Natura & Co Holding SA
BOVESPA:NTCO3
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Natura & Co Holding SA
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Welcome to Natura &Co's Fourth Quarter and Full Year 2022 Earnings Call. On this call today are Fábio Barbosa, CEO of Natura &Co; and Guilherme Castellan, CFO of Natura &Co. João 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 the call over to Fábio Barbosa.
Thank you. 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. Guil will comment on the results shortly, so I will provide a more qualitative commentary.
As you know, 2022 was a difficult year and we continued to operate in fourth quarter in a challenging environment, marked by high global inflation that is affecting discretionary spending and changing consumer behavior, as well as rising energy costs, foreign exchange volatility and of course the geopolitical fallout resulting from the war in Ukraine.
In this environment, we decided in mid-2022 to reassess the group's growth model in the short-term and shift the focus from sales growth to profit margins and cash conversion. As part of this shift, we took a hard look at cost structure and the role of the Holding company with significant savings already achieved and we're also reevaluating our global footprint to concentrate on profitable markets.
In full year 2022, we posted stable revenue at constant currencies while adjusted EBITDA margin decreased 160 points. In the fourth quarter sales growth improved at constant currency. And we delivered further progress in cash conversion, in line with our priority. We have some reasons for succession, notably continued strong momentum at Natura brand, especially in Brazil, and also a continued good performance at Aesop.
We also saw a solid performance by Avon in the beauty category in Latin America. This bodes well for the second wave of integration of our business in the region that is getting underway, aiming at harmonizing the distribution and sale systems and optimizing the product portfolio. At TBS, we continue working on costs and optimizing footprint of stores and geographies. At Avon International, we are focusing on countries with high growth potential by revisiting business model at several other countries, at the same time, reducing the cost structure.
A lot has been done and takes a while to show up at results. This is, as I like to say, a Transatlantic. A lot has been done by all means, but a lot has to be done yet. And we are undertaking every effort in that direction.
At the same time, I want to remind that the group continues to focus on its ESG agenda. We remain as focused on our commitment to our environmental agenda, the Amazon and its biodiversity, social inclusion, female empowerment and other matters that constitute Natura &Co's DNA, are at the core of our Commitment to Life 2030 vision and give us a competitive advantage and make us a differentiated company.
With that, let me now hand over to Guil to comment on our fourth quarter performance in greater detail. Guil?
Thank you, Fábio, and hello to everyone. I'll start with Natura &Co’s consolidated revenues on Slide 5, which stood at nearly BRL 10.4 billion and grew by 3% in constant currency, improving sequentially despite the challenging macroenvironment. In reais, sales were down 10.8%, mainly reflecting the depreciation of the British pound, the Australian dollar and the Argentinian peso, among other currencies versus the real.
We will look at the performance by business units shortly. But in a nutshell, we also saw the constant currency growth at Natura &Co Latam with a strong performance by Natura Brand notably in Brazil, and by Avon in the beauty category, while Aesop again posted double-digit growth at constant currency. Avon International's fundamentals improved, but performance was still impacted by the war in Ukraine, and by one-off supply chain issues. The Body Shop had another difficult quarter, as The Body Shop at Home is seeing a return to pre-pandemic levels.
In the full year, revenue rose 0.4% at constant currency and was down 9.5% in reais to BRL 36.3 billion.
We turn to adjusted EBITDA margin on Slide 6, which stood at 10.5% in Q4, down 280 bps, this reflected different moving parts and business units' dynamics. First, the main positive impacts are an improvement of Holding expenses down 23% year-on-year. This is the result of our efforts to create a leaner and simpler organization as mentioned by Fáb but impacted by the BRL 25 million of phasing expenses mentioned in the previous quarter. In full year '22 corporate expenses show a 30% decrease compared to full year '21, even though the adjustments only started in the second half. Improving margins at Aesop supported by strong top-line growth and constant currency. And finally, 90 bps year-over-year improvement of selling expenses as a percentage of net revenues, benefiting from financial discipline across all businesses with a focus on improvement efficiency and simplifying the business model.
These were more than offset by the combination of: First, pressure on margin at Natura &Co Latam and Avon International due to higher G&A expenses. Second, additional margin pressures at The Body Shop, amid a challenging top-line. Finally, G&A as a percentage of net revenues increased by 290 bps in Q4 '22 on a year-on-year basis. Q4 '22 was particularly impacted by increased costs related to phase of expenses, including incentives provision, as there were almost no incentives in the first nine months of 2022. In the full year, adjusted EBITDA margin was 8.7%, down 160 bps.
On Slide 7, we focus on net income and underlying net income. Net income in Q4 was a negative BRL 890 million compared to the net profit of BRL 696 million in Q4 '21, driven mainly by lower EBITDA, higher net financial expenses and a higher loss from discontinued operations. EBITDA was impacted by a non-cash impairment of BRL 383 million. It's worth highlighting that Q4 '21 net income had also benefited from tax gains related to credit recoveries. Q4 '22 underlying net income, which is net income excluding transformation costs, restructuring costs, discontinued operations and PPA effects was a loss of BRL 49 million. You see the bridge on this slide, with the main impacts coming from PPA effect for BRL 367 million; restructuring costs, discontinued operations and other effects for BRL 357 million. And finally, transformation and integration costs were BRL 117 million.
On Slide 8, we focus on free cash flow, which is a particular focus of ours, and which show a sharp improvement in full year 2022. Free cash flow was an outflow of BRL 1.7 billion, compared to outflow of BRL 2.4 billion in the previous year. Despite a negative impact from net income in the year, which was positive BRL 1 billion in '21 to negative BRL 2.9 billion in '22, cash flow from operations improved to minus BRL 280 million from minus BRL 1.2 billion in 2021. The improvements are mainly driven by: first, operating working capital that improved across all business units as a percentage of net revenues, but was partially offset by business unit mix. The business units that are growing the most carries higher structure working capital. Main driver for working capital improvement was inventory, which was partially offset by receivables with the growth in Latam. Working capital also benefited from lower advance to suppliers. Significant improvements on income tax and social contribution was seen as well.
On top of the significant improvements in cash from operations, we continue our resource allocation efforts, which resulted in lower CapEx, down 25% year-on-year, while still investing in our main priorities. As previously mentioned, management continues to be strongly focused on optimizing cash conversion, and continues to work on several fronts. First, improving working capital management, where we still see furthering opportunities for improvement. Second, thorough discipline in capital location and CapEx optimization. And third, continue improvement in the cash tax rate.
On Slide 9, we look at our liquidity profile. We ended the quarter with a cash position of BRL 6 billion, up BRL 1.4 billion versus the previous quarter and in line with our cash position in Q4 of 2021. Our net debt to EBITDA ratio stood at 3.5x at the end of the year, up from 2.85x at the end of Q3 and 1.5x one year ago. Although net debt improved on a quarter-on-quarter basis to BRL 7.4 billion from BRL 8.8 billion, reported EBITDA was particularly impacted this quarter by non-underlying expenses, including BRL 383 million of impairments.
Talking about that capacity payments, as you see in the second graph, our cash position of BRL 6 billion is higher than the total of our debt payments through 2027. The average maturity of our debt -- and we face limited debt repayments until 2028. As part of the group's continuous efforts to improve its capital structure, and actively addressing the upcoming maturities Natura &Co Luxembourg Holdings entered on November 14 in US$250 million Club Loan maturing in 2025, guaranteed by Natura &Co Holding and Natura Cosméticos. The funds were used primarily to prepay US$150 million loan under the group revolving credit facility maturing in 2024 and a GBP 70 million loan of The Body Shop with the UK Export Finance agency. Also in December 2022, Natura Cosméticos management repaid BRL 913 million related to its 10th issuance of debentures. At the same time Natura Cosméticos received an inflow of approximately BRL 1 billion in October 2022, resulting from the issuance of certificates backed by real estate receivables known as CRI. It is important to note that the repayment of the 10th issuance of debentures eliminates all group financial covenants.
Let's turn now to our performance by business units beginnings on Slide 11 for Natura &Co Latam, which posted a solid performance. Total net sales were up by 10.6% in constant currency and down 3.2% in the reais. This was driven by double-digit growth in Natura brands, which grew by 7.5% at constant currency. While the Avon brand was also up slightly in constant currency at 2.2%, thanks to the growth in the beauty category.
The Natura brand posted strong momentum with year-on-year growth of 17.9% in Brazil, supported by price increases and mixed effects, which results in 14.9% growth in consultant productivity in the quarter. The average available consultant base is broadly stable at 1.16 million in Q4 2022, up by 1.7% versus Q4 '21 and by 0.9% versus Q3 2022. This is aligned with our ongoing strategy of focusing on increasing productivity with a more stable consultant base.
In Hispanic Latam, net revenue was up 16.9% at constant premise despite a challenging situation in several countries in the region. Revenue was down 18.6% in reais. Growth constant currency was mainly driven by Argentina, Colombia and Mexico acceleration, boosted by channel mix and productivity gains. Excluding Argentina, sales in Hispanic markets were up in mid-single-digits at constant currency despite softer performance in Peru and Chile.
At the Avon brand Latam, net revenue grew by 2.2% at constant currency. In Brazil, trends continued the sequential improvement we have seen every quarter in recent periods and Avon entered positive territory in Q4, growing by 7.5% albeit on a soft comparable base. The Beauty segment continued to grow accelerating to 12% while Fashion and Home was down 10%, in line with our portfolio optimization strategy.
In Hispanic markets, net revenue was down 1.1% at constant currency and down 19.5% in reais. Performance was good in Argentina, but impacted by a decrease in Mexico which was higher exposure to Fashion and Home category, as well as in Peru and Chile, which were affected by political and economic volatility. The beauty category grew 7.3% in constant currency, but this was more than offset by Fashion and Home, which was down year-on-year.
On Slide 12, we turn to Natura &Co Latam’s Q3 adjusted EBITDA and margin. As shown on the graph, adjusted EBITDA decreased to BRL 526 million from BRL 741 million in the same period last year. Adjusted EBITDA margin was down 320 bps to 8.9%. Margin benefited from strong top line performance and strict financial discipline but this was more than offset by 60 bps drop in gross margin and higher G&A as percentage of net revenues.
G&A growth was mainly driven by higher investments in R&D, notably the Natura brand, expenses deleverage of Avon Latam and increased quarterly fees and expenses, including accrual for incentives provision.
Let's now move to Avon International on Slide 14. Revenue was down 9.9% at constant currency and 23.8% in reais. This drop continues to reflect the situation in Ukraine. Excluding that, sales were down by more limited 6.2% at constant currency. Revenue in the quarter was also impacted by one-off supply chain challenge related to mascara products, which had an estimate and favorable impact of 2 percentage point. The TMEA and APAC regions show year-on-year growth while Western Europe posted softer performance.
However, even in a tough macro environment Avon International was able to pass through inflation and FX pressure to prices, which also benefits rep productivity. As expected, the number of representatives is still down 20% amid the new commercial model rollout and the footprint optimization impacts. However, we continue to see good progress on fundamentals. For example, penetration of the Avon On app reached 30.6% in Q4 '22 compared to 25.5% in Q4 '21. Activity units per rep and productivity continued to show sequential improvements as well.
Gross margin was 61.1%, up 230 bps, driven by price increase and a positive product mix, which more than offset pressure from costs inflation and FX headwinds. However, adjusted EBITDA margin was 5.8%, down 490 bps, as gross margin expansion and continued focus on transformation savings were more than offset by the sales deleverage and phasing of expenses in the quarter.
We now move to The Body Shop. Q4 net revenues declined by 8.4% at constant currency and 20.6% in reais. Although still showing challenging results, these figures mark a sequential improvement over the previous quarter, which have seen constant currency sales decline of 19.5%, albeit on a softer comp. Combined sales of core business distribution channels, in other words, stores, e-commerce and franchises show a low single-digit decline in constant currency, an improvement over the high single-digit decrease in the previous quarter. This underscores the significant impact of The Body Shop at Home, which returned to pre-pandemic levels. However, the tough macro environment, particularly in the UK and the rest of Western Europe, continued to impact retail and same-store sales sellout was minus 4.8%. Franchise sell-in grew in the quarter, but softer sales sell-out impacted the trend of franchise partner inventory normalization seen in the last quarter. Q4 '22 EBITDA margin was 21.4%, down 80 bps year-on-year. This represents a 270 bps efficiency gain on SG&A as a percentage of net revenues, despite the sales deleverage impact, partially offset 350 bps of gross margin pressure.
2022 was a very challenging year and management is focused on stabilizing the core channels top-line and the implementation of cost savings initiatives to deliver margin expansion and support cash generation. Strict cost containment measures to manage headcount levels and discretionary spend were complemented in the quarter by the first phase of structural cost reductions, including the rightsizing of The Body Shop at Home overhead structure, reductions in leadership and IT transformation.
The restructuring of the business continues, and in early 2023, management announced several additional steps to improve long-term profitability. These include the announcement in January of the closure of At Home business in the U.S. and of the dedicated distribution center in the UK. And in February, we announced a restructuring of our global management structure, reducing leadership positions by 25% as well as 12% reduction in the rest of global overhead staffing. These actions are part of a broader recovery program that will support margin expansion, cash generation and net revenue stabilization in 2023 and beyond.
On Slide 18, Aesop again recorded an excellent performance, with another quarter of double-digit growth in constant currency, up 18.2%. Revenue in reais was down 2.1%. All regions delivered double-digit growth despite the challenging environment. Retail and wholesale showed solid growth, partially offset by a softer e-commerce performance, reflecting post-COVID normalization of consumer behavior. From a category standpoint, fragrance sales grew at more than twice the overall pace, aligned with the Aesop's category diversification strategy. The fragrances market has outgrown the market as a whole, especially the premium segment, indicating the importance of this category for the future of the company.
The highlight of the quarter was, of course, Aesop’s successful China market entry with the launch of two physical stores, along with the aesop.com platform and a domestic T-Mall operation. Performance has exceeded expectations and these stores are already the top two sellers among Aesop's 287 signature stores worldwide. Q4 adjusted EBITDA margin was 28.6%, up 190 bps year-over-year, still pressured by planned investments to deliver sustainable future growth, notably in technology, supply chain enhancements and China market entry, but more than offset by sales leverage and other efficiencies.
As mentioned, in the notice to the market published on November 30th, Natura &Co continues to evaluate strategic alternatives for Aesop. We will keep the market updated as soon as we have something concrete to communicate.
Let me now hand back to Fábio.
I think now we're ready here to go for the Q&A. And we can start. Please address to [John Santos], help me here.
We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from João Soares of Citibank.
I have two questions if I may. First one, I just wanted to understand better what's happening in Latam. I understand there was a big impact of Argentina, some accounting issues. So if you could talk a little bit more into how that -- the revenue of that operation, how should we expect the performance of this operation and understand the margin dynamics of that operation as well? I think that seasonally we're expecting a better fourth quarter. So if we could understand -- I mean, after all the initiatives that you took throughout the year, how should we think about the recovery rate of that EBITDA margin? And if I may just one last one on TBS. There was a big improvement sequentially on EBITDA margin. I just wanted to understand how sustainable is this margin recovery at TBS, please?
João, can you please repeat the first part of your question? It's not clear here for us if it's only Latam or if it's, everything? So if you can repeat? That will be great.
Sure, Guil. Just especially looking to Hispanic, both at Natura and Avon, I just wanted to understand -- because it was big impact of Argentina and accounting. Also if you could -- please understand the underlying operation, specifically on Hispanic, which was for -- at least for us it was worse than what we expected?
Sure. Well thank you João. I'm going to tackle here the first part of the question. And then I'm going to pass to João to talk a little bit about the situation and the operation, specifically in Argentina and the rest of Hispanic, right? So first, let me just be extremely clear that there is no accounting changes whatsoever from this year to previous years, right? We're still following the accounting practices related to IFRS 16 to IFRS 5, so it's 100% in line with what we have done in the past, right?
Now, Argentina of course, it has a special situation given the hyperinflation, which as you know, João, it impacts all the lines of the P&L, right? It's not only the revenue, not only the costs, but it's throughout the P&L. Of course through the price dynamics, in revenues, and of course, through the inflationary dynamics in the cost side, right? There is no difference whatsoever to what we have done in the year.
Now, given the very high inflation that we saw in 2022, especially in the second half of the year, especially compared to the previous year 2021, of course, you can assume that those adjustments, especially impacting EBITDA margin, they were higher in 2022. So a headwind compared to 2021, right? But it's important to mention that the business there remains very healthy. Natura specifically, and João’s is going to comment a little bit on that, doing extremely -- continues to do extremely, extremely, extremely well. The margins of Natura in Hispanic Latam, not only in Argentina, but Argentina as well but in Hispanic Latam in general, they continue to be healthy. And of course, as we have communicated before, the main issue in Hispanic Latam has been the profitability of the Avon brand, which is the main focus of the [ALO] project going forward and this is why we have been communicating the [ALO] is the cornerstone, is transformational for us to get the margin for Latam back to the levels where we want it to be.
So I hope that is clear. From accounting perspective, there's absolutely no change whatsoever. There is a headwind, of course, given the inflationary pressures that we saw in the second half of last year, which was 7%. But now I'm going to pass to João so he can comment a little bit more on the operational results.
João, I wonder if your question is trying to -- is inferring that the drop in Latin American profitability is coming from Argentina. So I just want to reinforce that that's not the reason why you see the reduced profitability in Latin America, which comes from other effects, I can comment later, if you prefer. So -- but just talking about the operation itself, preliminary data indicates that Natura &Co in Latin America defended its market share throughout the year, increasing market share in the second half; in Hispanic Latin America, Natura grew market share, whereas we lost some market share in Avon. We do see macro, socioeconomic headwinds in some countries. Chile, as you followed from other companies, consumption has dropped. Peru in the fourth quarter had to face some political issues which lead to strikes, on street demonstrations. And in Argentina, we faced difficulties with the shortage of goods. So there were restriction in imports of goods which reflected on a softer top line growth in those countries, only partially compensated by our performance in Mexico and Colombia.
As I said, Natura is -- it continues to grow, albeit a bit softer than before because of these macro headwinds. And as I said, and as Guil just mentioned, in the case of Avon, we are restructuring the operation more thoroughly at this point in time, restricting Fashion and Home but by choice in preparation for Wave 2. But overall the operation is pretty healthy, as well its margin.
And João let me talk about the second part of your question, which is related to The Body Shop. So first, of course, let me remind everybody that from a seasonality perspective, The Body Shop has historically a very strong Q4 compared to the previous quarters, right? So that's again the quarter where margins and cash flow for The Body Shop are the highest. In the case of The Body Shop in this particular quarter, we had some headwinds coming from gross margin, right, given the inflationary pressure. And as we also have discussed before, right, the fact that we were not that aggressive from a net price increase perspective, right, given the changes, the momentum of the retail especially in some markets and the head franchises inventory level. So that impacted the gross margin by 350 bps negatively. But of course, through the cost containment actions that we exercised during the last part of the year, we are able to offset great part of that amount through SG&A, right?
Now those actions, of course -- most of them, they are structural changes and they will remain. There are some small technical changes as well -- technical movements as well in the last part of the year. But it's very important to say and to comment that our focus of rightsizing The Body Shop organization is there, right? And again, there are some actions that we disclosed that we took in the first quarter of 2023, which of course doesn't -- they don't reflect in the numbers of last quarter, of Q4 2022, such as the closure of TBS At Home in the U.S. and the dedicated distribution center in the UK as well restructuring of the global management structure, by which we reduced leadership positions by almost 25%, and again, further headcount reductions in the rest of the global overhead staffing. So all of those things, again, we continue to deliver in order to protect the margin of The Body Shop. So yes, it's a big focus and we are expecting The Body Shop to improve margins compared to 2022 going forward.
The next question comes from Danniela Eiger of XP Investiment. Please go ahead.
Hi. Good morning. Thanks for taking my question. I have two from my side. The first on Aesop. Something that caught our attention was actually the restatement of the past results of the company, mainly on the gross margin line. If you could just provide some color on why that was done throughout the past quarters? That would be great. And also, I think that, that one is for Guil is mainly related to leverage. The picture of the quarter called the attention, especially when looking at EBITDA ex-IFRS reaching almost 8x. I understand that you don't have like a short-term financial issue in terms of liquidity, because you actually -- sorry, not sure if that was cut. But I understand that, you don't have any like short-term liquidity issues. But just wondering, how we should think about the deleveraging process in terms of leverage to get that done and also the speed throughout the quarter? Thank you.
Thanks, Danniela. So just to confirm, your first question was on the Aesop standardization in terms of the gross margin, from SG&A, right, a reclassification that we did. And the second one was related to leverage and how we see that going forward. Is that correct?
Yes, that's it.
So again, the Aesop was an adjustment -- an accounting adjustment that we did. So there is no impact on previous numbers in terms of EBITDA, or net income, right? So it was just a reclassification from some logistic costs that were sitting in selling expenses and basically, they were reclassified to the gross margin, right? That's why, again, there was a negative impact when you look at the gross margin of the company. Even though it was just an accounting reclassification to standardize the way that we look at numbers correctly across the BUs, right? But again, there's no -- as you can see, there's no impact in previous numbers in terms of EBITDA, net income or anything below EBITDA. Just to be clear on that. And that will be the way that we'll continue to present this Aesop's numbers going forward.
Now on leverage, in particular, right? I mean we -- of course, we finished the year with a high leverage, and that is mainly explained by the very low reported EBITDA in the quarter and of course, in the year, right? So the reported EBITDA of course, was impacted by the performance of the business, needless to say, but also through several one-offs impacts and those one-offs are transformational, restructuring, corporate rightsizing, and impairments, which were again a big number, especially in Q4 of the year, which brought the reported EBITDA of the year to low levels compared to historical numbers.
And of course, if your denominator is low, your leverage is high, right? Despite the fact of course, that we have a significant improvement in terms of cash conversion, and that will remain the focus.
So on that, I'd like to say that, of course, we continue to focus as a company all across the BUs and in the Holding, we continue to focus on our two priorities for 2023: EBITDA margin, and cash flows. So margin has to improve right again -- 2022, with less than 9% adjusted EBITDA margin in the year. And of course, that number has to significantly improve going forward and the BUs and the teams are working on that. And we need to continue our efforts in terms of cash conversion, right, which again, we already start seeing that in Q3 and Q4. And that effort will remain in 2023 in order, of course, to continue to reduce the net debt impact.
On top of that, right, which again, it's important to mention as Fábio has said, we are working on our capital structure, right, and we are working on the actions to take to improve our capital structure. And of course, as soon as we have concrete news on that, we will communicate the market, but it is a big focus for us. As of course, you can see the impact of net interest expense in our results and how interest rates is impacting of course not only the cash but the P&L profile of Natura &Co.
Next question comes from Thiago Macruz of Itaú Unibanco.
Guys, my question is regarding a potential divestment of the Aesop operation. I mean, I want to understand how you guys would be back on a potential transaction like that in terms of capital gains? Is there any sort of tax shields that you guys could eventually use to diminish that amount? Is my question. Thank you.
Hey, Macruz, thanks for the question. So let me revert to public information to what we can say. As you can see, in the material facts that we issue to the market, we are evaluating and studying, structural and alternatives for Aesop going forward, right? Of course, that process, that project is ongoing and we cannot communicate anything to the market, right? So several alternatives were on the table; and of course, as we continue to evaluate and as we continue to study, we continue to funnel those alternatives to what we believe is the right thing for Natura &Co at this moment, but I know that Macruz, you appreciate that we cannot say anything that it's again, not yet communicated. And of course, we're not going to comment on tax or anything like that at this point. And as soon as we have news on the Aesop process, we will communicate the market in a more comprehensive way.
Next question comes from Bob Ford of Bank of America.
JP, Natura Brazil growth was very impressive in the quarter. Can you comment a little bit on pricing, competitive dynamics, gross margin and operating profitability for Natura Brazil as well as the momentum for the brand in early 2023? And then Guil, how are you thinking about market exits and Fábio as well, right? How are you thinking about market exits for Avon International this year, the fixed cost structure of The Body Shop and for the restructuring and impairment charges for 2023? Thank you.
Hi, Bob. JP here. Indeed, we are passing prices across the entire region. You can probably appreciate that when you see that we are catching up in terms of gross margin, and there's still room to continue to price in a couple of countries, right? So a significant portion of our growth across the region came from prices, but not sacrificing volumes in any significant way. So we are pretty glad with that. Notably with Natura in Brazil, Natura in Brazil is living through a very, very good moment. We see an acceleration of the digitalization, personalization features through all our business model, which is definitely helping us to navigate through the changes in the markets. So very glad with that.
I also want to say that behind the aggregate numbers even when you look at Avon, when you see increased profitability for CFT, that is showing that we are able to price up across the region. We are facing other difficulties related to the shrinkage of the Fashion and Home category as previously announced. But even there, with Avon and CFT, I'm pretty glad with the fact that we are being able to price up. Okay?
Thank you. Let me hand over to Guil.
Hey, Bob. Thanks for the question. Yes, as Fábio have mentioned, again, I'm going to start. And of course, if Fábio has anything to add, feel free, right? Especially in the short and medium-term, the revision of footprint is an action that both Avon International and The Body Shop were taken in order to improve profitability, right? So just talking a little bit about Avon International, right, we continue to see good momentum coming from a few geographies, right, especially when we look at the Middle East and Asia -- Turkey, Middle East and Asia region, and we will look at APAC with a very high weight and performance of Philippines, those regions continue to do well.
Now of course, Central, Eastern Europe in 2022 was impacted by the war in Ukraine, but we see resilience. We see some countries improving results. And that is also seen in the operational KPIs, especially with the new commercial model. Now Western Europe, again, mainly the developed markets are the regions that we are seeing softer results, right?
Now the strategy for Avon will continue to go two-folds. First is, of course, looking at markets with EBITDA and cash flow, particularly cash flow have been negative. And again, with no plans to turnaround that quickly, right? So we will continue to exit those markets, as we have seen in 2022 and we are working on that. Of course, that exiting market is not just pressing a button, right? It requires a lot of work. And again, hopefully, we have more news to communicate to the market as we progress.
And the second part is to continue to work on the transformational costs in the markets that we operate. So more recently, we announced the one Europe structure for Avon, right, in which basically were merging the two sub-BUs into one leadership team only, with a significant reduction of headcount and in a more lean and agile -- and of course, giving more focus as well to the countries that we believe, that will make a difference in the future. So that again will also continue. So you should expect to see more news from Avon in terms of market exits as soon as -- as well as more news in terms of transformational savings across the BU.
On The Body Shop, you are also correct, Bob, that more recently also became a focus of ours to look again at our footprint and focus not only the core channels, right, that are basically retail, e-commerce and franchises, the franchises model, which is very important for The Body Shop, but also at the right geographies, right? So a few markets that we used to operate on a standalone basis, right, those markets were significantly impacting EBITDA margin, especially on a few channels. And that's the case, of course of the U.S. as we communicated, that we are basically ending the operations of The Body Shop at Home in the country, and of course, also looking to optimize the rest of the channels in North America in general, right? We'll continue of course to focus on the markets that we believe that we have, again, a strong competitive advantage. UK being of course, our main market, right, but also some very strong markets that again -- we have our own stores or our franchises models in Europe in the rest of the world. But again, you should also expect to see some news about rightsizing and exiting some markets for The Body Shop doing 2023.
And just to add, if you allow me, in terms of Avon International. We are revisiting our presence in countries which are not profitable, and we will invest in countries which are growing and being profitable. But revisiting the ones which are not profitable means also going from full presence possibly to head franchise possibly, to distribution possibly, to an exit. So all this -- and that’s depending on our penetration, our brand, it depends on what kind of agreement we can reach. And at The Body Shop, it may be something like that. Although we are more -- we have largely with head franchise went outside the key countries. But just to clarify that is not from presence to exit, but there are scales in what kind of presence we want to have in markets where we may have some opportunity, but with no investment, investment only in the countries where we have seen growth.
And just to be clear, sorry, I make a correction for us, was not clear. The Europe plan that I announced for Avon is basically, the merge of CE and Western European one cluster, is the marketing and the brochure plan, and of course, some leadership positions. But as I mentioned, we'll continue to focus in the right markets for that region. So I just wanted to clarify this.
And just one little follow-up and that is, JP, can you comment a little bit about the momentum for Natura Brazil going into early 2023 please?
Yes. Well, it's a strong operation that remains strong as we speak.
The next question comes from Joseph Giordano of JP Morgan.
I have a few ones that went -- are still to touch upon on Latam results. So first, I'd like to see if you can help us quantify the impact of IAS 29 impacts on the conversion of Argentina sales, given hyperinflation? So Guil just mentioned like headwinds and tailwinds, we saw that throughout the region in companies that are operating in Argentina, that results for the fourth quarter actually had like massive accounting headwinds that actually distorted the P&L in the sense that it kind of hides the material cash flow improvements you guys have been showing. So that's my first question. So try to quantify a little bit the IAS 29 impact on Latin America.
The second one is about the higher bonus provisions. I think like the market wasn't expecting such provisions given the EBITDA decline. So my question to you -- and again, like the EBITDA decline, and it goes back with the cash flow improvements, right? So maybe the EBITDA is not a good proxy in Latin America to the cash flow generation at this point. So my question to you is like what changes in terms of KPIs for the variable compensation?
And last but not least, like, if you have like any kind of like short and mid-term leveraged targets to kind of guide us through the potential improvements of the free cash over the next quarters? Thank you very much.
Thank you, Joe. Let me start of course, answering your questions here and I will pass through to João if he wants to say anything else about Latam. And so on the IAS 29, to your point, right? As I mentioned in the previous answer, we had a headwind in Q4 coming from Latam, of course, when we say Latam, we're talking mainly about Argentina, right? Now to quantify that, you can estimate that the headwind impact on margin was around 70 bps, right? It's not again, that meaningful given the weight of Argentina in Latam but was significant given, of course, what we saw in terms of hyperinflation and the FX dynamics in the country, right? So again, it's very difficult to estimate and to project what that impact is going to be in 2023. But that was basically what we saw in terms of Latam impact only -- I'm not saying consolidated results, but Latam impacting margins for Q4 of 2022. And of course, you can get more information on the IAS 29 and the hyperinflation, on how we account for that in our financial release, right, in the ITR. But that was basically just to answer your question on how to quantify that. I think that goes a little bit to what I just said.
Now, the impact on G&A, of course, in Q4, there was a significant impact, especially when we look at Avon Latam and Avon International. So basically, let me start saying that, again, that we're phasing off expenses. And it's not only related to incentives, right, that we're phasing off different expenses, Q3 to Q4, and also Q4 to Q1 of this year, that impacted the results of the quarter, right? Also inflationary pressures on G&A, in the case of Latam costs related, of course, to [ALO] and, of course, [IND] as well, which will continue to invest for the Natura brand.
On the incentives part, I want to be a little bit clearer, right? First of all, this is not again, an allocation to one person or to only a group of individuals, right? This is basically an extraordinary change that the company did in the half of the year, in which we try to allocate a higher weight of incentives to cash flow performance as we have communicated to align on our priorities, right? Of course, that was an extraordinary change that we did in 2022 with also the clear separation of H1 and H2 results.
Now we have accrued basically none to very little incentives in the first nine months of the year, and with the stronger cash performance coming in the second half, especially of course, given by the high seasonal Q4, that's where again we saw the higher impact given again that we have communicated and we'll continue to communicate, the cash flow is a strong priority for ours. Now you should not expect that level of G&A as part of the underlying business, just to be clear, okay? So that was -- Q4 was impacted by significant one-offs. One of them being just what I described. But going forward, I should not expect to see the same levels of G&A, not for Latam, Avon International or for the group. I'm going to pass to João just to see if he has anything else to mention about Latam. And then I'll come back to answer your last question on leverage.
Thanks, Guil. I do want to comment, Joseph. So as I read most of your reports earlier today, I fully understand that the EBITDA margin of -- Latin American EBITDA margin came as a negative surprise. However, I just want to reinforce my full confidence on our journey to recover profitability. And I wanted to take you through some of the elements. As just mentioned a few minutes ago, our business in Brazil are doing extremely well. Natura, a highlight and Avon stabilized and with improved profitability. In Hispanic Latin America, we faced some macro headwinds. But as we speak, in Q1, they are less strict than they were in Q4 in Argentina and Chile, and Peru. And Natura brand has proven a bold story of profitable growth there. And as regards Avon, all the restructuring that we are doing, which will create turbulence in terms of top-line, is targeted at improved profitability and cash generation. Moreover…
[Technical difficulty]
Sorry. So I hope, I'm still on. So then I was...
[Technical difficulty]
What's going on? Okay. Sorry for the…
Joseph, are you hearing us?
I'm still here, but I'm hearing the operator.
Okay. Shall we try again? Just a second, people. Okay. Yes. Shall we try again?
You guys are back.
Hello. Good. Thanks. So I described what we are doing in terms of top-line, then I was developing -- gross margin. I just mentioned our efforts to price up and recover gross margin, which has been a successful movement so far.
And finally you know that we have a story of trimming down our G&A, capping it to a healthy level, which we continue to do, which will be easier now with Wave 2, right? And Guil just mentioned, a significant portion of the G&A in Q4 related to phasing of non-recurring items. So, just to say that we are pretty confident in our journey to recover profitability going forward. Guil?
And then on the leverage, Joe, we haven't communicated basically what is the optimal level of capital structure for the company. Of course, the focus right now is to work on the capital structures to reduce leverage. And as Fábio mentioned right in the beginning, by doing that, allowing us to have the right firepower to invest in our priorities. So you can, of course, assume that we'll continue to have to work on the two priorities that I mentioned, which are profitability and cash conversion, but also in structural items to improve the capital structure in the short-term. And once we are in that position, then we'll communicate what is the optimal leverage for the company, the optimal capital structure for the company going forwards.
And JP just a follow-up here. So you guys mentioned like both about like non-recurring G&A expenses, both at the perimeters of Latin America and Avon International. So can you help us quantifying that? So that's like, really, really useful.
Joe, you can assume that a significant portion of the G&A increase is coming by those non-recurring. So we're not going to break down but you can assume that is the majority of the G&A increase in the quarter is coming from what we see here is non-recurring expenses. Again, part of that, they were again distribution of quarterly phases; part of that, they were tactical decisions that we decided to invest. But you can assume that most of those -- most of the increase, or actually the decrease that we saw in EBITDA, and the increase that we saw SG&A in particular, for Avon international and Latam, they are non-recurring going forward. And as Guil mentioned, we're confident in our plan to improve EBITDA margin this year.
Next question comes from Eric Huang of Santander.
So from our side, we have seen these improvements in cash generation. So we would like to better understand if you could breakdown, how much of these improvements were related to seasonality and how much were structural? And going forward, what are the biggest opportunities for you to be captured in the cash profiles?
Thank you, Eric. I'm going to take that one. And again, needless for me to repeat the focus of the company in this particular item going forward, so I'm going to skip that. But when you look at the cash flow results that we had, especially in the second half of the year, right? You can see that the bulk of the improvement, even though EBITDA -- EBITDA margin was compress, the bulk of that improvement comes from cash conversion items, right? And with that's basically I mean, working capital, the net CapEx and the cash tax rate as well.
The biggest item of improvement in the last quarter of the year, and in the second half in general and full year, was inventories, right, given where we were last year. And what we communicated again, that we wanted to be in the big focus on reducing inventories across the region, but with a strong focus in some Latam countries, right? A great part of that is coming from Fashion and Home and the bulk of the inventories reduction is coming from finished products. So we are in a very good position right now in terms of supply and service level at least in our view.
Now, of course, as we mentioned, there is seasonality that impacts the business but the important is -- the important thing is that when you look at the 12 months combined, we continue to deliver optimizations in terms of working capital as percentage of the revenues.
On the payable side, we remain flat in the year, mainly caused by a reduction in CapEx and of course by lower expenses as well in terms of some important items in Q4; lower purchase, which impacted of course the payables items. Even though we have implemented in the second half of the year some important actions that we are confident that we'll continue to see results going forward in 2023 and receivables in particular, of course, negatively impacting the cash flow. But that's a mix of BUs. As you know, most of our receivables, they sit in Latam, and with Latam in particular, Brazil, showing strong growth in the quarter, again, with Natura growing more than 17%. And Avon for the first time in the last six quarters in positive territory, posting high single digits in terms of growth with Fashion and Home actually, in that equation. That is why again, we're seeing the headwinds in terms of receivables.
In CapEx as well, again, as I mentioned optimization that you should expect to continue in the same theme of cash tax rate. So in terms of seasonality, again, there is of course, quarters that impact the cash flow. But the important thing is that when you look at the 12 months -- past 12 months, this number has improved and will continue to improve with our actions that we're taking. We're confident on that and there mobilized on that topic.
Next question comes from Andrew Ruben of Morgan Stanley.
I'd be interested to hear more about the Wave 2 integration plans, and specifically, how that's going to differ for Brazil versus the rest of Latam? We saw in the release some of the regions Wave 1 and Wave 2 would occur simultaneously. So curious what that would involve? And then you mentioned with integration costs that could be offset within Latam asset divestment. So curious if you could provide more detail on what that might include as well? Thank you very much.
Hi, Andrew. JP here. So as previously announced, we're starting Wave 2 in Peru in Q2 this year, which followed by Colombia and Brazil in the second half. Indeed, we are looking at assets -- divestment of some assets that could partially offset the investments related to the implementation. And the difference in Brazil is -- well I think it's twofold. Brazil is the largest, so we need to be mindful of how to implement it in a sort of phased way, although to get it behind us before the end of the year. And the other thing is that Avon in Brazil has already gone through most of the structural changes which are necessary for this combination, which is not the case in every single country. So when you look at Peru, the first one we are doing, I mean, there we are simultaneously making structural changes to Avon's business commercial model and combining it with Natura. So that puts additional pressure on the Peruvian operation, which would not be the case in some other countries. But these are the main differences.
That's all the time we have for questions today. I would like to turn the call back over to Fábio Barbosa for closing remarks.
Thank you very much. Thanks everyone for following the call here. It was a good dig into the details and so on, so that we do not lose the perspective of what is the strategy that we are following. I will quickly go through them again.
So first, the structural steps are in motion across the group to improve our performance. This includes accelerating the integration of Natura and Avon in Latin America, optimization of Avon's international footprint and rightsizing The Body Shop. At Aesop, we are evaluating strategic options, aiming to improve the company's capital structure. Second, our priorities of focus on cash generation and improving the company's capital structure, build the path to unlocking significant value with some first green shoots appearing in the fourth quarter numbers already. The whole organization is mobilized and incentivized to achieve these goals. Third, looking forward, we are confident that the actions we are taking will position Natura &Company to focus not only on profitability and cash, but also return to focus on growth. And fourth, 2023 will likely be another challenging year, but we expect a continuous improvement in revenues, as well as a better profitability and cash generation, while continuing to invest in the transformational actions just mentioned.
So we are continuing our ongoing work to improve the fundamentals of our brands and businesses. Our priority remains very clear, we are strongly focused on improving margins and generating cash flow, and the teams in the BU are all mobilized and incentivized to achieve these goals.
Well, thank you very much for your attention from everyone, and we will be ready to talk in the next few weeks and day -- days and weeks. Thank you.
Conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.