all of that fit into the expense dynamics, all these moving parts in my head, I think we should see an expansion in EBITDA margin still in the present for Brazil in this year. Can we assume that? Is that something we can expect? Can we expect improvements? Can you help us think more clearly about this margin?

Let me answer your question about the market dynamics. Our projections are similar to what you said. The market is now growing in volume, a little bit in price. But to be honest, looking at the market scenario worldwide and in Brazil, there's still a lot of uncertainty. Geopolitics impact, logistics, supply chains, commodity and fuel costs, it's an election year. We have to be prepared to this market volatility. That being said, we have been working to make sure Natura gets back to gaining market share. This won't take place overnight. We expect that to happen throughout the year. But on the short term, we're still subjected to a lot of turbulence, and I don't see any major shifts in direction of the company.

With regard to profitability in Brazil, well, profitability in Brazil and in the region was in line with what we were expecting. If we exclude the impact of nonoperating expenses, this profitability shows different types of performance, different levels of performance. Now, if we look forward and start thinking about profitability in Brazil around '20, our SG&A was impacted by the deleveraging. So with the forecast that we have for the resumed growth, we may see improvement to that line. But most importantly, what we'll see is the positive impact on SG&A by the capture of efficiencies, operating efficiencies because now in Q1, as I mentioned, we didn't yet capture any benefits. We only captured the negative impact of the severance. And specifically, in the case of Brazil, the increase in average delinquency, which is par for the course for this type of operation. So we're -- we've got all the tools we need to keep improving profitability in Brazil.

Eric Huang from Santander asks the next question.

I would like to hear a little bit more about Hispana. I know that, there's some headwind coming from Argentina, but I would like to better understand how you can play out the Wave 2 lever. When do you expect the recovery to happen more specifically in Argentina?

Well, Hispana, except for Argentina, they're moving along quite well. Mexico, the Andean countries, Chile, they have all been recovering substantially with good profitability results, and these markets are well underway. Argentina is still on the recovery, but more slowly than we foresaw. At the same time, we are speeding up the channel efforts, because of the adjustments we made in Brazil already applying there. Early signs remain positive. At the same time, we have to come up with a better balance between price/expenses, price costs and G&A, so that we can have more profitability. So we are operating at all fronts at this time.

Well, if I may, let me ask you another question. My question is about the retail channel. You said that, you are preparing a new format for the new franchises. You mentioned the timing maybe later this year. Could you give us some more color as to the timeline so that we can detect of the same-store sales inflection point coming up soon?

Yes, that's right. In the previous quarter, we focused on speeding up the renovations and adapting the format, especially for the franchise stores so that they could have that more productive system. This has been very positive. And we are now opening up more stores. We'll be focusing on that opening of new stores because the old formats that are unproductive or improductive remain small. They'll keep on migrating to the new format, but we're speeding up the opening of new stores, both in Brazil and in the Latin America.

Next question from Vinicius Pretto from Itau BBA.

Let me just follow up on the selling dynamics. We have already resumed that sequential growth from sell-out that can entail some sell-in improvement. What has been in the way of that improvement? Do you need more credit on this side? Is it something more structural coming from the channel? And my second question, you talked about disturbances in the service level. Can you give us some more color on what happened? Were those sales losses or maybe the revenue shifted from Q1 to Q2 that could contribute to the sell-in in Q2? Could you talk about the changes in sales tax in the state of Sao Paulo? What's the competitive strategy? Are competitors transferring that to price? What's your expectations of the door-to-door sales coming in the coming months.

Vinicius, as to the sell-in, sell-out difference, the main driver, the way I see it is shortage of inventory from consultants. We have been precise in credit concessions. We don't see the number of blocked consultants going up block by debt, of course. The major impact in credit concession is the inventory management with consultants. Well, as to services, we were impacted by 2 effects. When we closed down the Interlagos plant, we had to move production to Cajamar. We had to adjust production lines, materials flows that posed some challenges in Q1. The second component that impacted us was the replacement of planning systems. We talked about them extensively last year. This new integrated planning system was in effect at the end of the year, and we had to adjust synchronization. We had to adjust parameters, which is only natural that provided some destocking in the period. And they are translated into losses in sales. It's not a sale that was moved elsewhere. And we expect to normalize the system starting in Q2.

All right. Vinicius, about ST, the explosion of ST to direct sales comes into effect starting in July. And we expect now for Q2 to see a transitory effect due to the end of MBA 177, which is mismatched from the exclusion of ST. But in the second quarter, this neutralizes and over the course of the year. So this is going to be a positive impact for us. I don't know if the prices are being passed through or not.

Andrew Ruben from Morgan Stanley asks the next question.

I'd like to understand a bit more about trends in the social selling channel. We see the growth in omni and the decline in relationship selling. And one of the items you mentioned was a transition from some relationship selling to social selling. So I'm curious how you see that channel evolve over time? And if you can help us understand if it's the same representatives that are active in social selling? And if so, how you're doing that classification. Again, I think it's going to be a trend here. So trying to understand how it's progressing in your business.

Andrew, thank you for your question. Yes, you're right. Sales from consultants through social media. And marketplaces or even through WhatsApp, they have been on the rise quite substantially. And we are encouraging them to resort to this type of sale with a new format called -- My Store, Minha Loja. They have sellers center to manage their customer base. And adoption rate has been fantastic, and we want to speed it up even further. When we report that revenue in our release, it comes in as omni digital. And we put a note and part of it comes from consultants. It's direct sales but not adding these sales that are conducted digitally. But the notes explain that difference. Well, while adoption rates have been growing through all consultant types, on average, they are younger. These consultants are younger. This is a very positive impact in that renewal effort of our consultants as that number is expected to grow even further in the coming earnings calls.

Bob Ford from Bank of America comes in next. It's a question in writing. What's your take on the churning impacts in the channel? What -- how should we evaluate brand equity from Avon? These are Bob's questions.

Thank you, Bob. As I said before, efforts we undertook to help our consultants, especially the smaller ones. These efforts have yielded good results. The number of consultants are growing and their activity as well. So churn is coming down. As to Avon's brand equity. And their early signs. The consideration of the brand and the consideration of purchasing the brand have improved in the first quarter. However, most investments made in the relaunch came in, in Q2. So that makes us feel very optimistic. And that has been flanked by good results in the launches of new products, but they amounted to a smaller portion of the entire portfolio. These are only early signs, but encouraging. The relaunching of Avon is not a big bang event. It will happen gradually. We'll be allocating resources as the brand performances picks up. We still have a long way to go to renew the entire portfolio, and they become the majority of the assortment of products. But the early signs are very positive, nonetheless.

This concludes the Q&A session. And we conclude Q1 earnings call. The IR department is available to answer any questions you may have. Have a great day. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]