Natura & Co Holding SA
BOVESPA:NTCO3
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Natura & Co Holding SA
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Good morning, ladies and gentlemen. Thank you for standing by. At this time, we would like to welcome everyone to Natura &Co Conference Call on the Second Quarter 2018 Results.
Today with us we have, Mr. Roberto Marques, Executive Chairman of the Board of Natura &Co; Mr. João Paulo Ferreira, CEO of Natura; Mr. José Filippo, Chief Financial and Investor Relations Officer of Natura &Co; and Mrs. Viviane Behar, Investor Relations Director of Natura &Co.
This event is being recorded. [Operator Instructions] We have simultaneous translation into Portuguese and questions may be asked normally by participants connected from abroad, either in English or Portuguese. [Operator Instructions]
We have a simultaneous webcast that may be accessed through Natura's IR website, www.natura.net/investors. The slide presentation may be downloaded from this website. There will be a replay of this call on available on the website as well.
Before proceeding, please be informed that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Natura management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstance that may or may not occur in the future.
Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Natura and could cause results to differ materially from those expressed in such forward-looking statements.
Now, I will turn the conference over to Mr. Roberto Marques, Executive Chairman of the Board of Natura &Co. Mr. Marques, the floor is yours.
Thank you, Elisa, and good morning to all of you, and thank you for joining us on this conference call to talk about Natura &Co second quarter results.
I'm joined on this call by José Filippo, who, as you know, joined us in May as our CFO and to whom I would like to extend a warm welcome. He came to us from Embraer and brings vast experience both in Brazil and international markets. Also with me is João Paulo Ferreira, the CEO of Natura, and Viviane Behar, who recently joined us as Director, Investor Relations, and whom I'm also happy to welcome to our team.
I will start by presenting the highlights of Natura &Co second quarter performance. Filippo will then present our consolidated financials and performance by brand. I'll make some concluding remarks before the 3 of us can take your questions. As usual, I'll be referring during this call to the presentation that is available on our website.
So let's begin on Slide 3 with the key highlights of Q2. In a nutshell, this was a very strong quarter for Natura &Co, delivering double-digit revenue and EBITDA growth, demonstrating once again the power of multi-brand, multi-channel group in the global footprint that we are building. And as you can all appreciate in a quarter that was pretty challenged for all of us, being able to report double-digit growth in revenue and EBITDA is pretty exciting and something that we are really, really pleased. And this is even more evident in the headline numbers.
Reported net revenue increased by 53% in Brazilian reals and by 13.6% on a pro forma basis, which, as you know, includes The Body Shop in the base. Profitability was also up with a solid EBITDA increase of 12% on a reported base and 8.5% on an adjusted base.
This quarter, we are also introducing to help all of you the concept of underlying operating income, which excludes nonoperating results, financial expenses, income tax and nonrecurring effects, providing a clear view of the health of each business and the group. And in this metric, this quarter, underlying operating income rose 9.4% in the quarter and 54.1% in H1. Again, Filippo will provide greater details on the numbers shortly.
Each one of our 3 brands and businesses is contributing to the performance. Natura's relationship selling and increasingly multi-channel model is continuing to deliver strong results despite the impact of the truckers strike in Brazil, with solid sales growth both in Brazil and in Latin America and EBITDA also growing.
The Body Shop transformational plan is underway and delivering its initial results. Underlying profitability, excluding the transformational cost that we are now implementing, was strongly up in line with the plan to generate EBITDA margin improvement.
Sales in the quarter were impacted by the commercial calendar that helped us in Q1 as we disclosed in our last earnings call, but H1 sales were up by a healthy 3.6%, something again that we are very pleased to see those sales numbers already coming from The Body Shop. And Aesop continues to deliver remarkable growth with high-double digit growth in sales and EBITDA across all channels and geographies.
We have also brought in some new leadership talent for the group, Natura and The Body Shop that I would like to highlight. I've already talked about Filippo, who joined us as a CFO of the group and Natura, and Viviane Behar as Director of Investor Relations, a role that has become more global. Natura also recently announced the appointments of Paul Andraji as Head of its Retail Operations and Fernando Lemos as Head of Digital.
The Body Shop also announced the appointment of Domenico Trizio to the newly created role of Chief Operating Officer, Amy Liddy as Global Financial Director and Elen Macaskill as Global Customer Director, as well as Lionel Thoreau as Global Brand Director to support the CEO David Boynton and the team of The Body Shop in this brand transformation, which has gotten off to a strong start.
In line with our triple bottom line approach, we recorded also new initiatives and advances in sustainability this quarter. Let me mention particularly a new certification by The Union for Ethical BioTrade for Natura's EKOS line, and also, The Body Shop global campaign Forever Against Animal Testing that has also continued to show momentum and it's nearing its aim of collecting 8 million signatures, which is something very exciting.
With this strong performance in Q2 and H1, Natura &Co is fully on track to deliver the medium term targets that we present back in April at our Natura &Co Day.
With that, let me hand over to Filippo to go into our financial performance in greater details.
Thank you very much, Roberto, and good morning to everyone. It's a pleasure to have joined Natura and to be with you today, and I'm very much looking forward to our future exchange.
Roberto mentioned that Natura &Co posted another quarter of very strong growth. And in Slide 5, you see the pro forma consolidated net revenue, which includes figures for The Body Shop in 2017 was up in double-digit growth both in Q2 and H1.
In the second quarter, consolidated net revenue reached BRL 3.1 billion, up 13.6% versus the same quarter of last year on a pro forma basis, and that's 8.6% at constant foreign exchange rate. This increase was driven by double-digit growth at constant exchange rates both at Natura and Aesop, whereas The Body Shop's Q2 sales were impacted by the commercial calendar and the phasing of purchases by franchisees, which boosted Q1 sales as we reported at the same time.
In the first half, sales reached almost BRL 5.8 billion, representing 12.4% growth on a pro forma basis and 8.6% at constant currency. All 3 brands posted sales growth in the half with Natura up by the same 8.6% in constant currency, The Body Shop up 3.6% and Aesop up by a very strong 33.4%.
On a reported basis, Q2 sales were up 53% and H1 sales were up by 54.2%.
On Slide 6, we turn to our consolidated adjusted EBITDA, which was up 8.5% to almost BRL 372 million in Q2, and up 27% in H1 to almost BRL 691 million. Adjusted EBITDA is a metric we are using to provide the clean reading of our operating performance, which excludes all one-off effects linked to The Body Shop acquisition. These include acquisition expenses incurred in Q2 of 2017 for BRL 36.1 million and transformation costs incurred in Q2 2018 for BRL 37.5 million.
As we see on the slide, all 3 businesses improved their performance and therefore contribute to our EBITDA growth in the quarter. Reported EBITDA was up by a solid 12% to BRL 334.4 million after taking into account The Body Shop's transformation costs in Q2. In H1, reported EBITDA was down 1.5%.
Let's turn on the following slide to our bottom line. As shown in the graph, underlying operating income rose by a solid 9.4% in Q2 and by a very strong 54.1% in H1. Q2 growth was driven by The Body Shop and Aesop, while Natura was broadly stable on lower gross margin and higher SG&A as we will see shortly.
As Roberto mentioned, here again, to provide comparable numbers, our underlying operating income excludes acquisition-related effects and expenses such as debt servicing and transformation costs.
On a reported basis, net income stood at BRL 31.8 million in Q2 versus BRL 163.5 million in Q2 2017, reflecting the acquisition financing transformation costs. In H1, reported net income was BRL 56.2 million versus BRL 352.6 million in H1 2017.
On Slide 8, let me conclude the graphic overview of our key financial aggregate this quarter with a couple of balance sheet considerations. We recorded a free cash flow of BRL 121.5 million in Q2 with a positive contribution from all 3 business. This compares with BRL 225.5 million in Q2 2017, mainly attributed to a lower reported net income in the period impacted by acquisition effects and higher working capital with the seasonal inventory at The Body Shop and higher receivables from sales growth at Natura. Our net-debt-to-EBITDA ratio stood at 3.3x at the end of Q2, in line with our expectations. We are on track to reach our target of 1.4x by 2021.
With this, let's turn to a more detailed look at the performance by business. On Slide 10, we begin with Natura with the key highlights of Q2 performance. Overall, Q2 saw further consolidation of Natura's transformation with sales growth in both Brazil and Latin America and market share in gains in Brazil, while sustaining the impact of the truckers strike in May. This demonstrates the strong resilience of Natura's business model.
Brazil's performance was driven by excellent Mother's Day and Valentine's Day campaign this year, both of which outperformed last year's campaign on the back of stronger sales of key categories. Our relationship selling model continues to progress with our productivity per consultant up by a very strong 24.1% in Brazil as shown in the graph, and further improvement in Latin America.
Our multi-channel strategy is all advancing with high-double digit growth in online sales in Brazil and an acceleration in Argentina and Chile. And our innovation index improved again and stood at 64.2% in the quarter, up from 64% in Q1 and 62.1% in the year ago period.
Let's take a closer look at top line performance on Slide 11. Overall, Natura's net sales were up 9.8% in Q2 to a little over BRL 2 billion, and up 8.1% in the first half to BRL 2.7 billion. At constant currency, growth was 10.3% in Q2 and 8.6% in H1. We grew both in Brazil and Latin America.
In Brazil, sales grew by 6.7% in the quarter and 4% in the half driven by strong performance in key categories. The shift in Mother's Day Q2 this year helped offset the impact of truckers strike in Brazil as well as some sales interruptions due to the World Cup. The number of consultants in Brazil stabilized and even increased slightly compared to the Q1 and productivity improved sharply.
We continue to ramp digitalization of all businesses with more than 50% of all consultants now using our mobile platform and online sales growing in double-digit again this quarter with significant increasing in traffic, a higher average ticket and a strong conversion rate. E-commerce now accounts for about 3% of the sales. We are also continuing to roll out a multi-channel strategy with a new wave of store openings beginning this month.
Latin America's sales were up by a very strong 17.7% in Q2 and 18.8% in H1. At constant currency, growth was even stronger at 20.6% in the quarter and 21.8% in the half. All geographies grew with a particular good performance in Argentina, Chile and Mexico. The number of consultants grew 10.5% in Latin America, and we are also seeing improvement in productivity and we are rolling out our relationship selling model in Chile with positive initial results.
Let's now look at Natura's profitability on Slide 12. Overall, EBITDA was up by 5% in Q2 in Brazilian reals and strong growth in Latin America more than offset a broadly stable performance in Brazil. In Brazil, EBITDA was down by 0.5% in the quarter. The performance was impacted by lower gross margin pressured by higher manufacturing costs as a result of the truckers strike, foreign exchange effects and promotional investment.
G&A expenses were up in the quarter due to a higher investment technology to support the increasing digital nature of our business and research and development as we strengthen our product portfolio to keep delivering innovative and desirable products.
Conversely, selling, marketing and logistics expenses improved sharply, falling by 260 basis points as a percentage of net sales even with higher marketing expenses, demonstrating our relationship selling model is more productive and efficient.
Latin America is maintaining its excellent momentum, and its profitability was boosted by productivity and efficiency gains with EBITDA up 23.1% in the quarter. In H1, EBITDA was down 13.5% overall, with Brazil down 24%. However, it's important to note that H1 last year was boosted by a nonrecurring tax reversal of BRL 154.8 million. If you exclude this, comparable EBITDA was up 11.7% overall and 3.5% in Brazil in H1, which constitutes a solid underlying performance.
We now turn to The Body Shop on Slide 14. In Brazilian reals, The Body Shop posted double-digit growth in net revenues both in Q1 and H1. In Q2, net revenues were up by 14.8% to BRL 806.7 million, and in H1, they rose 15.6% to a little over BRL 1.6 billion. At constant currency, the sales were down 1.1% in Q2 due to The Body Shop's commercial calendar and strong purchase in Q1 by franchisees in line with our forecast. Q2 did not benefit from those same effects as expected. Looking at H1, which eliminates these effects, we saw reported sales rise by a healthy 3.6% with growth in owned stores, sales by franchisees and online.
In terms of geography, Asia Pacific and Europe, Middle East and Africa region drove growth. This H1 growth was achieved despite having fewer stores as The Body Shop continues to optimize its store network. At the end of Q2, it had 1,050 owned stores, 52 fewer than the end of Q2 last year and 1,928 franchised stores, down 6. Most of the store closures were concentrated in the U.K. and the U.S.
On Slide 15, we take a closer look at The Body Shop's profitability. As mentioned previously, The Body Shop began implementing its transformation plan and built-in transformation costs in Q2 of BRL 37.5 million or GBP 7.6 million. This was part of the estimated transformation costs totaling GBP 30 million to be booked in 2018 and 2019. These costs are in line with our plan and already factored in the guidance we have provided to the market. The costs are tied to initiatives that will bring about a recurring improvement in the business with an estimated cumulative margin improvement between GBP 105 million and GBP 135 million over the next 5 years in line with our guidance. These initiatives include such actions as organization redesign, focused store optimization and improve operational efficiency among others.
We are already seeing a strong improvement in The Body Shop's underlying performance, excluding these costs. As you see on the slide, adjusted EBITDA grew in Q2 to BRL 24.7 million from BRL 8 million with margin of 3.1%. On a reported basis, including the transformation cost, reported EBITDA was negative BRL 12.8 million in Q2.
In H1, the improvement was even stronger with EBITDA improving to BRL 44.4 million on a reported basis. Adjusted EBITDA, excluding transformation costs, reached BRL 82 million, equivalent to margin of 5.1%. This improvement is largely due to a lower discount in the quarter as well as lower occupancy cost in owned stores and better franchise sales. These numbers reinforce our confidence that The Body Shop's 5 pillars transformation plan is on track and already delivering results.
Let's now turn to Aesop on Slide 17. As shown in the graph, Aesop turned in another impressive performance, both in the quarter and in the half with sales up 36.6% (sic)[ 36% ] in Q2 to BRL 235.5 million and 33.4% in H1 to BRL 436.6 million at constant currency. This high double-digit growth was across all channels and geographies. This growth was supported by continuous store openings, including 25 new signature stores in the past 12 months as Aesop entered new markets. Like-for-like sales in signatures stores were also up by 21.6% with particularly strong growth in Asia Pacific, demonstrating the brand's improving appeal. Online sales were also up in double digits.
The graphs on Aesop profitability on Slide 18 also speak for themselves and show that Aesop growth from strength-to-strength. EBITDA grew by a remarkable 32.5% at constant currency in Q2 to BRL 25.3 million and 66.6% in H1 to BRL 52.3 million. EBITDA margin reached 10.7% in Q2 and 12% in H1, a 200 basis point improvement.
On Slide 19, we conclude this overview with a few sustainability highlights. First, as Roberto mentioned in introduction, Natura became the first Brazilian brand and one of the only 2 worldwide to be awarded by a certification for the EKOS product line by The Union of Ethical BioTrade. This reflects how Natura sources its natural ingredients, respecting fair trade, conservation of biodiversity and trust-based relations with community.
Second, the United Nations Global Compact nominated Guilherme Leal, one of our founders of Natura and Co-Chairman of the Board of Directors, as a member of its global council in recognition of his commitment to sustainable business practice.
And finally, with 7 million signatures in its Global Forever Against Animal Testing campaign, The Body Shop is nearing its target of obtaining 8 million signatures for the submission with intent to submit to the United Nations later this year.
And now, let me hand back to Roberto for his concluding remarks.
Thank you, Filippo. Let's now conclude on Slide 20 with our key takeaways.
With another quarter of growth in revenues and EBITDA, Natura is delivering and showing the strength of the group we are building. So hopefully, the story of the group now becoming multi-channel, multi-brand with a more international presence is helping the group and the business delivering solid results despite some of the challenges that we saw in Brazil, particularly in Q2. And all brands are contributing to this performance. Natura's good momentum continues, both in Brazil and Latin America, and its relationship selling model and multi-channel strategy are advancing quarter-after-quarter.
The Body Shop is making significant strides to deliver its vision of the future. The transformational plan is advancing and already showing early results as evidenced by a significant improvement in sales and underlying profitability, excluding the transformational costs.
In Aesop, impressive growth story continues with strong growth in sales and profitability quarter-after-quarter.
With this solid second quarter performance, Natura &Co is on track to deliver the medium term targets it presented recently, namely a high single-digit compound annual growth in net sales and a low-double digit compound annual growth in EBITDA through 2022, while at the same time reducing our net-debt-to-EBITDA ratio to 1.4x by 2021, a year faster than we first announced after we did the acquisition of The Body Shop.
Thank you very much for your attention, and we are now happy to take your questions.
[Operator Instructions] Our first question comes from Thiago Macruz with Itaú BBA.
My question is regarding the Brazilian operation. I would like to get more color on the impact this quarter of the truckers strike. You mentioned some recurring and nonrecurring effects to explain the stronger top line, softer profitability. Just to make sure I understand what was the impact of the truckers strike in profitability. When it comes to your strategy moving forward, is it reasonable to assume that you will adopt a more aggressive stance in terms of pricing in Brazil from now on? Should we see this as a new normal? That's my question regarding the Brazilian operation, guys.
JP speaking. So as regards the effects of the truckers strike, it's actually impacted us twofold. One on top line. So our top line, which was really good, would have been even better if it was not for the strike. But once again, we proved the high quality of the services we provide and the capabilities we build over the years will deliver us ongoing advantage in the business, but proves itself in moments of stress like this, so that was the first impact. And indeed, we had impact on costs.
Because we had some idle assets. We produced as much as we could of what we could. Our distribution centers did their best. But however, I mean, we did face some idle time with our assets reflected in our gross margin. So -- and that's one of the reasons I'm very, very confident on margin improvements going forward in the second half, both in terms of gross margin, but moreover, in EBITDA margin.
As it comes to pricing, as I said, we are sort of seeing a moderate, not to say shy consumption pattern in the country, which -- yes, there is not much room for aggressive price increases, although we do plan a slight price increase as of next month. So the overall promotion activity grew in comparison to last year, but we do think this is a temporary level and should normalize as economy picks up.
Is it fair to say that the impact of the truckers strike and profitability this quarter was north of 100 basis points? Is this a good estimate just first to really have a ballpark and be more educated in our forecast for the remainder of the year?
Yes, that's a fair assumption. That's a good ballpark. A higher impact on top line and above that in profitability.
Our next question comes from Olivia Petronilho with JPMorgan.
I have 2 questions actually. The first one is on the gross margin in Brazil. I'd like to understand a little bit more the effects that resulted in the drop in margin. And maybe if you can link that a little bit to the lower average pickup that we saw in the quarter. So is this a matter of mix? Is this a matter of actual investments in prices? Is it impacted by the commissioning structure? If you could give us a little bit more visibility here.
The second question is regarding The Body Shop. So basically, you gave us a little bit more guidance regarding the investments in the revamping purpose of banner. If you could give us a bit more visibility on which regions we should be focusing on? If there should be more focus on franchisees, owned stores, e-commerce, launches, et cetera?
JP. I'll take your first question and then Roberto will take the second, okay? So as regards gross margin impact in our Brazilian business for Natura, 4 main drivers for that impact that you noticed. First of all, the strike, as I mentioned before. So it’s a fixed cost that couldn't be diluted. There is already showing some ForEx effect, right, exchange rate effect in our raw materials, right? There was a third element of product mix, which explains your second part of the question on a lower average ticket. Actually, there was one of the categories with a lower price outgrew the average. And finally, an increased promotional activity. So these are the 4 elements that explain the gross margin in Brazil.
Olivia, Roberto here. I'll take The Body Shop on behalf of David, who is not here on the call with us. So the transformational program, as I think Filippo mentioned, we now have a very, very good handle in terms of the cost of the transformation. We are planning to spend about GBP 30 million between 2018 and 2019. Roughly, I would say GBP 20 million will be in '18 and then the other GBP 10 million will be in 2019. Most of that is going to be related to some of the organization design to improve the operation and efficacy of our restructure. That's primarily in our company markets, so Europe, North America and some parts of Asia. And also, in terms of optimizing our store footprints. As we communicated throughout this [ tract land ] over the next 5 years, we're saying we're going to net reduction between 100 to 120 stores in some of those key markets for us, again, company markets, okay? So hopefully that helps.
Okay. No, on The Body Shop, that's great. If I could just have a follow-up on the Brazil margins. Do you this -- strike apart, okay? Do you think this should be the -- what we should continue to see in second half? I mean, a little bit of pressure from FX and your promotional activities?
Yes, strike effects apart, there will be a pressure on those elements, however, partially compensated by a slight price increase, moreover, a volume increase. As you recall, our volumes are skewed to the second half of the year and we foresee huge flow-through through our P&L.
[Operator Instructions] Our next question comes from Guilherme Assis with Brasil Plural.
I would like to get your views, maybe JP's views actually, on the growth of the Brazilian market. Like we lost some of the information that you used to have about the potential growth. So I'd like to understand like market share-wise, how are you seeing the company and how are you seeing the market grow in Brazil, like the expectations for this year and maybe for next year? And how do you think the market share-wise, Natura will perform? So that's 1 question. And another question is about the consultant base in Brazil, like we understand that Natura underwent like a cleanup, and it seems like the churn this quarter, like in the last quarter, actually became a net addition again, right? So the question here is, do you think that the cleanup is through? And should we expect that the base to start growing, again, like in the short-term? So those are my questions.
Guilherme, JP speaking. Thanks for the questions. Starting with the market, the market is very -- market growth is very modest currently as we alluded. All information -- following the GDP growth, smaller GDP growth than forecasted originally, so consumption is quite contained. Having said that, we are very, very pleased to say that we continue to gain market share after achieving or recovering market leadership last year, we continue to see that we are growing market share. And actually, looking forward, it's also very promising. As you know, this Sunday, we're going to celebrate Father's Day. By the way, all of you who are listening, enjoy the day with your families. But this is a very important day for us, which has been outperforming our expectations, which suggests that we will continue to increase our competitiveness in our markets. So excellent opportunity for Natura going forward in spite of a lower market growth.
As it comes to your second question, the consultant base, indeed, it seems it's stabilized. So it seems that most of the cleanup is over. The total number of consultants end Q2 is very similar, actually slightly higher than end of Q1. So as of now, we should see a sort of stable or perhaps an even slight growth going forward.
Okay. I think that's clear, JP. Just a follow-up on my first question, if I may. Regarding like in the market share gains and when we look at the numbers, like the operating data that you provided like you mentioned before that there was like a decline in the average price. I tend to think that as a mix of more promotions, but also important part in product mix, right? So when you think about that and try to reconcile with market share gains, is it fair to say like that you're -- that like maybe last year, the main driver for market share gains was fragrances, and this year like you're more diversified in market share gains?
Yes, I think it's a fair assumption. We actually gaining share in all of our categories, basically and the core ones, so more diversified than last year indeed. Last year, fragrances was perhaps the biggest driver and continues to be, but the other categories are performing as good as, and some of them at this moment even better. So it is a more spread growth, and that had an effect on the category mix in this particular quarter.
Okay. And maybe just 1 last thing. Now that you mentioned that you believe that your consultant base is already stabilizing now. So should we start to see like a reduction in the productivity gains we saw like that was a big highlight in this quarter, like in the second quarter, should we start to see like more modest productivity gains going forward?
No, Guilherme. That will lead to our modernization, digitization strategy. So as we start filing new services and new possibilities of improving the shopping experience through the consultants, through digital services, through our end consumer, if that continues to work fine, we're going to continue to see improvement gains. Now whether they're going to be as sharp as they were in the last, say, 4 quarters, that's yet to be seen, but we are working to have that indicator continue to grow.
Our next question comes from Richard Cathcart with Bradesco.
Just a couple of questions about Natura in Brazil. Firstly, you said that you're going to begin to open more owned stores by the end of the year. Should we expect to see kind of a new, different updated store concept? Or are you continuing to roll out the stores kind of that we've already seen some locations in Brazil? And then the second question is just about the drugstore channel. You got some specific products for that channel, the Faces makeup, so body care, et cetera. Could you just kind of give us some information about how that business is performing? And what your expectations are for the rest of the year and next year?
Thank you for the question. JP speaking again. When it comes to store concept, we are indeed opening stores in the second half of this year. We opened [ the Roi ] 2 weeks ago. Today, this morning, we just opened [indiscernible]. So there is a dozen stores yet to be open or more in the second half. Still under the current concept, we are indeed working on a new store concept, but that should be -- should materialize next year, okay? When it comes to drug stores, we are happy with the performance so far. And we are looking at the opportunities to gear it up next year. So it's work-in-progress. Understanding where the opportunities lie and as soon as we have more news on that, we will inform you accordingly.
If I may, just to follow up on The Body Shop in Brazil and Latin America. I think the acquisition that you made, one of the strategies you wanted to implement with direct sales at The Body Shop in Brazil for leveraging the relationships you already have. Can you just give us an update on kind of -- on that strategy and when we should begin to see that in place?
Richard, Roberto here. Again, just on The Body Shop LATAM, again, we still see this as one of the biggest opportunity to drive growth. And we have now under David, but also under Robert Chatwin, our Chief Transformation Officer, really starting to tell you what potentially could even help and boost even more the presence of The Body Shop in LATAM. We are looking at our store footprint. We are looking now at the franchise model that we currently have and we are going to be evaluating potentially direct selling as a complement. We don't have the strategy defined yet, it's work-in-progress as building back here on JP's point.
Our next question comes from Gustavo Oliveira with UBS.
I want to talk a little bit on Brazil, if I may. I understand there is a recent price increase being implemented. If you could comment a bit on that? And whether you expect really start to increase the margin improvement, gross margin improvement in the second half of the year or not? That's the first question.
Gustavo, as I just mentioned, yes, we will increase prices slightly, and that should help gross margin increase going forward.
And what's the magnitude of the price increase? And just to confirm, you usually do a price increase at the beginning of the year. So I'd like to understand if this is the second price increase, but within the first half of the year? And if you could give us a sense for what's the magnitude of the price increase now? And also if it's more related to pressures related to the BRL devaluation? Or if you are seeing opportunity in the marketplace at the moment? It seems that you've been insuring the capacity over the period at the moment?
So not only the price increase, so low single-digit, right? We didn't increase price earlier. Not much room for price increases in the market.
Okay. And the second question is with respect to [ GNA ]. I think in the first quarter you had very good results in [ GNA ] in Brazil, but right now you have -- [ GNA ] expenses have been up 25% in this quarter. What we should expect for the rest of the year? Is it going -- [ GNA ] going to be growing more in line with revenues and more in your expectations? Or there should be some pressures [indiscernible]?
Okay. This is Filippo. Yes. In terms of the projections for the year, I think, we should take this number as we mainly don't expect to see increases in this number, we should be keeping this level. Again, that reflects, as we indicated, our investments in innovation is important about our digitalization and IT platform as well that we incur in some effects of that. And also, that we took some of the IT assets in terms of the life -- we revised -- we used the life of some of the IT assets that also accounted for what you see there. But we expect to see the remaining nominal terms for the year. However, with the growth, we'll definitely will dilute those costs throughout the year in the future.
That's very clear, Filippo. And last question is around The Body Shop, if I may. I would like to understand a bit, I understand you are encouraging product discounts. You are reducing the level of product discounts. I want to understand where you stand on the profits. And whether you would expect any impact on your revenue in the second half of the year? Or whether the consumers are continuing to buy and therefore the elasticity of these discounts is actually very low or not? Or rather there would be a potential deceleration of revenues going forward? It's quite difficult still at this stage to forecast your revenue line, although I recognize that you have given a mid- to long-term guidance, but in the very short-term structure, but in the second half it's quite difficult to understand where you stand in terms of the potential impact of the product discounts -- reduction of product discounts on your top line?
So Roberto here. Let me see if I can help you. Again, I think, yes, we are in the process of reducing levels of discount for The Body Shop, and again, we think that the brand is worth more and we are seeing some very good results in store. In a couple of markets where -- in Europe and also in the U.S., where we are experimenting and seeing consumers respond in terms of transaction positively, then they will be reducing level of discounts. We felt, as part of our due diligence, that probably the brand was too much discounted, and we have great products, a great brand and continue to really start it again to work on the digitalization of the brand and how we can add more value. So that trend will continue. There is a projection from a revenue perspective. Again, we are very pleased with the results on the half 1. So if you look at half 1, we grew a little bit above 3% -- 3.5%, 3.6%. And I would say our expectation is that we'll continue that trend, right? Again, a combination of improving our ability to do the transformation, reducing discount, but again, we do have a long way to build -- to implement this brand rejuvenation. So that's pretty much the best structure that we can have at this point is based on the half 1 results.
That's very helpful. And 1 last question on the gross margin for The Body Shop. In the fourth quarter of 2017, and I'm asking a little bit ahead of the fact that the fourth quarter is your most important quarter giving you a breakeven business. And you had a margin contraction versus the third quarter 2017 number. But you're managing the company differently now. Should we see a drop in margins in the fourth quarter because of mix effect and different components? Or you think margins could be more stable where they are right now, gross margin?
Gustavo, we still expect to see the margin level that we saw before, not that -- this, or as you saw the first 2 quarters already had a good indication about the capacity and the momentum of this business. And the fourth quarter is the strongest. There is a clear seasonality in this business for CBS and we expect to see stronger fourth quarter as we saw in good years, that's what we expect.
This concludes today's question-and-answer session. I would like to invite Mr. Roberto Marques to proceed with his closing statements. Please go ahead, sir.
Thank you, Elisa. And again, thank you all for joining us. I'd like just to wrap up in the knowledge and thank all of our associates at Natura, The Body Shop and Aesop for driving those tremendous results for the quarter and for the semester. Again, we are in a journey. We are building a group that we are very proud of, and the results again, hopefully you would agree with us are pretty encouraging and very positive on the quarter. And for the ones in Brazilian, we wish you a happy Father's Day and just reinforce JP, make sure that you're buying a Natura gift for your fathers. And thank you very much. Have a good weekend. Thanks, everybody.
That concludes the Natura audio conference for today. Thank you very much for your participation, and have a good day.