Natura & Co Holding SA

BOVESPA:NTCO3

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to Natura & Co's Second Quarter 2022 earnings. On this call today are Fabio Barbosa, CEO of Natura & Co; and Guilherme Castellan, CFO of Natura & Co; Joao Paulo Ferreira, CEO of Natura & Co Latin America, will join for the Q&A session.

The presentation, they will be referring to during this call is available on the Natura & Co Investor Relations website.

I will now hand over to Fabio Barbosa.

[Fabio Barbosa;CEO, executive]

Good morning or good afternoon to all of you, and thank you for joining us today. Very happy to be with you for my first quarterly earnings call since becoming CEO of Natura & Co less than 2 months ago. Guil, the CFO, will comment on the results shortly. So I will limit myself to a more qualitative commentary.

Q2 was a difficult quarter marked by high inflation, lower consumer spending, continued supply chain disruption and of course, the macroeconomic and geopolitical uncertainty that results from the war in Ukraine. Our performance in the quarter, of course, reflects this challenging environment. But let's be clear, it also reflects the structural issues within our group that we have clearly identified and that we are now addressing.

As you know, when I was appointed CEO, we also announced that I would head up a streamlined transition committee, and I'm pleased to report that we are making good headway in redefining the respective roles of the holding company and the business units in order to make our group less complex, leaner and more decentralized, so that each BU can get on with the business of improving its performance, getting the supporting needs but also the latitude it needs. We want to preserve what makes Natura & Co strong and unique, notably, its culture and commitment to sustainability. But the BUs need to have the ability to react quickly to their market and strategic challenge.

In my first few weeks, I have focused on 2 main priorities within the transition committee. The first is delivering a lighter and leaner organization structure, one that combines autonomy and accountability. I'm happy to announce today that we have already identified significant savings in corporate expense, which we are implementing as we speak. To give you an idea of the magnitude, the savings we already identified would represent at least 40% of 2021 corporate expenses if the new structure was already in place last year, just as a reference of what we are doing.

The second is within the governance model and new ways of working within Natura & Co. The idea is to have a concentrated and streamlined holding company structure, focused on a few key priorities: defining KPIs, monitoring the performance of more autonomous brands and capital allocation. We are advancing well, and I confirm today that the transition committee, which is by nature transitory, will have concluded its work before the end of the year. At the same time, of course, we will continue our ongoing work to improve the fundamentals of our brands and business and notably the underperforming ones, which we regard as our principal challenge but also our main upside driver.

We expect the environment to continue to be challenging in the second half, and we'll continue to see headwinds. Revenue trends should improve in the second half. We want to say that revenue should improve, but margins should -- I mean, the revenues will improve, but margins should continue to be pressured in the short term. In this context, our priority is very clear. We are strongly focused on improving margins and generating cash flows. This is the guideline for every single business units, and they are all mobilized and incentivized accordingly to achieve these goals.

With that, let me now hand over to Guil, to comment on our Q2 performance in greater detail. Guil?

[Guilherme Strano Castellan, executive]

Thank you, Fabio, and hello to everyone. I'll start with Natura & Co's consolidated revenue on Slide 5, which stabilized in constant currency in the quarter amid the challenging macro environment. The stabilization came on the back of a high comparable base as sales in Q2 of last year were up 31.7% at constant currency. In reais, sales were down 8.6%. We look at performance by BU shortly. But in a nutshell, we posted solid growth in Natura & Co LatAm with a strong performance by the Natura brand and Aesop continues to post double-digit growth at constant currency.

Avon International's performance was impacted by the war in Russia, but trends improved in most of other markets. The Body Shop had a difficult quarter from challenging macro and a low retail recovery, which could not offset the decrease in the Body Shop at home and e-commerce.

On Slide 6, we zoom in more specifically on our digital sales. Digitally enabled sales, which includes both online sales from e-commerce and social selling as well as relationship selling using our main digital apps held versus last year at nearly 50% despite the reopening of retail post-lockdowns. They remain significantly above pre-pandemic levels.

This slide shows you a few key highlights. First, our digital payments platform and co-pay continues to grow. The number of accounts at Natura in Brazil grew to 457,000 from approximately 390,000 in the previous quarter and total payment volume reached BRL 7.5 billion in the first half, as all direct selling and e-commerce payments at Natura Brazil already capture and processed through the platform. Natura consultants who use the platform generally record higher activity levels and lower payment defaults.

Second, relationship selling using apps continues to progress. At Natura LatAm, the average number of consultants sharing content reached 28% this quarter compared to 24% in Q2 2021. At Avon International, penetration of the Avon ON app reached 23% in Q2, 7 percentage points more than in the same period of last year. And third, our online sales are above pre-pandemic levels at all our brands with strong growth, notably at Natura and Avon.

We turn to adjusted EBITDA margin, Slide 7, which was resilient at 8% in Q2, down 50 bps compared to the same period last year. As shown in the slide, the major unfavorable impacts were on gross margin. We managed to partially offset them through improvements in SG&A in LatAm and a reduction in corporate expenses. The main unfavorable impacts on EBITDA were first 750 bps from inflationary and FX pressure. And second, impacts of the war in Ukraine and others. These were partially offset by 2 positive impacts: 550 bps of synergies and revenue management and other efficiencies, cost containment and one-offs, which improved margin by approximately 200 bps. This includes corporate expense savings of BRL 60 million, of which BRL 20 million is cost containment and phasing effects of expenses.

On Slide 8, we focus on underlying net income. This slide shows you the bridge from net income, which was a negative BRL 767 million to underlying net income, which was a negative BRL 262 million. The difference between the 2 comes from transformation costs for BRL 282 million, BRL 66 million from discontinued operations and the PPA effect from the acquisition of Avon for BRL 158 million.

On Slide 9, we look at our balance sheet and liquidity profile. We ended the quarter with a cash position of BRL 4.3 billion. This cash position comes after free cash outflow of BRL 56.5 million in Q2. Management is strongly focused on optimizing cash conversion in the short and medium term. And while we cannot be satisfied with our second quarter performance, it is an improvement of nearly BRL 736 million over Q2 of last year. This was notably driven by improved inventory levels as the businesses focus more on managing inventory, greater discipline in CapEx and favorable exchange rate variation.

Our net debt-to-EBITDA ratio stood at 2.46x at quarter end, up from 2.13x in Q1 and 1.43x in Q2 of last year. The leverage ratio reflects cash consumption and lower EBITDA. As you see on the second graph, our cash position of BRL 4.3 billion is higher than the total of our debt payments through 2027. The average maturity of our debt is 6.3 years, and we faced limited debt repayments until 2028. Note that this does not include the July 2022 issue by Natura Cosmeticos of BRL 826 million in debentures maturing in 2027. These debentures partially replaced the '22 and '24 issues, further extending our average debt maturity to 6.5 years as part of our continued liability management.

Let's turn now to our performance by business unit, beginning on Slide 11 with Natura & Co LatAm, which returned to growth in the quarter. Total net sales were up 5.6% in constant currency. This was driven by double-digit growth at the Natura brand, which grew by nearly 15% at constant currency, partially offset by a decline in Avon brand, although trends have been improving since Q3 of 2021, particularly in beauty.

Natura brand gained momentum over the previous quarter and posted year-on-year growth of 14.3% in Brazil, supported by an acceleration in consultant productivity, up by 17.5% in Q2. In Hispanic LatAm, net revenue was up 15.5% at constant currency and 8.8% in reais. Growth was mainly driven by Argentina and Colombia. Excluding Argentina, growth in Hispanic markets was still up in low single digits at constant currency despite a very strong comparable base in Q2 of last year. Another highlight of the period was that the Natura brand was again ranked the strongest cosmetics brand in the world by Brand Finance. At the Avon brand in LatAm, net revenue was down 5.1% at constant currency. In Brazil, trends are improving every quarter in recent periods.

In Q2, net revenue showed the lowest revenue decline since Q3 '21 at minus 10.7%. It's important to highlight that the Beauty segment actually grew by 5%, which was offset by a 31% sales contraction in Fashion Home. The Beauty segment in Brazil saw a double-digit gain in consultant productivity. In Hispanic markets, net revenue was down 2.8% at constant currency and 13.9% in reais. Here, too, due to a drop in Fashion & Home. The new commercial model is showing significant progress in Ecuador and Colombia, with sales growth and a sequential improvement in the number of representatives activity and productivity. Reproductivity in the Beauty segment was positive across most markets compared to last year and also improved sequentially. The total number of available representatives was stable versus Q1 of 2022, driven by Ecuador and Colombia, while the churn ratio improved in Ecuador, Colombia and Central America.

On Slide 12, we turn to Natura & Co LatAm's Q2 adjusted EBITDA margin. As shown on the graph, EBITDA was up slightly by 70 bps, while margin at 10.8% was stable versus last year. This performance was supported by synergies, revenue management and strict financial discipline, which offset by the impact of sales deleverage at Avon, raw material inflation and FX headwinds. The Natura brand margin remains very strong despite high cost pressures. Avon was impacted by the continued effects of the transformational plan, higher inflations and logistic expenses, too.

Let's now move to Avon International on Slide 14. Revenue was down 11.4% at constant currency and 25.4% in reais. This drop was strongly impacted by the situation in Ukraine. Excluding Russia and Ukraine markets, sales were down 5.8% at constant currency and improved sequentially versus the previous quarter. Sales also reflected lower purchasing power in Europe, but this drop was partially mitigated by an aggressive revenue management plan across all markets.

Fundamentals continue to show improvement. And the new commercial model now implemented in 60 markets resulted in better rep productivity and activity and a reduction in churn ratio. Q2 adjusted EBITDA margin stood at 3.3%, down 100 bps versus the same period last year. This was due to substantially higher cost pressures, the impact of the war in Ukraine and lower volumes mainly in European markets. These were partially offset by an effective revenue management strategy across markets and cost reduction resulting from strict financial discipline and a leaner operating model.

On Slide 16, we now move to the Body Shop. Q2 net revenues declined 11.8% at constant currency and 25.3% in reais. This reflects falling consumer confidence, but also post-lockdown channel rebalancing. Store revenues were up versus last year and improved versus Q1 '22 with growing footfall, but they remain below their pre-pandemic levels. This progressive retail recovery was outpaced by a decrease in sales in other channels, the Body Shop at home and e-commerce, although they remain above pre-pandemic levels.

Sales to franchisees also posted a decline in Q2, but are showing increased retail sales month on month, further reducing franchisees' inventory as they recover from lockdowns. Q2 adjusted EBITDA margin was 3.3%, down 970 bps versus Q2 '21, driven by lower volumes and channel mix as a result of decreases at home and e-commerce and lower selling to franchisee partners. In order to address these challenges through H2, management has been focused on actions to drive margin improvement. This includes leveraging recent investments to drive store and consultant productivity, especially in the critical fourth quarter, the continuation of the store footprint optimization, margin improvement from the continuing focus on product mix and a detailed review of SG&A costs.

On Slide 18, Aesop again recorded an excellent performance with another quarter of double-digit growth in constant currency, up 25.4% despite a challenging comparable base. Revenue in reais was up 5.7%. All regions delivered double-digit growth led by North America and Asia Pacific.

Aesop continues to consistently post superior sales growth on a like-for-like basis, while continuing to roll out new stores in existing and new cities. Aesop is also continuing to see channel rebalancing, but online sales at 23% of the total are still more than twice above the pre-pandemic level.

China entry plans are on track for launch by year-end 2022, including investments in digital platforms in the quarter. Q2 adjusted EBITDA margin of 16.2% was down 480 bps compared to Q2 '21. This reflects planned high investments in digital, categories, geographies, notably China and human resources to continue driving future sustainable growth.

Let me now hand back to Fabio.

[Fabio Barbosa;CEO, executive]

Thank you, Guil. I will conclude now on Slide 21 with our key takeaways, basically reinforcing what I said at the opening here. So first, the transition committee work is progressing according to plan, and we fully expect to have it completed it work before the end of the year.

Second, the work of the transition committee is clearly aimed at delivering a leaner, less complex and more decentralized organization, giving our BU's autonomy, but also more -accountability to a holding structure that is clearly focused on monitoring performance, tracking the right KPIs and allocating capital to well-defined priorities.

Third, we believe that headwinds will continue. And in the second half, sales trends should improve as we cycle over weaker comps, but margins will remain under pressure in the short term. And fourth, in this context, our immediate focus and that of all our business units is on defending margin and generating cash flow. The whole organizations mobilize and incentivize to activities goals. This is part of our ongoing focus on improving the fundamentals of our underperforming business, we attribute both as our principal challenge and our main upside driver.

Thank you very much for your attention and Guil, JP and myself are happy to take your questions.

[Operator]

[Operator Instructions] And our first question will come from Robert Ford of Bank of America.

[Robert Ford, analyst]

This is Bob Ford at BofA. Fabio, I'd like to ask a question about governance. As you review governance structures, incentives and KPIs, what are some of the early takeaways in terms of misalignments or flaws? And what does that mean for senior management scorecards moving forward? And what kind of tracking and monitoring were in place for more autonomous brands and regions? Were those -- did you have reliable brand health indicators in place or measures of competitive dynamics that you could understand? And what do you feel is needed to better understand those businesses?

[Fabio Barbosa;CEO, executive]

Well, lots of things here. Yes, we have the KPIs. KPIs not only in terms of, let's say, working capital but also KPIs in terms of brand soundness aspiration, and we're going to track many of the things in terms of expense control and everything. And in terms of the incentives, what we are doing now, especially for the second half is giving a lot more focus on margin and cash generation and a little less on growth, at least in the short term, these are the priorities we are having.

And the idea, when you give more latitude to the branch, to the business units, of course, I mean, you have to have the accountability. So basically, when we talk about the role of the company here of the holding company, it's not to -- I mean, that we will maybe continue to find synergies, but it's not going to be the driving force here. The driving forces more to give autonomy and say, okay, these are the things that we believe are necessary. Again, in terms of performance, in terms of brand, in terms of sales force, in terms of -- I mean, sustainability is something that we keep on.

So the KPIs will be the monthly track, and that's the way we will be able to make sure that the guardrails, which are sending to the people right now, we have sent already to the various business units that they will be followed and we'll be tracking any deviation we have from there. So it's a lot closer monitoring of KPIs without going to the details of each one's decision given the specificities that we are dealing with on different brands, different markets, different realities and different kind of problems that you are facing in our views.

[Robert Ford, analyst]

Fabio, I think it sounded like you felt there was an overemphasis on synergies before. Were there other flaws in terms of the incentive structure that was in place in your opinion?

[Fabio Barbosa;CEO, executive]

No flaws. I think as a matter of the incentives are designed to give a sense of priority for that period of time. And the central priority that we're giving now, like if we had ended the cycle where we're looking for synergies, is saying, listen, for this point in time, I mean, given also inflation and all the pressures we are having on raw materials and everything is to make sure that we take good care of the margins, to take good cash flow generation, which has to do with working capital and so on. And that we give less emphasis at this point in time to grow sales, especially in a difficult market with rising costs. So these are the ideas. And no flows is another cycle that we are going to, but incentives are aligned now for the priorities we defined.

[Operator]

The next question comes from Joseph Giordano of Banco JPMorgan.

[Joseph Giordano, analyst]

So my question goes into the streamlining strategy of the business. We do see a very challenging environment on Avon International. So I don't know like if you guys are evaluating any kind of change there, particularly now that we have this sad situation between Russia and Ukraine. So maybe you would be considering discontinuing some of those operations? So that's my first question.

And the second question goes, I think, to JP. So it seems that like even in Brazil, it was not just synergies, but we also had some savings there. So my question to you is like, if you still see some like low-hanging fruit on the expense side to make like the company a little bit linear and faster to do the market dynamics in Brazil?

And lastly, like when you start to look at the store strategy, how should we be thinking about the franchise model and accelerate that to really change the dynamics of the channel?

[Guilherme Strano Castellan, executive]

Joe, Guil here. Great to hear from you. Just to be clear on your third question is about the Body Shop.

[Joseph Giordano, analyst]

No, it's Natura Brazil, sorry.

[Guilherme Strano Castellan, executive]

Okay. Perfect. So I'm going to take the first one, and then I'm going to pass the word to JP, so he can expand on the other questions, right? But I think to your first question, Joe, we are always looking, of course, at optimizing our footprint, right? And we'll continue to do so, especially in those markets that we are not able to generate profit and especially in the short term, not able to generate cash flow, right? So we are doing that as we speak. We'll continue to do that throughout the second half. And if we have to exit, if we have to put any markets into another credit model, we'll act in that sense, as Fabio mentioned, the short-term priority is very much focused on EBITDA margin expansion and cash flow. And if we have to close markets or exit markets to improve that in the short term, we'll do that, right, with a sustainable long-term view, of course.

Having said that, I think it's important for us to highlight a few things in Avon International, right? First is excluding the 2 markets of Russia and Ukraine, the trend is significantly better than before. We're posting minus 5.8% compared to double-digit decline in other quarters, right? Not only that, but we're seeing some advances due to the change in the commercial model. So activity is up in most of the markets. And more important, productivity is very healthy, right? And the team has done a good job, of course, to offset part of the commodity pressure and the inflation pressure with revenue management. So that gross margin pressure that we see in Avon International, that will have been much worse. The team wouldn't have reacted fast on the revenue management side.

And it's very important that even with the operational deleverage that we have in Avon International and with the gross margin pressure, which was significant in this quarter, you see that the team was able basically to offset part of the decrease in SG&A, right? So the EBITDA margin for the period was only 1 percentage point. That is still at very low levels. And of course, we cannot be satisfied with that, and we're working to improve that towards the second half of the year, especially in the very critical Q4, which has, of course, a big seasonality impact not only for Avon international but for all our brands. But it's a key priority for us to continue to work on SG&A as well to improve profitability.

So yes, ex-things, market seems to be -- if that's the case, revisiting some markets, if that's the case, but also continue our organic commercial model expansion and thorough revision of SG&A. With that, I'm going to pass the word to JP, so he can comment on LatAm.

[João Paulo Brotto Ferreira, executive]

Joseph, JP here. So your first question was to do with additional synergies opportunities. And the answer is, yes, there are. I'd like to remind you that we are not through the entire integration program just to start with. So that's that. But moreover, as we see Avon trending to stabilization in the region, we will accelerate business combination opportunities, which was roughly known as Wave 2, and that will bring additional opportunities also on SG&A. So we are pushing in that direction going forward, no doubt.

And the second question was to do with our retail franchise stores for Natura. Well, retail for Natura is doing extremely well, not only in terms of additional stores, but same-store sales is performing extremely well. So that model will continue to expand very cautiously, where we think there are opportunities to expand our presence, but we are very happy with that. And that we will expand.

[Operator]

The next question comes from Thiago Macruz of Itau.

[Thiago Macruz, analyst]

My question is regarding the Body Shop. Is it fair to say that you guys have tried to increase prices to offset the inflationary pressures and saw significant demand sensitivity? Or are you still deciding on whether to pursue that route? And on that topic, can you give us more color on the inventory levels of the franchisees? How far are we today from the highs? Those are my 2 questions on the Body Shop.

[Guilherme Strano Castellan, executive]

Thank you, Macruz. Yes. Look, I think the story on the Body Shop this quarter is a story in which the retail recovery, of course, has improved year-over-year, right, given the COVID last year. But of course, it hasn't offset the decline, the big decline in the Body Shop at home, right? The issue there is that the retail, even though it's improving year-over-year is still down compared to 2019, right? When we look basically at the overall public information that we have on the retail in the U.K., which is our main market, right?

We get a sense that the footfall is down basically double digits, right, compared to 2019, which is significant, right, and especially in the mass masstige retail segments that we see in the country. However, in order to, of course, to offset the footfall, the main action in revenue management for the Body Shop hasn't been on price increasing in the first half of the year. Has been mainly on the category mix, right, with a big focus on innovation and a big focus on some categories like skin care, which has a better margin in the end of the day, right?

Now with the retail footfall improving, which, by the way, it has improved on a monthly basis when we look at the trend in the last few months, month-over-month is better. It's just, again, a little bit lower than our expectations. We intend to, of course, look at other ways of revenue management such as price increases for the Body Shop in Q4 and especially in 2023. But just to mention that in the sense of discounts, right, which was a big problem for the Body Shop a few years ago, we have improved significantly, even though again in some period of time and some countries, we may be tactical about giving discounts due to the inventory level.

Your question on franchisees. Franchisees, of course, is a channel very important as it drives significantly higher margin at the end of the day. It has been lackluster in the first quarter of the year and it follows the same trend in the second quarter of the year. Even though to your point, the inventory level has improved, right? So when we look at the inventory level by the end of June and compare that inventory level by the beginning in Q2, right, end of March or April, the level has improved in most of the countries that we operate through franchisees, right? So looking at the consolidated basis, inventory level is certainly better.

However, just to be clear, it remains still at a higher level than what we had estimated, right? So we continue to be cautious especially in Q3, with the retail recovery in some of the countries about franchisees, but we do expect that at least to achieve better levels in the very critical Q4 for the Body Shop.

[Operator]

The next question comes from Stephanie Wissink of Jefferies.

[Stephanie Schiller Wissink, analyst]

We have a 2-part question related to gross margin. If you could talk a little bit about your current inventory position and maybe across your major brands? I know you just talked about Body Shop on the franchisee side, but just at the more global level, if you could talk about inventory by brand? And then on price strategy, which brands have you implemented price to help offset inflation? Which brands do you still need to implement price? And are you finding that consumers are receiving price without significant elasticity?

[Guilherme Strano Castellan, executive]

Thanks, Stephanie. Thanks for the question. Great to hear from you. Yes, look, gross margin was significantly impacted this quarter, right? So we look at basically Avon International, we had almost 300 points impacting gross margin. We look at the Body Shop with 250 bps approximately and LatAm with 160 bps of impact, right? So basically, all our views were impacted by gross margin as we had, of course, a big inflationary pressure and FX headwinds basically in all of them, right?

So we saw almost 600 bps of negative impact in inflation and in FX, right? Just to give an example, I think we wrote about that in the release, palm oil has increased almost 50% when compared to the same period of last year. And PoCof Paper, double digit as well with an increase of 10%, right? So we're still seeing a big commodities inflation, basically, our raw materials, and we expect to continue to see that in the short term, right?

To your point on inventories, basically I think inventories, it really depends on a BU basis, but on a consolidated basis. Though we are improving the way that we are managing inventory through a better SOP process, we're still operating with high inventories, right? And still, there is a lot of room for us to improve.

If you look at LatAm, for example, on a year-to-date basis, there is a very significant improvement in inventories in the first half of this year compared to the second -- compared to the first half of the previous year, right? And we'll continue to intend to do the same thing in H2. It is also a category story, right? And we see, for example, inventories in fashion and home, increasing more. Then, of course, the inventories in beauty as we described before, as beauty continues to gain momentum in Avon in LatAm with a growth in Brazil of 5%, right? So it really depends also on the category and of course, in the country. But we still look -- we're still expecting some supply chain issues, right? And especially for our retail operations, that has an impact, especially for the very critical Q4. I repeat, right? That's for both The Body Shop and Aesop as well, right? So in that very uncertain scenario, we may see inventories for the retail increasing a little bit in Q3 for the preparation of Q4, right?

So it's, again, a fluid situation. We're improving a lot of our process, again, even though potentially at a lower and lower pace than what we were expecting, but we are already seeing some improvements in our inventory management process, and we continue to intend to do so even without the external pressures throughout the second half of the year.

Did I miss anything, Stephanie? Yes. I think you had a question as well about overall pricing, right?

[Stephanie Schiller Wissink, analyst]

Yes, please.

[Guilherme Strano Castellan, executive]

Perfect. I'm going to talk about our 3 BUs, and then I'm going to pass to JP to talk about pricing in LatAm, right? But look, I think with the exception of the Body Shop, I think both Aesop and Avon International has pass prices through H1. Of course, in different proportions, different categories in different locations, right? Avon International, as I mentioned before in my previous question, we have been able to pass prices aggressively actually in most of the countries that we operate. And again, we're seeing good productivity coming from revenue management in that sense in most of the countries, right?

The Body Shop, as I mentioned, we haven't been super active on price increase. Our attention has been more, of course, on managing discounts and in the short term, given, of course, the footfall decrease compared to pre-pandemic levels in some of the markets. But I repeat, as it recovers, we'll tend, of course, to continue revenue management, not only through category mix in the Body Shop, but also potentially through some price increases in a few markets, right.

So with that, I'm going to pass the word to JP, so he can comment a little bit on the LatAm situation.

[João Paulo Brotto Ferreira, executive]

Stephanie, as regards to the markets where we operate, what we are seeing across Latin America is that the industry is being increasing prices and volumes remain relatively flat up to now, right? Within that context, we haven't shied away from increasing our own prices and we already have and we will continue to try and protect our gross margins.

If trends change, of course, we will make sure that our offerings to continue -- competitive against our main competitors in the region.

[Operator]

The next question comes from Joao Soares of Citibank.

[João Pedro Soares, analyst]

I just wanted to hear about Avon Brazil. I mean, you're already seeing improvement in terms of the Beauty line. So just hoping to see when should we see this overall productivity improving? You have been reducing the fashion at home. So I don't know if there's any additional adjustments to be made there. And just wondering to hear about the initial -- the cross-selling, right, the initial effect of the cross-selling. How are you on that front? And lastly, about China, in the last call, you mentioned that you were visiting certain growth strategies, and of course, you're now focused on margins and cash flow. Just hoping to see where we are at that strategy.

[Guilherme Strano Castellan, executive]

Jon, can you repeat the last question, please?

[João Pedro Soares, analyst]

Sure, Guil. No, just on China, on China expansion, so how are the plans for China have been? Have they been completely postponed?

[Guilherme Strano Castellan, executive]

Thank you, Joao. JP is going to start here and then I'll answer the other questions.

[João Paulo Brotto Ferreira, executive]

So Joao, we are confident on the trends coming from Avon. If you look at the trends quarter-on-quarter, you see that it's trending towards stabilization, as I mentioned before. So that trend should continue and driven by Beauty, which was a deliberate choice. As regards Fashion & Home, we have simplified the portfolio. We are working towards targeting a more profitable business and simpler business there. So that should remain somewhat negative in terms of productivity, but -- so that we can focus on beauty. And that's what you're seeing there. And if you extrapolate the data points, I think you can estimate when we should reach stabilization.

As regards to cross-selling, we are aiming to see a significant acceleration of the cross-selling initiatives towards the end of this year. We do think we are now better prepared to do that.

Guil, should you go?

[Guilherme Strano Castellan, executive]

Yes, I will. Thank you, Joao. We're super excited about the entry of Aesop in China in Q4, right? We remain enthused about that. Aesop already has a pretty good brand awareness and brand equity in China even though it hasn't operated there with own retail. And again, all the indications that we have is that basically the consumers are going to be also very much into the Aesop proposition through the experiences that the different experiences that Aesop offers, right, especially compared to other luxury brands, right?

So the plan for China is one, just to be super clear in the short term, is of Aesop plan, right? We're still expecting to launch 2 stores until the end of the year in Q4. We already have basically decided on the retail location. We're working on that. And again, we're still committed here with the Q4 entry at least in 2 store locations in Shanghai with a plan to continue to expand the debt in 2023, right? But in the short term, that plan will be mainly focused around the Aesop brand. And again, we're very enthused about that story in China Mainland.

[Operator]

The next question comes from Irma Sgarz of Goldman Sachs.

[Irma Sgarz, analyst]

I was hoping to get a little bit more detail on the integration cost line, which I think was primarily coming from Natura and Co LatAm this quarter as well as the group restructuring costs of, I think, about BRL 150 million. I mean, obviously, you've talked about a little bit of what you're doing in this group restructuring. I was hoping to get a little bit more detail for exactly what is in those lines? And also how you're thinking about the forward for those lines? Should we think about those lines to recur for a couple more quarters? What sort of magnitude, any sort of indication that would be useful. And then also about guidance, you had revised guidance -- previous management had revised guidance in May, if I recall correctly. And especially for the leverage targets that you had pushed out to 2024, I was just curious if you're maintaining those targets?

[Guilherme Strano Castellan, executive]

Thank you, Irma. Good to hear from you. Thanks for the question. Yes, look, we continue to deliver basically on our transformation costs, namely for Avon International and the integration costs in LatAm, right? And you're right, in Q2 of this year, we had approximately BRL 100 million coming from integration in LatAm, right? And of course, that is efficiencies that we find with the Avon/Natura combination. Part of that, of course, is related to people as the transformation costs of Avon is related to people as well. So it was a big impact in Q2. We should expect to continue to see some impact in the second half of the year as we continue to find efficiencies, sustainable efficiencies for our business going forward.

And you're right. Look, there is a group restructuring costs that already impacted Q2. That was basically the decisions that we took in the last quarter. So basically, what Fabio had mentioned at the beginning of his presentation that the -- there is basically a cost savings map around 40%, that if we had implemented that in the base of 2021, not necessarily that number is the impact in Q2, that number, we're going to see that especially in Q3, but mainly in the second half of the year. So you should estimate to see more, let's say, expenses are coming from the group restructuring in the short term to drive, of course, recurring savings in our group as we move towards some more leaner and lighter structure as Fabio mentioned.

Then the second question, sorry, was about?

[Irma Sgarz, analyst]

Guidance.

[Guilherme Strano Castellan, executive]

Thanks, Irma. Yes. No, look, we're not commenting on guidance at this point. I mean, as we discussed before, right, the transition committee is -- continues to analyze the structure and the new governance model, which we know that there will be a potential impact in our financial forecast, right? And again, the idea of that is not only looking for savings in the group structure, but also to improve the governance, gives more autonomy and accountability for The Bus, so we can be a little bit more agile in reacting to the market the market changes, right? We will continue to review our strategy, especially in the very important Q3. And of course, assuming there is any change related to that topic will make a formal communication to the market. But at this point, there is absolutely nothing to comment on the change in guidance.

[Operator]

The next question comes from Richard Cathcart of Bradesco.

[Richard Cathcart, analyst]

Just a quick one here. I mean both Fabio and Guil, you talked about improving cash generation. This quarter, I think we saw a pretty large consumption of cash. So I was just hoping that you could take us through a little bit of the detail about what has driven that in the second quarter?

[Guilherme Strano Castellan, executive]

Richard, thank you for the question. So just to be clear, the question is about the cash flow in the second quarter, right? And then the main drivers, is that correct?

[Richard Cathcart, analyst]

That's correct. Yes.

[Guilherme Strano Castellan, executive]

Okay. Perfect. Look, again, I think we already said that. I don't want to be repetitive what I'm going to say again, right? Cash flow has become, I think, the top priority for the company, right, in terms of focus, especially in the short term, right? And very important, as Fabio mentioned, the BUs are incentivized to deliver that as well, of course, as the holding is, right? So it is very important for the firm to continue to focus on cash generation, right?

We're not happy with the Q2 results, right? We understand that there are, of course, some one-offs there and some catch-up to do in Q3 and Q4, but we're not happy on that. Even though, again, we already see some better results as I mentioned, especially on the inventory on the inventory management level in terms of working capital and on the return on investment as we do a more diligent and thorough CapEx review of the projects in the short term, right?

As I mentioned before, Richard, the 3 priorities for us, when we look at cash conversion, right, we continue to be working capital. We'll continue to be on the inventory management, which we believe is one of her biggest terms that we have there. We continue to be on payables, and we understand that the results in the second quarter of the year on payables, they were not satisfactory, and we expect to catch up, especially in Q4 in that sense. And of course, receivables, even though, again, we continue to see an improvement in bad debt in most of the countries that we operate. And of course, we'll continue to be diligent in that sense as well. CapEx is another lever as we have seen in Q2 and H1.

We to be, by the way, in H2, even with some investments, as I mentioned, for Natura and for Aesop, especially geography and category for Aesop. But that will continue to see a lever of improvement, especially when we look at percentage of net revenues.

And finally, cash tax rates, especially in the second half of the year, where, again, we see a better profitability coming from the markets and will continue to evolve in our tax planning side.

It's very important to highlight, though, right? And again, I want to be very clear that we're not happy with cash flow. But I think very important to highlight that historically, the business has a big seasonality in terms of cash consumption in H1 and cash generation in H2, especially in the very critical Q4, right, which again is basically a seasonal quarter for all the BUs and basically a huge cash generation quarter for Natura & Co, right?

So we remain very much focused on delivering this -- the cash flow in H2. And as I said in the beginning of my answer, all the BUs are mobilized and more important incentivized to deliver on that front.

[Operator]

The next question comes from Danniela Eiger of XP Investments.

[Danniela Eiger, analyst]

The first one is a follow-up on the restructuring expenses. You mentioned that it was mainly related about the adjustments made on Q4. Just wanted to know if we should expect that to continue in the coming quarters. I know that the transformation and integration expenses should continue, but just on this particular line?

And my second one is actually regarding the tone of the speech in the release regarding the second half of the year. I understood it as more cautious on profitability, though still constructive top line and obviously, very focused on cash generation.

I just wanted to understand if that's correct, maybe you could provide a little bit more color on an how you're thinking about the margin dynamics for second half of the year across brands? And my last one, if I may, is regarding leverage, given that there is a lot of headwinds both on the macro front and the restructuring of the businesses, how you're feeling about that going forward? I know that again, you're very focused on cash generation, but just wanted to have a greater view on how you are thinking about this going forward. Thank you. I'm going to try to over the -- all of your 3 questions.

[Guilherme Strano Castellan, executive]

I'm going to try to forward all of your 3 question. If I forget anything, let me know. But I think the first one was related to corporate expenses. We saw a decrease in the corporate expense in the quarter basically from more than BRL 150 million in Q2 of the previous year to BRL 88 million in the Q2 of 2022, right? Just to be clear, as we stated in the release, there is approximately BRL 20 million that was driven mainly by cost containment and phasing of expenses, right, in Q2 of this year. And of course, there are savings that are going to stick. There are savings that, as we discussed before, they were related already to the actions announced in Q2.

Now we expect more savings to come, as Fabio mentioned in the beginning of the call as, of course, we continue to deliver this leaner and lighter structure at the holding level, even though, again, we are not giving any type of guidance about corporate expenses for the short term or the medium term. But we do expect significant savings to continue to flow into the bottom line coming from a linear structure and especially the announcements that we have made and will continue to make throughout the Q3.

The second question, I think, was related to the tone to the H2 outlook, right? Look, the situation is very fluid, right? And I think you can get a sense as per our results about some good news coming from a few places, other places is still showing a little bit of a challenging environment and so on, right? So we're being cautious, yes, about the H2. We're still expecting to see basically commodities and inflationary pressure to play a role in our gross margin. We'll continue to offset that through revenue management, right? Not only price increases and discount management but also through basically a mix of categories, right, which has been a focus for us in most of our Bus.

And we're expecting, of course, as we saw in H2 -- sorry, as we saw in the second quarter in Q2, we expect to -- our revenues to trend better, and we're seeing basically our BUs trending better Q2 versus Q1. And we continue cautiously, of course, expecting to see that trend to flowthrough into the H2. But in terms of margins, I think you're right, we're still expecting the commodities to play a role in the short term. We are working thorough on the margin side. As I think one example of that is the corporate expenses in the holding that you just saw. But not only that, all the BUs are very much focused on delivery margin in H2, even with the challenging scenario that some are experiences.

So it's -- I think it's yes, given the -- how the situation is fluid and how the situation is certain and how we're still being impacted by geopolitical tensions and inflation in most of the markets. We are cautious about the second half. Even though, again, I repeat, we're not providing any type of guidance in terms of margin for the second half of the year.

But keep in mind that as cash flow margins also have a seasonality, right? And of course, we -- I repeat that, that Q4 is the critical quarter for us to deliver a good margin in terms of results, right? So when we say that we're being cautious on margin, not necessarily we are comparing to H1, but we're comparing to the margins of the previous year.

And I think that the third question is related to leverage. Yes, I think, look, on that, a couple of things impacted our leverage. The first one is all the transformations that we see in our P&L, either through the transformations of Avon or integration costs of LatAm and the corporate restructuring. Of course, there has an impact in the reported EBITDA, right. Though again, those savings there supposed to be recurring. So we should have, again the benefit of those actions supporting bottom line in the future. And cash is a priority, right? Both cash and margins are priority. Cash is a priority for us, as we discuss, and we continue to, of course, tracking into results of the BUs and if the holding very closely and incentivizing them accordingly, right?

From a financial perspective, I think you saw the -- and you're aware, of course, of the chart in terms of debt level maturity. We are comfortable with that. But that doesn't mean that we shouldn't focus on leverage in the short term and is again a priority for us, as you well described.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Fabio Barbosa for any closing remarks.

[Fabio Barbosa;CEO, executive]

Thank you very much for being with us today. As it was extensively discussed here and is widely known, we are all operating in a challenging environment. But we have a clearly defined priority and we are mobilized to deliver them. How? Let's stress it. First, by allowing BUs to increasingly focus on their specificities. And 2, by setting the right guard rails and incentives from the holding for the people which are close to the action to go in the direction that we all believe we need to go. So thank you for handing your attention. Have a great weekend. Goodbye.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.