Natura & Co Holding SA
BOVESPA:NTCO3
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
13.11
18.5
|
| Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Natura & Co Holding SA
Earnings Call Analysis
Q3-2023 Analysis
Natura & Co Holding SA
Natura &Co presented a performance consistent with its first two quarters, characterized by steady growth in gross margins and EBITDA in comparison to the previous year. This progress happened despite a minor slowdown in revenue, primarily caused by the implementation of Wave 2 later in the period and persistent declining sales at the Body Shop. The initiation of Wave 2 in Brazil showcased positive early results as revenue growth in the CFT category, along with proceeds from productivity gains and cross-selling, compensated for an anticipated drop in channel count. Facing temporary channel challenges, actions taken in Peru and Colombia showed early signs of recovery, particularly with margin expansions heading into the holiday season. Comparable performance was seen at Avon International, with relatively stable sales and further margin enhancements.
The quarter marked a significant strategic pivot with the announcement of an agreement to sell the Body Shop to AURELIUS Investment Advisory Limited for GBP 207 million, continuing the company's effort to streamline operations. This transaction, coupled with the sale closure of Aesop late in August, allowed significant advancement in the company’s liability management plan, prepaying over half of its debt. The resulting net cash position of BRL 700 million showcases a transformed balance sheet, providing a solid foundation for disciplined investment in strategic priorities.
The adjusted EBITDA margin reached 10% in Q3, with a year-on-year increase of 190 basis points, reflecting gross margin advancement of 310 basis points and SG&A efficiencies, particularly at the Body Shop and Avon International. However, net income showed a significant upturn from a net loss in the previous year to BRL 7 billion, boosted by capital gains from Aesop's disposal. Excluding transformational and restructuring costs, Q3's underlying net income stood at BRL 745 million, versus a loss the previous year, demonstrating improved profitability despite higher free cash flow outflows year-on-year.
The sale of Aesop moved the company to a net cash position of BRL 700 million, a stark contrast to the net debt of BRL 10 billion recorded in Q2. The sound balance sheet, characterized by a negative net debt-to-EBITDA ratio, and limited debt repayments due until 2028, positions Natura &Co favorably for future investments within its strategic initiatives while maintaining financial discipline.
Natura &Co witnessed an increase in net sales in constant currency terms, although a decline was noted in reais, reflecting currency depreciation. The Natura brand notably achieved double-digit growth in constant currency, offsetting declines of the Avon brand in the duty category. Natura and Avon in Brazil, however, registered positive growth year-on-year. There were setbacks in market operations, particularly in the LATAM region due to shortages and late deliveries, which the company aims to resolve before year-end.
You don't have any saved screeners yet
Welcome to Natura &Co's Third Quarter 2023 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 that we'll be referring to during this call is available on the Natura &Co Investor Relations website.
I will now hand over to Fabio Barbosa.
Good morning or good afternoon to all of you, and thank you for joining us today. I'm very happy to be with you again. Natura &Co third quarter's performance continued the trend of the first 2 quarters of the year showing a strong expansion of growth, gross and EBITDA margin versus the previous year. Despite a small deceleration in revenues, mainly caused by the Wave 2 implementation latter and the continued decline trend sales at the Body Shop.
The main highlight of the quarter was the launch of Wave 2 in Brazil, which showed positive initial results, delivering combined year-on-year revenue growth in the CFT category. Productivity remains gains and cross-selling more than offset the expected channel count reduction. Peru and Colombia have continued the rollout of the integration started in the first half of the year, showing further improvements in the productivity. Although there has been temporary challenge in the channel, we have seen the actions implemented by the team using early signs of recovery ahead of the holiday season. We are encouraged by the margin expansion of those countries in the most recent cycles which is the main objective of Wave 2. Avon International posted as planned, broadly stable top line and further margin improvement, reaching the high single-digit adjusted EBITDA margin. The proceeds from the sale of Aesop closed in late August, enabled us to quickly advance in our liability management plan with more than half of our debt already prepaid by the end of the quarter. This is an important step to unlock sustainable value for our investors and deliver on our financial priorities of maintaining a strong capital structure, strict financial discipline on costs and expenses and boosting cash conversion.
On the latter, we reached a neutral cash generation this quarter despite the normal season cash conception to build up inventories for the holiday season. Furthermore, making the third year of our sustainable -- sustainability division after having made substantial progress to order our goals in September 2020. Our approach has evolved. We have realigned our metrics and targets to address the pressing concerns of our time. We have been a partner of The Union for Ethics BioTrade for over 15 years. And together, we will work toward [ Metro ] adoption of regenerative practice to deliver even more positive impact.
Finally, this morning, we have just announced a buying agreement with AURELIUS Investment Advisory Limited to sell the Body Shop. The transaction has an enterprise value of GBP 207 million, including an amount of GBP 90 million. This is another important step to continue to streamline our business, a journey that started in second half of 2022.
With that, let me now hand over to Guil to comment on third quarter's performance in greater detail.
Thank you, Fabio, and hello to everyone. I'll start with Natura &Co consolidated revenue on Slide 5, which stood at BRL 7.5 billion, down 0.7% in constant currency. In reais, sales were down 10.5% reflecting the depreciation of some operating currencies versus the reais. We will look at the performance shortly. But in a nutshell, we posted solid constant currency growth at Natura brands and broadly stable trend at Avon International, offset by another challenging quarter at the Body Shop and the expected reduction at Avon [ new attempt ] amid-wave rollout in Peru, Colombia and Brazil and also in preparation for other countries.
We turn to the adjusted EBITDA margin on Slide 6 which stood at 10% in Q3, marking another strong improvement of 190 bps year-on-year, with solid expansion across our businesses. These reflect the different moving parts with a strong 310 bps improvement in gross margin, SG&A efficiencies at the Body Shop and year-over-year improvement in selling expenses at Avon International, driven by transformational savings being implemented for some quarters already. These were partially offset by many 3 factors: first, the continued investments at the Natura brand notably in market; and finally, an increase in G&A at Avon International.
On Slide 7, we focus on net income and underlying net income. Net income in Q3 was BRL 7 billion, which compares to a net loss of BRL [ 160 ] million in the corresponding period last year. The bottom line benefited from the capital gain from the disposal of Aesop. Q3 underlying net income, which is net income excluding transformational costs, restructuring costs, discontinued operations and PPA effects, thus excluding the Aesop capital gain, was BRL 745 million. This compares to a loss of BRL 198 million in the third quarter of 2022. This quarter, the one-off effects in net financial income and expenses related to the liability management of BRL 896 million and the fact field related to such expenses of BRL 305 million were also adjusted.
Let's turn on Slide 8 to our cash flow. Q3 free cash flow from continuing operations was an outflow of BRL 1.6 billion, which compares to an outflow of BRL 39 million in the previous year. It's important to highlight that this quarter was particularly impacted by the liability management process with a cash outflow from non-underlying expenses of BRL 1.5 billion with an impact on the interest on debt and derivative settlement line. Excluding these one-off effects, free cash flow will be an outflow of BRL 57 million, broadly in line with the same period last year.
Higher adjusted net income after operational impacts of discontinued operations was offset by inflow of BRL 47 million from working capital. Lower than the inflow of BRL 470 million in Q3 2022. Working capital was impacted by the following: inventories due to the holiday build up and Natura &Co [ tan ] and Avon International. Accounts payable consumptions of BRL 103 million during the quarter, mainly related to lower costs and expenses and the mix impact due to the lower weight of Home & Style category. Despite seeing overall improvements in accounts payables days year-over-year. This was offset by other assets and liabilities, mostly driven by higher restructuring and transformational expenses and phasing of expenses.
On Page 9, we look at our liquidity profile, which is marked by a return to a net cash position. We ended the quarter with a cash balance of BRL 6.8 billion, up from BRL 3.7 billion in the previous quarter and BRL 4.6 billion in the year ago quarter. We ended the quarter with a net cash position of BRL 700 million which compares with a net debt position of BRL 10 billion in Q2 as a result of the sale of Aesop for an enterprise value of $2.6 billion. The net debt-to-EBITDA ratio stood at minus 0.37x compared to plus 4.7x at the end of Q2 and 2.85x in Q3 of last year. This shows a very strong balance sheet that allows us to invest with discipline in our strategic priorities.
Note that in Q3, in connection with the conclusion of the sale of Aesop, Natura &Co Luxembourg holding repaid almost $1.6 billion of debt plus accrued interest. This amount comprises of $468 million in imbursements under the revolving credit facility with maturity in October 2024. $250 million in a [ club loan ] maturing in November 2025. $550 million in a tender offer for bonds maturing in May 2028 and [ $330 ] in a tender offer for bonds mature in April 2029. This repayment is part of our continued average management and our plan to deleverage the company after the competition of Aesop's disposal, as mentioned in our material fact dated April 3, 2023.
As you see on the second chart, our cash position of BRL 6.8 billion is higher than the total of our debt payments. The average maturity of our debt is 5.7 years. And we faced limited debt repayments until 2028. Before turning to our performance by business unit, let's discuss our progress in the rollout of Wave 2. In Peru and Colombia, CFT productivity continued to show results above expectations, mostly the retail, which led to further improvements in profitability year-on-year. As expected, the reduction in the beauty consultants count was concentrated in less productive ones. Short-term temporary operational disturbances were experienced during Wave 2 rollout in Peru and to a lesser extent in Colombia, caused by the reorganization of sales leaders, changes in our commercial incentives, [ critical ] Home & Style portfolio optimization rebalanced product mix and transportation services optimization. Remediation initiatives were put in place in both countries, first signs of recovery already seen.
Consultant satisfaction level is showing positive trends. In Brazil, the initial results of Wave 2 in the country show CFT revenue year-over-year growth. Cross-sell and productivity are already benefiting from the rollout more than offsetting the planned channel contraction. Brazil faced temporary operational disturbances similar to those seen in Peru and Colombia. And learnings from those markets are showing the stabilization period. During the quarter, [ shops in ] Brazil, Natura and Avon combined, show positive year-on-year growth.
Let's now look at performance by business unit. It's time with Natura &Co [ down ]. Total net sales were up by 2.5% in constant currency and down 9.4% in reais. This was driven by a solid double-digit growth of 18.6% at the Natura brand at constant currency, while the Avon brand was down in the low teens in the duty category. The recently renamed Home Style category previously call Fashion & Home saw a sharper decline as we continue to radically reduce its portfolio. The Natura brand continued to post strong momentum with year-on-year growth of 10.5% in Brazil on the back of a tougher comparable base than in Q2.
Sales regained momentum as we roll out Wave 2 after decelerating temporarily in the run-up phase. In Hispanic LatAm, net revenue was up 37.4% at constant currency. Excluding Argentina, revenue spending markets was up in low single digits. Still impacted by a softer yet positive performance in Mexico.
At the Avon brand LatAm, net revenue in be category was down 11.6% in constant currency. In Brazil, net revenues decreased 24.8% year-on-year, mainly due to the preparation Wave 2 in the region. During the quarter, the Avon beauty category was impacted by the adjustments made to the commercial model, before the combination shows some top line recovery after the actual rollout of H2, leading to year-over-year growth of the combined safety category during the combined 2 cycles.
In Hispanic markets, net revenue decreased by 1.5% in constant currency and by 18.7%, excluding Argentina. As already explained, some recent temporary challenges impacted the brand's performance in Peru and Colombia. In the home style category, formerly known as [ Special ] Home, Avon posted a decline of 38.7% in constant currency overall. This reflects our strategic focus on the beauty category with a radical optimization of our opportunity. In the Hispanic market, the decrease was 37.6% versus the same period last year, while in Brazil, the decrease was for 1.6%.
We now turn to Natura &Co Latam's Q3 adjusted EBITDA and margin. As shown in the graph, adjusted EBITDA was $645 million, and adjusted EBITDA margin was up by 100 bps a to 12.3%. Margin expansion was driven by a 320 bps improvement in gross margin to 63.7%, benefiting from the carryover effect of price increases richer category mix and marketing efforts. This was partially offset by SG&A investments, mainly related to Natura's marketing and energy expenses, as mentioned in the previous quarters. Furthermore, some SG&A pressure were driven by reduction of top line and mid-Wave 2 preparation in some countries where we did not explore the full opportunity coming from selling logistics and G&A expenses to be delivered when the integration is completed.
Let's now move to Avon International. Revenue was roughly stable versus the same period last year, down 2.3% in constant currency and down 11.6% in reais. As higher pricing mix were offset by the expected reduction in the number of active representatives amid the commercial model adjustments with a particular focus on leaders' incentives and the structure. The beauty category posted another quarter of growth, up 1.8% year-on-year, mostly driven by fragrances. The home style category for its part, continued last quarter's strength, with a decline amid the plan portfolio reduction. Adjusted EBITDA margin was 8%, up solid 440 bps year-on-year. Improving profitability was driven by a very strong 490 bps expansion in gross margin to 64.5%. Adjusted EBITDA margin evolution was out ported by a year-on-year decrease in selling expenses amid transformational savings, partially offset by an increase in G&A impacted by phasing of expenses and FX pressure. This further also show an evolution of our long-term goal to pursue healthy contribution margins in every region to which international is exposed.
We now move to the Body Shop. Q3 net revenues declined by 13.2% in constant currency and 15% in reais. Combined sales of core business distribution channels, in other words, stores, e-commerce and franchisees show a high single-digit decline in constant currency, a slight deterioration compared to the trend observed in the previous quarter, mostly driven by store closure. Retail sales through core business distribution channels show sell-out same-store sales of minus 5%. Gross margin again show a timid improvement in Q3 expanding by 30 bps to [ 7.6% ]. This was mainly driven by mix and pricing. Despite signed operating leverage, adjusted EBITDA margin improved again this quarter by 40 bps to 7.7%, driven by the slight gross margin improvement and strict cost control in line with the previous orders.
Let me now hand back to Fabio for his concluding remarks.
Thank you, Gil. I will conclude now with our key takeaways. First of all, with the announcement just made, I would like to highlight that streamlining our business continues to be a top priority for the company. We continue the simplification journey announced almost a year ago, which will allow us to prioritize our key markets and core business model. This laser-focused strategy combined with enhanced capital structure and improved cash flow conversion should unlock sustainable shareholder value, driven by our triple bottom line agenda.
Thank you very much for your attention and Gil, JP and I are now happy to take your questions.
[Operator Instructions]. Our first question comes from Danniela Eiger with [ XP Investimentos ].
The first, I had some doubts regarding the material fact published around the Body Shop sale. So it would be great to have some additional information. Essentially how much debt the company currently has. What is the timing of the payment ex earnout? You mentioned that 5 years, but just wondering the first installlment when it should be. and also the expected closing for the sale. And on something that was kind of not clear and not just for me but some clients as well. The GBP 207 million is including the earnout, that is [ GBP 117 million ], excluding it, right? Just wanted to check that.
Just -- and the second one, probably it would be to JP around Wave 2. If you could just share a little bit more details on the operational challenges that you are already facing in Brazil especially the impact on sales of the leaders reorganization and also which actions you're implementing to mitigate that? And also on logistics, we've been seeing some challenges on logistics. Especially as we are consultants ourselves. And that is interesting, given that integration is still not in place. So it would be great to understand what are the main drivers behind this challenge. Thank you.
Yes. Thanks for the question. Yes, as Fabio mentioned, again, we announced this important milestone today, right? As you know, the second half of last year, we have started a big change in strategy right simplifying our business. That spirit, as you can probably remember, with the significant reduction and the scope of the holding group here, as well as the announced divestments of the basically to stabilize our capital structure and our -- and mitigate our debt.
Simultaneously, basically, we started a very important project with a very high focus in LatAm, which is the Wave 2 project [ Tello ], led by Joao and the team. And we continue, of course, as you probably saw this quarter, the optimization of the margins of Avon International, which again achieved high single margins adjusted this quarter. So the divestment of the Body Shop just announced today, it fits that strategy of focus in our key regions and our core business model. And we're quite happy with that announcement.
At this point, we will only disclose what it is in published in the earnings release. As you saw an enterprise value of approximately GBP 200 million, there are some payments throughout the period with the less payment completed in year 5 as it is disclosed. And to your point, yes, you're correct, it includes the [ $9 million ] of earn-outs, right? So if you want to see the total value excluding the earn-outs, you just take the [ $90 million ] out of it.
I'll now pass the word to JP, so he can basically talk about the second question.
Thanks, Gil. Good morning, Danniela. So as regards the pause implementation issues that we faced in Peru, Colombia and Brazil, I can summarize them in basically 3 different natures. Product availability, late deliveries and field management.
So regards to the first, the combined mix of products and brands changed significantly in for new brands or SKUs from what we used to have separately and that poses additional [ pay ] on making those SKUs available in time. So we are seeing shortages in those operations.
The second one is to do our deliveries. We are combining transportation services in a few regions. And we have also sort of inherited addresses from the Avon database, which required some intimacy from truck drivers to actually know is where to drop the orders. So that takes a while to be reestablished.
Finally, as regards to the field management, as we changed a substantial part of the sales managers and the sales leaders reestablishing the connections with the consultants. So this is, by and large, what we face in the 3 markets. We put corrective measures on all of them. The Peruvian operation is getting close, very close to stability already. Colombia is following. And in Brazil, we are basically still seeing a bit of issues with the shortages and late deliveries, which we expect to have stabilized before the year-end.
Our next question comes from Joseph Giordano with JPMorgan.
Hello, good morning, everyone. I'd like to explore a little bit a few thing. So first, capital structure. So now we are a net cash position. Obviously, we have a turnaround ahead of us that blurs a little bit visibility. But my question is, how should we think about the capital structure, particularly now that you should be receiving proceeds from the Body Shops. The second question goes on the tax structure. So we saw a materially higher efficiency and taxation company this quarter. So how should we be thinking about [ net ] the recurring tax rate for the business. And last but not least, we still have some extra divestments that could take place, particularly related to assets of Avon Brazil [ real estate ] here. So if you could update us on that front, that will be great as well. Thank you very much.
Hi, Joe, thank you for the question. Always great to talk to you. Yes. So I think you touched in a few good points. I'll cover them in the order you asked. So the first one basically related to the capital structure. Again, as we announced before, we are in, finally, in a moment that we're able to show a positive net cash position. Remember, keep in mind that given the seasonality of our business, basically Q4 is the quarter where we generate the most cash. So we're quite where we thought we will be basically with our current cash position at the end of Q3.
And as you mentioned, we were quite happy and confident with where the business is price to go with the [ Avon ] integration in LatAm. As Joao mentioned, even though we may face some potential issues on this integration. The results are coming, right? As we saw in the last few cycles, the margin improvement is significant, and that gives us a lot of reasons to believe about the future of the business. At the same time, you can see the improved results and the trend that we're showing led by, of course, Angela and the team on the margin of Avon International, which, again, mainly driven by gross margin, but also with a significant SG&A savings, right, also poise us, of course, to increase significantly our cash flow generation outside Latin America. So we're happy with that.
But yes, look, we have a [ transfer ] still ahead of us, right? We don't want to minimize the efforts of the team and of course, the complexity of the execution. As we discussed in the past, there is no reason for a company as Natura continuously in the long term to operate with a net cash position, right? We just about our optimal capital structure and that optimal capital structure has to be leveraged, right? We understand that we have to be around 1x to 1.5x leverage in the long term. But again, in the short term, we are -- we understand the days that we have. And of course, we will make sure that we have firepower even to potential open invest in the levers that are growing, right? Important levers that we believe that can unlock a lot of value for our shareholders. Again, you're seeing the strong performance of the Natura brand.
But as well, again, other levers that we have communicated in the past that should become a priority for us as other countries in Latin America high level here in Mexico and, of course, the overall deployment of our omnichannel strategy which has already paid yields with a very good performance of our retail in the last 2 quarters.
So at the same time, look, we are confident on where we are. But again, in the short term, we're glad with the firepower that we have. And of course, with any changes related to that, we will announce to the market but there is no forecast to do that in the short term.
On the tax side, this is also a very important topic for us as we continue to evolve and increase our margin worldwide, most of our countries, they become, of course, profit-making countries right through profit-making entities. This is quite important for us because, as you know, we still had in the past countries that were basically generating losses, and of course, those losses not be deducted from other countries that generate profit. At the same time, with the integration of some business in LatAm through Project or the Wave 2, right, to the extent the law allows us in those countries, especially in Brazil. We will, of course, continue to take advantage of losses in the past. So it's very difficult, and we don't give guidance in terms of tax rate, but what you should continue to expect is a significant improvement in the next 3 years of our tax rate which, of course, as we have mentioned in the past, is going to be one of the key levers for our cash flow generation.
And in the third point, you're right, we still have some fixed assets to sell. Of course, we are analyzing the market momentum for, of course, the divestment of those assets. We don't have, of course, now any rush to do anything, given our cash position. We want to do what is right in terms of value. But that is going to be an important lever as we disclosed in the past, to offset the transformational process that we're going to face in LatAm, which again, they are quite high this year, but we should continue to expect them to remain high in 2024. And these divestments of assets, as you mentioned, they're going to be an important lever to offset. So yes, I think I cover all your 3 questions. Yes, I mean if you have any follow-ups, we can talk about. Thank you.
Our next question comes from Joao Soares with Citibank.
First, congratulations on management for restructuring the operation assess as you did. So I have 2 questions. First one, I just wanted to understand a bit of the cash proceeds dynamics as of [ Avon ] right. There's a clear breakdown when we look into the financial statements. There's a clear base on how much this flow through the P&L, and there is an income statement and social contribution line of BRL 3.9 billion. So my question is pretty simple. I mean how do you expect -- is there -- how should we see potential cash payments of taxes on the transactions or any other cash payments here. I just want to understand, I mean, we saw the gross amount here in the cash flow of the proceeds, but I just wanted to understand if there are any other cash payments on taxes or I don't know, transaction costs, okay?
The second point that I wanted to explore is there's a comment on the release, JP, about some setbacks during the Wave 2, and this affected the performance of Natura brand in Brazil. So I just wanted to understand if we can quantify those setbacks and understand the underlying results of Natura Brazil.
Hi, Jon. Thanks for the question. Yes, so if I understood correctly, your first question and then I'm going to try to tackle that and pass the second to Joao. Mainly related to the taxes on [ Aespo ] is that correct? I understood that correctly?
Yes. How should we see the cash payment on those taxes? If you can provide.
So again, the -- I think the P&L line, as we have closed that is part of the continued operations alongside with the gain that we have, of course, compared to the book value. Again, as we have disclosed also in the past, we're not giving any specific guidance related to the taxes on Aespo. But of course, you can assume that, again, we -- and basically, Joao, just to be clear, we have until basically December 31, right, to have a better view on that.
But you can assume that, again, to the extent that the law allows us, again, we can use any losses in the year, right? Related basically to any other potential divestments, such as the Body Shop right now or any other thing to offset part of -- part of the payment, right? So we're still working on that. Of course, again, we're making, of course, simplification on our structure, which, again, from a strategic perspective, that is very important. But of course, we continue to work on this tax issue. And of course, once we have more clarity to the market, we will disclose that more broadly.
I'll pass the word to Joao so he can answer the second question.
Yes. [ Jon ], as I said before, I mean, the issues we face are of 3 natures, late deliveries, product shortages, field management. In the case of Brazil, yes, indeed, there has been some late shipments at the end of the quarter which eventually overflow into Q4. So that affected the entire operation, both Natura and Avon.
The amount of Natura Brazil is -- you can have to quantify, right?
I can quantify. I cannot tell you, though. We actually quantified it, but I cannot disclose that. Sorry.
Our next question comes from Irma Sgarz with Goldman Sachs.
Just quickly, 2 questions. Can you talk a little bit about what you see ahead in terms of channel size in Brazil as you go through the Wave 2 implementation? How does it compare to Peru and Colombia when you were at a similar stage of Wave 2 and where -- and were there any positive or negative surprises so far when it comes to specifically to the type of reps that you lost or the engagement of the base that you've retained?
And then the second question, how should we think about the outlook for transformation integration especially at Natura &Co LatAm. I think you alluded to, it those transformation costs still remaining high into 2024. But is it correct to think that the largest is now behind us? Or should it remain quite substantial and very helpful that you brought the breakdown of these or rough breakdown of this in the press release, but again, like how should we think about this breakdown also going forward? Should it be similar? Are there any buckets that are potentially going away?
JP here. I'll take the first and then Gil's the second. So as it comes to negative surprises, I would say that the decline in Fashion & Home was steeper than I expected, although we planned for that, we said that before, we are aiming at higher productivity and cash generation. But that decline was steeper than I expected in all those markets. When it comes to the contraction of the size of the network, where we're seeing Brazil is similar to what we saw in the other countries at a similar stage. Basically, the smallest, least productive consultants face higher difficulties to keep their activities. Not a surprise. So we've been managing that accordingly. And so far, so good, I would say.
Gil, would you take the second on restructuring costs?
Yes, absolutely. Thanks, Irma. I think you probably remember the presentation that we had on the way to in [ OBs ], right? We show a little bit of the impact of the transformation costs for LatAm, right. Look, we do expect that the worst is behind us in terms of year. But as we have mentioned before, we should expect, still to see high transformation costs, especially related to Project [ pale ], right? And again, we just want to highlight that I think that's back to the point that you raised on the breakdown of those costs, right? Those are really specific cases related to the implementation of fellow, right, all one-off costs. Again, as you can see, there is a significant part LatAm, specifically coming out of and then a significant part coming out transition costs, right, which basically, as we mentioned, it's related to events specialized communications, et cetera, et cetera, which is extremely linked to the implementation of the integration of both brands.
So we just want to highlight that, that again, it's -- those are not generic costs. Those really one-off costs that we see linked to that integration. But we should still expect to see that level, especially in LatAm. But also in Avon International as we continue to, of course, to execute a transformational agenda improve our adjusted EBITDA margin. We should continue to expect to see that hearing out in 2024, again, with expectations that, again, the worst is behind us, as you mentioned.
Our next question comes from Andrew Ruben with Morgan Stein. Mr. Ruben, your line is open.
Our next question comes from Maria Clara from Itau Bank.
Hello, I have 2. They are related to the implementation of Wave 2 in Brazil. So the first to any that you commented in the release that we should expect further channel contraction. So I just wanted to understand why should we expect a normalization of red days ahead. And also, if you could give us more granularity on the cross-sell opportunities that you recognized? What are the main product categories that saw the highest cross-sell and there's the further room to optimize this cross-sell in these categories or there's room for improvement in other ones.
Hi, Maria Clara, JP here. So yes, we expect the channel still to contract for at least 6 campaigns after the implementation, that takes us to the beginning of the year and from then onwards, we should see a sort of a regular management of our network of consultants.
As regards to cross-selling, we are seeing cross-selling in all categories there. I mean in the case of Brazil, the opportunities are somewhat limited. As we said before, we have not yet integrated the operation into one single order. Consultants have to place 2 certain orders. And as much as we created some shortcuts for them to bring some items from the second rental to say that is still limited. That's why we said we see yet many opportunities going ahead because the levers cross-selling that we are operating in the other countries, are still somewhat limited in Brazil, sorry.
Our next question comes from Robert Ford with Bank of America.
Big congratulations on the improvements. JP, can you talk a little bit about the quality of sales that you're dropping in Wave 2. And additionally, can you is the intended pricing architecture to the consumer and how you're preserving that given the scale discounts to your more productive consultants?
And then Fabio mentioned [ split in cost ] how do you think about the overall cost structure for Natura, given the smaller scope of the company, particularly in Brazil? And are you happy with where the business is now? Or is there room to fund greater brand investment by improving administrative efficiencies in the core business.
I'll start and Gil takes the second Bob, I'm not sure I totally got it, but let me give you a try. So when it comes to the product mix, we see, first of all, Natura benefiting more than Avon from the combination. I think that is a relevant information. We've created, first we designed price corridors to place each one of our brands along those price corridors on Avon as more affordable offerings than Natura at a higher price position, and we've been trying to execute accordingly. We are learning how to manage the combined portfolio on a more dynamic basis not to tell you that or everything that we design has already hit the duration. So there are many things we need to practice to be able to comply with those price corridors. But overall, I think that we've covered a very broad space in terms of the various price tiers across the various categories in beauty. And I think this -- that gives us a lot of power to play the different market opportunities in different cycles of the economy. So I hope that helps.
Yes. Sorry, can I take the second question?
Oh, yes, please.
Yes. Perfect. So yes, no, I think, look, you're right. I think as you can see, the efforts that we're doing, I think, is twofold, right, related to our cost structure. First one is, of course, the efforts on each one of the BUs. And of course, part of that is disclosed only part, of course, it is closed the transformational costs. But of course, there are, meanwhile, significant agenda to deliver savings on other SG&A lines while continue to overinvest in our priorities, key brands such as Natura and again, in marketing as we closed, right, this quarter as well, that was one of the points of the SG&A in LatAm, right?
But to the extent that we have a smaller business and of course, to the extent that the operational deleverage will hit us also, there's a big effort going on at the broader central location, right? The more, the more broader, let's say, fixed costs, right, that we do believe and we are already working, there have to be, of course, significantly reduced as well in order for us not to suffer any potential fallbacks in EBITDA margin. So we're -- again, we are confident that we're going to be able to deliver that and continue our margin expansion story.
Ladies and gentlemen, that concludes our question-answer session for today. I would like to invite Fabio Barbosa to proceed with his closing statements. Please go ahead, sir.
Thank you very much. I just want to stress the 2 accomplishments that are in line with what we agreed and proposed about 1.5 years ago. Number 1 is the focus on EBITDA margin and cash flow generation as opposed to a major focus only on growth and revenues. Thus, what you'll see is sometimes stable revenues, but always an improving EBITDA margin. That is by design and be it for more focus on CFT at the expense of focus performance style, but also in terms of the CFT, which are the [ proceeds margin ]. So that's the first one that we are delivering.
Number 2 has to do with strengthening the balance sheet by focusing the company on what we believe the company can do better. I mean, the strengthening of the balance sheet you see by yourselves, but also in part to see including with the announcement of the Body Shop today, that we continue with the idea that back to basics to form what are our areas of expertise and namely direct sales and the omnichannel that follows the direct sales where we start. That's where we believe we can do better. And that's what we are doing in Latin America. That's what we are doing, so we internationally in the 7 countries where we are present and we will continue to strengthen the presence based on that, thus, being much more focused than we were when we went into an international expansion.
Now back to basics, we are going to do what we believe we do best. So that's the message I want to stress. Thank you, everybody. Have a great day.
That does conclude the Nature teleconference for today. Thank you very much for your participation. You may now disconnect your lines. Have a great day.