Natura &Co: Consistent adjusted EBITDA margin improvement alongside strengthened balance sheet in Q3
Wave 2 of integration between Natura and Avon launched in Brazil with encouraging early results; Natura &Co returns to a positive net cash position thanks to proceeds from Aesop sale
SÃO PAULO, Nov. 14, 2023 /PRNewswire/ -- Natura &Co (NYSE – NTCO; B3 – NTCO3) continued to improve its profit margins in the third quarter, while deleveraging its balance sheet thanks to the proceeds of the sale of Aesop, which closed on August 30th.
Natura &Co's Q3 consolidated net revenue stood at R$ 7.5 billion, broadly stable at constant currency (-0.7% at CC and -10.5% in BRL), with the Natura brand posting strong growth in Brazil and Latin America. Gross margin grew by 310 bps vs Q3 of last year to 65.3%, and adjusted EBITDA margin was 10%, up 190 bps vs the same period last year, reflecting improving margins in all three business units, Natura &Co Latam, Avon International and The Body Shop, as well as cost discipline. Reported net income surged to 7 billion Reais from a loss of R$ (560) million in the same period, boosted by the capital gain from the sale of Aesop. Underlying Net Income excluding this exceptional gain, as well as transformation and restructuring costs and PPA effects, was R$ 745 million, also improving from R$ (198) million in Q3-22. The Group ended the quarter with a solid cash position of R$ 6.8 billion and a debt-to-EBITDA ratio of -0.37x (vs 4.17x at the end of Q2-23 and 2.85x in Q3-22) after prepaying more than half of its debt and accrued interest, or approximately US$1.6 billion, in the quarter.
Fabio Barbosa, Group CEO of Natura &Co, declared: "Natura &Co Q3's performance continued the trend of the first two quarters of the year, showing a strong expansion of both Gross margin and EBITDA margin versus the prior year, despite a small deceleration in revenue, mainly caused by the implementation of Wave 2 in Latam and the continuing declining trend in sales at The Body Shop.
The main highlight of the quarter was the launch of Wave 2 in Brazil, which showed positive initial results, delivering combined YoY revenue growth in the CFT category. Productivity gains and cross-selling more than offset the expected channel reduction. Peru and Colombia have continued the roll-out of the integration, started in the first half of the year, showing further improvements in productivity. Although there have been temporary challenges in the channel, we have seen the actions implemented by the team yielding early signs of recovery ahead of the holiday season. We are also encouraged by the margin expansion of those countries in the most recent cycles, which is the main objective of Project Elo. Avon International posted broadly stable top line and further margin improvements, reaching high-single-digit adjusted EBITDA margin.
The proceeds from the sale of Aesop, closed in late August, enabled us to quickly advance in our liability management plan, with more than half of our debt already prepaid by the end of the quarter. This is an important step to unlock sustainable value for our investors and deliver on our financial priorities of maintaining a strong capital structure, strict financial discipline on costs and expenses and boosting cash conversion. On the latter, we reached a neutral cash generation this quarter despite the normal seasonal cash consumption to build up inventories for the holiday season.
Furthermore, marking the third year of our sustainability vision, after having made substantial progress towards our goals set in 2020, our approach has evolved. We have realigned our metrics, and targets to address the pressing concerns of our time. We have been a partner of the Union for Ethical Biotrade (UEBT) for over fifteen years and together we will work towards Natura &Co's adoption of regenerative practices to deliver even more positive impact.
Finally, we recently announced updates related to The Body Shop sale process and we will keep the market informed of any relevant news. This is another important step to continue to streamline our business, a journey started in the second half of 2022. We are confident that our enhanced capital structure, combined with a laser-focus on our key priorities, will allow us to unlock significant value for our shareholders in the future through both top line growth and margin expansion."
Performance by business unit:
Natura &Co Latam's net sales were up by 2.5% in constant currency ("CC") and down 9.4% in BRL. CC growth was driven by double-digit growth at the Natura brand (+18.6% at CC and +5.3% in BRL). The Natura brand continued to show strong momentum, with growth of 10.5% in Brazil, as the combined Natura and Avon commercial cycles more than offset some temporary operational setbacks during preparations for the Wave 2 roll-out. In Hispanic Latam, net revenue was up 37.1% at constant currency (-2.6% in BRL). Excluding Argentina, revenue in Hispanic markets was up in low-single digits in CC, still impacted by a softer, yet positive, performance in Mexico. The Avon brand posted a sales decrease of 11.6% in CC in the Beauty segment. In Brazil, revenue in the Beauty segment was down 24.8% at CC, mainly due to preparations for the Wave 2 roll-out while in Hispanic markets, they decreased by 1.5% at CC. Home & Style was down 41.6% in Brazil and down 37.6% in Hispanic Latam at CC, in line with our radical reduction of the portfolio. Both in Brazil and Peru and Colombia, operating KPIs such as cross-sell and productivity are showing improvement following the roll-out of Wave 2. Adjusted EBITDA margin was up by a solid 100 basis points to 12.3%. Margin benefited from strong gross margin improvement, up 320 bps to 63.7%, benefitting from the continued effects of price increases, richer mix and marketing efforts.
Avon International's revenue was down 2.3% at CC (-11.6% in BRL.) The Beauty category posted growth of 1.8%, notably driven by fragrance. Digitalization is progressing and the use of digital tools reached 31.6%, with digital sales representing 7% of the total, up by 1.1 percentage point year-on-year. Adjusted EBITDA margin was 8%, up 440 bps, driven by gross margin expansion of 490 bps thanks to price increases and product mix.
The Body Shop's Q3 net revenue declined by 13.2% at constant currency (-15% in BRL.) Combined sales of core distribution channels (stores, e-commerce and franchise) showed a high-single digit decline in CC. Adjusted EBITDA margin improved again this quarter, growing by 140 basis points to 7.7%, thanks to another quarter of gross margin growth, up 30 bps to 76.6%, combined with strict cost control. The Body Shop continues to work on returning to sustainable growth.
The Q3 numbers have been restated to exclude Aesop's operating performance and the comparable 2022 numbers have been restated accordingly, but net income in both periods also includes discontinued activities.
About Natura &Co
Natura &Co is a global purpose-driven, group uniting Natura, Avon, and The Body Shop. We connect more than 200 million clients worldwide, engaging them through 7 million dedicated Consultants and Representatives, 2,000 stores and franchises, and 30,000 employees.
We believe in promoting real positive economic, social, and environmental impact. We believe that the world does not need another big company. The world needs symbols of change capable of blazing new trails and inspiring others to follow. We believe in the power of cooperation, co-creation, and collaboration for a better way of living and doing business.
We are Natura &Co.
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