Natura & Co Holding SA

BOVESPA:NTCO3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to Natura &Co conference call on the fourth quarter results.

Today, with us, we have Mr. Roberto Marques, Executive Chairman of the Board of Natura &Co; Mr. José Filippo, Chief Financial Officer of Natura &Co; Mr. João Ferreira, CEO of Natura; 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/investor. The slide presentation may be downloaded from this website. There will be a replay facility for this call on the website after the end of the event.

This presentation may contain forward-looking statements. Such statements are not statements of historical fact and reflect the beliefs and expectations of Natura &Co management. This presentation also includes pro forma and adjusted information prepared by the company for information and reference purposes only, which have not been audited. Forward-looking statements speak only as of the date they are made, and the company does not undertake any obligation to update them in light of new information or future developments.

Now I will turn the conference over to Mr. Roberto Marques, the Executive Chairman of the board of Natura &Co. Mr. Marques, the floor is yours.

[Roberto Marques, executive]

Thank you. Good morning or good afternoon to all to of you, depending on where you are dialing from. Thank you for joining us for this call to present our fourth quarter and our full year 2018 earnings. I'm joined today here by José Filippo, CFO of Natura &Co; João Paulo Ferreira, our CEO of Natura; and our Investor Relations team of Natura &Co, headed by Viviane Behar.

I will start with a few introductory remarks on our performance; Filippo will then detail our financials on a consolidated basis and by business; and after my concluding remarks, we will open the floor to your questions.

Let me begin on Slide 3 with an overview of our performance. With double-digit growth in revenue, adjusted EBITDA, net income and a strong free cash flow generation, Natura &Co performance in Q4 caps its first full years of existence with a very strong note. These very solid results demonstrates the relevance of the purpose-driven, multibrand, multichannel group we are building. All 3 of our iconic brands contributed to this performance, with each one rolling out its specific strategy while benefiting from the scale, resources, sharing best practice and strategic direction of the group.

Natura posted its best-ever quarter in Q4 in terms of sales, with a record-setting Christmas campaign. EBITDA increased in both Brazil and Latin America, with all countries posting a strong performance. This year, Natura continues to consolidate its relationship selling model, enhancing the digital capabilities and increasing the productivity of its 1.7 million consultants. At the same time, it continued its omnichannel growth and launch of innovative products, reinforcing our leadership in the sector and in key categories in Brazil.

The Body Shop transformation is well underway and showing encouraging results, with an excellent Christmas campaign as well, including the U.K., where it actually outperformed the market.

Own store like-for-like growth was positive, demonstrating positive momentum. Q4 sales were impacted by the decision to close 62 underperforming stores, in line with our plan this year, and by the expected saving effects of the sales to franchisees.

The full year performance shows that the brand revival is on track. Both revenues and adjusted EBITDA posted growth, and EBITDA margin expanded despite the optimization of its store portfolio and transformational costs, which, as we expected and communicated, reached GBP 20 million in the year.

Aesop posted another impressive quarter, delivering high double-digit sales growth and strong profitability while advancing its rollout of its one retail strategy with differentiated products and expansion into new markets, such as Belgium and Russia.

From a financial standpoint, Natura continues to post strong cash flow generation, which more than doubled, more than doubled, in the last quarter of the year. This allowed the group to continue its deleveraging, with the ending net debt at 2.71x EBITDA, down from 3.27x at the end of the previous quarter and 3.01x 1 year ago. And in recognition of its triple-bottom-line approach and continued advances in sustainability, as illustrated by Natura's inclusion, once again, in 2 of the most important sustainability index in the capital markets: The Dow Jones Sustainability Index for the fifth consecutive year; and the ISE, the sustainability index of the São Paulo Stock Exchange for the 14th consecutive year. Natura is the only emerging market CFT company in the DJSI and only CFT company in the ISE. So as you see, Natura has very solid momentum.

With that, let me hand over to Filippo to go into our financials in greater detail.

[José de Almeida Filippo, executive]

Thank you, Roberto, and hello to everyone.

On Slide 5, before going into our financials, I thought it would be helpful to step back for a second and remind you again of the various adjustments that continue to impact our numbers and give visibility on their impacts.

Indeed, in Q3, the quarter was marked by several nonoperational adjustments: IFRS 15, which impacted net revenues both in Brazil and LATAM; hyperinflation in Argentina; nonrecurring tax effects in Brazil; and the new adjustment this quarter related to recoveries of PIS/COFINS tax payments over ICMS. These are taxes that were paid for several years, which have now been recovered by the company after a final court decision. Lastly, we have the transformation costs related to The Body Shop.

To make numbers comparable and focus on our underlying performance, which, as Roberto mentioned, was very solid, these adjustments have been excluded from the numbers I will comment today.

Also, please note that The Body Shop's 2017 numbers include pre-acquisition pro forma figures from January through August for sake of comparison.

On Slide 6. I will start this overview of our P&L with our adjusted consolidated revenue. As shown on the graph, it rose in double-digit both in Q4, which saw a 12.9% increase; and in the full year, with a rise of 13.5%. At constant currency, growth was also strong at 9.6% in Q4 and 8.6% for the full year. The solid increase in sales results from growth in all of 3 of our businesses in Brazilian reals. As a Roberto mentioned, the group's consolidated Q4 sales reached BRL 4.2 billion, up by 12.9% compared to Q4 of 2017.

Moving to Natura, which combines Brazil and LATAM. Sales in constant currency were up double digits in Q4 by 14.2%, and by a solid 9.7% in the full year on the back of very successful Christmas campaigns across all markets as well as continued improvements in the productivity of consultants. This is the strongest growth in Q4 since 2010.

The Body Shop's like-for-like own store sales in constant currency were up 0.7% in Q4 and up a robust 1.8% in the full year. Net revenue was down 1.7% in Q4, impacted both by the net closure in the year of 62 stores as part of its retail network optimization and the phasing of orders by franchisees, which boosted Q3 sales, as we mentioned last quarter, while Christmas orders in 2017 were largely concentrated end of Q4. Christmas sales were very solid. In the full year, sales in constant currency were up 1.7%, underscoring the positive effect of the transformation plan that is underway.

And Aesop posted strong double-digit growth of 25.6% and 31%, respectively, in Q4 and in the full year, with an excellent performance in all geographies and channels. On a like-for-like basis, signature store sales were up 13.5% in Q4 and 17.8% in the full year.

On Slide 7. We turn to consolidated adjusted EBITDA, which, as you see on the graph, grew by a very solid 17.4% in Q4 to BRL 738 million, reaching adjusted EBITDA margin of 17.5%, an expansion of 67 basis points on the back of the growth of the 3 businesses. On a reported basis, Q4 EBITDA was also up in double digits at 13.7%. The full year also saw a strong double-digit growth of 23% on an adjusted basis, with margin expanding by 111 basis points, reaching 14.3%. Reported EBITDA grew 6%.

As a reminder, full year adjusted EBITDA includes The Body Shop, in the basis of if it were already part of the group in the full year of 2017 and excludes the various effects that I mentioned after.

Slide 8. Turning to slide -- this slide, we look at Natura &Co's net income and underlying operating income. The latter excludes acquisition-related expenses, transformation costs, financial expenses and income tax. As shown in the box on the slide, we posted 2.9% growth in underlying operating income in Q4 and strong double-digit growth of 17.3% in the full year. Reported net income was up almost 49% in Q4 to BRL 381.7 million, despite The Body Shop's transformation costs, boosted by higher consolidated EBITDA; lower financial expenses and a lower effective income tax rate, due mainly to income tax recoveries in Brazil; recognition of deferred tax credits in Natura in Brazil and of The Body Shop; and higher accrual of interest on equity.

We just announced yesterday the distribution of dividends referring to 2018 earnings in the amount of BRL 56.7 million. Considering the interest on shareholders' equity already announced in December of 2018, the total distribution of 2018 earnings reached BRL 151.4 million. This distribution is subject to approval at our Annual Shareholders Meeting on April 12. The net remuneration per share reached BRL 0.35 in 2018.

On Slide 9. Let me conclude this quickly with a summary of our key financial highlights, with a look at the main aggregate of our balance sheet. Cash flow in the quarter was a strong inflow of BRL 708.7 million, more than double the nearly BRL 300 million in Q4 of 2017.

This reflects 2 main factors, first, lower working capital requirement at Natura and The Body Shop. In Natura, driven by reduced inventory and higher accounts payable to suppliers; at The Body Shop, driven by lower accounts receivables; and in Aesop, by reduced inventory. And the second, higher net income. In the full year, free cash flow was an inflow of BRL 469.2 million compared to BRL 617.2 million in 2017, due to lower net income and higher inventory levels than the previous years. That was a strong and consistent effort across the 3 businesses to optimize working capital, primarily by lowering inventory and increasing accounts payable.

Finally, we continue to deleverage the company in line with our expectations. Our net debt-to-EBITDA ratio stood at 2.71x at the end of December, down from 3.01x in the year-end year-ago period, and down from 3.27x at the end of the previous quarter. This puts us well on track to achieve our guidance of returning, by 2021, to our leverage ratio prior to the acquisition of The Body Shop at 1.4x.

After looking at our consolidated numbers, let me now comment on the individual performance of our 3 businesses, starting on Slide 11 with Natura. Natura posted a record quarter with its highest-ever quarterly sales, driven by strong Christmas campaigns, both in Brazil and Latin America. We are outperforming both markets, in particular in Brazil, in our key categories of fragrance, body and gifts, resulting in market share gains. And our brand preference is improving both in Brazil and Latin America.

The solid performance reflects the success of our relationship selling model, which is leading to higher productivity in Brazil. Consultant productivity increased for the ninth consecutive quarter, up by 18.4%, and the number of consultants has stabilized since Q1 2018.

Latin America is also performing strongly. Even in Argentina, where, despite the challenged economic environment, we are gaining market share, thanks to our robust business model.

And we continue our digital expansion in the quarter. The adoption of our digital platform by our consultants continues to increase, as did the range of available digital solutions and services. Online sales grew in high double-digit in the quarter, accounting for nearly 4% of total sales in the period, supported by higher traffic orders and average tickets. Natura now has approximately 400,000 consultant virtual stores and over 5 million consumers in its CRM base. We have continued to expand Natura's omnichannel approach, and online sales represented 3% of the total sales in 2018.

All these achievements are a great way to prepare for Natura's 50th anniversary, which we'll be celebrating later this year and will be an opportunity to show the company's fantastic journey.

Natura has just launched its new brand positioning. What can a beauty brand do for the world? And you can expect to hear more on this throughout the year.

On Slide 12. We look at the sales performance in Natura both on a consolidated basis and its 2 geographic zones. In Brazil, adjusted net sales, excluding the effect of IFRS 15, rose by 11.2% in Q4, the highest growth rate for a fourth quarter since 2010. Net revenue of BRL 1.86 billion was the highest ever in any quarter for Natura. This demonstrates the vigor of our relationship selling commercial model and a very strong Christmas, where, in full year, adjusted net revenue was up by 5.7%. Note that Natura continues to roll out its omnichannel model, opening 5 stores in the quarter.

In Latin America, also adjusted to exclude the effects of the hyperinflation and foreign exchange translation accounting standards, net sales were up 8.1% in Q4 and 14.8% in the full year. At constant currency, growth was even higher at 23.1% in Q4 and 28% in the full year. The number of consultants in the region grew by 9.5% in the quarter. Sales in the region were driven by strong growth in Mexico, Argentina and Colombia, and volume was up 11.8%.

I will conclude on Natura with its adjusted EBITDA, on Slide 13. In Brazil, Natura adjusted EBITDA rose by a strong 18.4%, and margin grew by 120 basis points to 19.9% in Q4. This results from strong sales and continued rationalization efforts to lower G&A expenses, which more than offset higher marketing costs and the short-term impact of sales force investments. In the full year, adjusted EBITDA grew by 5.5%, with the margin stable at 18.7%. EBITDA from online sales grew in double digits in the quarter and in the full year.

In Latin America, adjusted EBITDA grew by double digits both in Q4 and in the full year by 21.5% and 27.3%, respectively, thanks to strong performance in both -- in such markets as Mexico, Argentina and Colombia, market share gains and improving brand preference. EBITDA margin grew by a very strong 150 basis points in Q4 and 160 basis points in the full year.

Let's now move to The Body Shop on Slide 15. Net revenue in reals increased on a reported basis by 11.2% in Q4 and by 17.7% in the full year. At constant foreign exchange, sales were down 1.7% in Q4. As mentioned earlier, this reflects a smaller store base as The Body Shop continues to optimize its network and has closed net 62 underperforming stores in the year, and also, the phasing of orders by head franchisees, as orders were shipped in Q3, reflecting good execution of the Christmas campaign.

On a like-for-like basis, sales at own stores were up 0.7% in Q4 and significantly up a stronger 2.5% in the U.K., where The Body Shop posted a strong Christmas performance in a difficult environment for retail as a whole. This constitutes an encouraging underlying performance. In the full year, net sales were up 1.7%, and sales in own stores posted like-for-like growth of 1.8% in constant currency, with consistent growth across all regions, including EMEA, Europe, Middle East and Africa and North America. At year-end, The Body Shop had 1,037 own stores and 1,898 franchised stores.

On Slide 16. Adjusted EBITDA in the quarter, which excludes transformation costs, grew by 12.6% in reals, resulting in an adjusted margin of 18.2%, up by 23 basis points, impacted by store closure and phasing of franchisees' orders. In 2018, adjusted EBITDA margin was 10.4%, up by robust 280 basis points. This attests the advances in the transformation plan and is -- that is delivering operational efficiency through lower discount levels and the closing of underperforming stores.

The Body Shop's transformation costs, which stood at BRL 36.1 million or GBP 7.6 million in Q4, and BRL 98.5 million or GBP 20 million in the full year, mainly related to optimization of The Body Shop's retail footprint, organization redesign and other initiatives. This costs are part of the total previously disclosed estimated costs of GBP 30 million through 2018 and 2019.

On Slide 18. We round off this look at the performance of our business with Aesop, which posted another quarter of remarkable growth. On a reported basis, net revenue grew by -- in reals by 43.9% in Q4 and by 50.6% in the full year, with a very strong performance across all channels and geographies. In constant currency, growth remained very strong at 25.6% in Q4 and 31% in the full year. Like-for-like growth in signature stores increased 13.5% in Q4.

Profitability also grew in double digits in reals, with reported EBITDA up 24.8% in Q4, resulting in an EBITDA margin of 23.9%, 360 basis points lower versus the previous year, impacted by higher-retention planned provision, as a result of Aesop's very strong performance. Excluding this, EBITDA margin would be around 30%.

In 2018, EBITDA increased 46.7%, resulting in an EBITDA margin of 15.3%. Aesop continue opening signature stores, adding 18 stores in the year to reach a total of 227 at year-end.

Let me now hand over to Roberto for some concluding remarks.

[Roberto Marques, executive]

Thank you very much, Filippo. Before concluding, let me mention some notable advances in sustainability in the quarter on Slide 19.

Natura's Socio-Biodiversity Verification System, a partnership with UEBT, that has been promoting fair trade with supplier communities and the ethical sourcing of bio-assets from the Amazon region, received an important award in the quarter, Sustainable Development Goals -- SDG Brazil, granted by the Brazilian federal government.

The Body Shop advanced its Re-Wild the World program, a commitment to protect over 11 million square meters of the Wye Valley forest in England and the Caucasus Wildlife refuge in Armenia. This Bio-Bridge help protect animals in their natural habitat and help endangered species to breed again.

Meanwhile, Aesop launched a package recycling program in Hong Kong, aiming at developing a recycling culture over there.

So what are the key takeaways? Let me just mention 3, as you see on Slide 20.

First of all, as you heard throughout Filippo's presentation, Natura &Co posted a very solid performance in Q4, with double-digit revenue and EBITDA growth, net income growth of nearly 50%, doubling of cash flow generation and further deleveraging.

Second, each one of our businesses and brands is performing strongly. Natura is seeing the benefits of its relationship selling commercial model in a multichannel approach. The Body Shop's transformation is gaining speed, and Aesop post remarkable growth quarter-after-quarter. This growing momentum of Natura &Co in each of its constituent business show the strength of the global, multibrand, multichannel group we are building.

I also want to take this opportunity to thank all of our associates across the globe, across the 3 businesses for really a tremendous result in 2018. Congratulations.

And finally, with this new quarter of solid performance, Natura &Co is on track to deliver on its medium-term financial targets while making a positive social and environmental impact and creating value for its stakeholders.

Let me conclude on Slide 21 with the slide that we presented to you at our recent Natura &Co Day in New York because it shows what we are about and what makes us a different group. Our purpose is to nurture beauty and relationships for a better way of living and doing business. We put our passion for relationships, our integrity and courage at the service of our aspiration, which is to dare, to innovate, to promote positive economic, social and environmental impact. The results we present you today provide another illustration of that.

Thank you so very much for your attention. And now Filippo, JP and I are now happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Marco Calvi with Itaú BBA.

[Marco Calvi, analyst]

My first question is on the Brazilian operation. So out of the productivity gains that we have been watching in the Brazilian operation, how much, in your view, is driven by the increase of digitalization of the consultants? My second question is regarding the products. In which categories is the company gaining share in a faster pace?

[João Paulo Brotto Ferreira, executive]

Marco, JP speaking. Productivity gains include digital services, but it accounts for less than half of the productivity gains. There's a lot yet to be gained through the new commercial services we are providing to our consultants. Second question is on categories, and the ones that we are growing the fastest are perfumery, fragrances, body care and gifts.

[Operator]

Our next question comes from Robert Ford with Bank of America Merrill Lynch.

[Robert Ford, analyst]

Filippo, I was very surprised to see the big working capital improvements across all the businesses, and I was curious if there was a component when it comes to the earlier franchise you own at The Body Shop. And maybe you could talk a little bit more about your comfort in terms of running these businesses with leaner inventory levels, and as you push out these payables, how sustainable do you see that in an environment where, maybe, interest rates might bump up a little bit? And does it have any impact in terms of your sourcing costs or the synergies that you're anticipating from improved sourcing with The Body Shop?

[José de Almeida Filippo, executive]

Okay. Okay, Bob. Thanks for the question. First, regarding the inventories and the working capital, remember that we started 2018 with a higher level of inventory, as we would expect or desire. Remember, we already mentioned that. So throughout the year, there was an effort, an initiative associated for us to adjust that. And in the end of the year, especially on the fourth quarter, we were able to achieve some of those results. And then we expect to see levels which you may call normal going forward. So I think this is pretty much sustainable they were doing. Regarding payables, of course, we manage that to avoid that the extension of terms or suppliers impact the cost with -- as you said, there's cost associated. And we do this in the basis of the negotiation regionally, as the procurement does. And then it reflects on the optimum, if you will, the optimum terms, which is good for the company but also doesn't impact the supplier. That will be somehow adjusted in the price. So that's -- we're pretty much comfortable about the level that we have today. It was, I would say, was normal terms. It was not pushed that we could have impact in costs. So we should maintain that.

[Roberto Marques, executive]

Yes, Bob, Roberto here. Just to add one thing, that is also, I think, it's important to note from your question is also a much better management of working capital with The Body Shop this year compared to 2017. I think the team did an outstanding job really managing that and again, a successful Christmas campaign, but I would say probably in a much higher standard in terms of managing working capital this year than in prior years. So just to add that.

[José de Almeida Filippo, executive]

Yes. Let me just go back and add here the details on The Body Shop I missed. It was that, in 2017, we delivered the Christmas for franchisees in October. That was not what we intended, but somehow this happened. And the level of inventories were affected by that. This year, 2018, we did it in September. So this is something that if you compare both quarters, you'll see that difference. That did -- the 2018 performance, as Roberto mentioned, was what we plan to do and that's how we understand the business has to carried.

[Robert Ford, analyst]

That's really helpful. And one other question, if I might. And that is, in the press release, there's a very brief mention of an acceleration in the franchise store growth for Natura in Brazil. And I was wondering if João Paulo could please elaborate in terms of -- it's clearly above plan, right? But if you could elaborate on growth in terms of the franchise stores and how you're thinking about the longer-term footprint of the store base in terms of the balance of corporate and franchise locations and the dimensions of the footprint, if you feel comfortable with that.

[João Paulo Brotto Ferreira, executive]

Bob, so this is indeed accelerating. It's proving very fruitful for our consultants and our customers, right? We had to learn some capabilities of retail management, right, which we're now -- we have now, I wouldn't say marked them, but we know enough to support our consultants in that job. So we closed the year with 200 of those franchise stores -- or consultant stores. And we already have a significant pipeline of new contracts to be implemented throughout this year. So this should continue to accelerate. It proves relevant for our consultants as a career path, if you want -- for those who wanted to be more entrepreneur, right? But it also services our customers in a complementary way, whereby even our consultants can use those franchise stores as points of support to return products and similar services. So going forward, we see a growing trend for that format.

[Robert Ford, analyst]

I do apologize, just one little follow-up. And that is, are you happy with the way the brand is being expressed with the franchisees? Or do you feel it important, perhaps, to open up a few more corporate stores to maintain a kind of a high level of execution at the point of sale?

[João Paulo Brotto Ferreira, executive]

Yes. So we do see the importance of our own stores, exactly to play that role you just described. So that sets the standard -- or the golden standard for our brand experience, and that will continue to grow. And soon, we're going to have news on those stores, by the way. So that sets the standards. Now when it comes to the consultants' franchise stores, they offer a significant improvement on the former sort of retail mom-and-pop store that they used to show, with no control whatsoever on the brand. So now they are standardized. You can feel the brand -- the team is better trained to support the customers. So that is already a significant improvement on the brand as well. But as you said, we will continue to raise the bar with better standards of our own stores, which will eventually trickle down to the consultant stores as well.

[Operator]

Our next question comes from Joseph Giordano with JPMorgan.

[Joseph Giordano, analyst]

I actually have a follow-up on those sales rep franchise stores. So I just wanted to understand a little bit more how the productivity of those locations or sales reps compare to the average of the company. Then the second question would be on the innovation index. So we saw an, I don't want to say a sharp decline, but it's a decline since it's below -- already below 60% level at this point. So I really wanted to understand what's the trend here, and if you still see the market being really driven by innovation or other strategy. And the market has been changing quite a lot. And then moving to The Body Shop, you mentioned the closure of slightly over 60 stores. I'd like to understand if you have more to go and when we should start to see openings, if they are already -- not already taking place.

[João Paulo Brotto Ferreira, executive]

JP speaking. Of course, the productivity of those franchise stores is well above the average of the consultant network. It was already well above even before they were converted into this format. But when they are converted, their increase is significant. The productivity goes up by large amounts because of the better brand experience and the way categories are exposed and the service -- the qualified service that our consultants offer to the customers. As it comes to the innovation index -- yes, that's it. When it comes to the innovation index, it was exactly as planned because we plan the phasing of the launches differently to -- so that we would focus the Christmas season on the gifts and use them better, that's first. Second thing is that we are structurally supporting our hero products to increase their life cycles. I mean, there's lot of investment to produce outstanding products. And you may have heard before customers complaining that when they finally discover that hero product, we delisted them. So we don't want that to happen. So we are pushing them to last longer, right? So it was not a change in the market. Innovation is extremely important. It is extremely important for us, right? It is extremely important for us. We will launch amazing innovations this year. I mean, this is the 50th anniversary of Natura. So I mean, we have been working hard to surprise and charm our customers. So you're going to see amazing launches throughout the year. But at this time, this was exactly in line with our plan.

[José de Almeida Filippo, executive]

And Joe, regarding The Body Shop closure of stores that we mentioned about, the net 62 in 2018, as you know, we already indicated that the transformation plan will go up to the middle of next year, 2019. So we still have some initiatives associated to closure, but most of that already happened. And those will be basically associated to the moment that you have in terms of the contract, that you can terminate or something related to that. So there's a schedule that we follow normally. We may see -- continue something. We don't guide specifically the closure before we have the -- but most of that already happened in 2018.

[Roberto Marques, executive]

And Joe, just one thing to add. The 60, it's a net closure, which means that we opened about 20 and closed 80. So the net is about 60. So there is some opening as we try to optimize. When we say optimize the footprint, it's a little bit of that combination of relocation, opening stores and closing. The net was 62, just to be clear. Thank you.

[Operator]

Our next question comes from Ruben Couto with Santander.

[Ruben Couto, analyst]

Just a bit follow-up on this innovation index answer. Does the online channel play a significant role here in changing the trend that we haven't seen? JP mentioned about the extension of the hero products. So just to get an idea if them being available online, this might change the level of innovation index from the previous 60% to 70%, if it can ever be below the 60% threshold, and it wouldn't be a problem in your guys' view. And if we can compare that same innovation index to The Body Shop, can you guys give us a sense on that as well? And I have a second question, more on Brazil. We saw some operating margin gain in this quarter, but on a full year basis, margins were flat. And there was also a big volatility in both selling and G&A expenses throughout the quarters. But given that sales growth in Brazil is expected to pick up in 2019, can we assume that you'll deliver some operating leverage in 2019 that will lead to some EBITDA margin expansion this year in Brazil?

[José de Almeida Filippo, executive]

Okay, Ruben. Starting with the operating -- the margin that you mentioned before we go in the other. We had -- of course, the last quarter, always, we have some impact, some provisions. And we had, for example, because of -- we had some provisions on the remuneration plan just associated to the increase of the shares. Typically, we do this so it's very specific for the quarter, and the full year is where you should see it most. Also, you have to remember that there's another operating impacts there, primarily related to tax-related contingencies and reversals, gains and losses on disposal of fixed assets, fund donations to Natura Institute and sales of aged accounts receivable. There is a detail on the notes, the Note 27 on the financials. You can have the full information on this. And this also was something that we signed last quarter. So you couldn't see in the full year, but that's basically the -- those impacts on the results -- of the operating results.

[João Paulo Brotto Ferreira, executive]

So coming back to your question on innovation, no, we don't see that related to the online channel at all. It's part of our choices for now. And actually, as mentioned, we continue to gain market share. So it's a better return on the innovation investments that we are doing.

[Operator]

Our next question comes from Tobias Stingelin with Citi.

[Tobias Stingelin, analyst]

Quick question, JP. How do you see productivity in Brazil as we go into 2019? We have the consultant base, which is kind of more stable right now. So if you compare 2018 versus 2017, there was still a decline, which might have helped on a year-over-year basis. But how should we see productivity going forward in 2019 and beyond?

[João Paulo Brotto Ferreira, executive]

Tobias, well, we foresee it will continue to grow, right, for -- the forces of the new commercial model that is encouraging our consultants to be better qualified. And with that, they can -- they know better how to sell the more added-value products in our lines, right, and develop loyalty with our own customers, right? So that continues to grow, right. On top of that, there's the whole range of digital services, right, they -- as they adopt the digital platform as they are. And so we've closed the year with 850,000 of our consultants: 650,000 in Brazil, 200,000 across the other countries in Latin America, already actively using that platform. Adoption is growing, and the range of services we've been offering our consultants and services for them to offer better experiences to their clients continues to grow. And with that combination of higher qualification and better services, we expect purchases to continue to grow.

[Tobias Stingelin, analyst]

And if I may, just -- I don't know if it's a fair question, but do you know how much we are into this process? Do you think that this whole journey with digitalization and so on, that as of now, we are like 20%, 30%, 40% and choose to be -- like, choose 50% to go? And that was the third question. Well, maybe you can give us a sense of where we are in the process.

[João Paulo Brotto Ferreira, executive]

We feel there's still a long way to go. I mean, when I mention, say, half of our consultant network is actively using the platform. So that is a number if you think about the first adoption step. But when it comes to the usage of the various features, tools that are already available, not to say the ones that are in the oven to be launched, I mean, there's a whole new world of opportunities to transform the consulting service -- beauty services into a high added-value product.

[Operator]

Next question comes from Gustavo Oliveira, UBS.

[Gustavo Oliveira, analyst]

I have a couple of questions. I would like to start on The Body Shop. You anticipate sales in 3Q, but yet the 4Q same-store sales was a bit soft at 0.7%. You comment that you had an outperformance and a very good performance in the U.K., but you don't see on the sell-out, over -- on a consolidated basis, the same performance. I don't know if the 0.7% came in line with your expectations or if there was any reason that underperformed more than the others. But if you could give us some color on that. And around the same lines, still on The Body Shop top line growth, if you could please help us to understand how the changes in dry goods taxation and new commerce privileges in China could affecting your Asian business as a whole.

[José de Almeida Filippo, executive]

Yes. Regarding the sales, the growth, I think you have to take into account that -- I don't know exactly what the number is there, but -- that you took, but there were a closure of stores. So there was a lot of things that is important that we take into consideration, that we have a lower base of stores. Some of those stores were closed in 2018, but they were strong in the last quarter of last year. They were there, although they are not, in full year, they are not performing. And that part of this is what really happened.

[Gustavo Oliveira, analyst]

No, no, I understand. But I was referring to same-store sales and not total sales.

[Roberto Marques, executive]

Yes. So let me -- Gustavo, it's Roberto here. On a like-for-like -- which, I think, was your question more related to a like-for-like performance, right?

[Gustavo Oliveira, analyst]

Correct. Right.

[Roberto Marques, executive]

Yes. We finished Q4 about 0.7%, to your point, which is kind of what we expected. Again, as you know, it is a very competitive part of the year. We are -- as you know, we're still in the process of rejuvenating the brand and developing some of the new layout of the stores. We are very encouraged by the performance of U.K., which is our most important market, where we are starting to try some of those new ideas and executions in terms of store design. And we saw a 2.5% performance despite some of the challenging situations in U.K. So we are encouraged by the performance in U.K. You are right in terms of the 0.7%. It was not a stellar result in terms of like-for-like, but it's kind of what we projected in terms of the journey of the transformation. Now to your second question about China. As you know, with The Body Shop, we are not present in China because of the animal testing. But of course, we love the Chinese consumers. They love The Body Shop, and we continue to work with potentially trying to influence the legislation, and hopefully, we'll be able to get into China at some point.

[Gustavo Oliveira, analyst]

No, I understand that as well, Roberto. But as you know, the dry goods buyers, they go to Hong Kong and other places in Asia, and they buy a lot and they take that product back in China, regardless of you are approved to sell that or not. And there are changes affecting several of the companies in the region. I don't know if that's affecting your Hong Kong business, for instance, or your other business around China.

[Roberto Marques, executive]

Yes. No, that's right. And again, as you know, because of some of the situations in currency and some of the retraction in China, Hong Kong, especially in the Q4 -- and I think that's pretty across the board for all companies, has been impacted. It's a market that, as you articulated, there's a lot of purchase happening in Hong Kong. But we continue -- I mean, this is a very important market for us, and we continue to be very well established. But you're right, it was impacted somehow with some of those changes in the valuation and some of the situations in China.

[Gustavo Oliveira, analyst]

Okay, understand. I have 2 more questions for Filippo, if I may. One is on the effective tax rate. If you could help us to understand what could be the effective tax rate for 2019 because it was very low in 2018. So it seems that -- and it seems that you had more gains in the fourth quarter versus what you had in the first 9 months. So maybe you have even more gains to capture in 2019. So I'd like to understand that a little bit, if possible. And the second question is still for Filippo. On the working capital improvement that you comment on 3Q -- on 4Q, on a quarter-over-quarter basis, that's clear and it's possible to see, and they have a lot of your cash generation. But if you look on a year-on-year basis, inventories, they were down only 5%. Accounts payable were down only 5 days and down only 4 days. So there was not much of an improvement on a year-on-year basis, which is a more comparable metric. So what is the thinking in working capital going forward? Do you think you can reduce even further your inventory levels? Is the payable days at this level at risk or is it stable? I'd like to understand that a little bit better.

[José de Almeida Filippo, executive]

Okay, okay. Thanks, Gustavo. I think, first, starting with the income tax. Of course, when we have the last quarters where some of the impacts happened, we have some deferred taxes that has impacted here and some reversals. I think that, again, this is -- the results are -- they are mostly impacted by the nonrecurring adjusted that we have in EBITDA. But this quarter, last quarter, we had a couple of items that impacted the year. I would say that our historical income tax rate would be considered around 30% or 31%. I think that's something that you could expect. Of course, sometimes, it happens that we have some impacts from one side to the other. But typically, I think that you should consider that amount as a reference. Regarding working capital, yes, like we said, we started the year with the levels that we didn't like, that we wanted to adjust. This was the most of the efforts. And reaching the amount we wanted in the fourth quarter was something positive. Definitely, we target to have improvements going forward. This is related to efficiencies. We deal with -- especially if you think about Natura and in Brazil, the -- our network of distribution, we always envision that and think, how can we improve? And that's something that we could expect to see some inventory days reduction. But it was -- the most important was the adjustments that we had throughout the year. That's basically was the target.

[Operator]

Our next question comes from Irma Sgarz with Goldman Sachs.

[Irma Sgarz, analyst]

Regarding the productivity of your rep base in Brazil, it's certainly impressive when you just sort of divide the overall sales that you posted for Natura Brazil by the rep base. But if you were to exclude, for example, the initiatives that you're taking across the board in terms of online, direct-to-consumer, online through the consultant stores, the franchise stores and your own stores, if you were to exclude all these and just look at the classic productivity of your -- of the rep space, what would sort of development would do you see? I don't know if you've done that exercise. And if you can parse out what's been happening there. And then just in terms of -- I don't know if it's cutting out, but performance in some of the other markets of The Body Shop would suggest to be negative if I consider that you had a positive number of 2.5% in U.K. and the U.S. compared to 0.7% globally. So if you could make some comments about those other markets, please.

[Roberto Marques, executive]

Irma, Roberto here. Just -- I'll start with The Body Shop and then JP will comment on the productivity of the consultants. So again, on the like-for-like, right, so some of the markets did very well. And we think that, again, as part of our transformational journey, we put a lot of effort this year primarily on optimizing the footprint, closure of nonprofitable stores. And we started this whole process of rejuvenation of the brand of The Body Shop with the new positioning, which now, the team is working on the new store design which is going to be -- started to be implemented throughout 2019. So at the end, we are very pleased with the performance on the like-for-like throughout the year, which was 1.8% growth. Q4 was 0.7%. And the rest of the markets you highlighted, we're very pleased both U.S. and U.K. That grew over 2%.

[João Paulo Brotto Ferreira, executive]

Irma, JP speaking. You know that the new own stores -- new channels are relatively small in comparison to our huge network. So you can actually see the productivity gain as -- very much due to the consultants. One information that supports that is -- you know that now we have tiers, right? Different tiers of consultants. If you take the silver-plus tiers, so silver, gold and diamond, the number of consultants in those upper tiers grew by more than 35% since the launch of the model, which supports the gain in productivity. So again, they dedicate more time to the activity. They receive better training. They learn better how to operate with more sophisticated, higher-priced products and -- but higher consumer loyalty out of that, that is driving productivity power. By the way, I should also mention that consultants' loyalty index, which is something that we measure on a continual basis, has achieved its highest level ever in history, once again supporting the strength of the new model. And that is very much driven by higher productivity.

[Operator]

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.

[Roberto Marques, executive]

All right, guys. So just big thanks to all of you for joining us. And again, and most important, a big thanks to all our teams, associates for, really, our remarkable results in Q4 and throughout the year across all of our business: Natura, The Body Shop and Aesop. We are very excited and very encouraged by the prospects as we enter 2019 as well. So thank you very much, and have a wonderful day.

[Operator]

That concludes the Natura audio conference for today. Thank you very much for your participation. Have a good day.