Good morning, everyone. Thank you for waiting, and welcome to the Natura &Co fourth quarter and full year 2023 earnings conference call. It's important to point out that we have a simultaneous translation tool available on the platform. To access it, just click on the interpretation button through the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. For those who are listening to the video conference in Portuguese, there's the option to mute the original audio in English by clicking on "Mute Original Audio." 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 refer to during this call is available on the Natura &Co investor relations website.
I will now hand it over to Fábio Barbosa. Please, sir, go ahead.
Thank you, and good morning, everyone. We greatly appreciate your participation today. 2023 was a year of key advancements in our strategy operations, financial performance, and enhanced overall financial position. I'm encouraged that we delivered solid results in the fourth quarter and for the forward full year, marking significant progress in our transformation. I would like to start with a quick overview of what drove our 2023 performance and contributed to our success. The past year was driven by three key enablers that we had established back in June 2022. They were: streamline our business, focus on profitability and cash conversion versus revenue growth, and advanced structure projects. Beginning with simplification, we closed the sales of both Aesop and The Body Shop in the second half of the year. We also continued to optimize the holding structure by giving more autonomy and accountability to the business units.
Early this year, we announced the delisting of our ADR from the New York Stock Exchange, and last month we released the material fact informing the market our plan for assessing a potential separation of Natura Cosméticos, Latin, and Avon. As you all know, we are still in the very early stage of this process, and of note, there can be no assurance at this time that the separation will be approved by the board. We'll keep you and the market posted with any relevant update on this process. Next, financials. We are pleased that our business is moving in the right direction. We strengthened our margins, improved our cash flow, and the leverage to be in the net cash position at year-end.
The positive free cash flow to firm, alongside our much stronger balance sheet, allow us to start moving to a more optimal capital structure and to announce a BRL 979 million dividend payment for this year. Moving to the strategic projects. In Brazil, Wave 2 already led to a fourth quarter where we saw enhanced productivity, cross-selling, and recovery of the distribution channel activity. Furthermore, the initial challenge mentioned in the last earnings call showed improvements. At Avon International, I would highlight that the entire business is already being managed from two lead regions, down from the previous four lead ones, showing further simplification of the business model. Last, our strategic focus and investment in our ESG goals has been and will always be a priority for us and our key stakeholder, and is totally embedded in our business strategy.
In this sense, I want to highlight important initiatives from this year and that we are very proud of, which have to do with our people. We not only met our goals to ensure a living wage for all Natura Cosméticos employees, but also reaffirmed our commitment to eradicating the gender pay gap across the organization. With that, I will turn the call over to Gui, who will provide more details on our 2023 financial results. Gui.
Thank you, Fábio, and hello, everyone. I'll start on slide six with consolidated revenue from Natura Cosméticos, which stood at BRL 6.6 billion, up 4.5% in constant currency. In BRL, sales were down 17.4%, reflecting depreciation of some currencies in the countries in which we operate versus the real and the impact of hyperinflation accounting. Excluding Argentina, this decline was 5.1%. We'll look at the performance review shortly, but in a nutshell, we posted constant currency growth in Natura Brand, which was up 8.5%, but down 4.7% excluding Argentina, mainly driven by a solid Natura Brazil performance offset by the Avon Brand. At Avon Latam, we saw an expected decrease given the rollout of Wave 2 , which included planning reduction in reps coupled with portfolio organization, especially in the Home & Style category.
On a positive note, we could see improvement in the downward trend in Brazil when we compared Q4 to Q3. The changes implemented in the Home & Style category were also responsible for most of the decline seen at Avon International. Now, turning to slide seven, the adjusted EBITDA margin was 10.1% in Q4, expanding 370 bps year-over-year from 6.4% in Q4 2022, and marking another strong quarterly improvement with solid expansion across all businesses. Excluding the hyperinflation accounting impact, the expansion would have been 510 bps year-over-year. This reflects improved results at Avon International, with margin expansion of 550 bps year-over-year driven by both higher gross margin and transformational savings being implemented, along with a strong impact from SG&A savings. Natura Cosméticos Latam also registered solid margin expansion of 250 bps year-over-year, also driven by higher gross margin and improving G&A expenses.
It is important to note that we saw expansion of EBITDA margin in every quarter during 2023. We're particularly pleased with the trend in corporate expenses, which have declined approximately 40% in over two years, as Fábio also mentioned. The improvement in our cost structure is a big contributor to our improved adjusted EBITDA margin. Moving to slide eight, let's now look at our bottom line. The reported net loss in Q4 2023 was BRL 2.7 billion, compared to a net loss of BRL 890 million in the same period last year. This is mainly explained by discontinued operations, which includes the capital loss due to the The Body Shop divestment and the Avon International non-cash goodwill impairment of BRL 664 million.
When we look at the underlying net income, which excludes transformational costs, restructuring costs, discontinued operations, and PPA effects from net income, we get to a net loss of BRL 506 million versus a loss of BRL 49 million in Q4 last year, as higher adjusted EBITDA was more than offset by higher net financial expenses mainly related to the peso devaluation, hyperinflation accounting, and also tax expenses given the mix of profitable and unprofitable countries. In the year, reported net income was positive BRL 3 billion, an improvement from the loss of BRL 2.8 billion reported in 2022. In full year 2023, free cash flow from continued operations was minus BRL 2.8 billion, mainly impacted by the BRL 1.5 billion settlement of the derivatives related to the equity management exercise we executed in the second half of the year and a higher working capital consumption.
Free cash flow to firm in the same period was positive BRL 59 million, adding back the effects and interest on debt and derivative lines versus negative BRL 561 million reported in full year 2022. Working capital was impacted by accounts receivables, given higher revenue sales from Natura Brazil that is exposed to the longest receivable terms, and inventories impacted by write-offs as a consequence of portfolio optimization in Latin Wave Two. On slide 10, you can see our liquidity profile. We ended the quarter with a cash balance of BRL 7.8 billion, up from BRL 6 billion a year ago as a direct result of the sale of Aesop. The proceeds from the sale allow us to pay down most of our debt in the second half, becoming cash positive in BRL 1.7 billion and reaching a negative net debt to EBITDA ratio of -0.79x.
During the quarter, we also concluded the tender offer of $880 million related to the bonds maturing in May 2028 and April 2029. The average maturity of our debt now is 4.7 years. Our balance sheet is strong and sufficient to support our investments in growing the business, and combined with a positive free cash flow, allow us to move to a more optimal capital structure, and we are announcing BRL 980 million in dividends payment for this year. We will maintain a balanced and disciplined approach to capital allocation with respect to our strategic priorities. Before turning to our performance by business unit, let me update you on our Wave 2 progress. The rollouts continue to evolve with a solid performance from the Natura Brand in Brazil and a recovering trend from Avon.
We continue to see enhanced productivity and cross-selling, coupled with a recovering distribution channel activity in Brazil during Q4. We're also already noticing improving trends related to some of the issues that we disclosed last quarter. In Brazil, more specifically, most of the backlog of delayed deliveries was resolved in the beginning of the year, restoring on-time delivery and lead times for both brands to their pre-disruption level. The efforts to reorganize sales leadership are already showing signs of stabilization, and the performance indicators are already aligning with historical norms. The level of inventory shortage has seen improvements on a quarter-over-quarter basis, despite the seasonal strong demand in Q4. It is worth noting that these adjustments are ongoing as we speak, as we get to better understand the new levels of demand from the combined business.
In Hispanic Latam, the level of service in Peru and Colombia is also better, and we saw improved satisfaction from our consultants. With the experience gathered and lessons learned since the first rollout of wave two in August, we're able to implement a smoother integration process of Natura and Avon in Chile in the beginning of this year. Let's now look at performance by business unit, starting with Natura Cosméticos. Excluding Argentina, revenue was down 4.7% in BRL. The Natura Brand continued to post strong momentum with year-on-year growth of 8.6% in the quarter in Brazil in constant currency, demonstrating solid performance despite the operational challenges related to the wave two rollout that I just mentioned. Still, these results were fueled by non-direct selling channels, including retail and digital, which we saw significant growth, contributing to a larger share of total revenues and improving contribution margins.
In Hispanic Latam, excluding Argentina, revenues were broadly stable year-over-year. Mexico faced challenges to the adjustments in its commercial model, while Chile experienced a dip in performance as it prepared for the early 2024 Wave Two rollout. Now, the Avon Brand in Latin, net revenue in the Beauty category was down 5% in constant currency, mainly impacted by the 12% drop in Brazil, still impacted by the Wave Two rollout. Although still in negative territory, this was an improvement from the 25% decline reported in Q3. In Hispanic markets, net revenue was broadly stable in constant currency, but down 19% excluding Argentina, reflecting ongoing challenges and similar trends to Q3, particularly related to the preparation and execution of Wave Two. Finally, the Home & Style category recorded a 31% revenue decrease in constant currency year-over-year, directly related to the portfolio optimization strategy we announced before.
We'll now turn to Natura Cosméticos profitability figures. The adjusted EBITDA was BRL 557 million, and adjusted EBITDA margin was up by 250 bps to 11.4%. Excluding hyperinflation accounting impact, margin expansion would have been 410 bps year-on-year. Natura Cosméticos Latin was again a solid performer in terms of profitability, driven by strong performance from Natura Brazil and an evolution in the performance of Avon in the region. We saw gross margin expansion of 380 bps, mainly by Avon Hispanic, which was boosted by commercial adjustments. Although we're pleased with the progress to date, Avon is not yet where it needs to be. Overall, the improved profitability at Natura Cosméticos Latin was due to gross margin expansion driven by effective pricing strategies, product mix enhancements, portfolio optimizations, and reductions in G&A expenses. These gains were partially balanced by planned increase in marketing.
Now, let's turn to the performance of Avon International. Now, moving to slide 16, Avon International Q4 revenue was down 6.1% year-over-year in constant currency and 16.9% in reais, an underperformance when compared to the last couple of quarters when it was broadly stable. The main impact here is the Home & Style category, while beauty revenue was down 2.6%. Avon International is also improving digital sales penetration, which increased by 2.2 percentage points year-over-year to 8.3% of total revenue. Profitability, in turn, showed an important evolution with adjusted EBITDA margin reaching 11.3%, an expansion of 550 bps year-over-year. The expansion reflects gross margin improvements coupled with a decline in selling and G&A expenses. The year-over-year comparison base was easier as Q4 2022 was significantly impacted by phasing of expenses, which helped Q4 2023 margin expansion despite sales deleverage.
I will now turn the call back to Fábio for his closing remarks.
Thank you, Gui. 2023 marked a pivotal chapter in the company's history, setting the stage for the ambitious horizons we aim to reach in 2024 and onwards. We are encouraged with the positive results from the strategy set approximately 18 months ago, but it must continue evolving in our strategy as margins and cash remain a priority in the short term, paving the way for additional investments in brands and technology. During 2024, resource allocation will continue to be a critical driver for future value creation with a focus on investments in key growth markets and projects. We continue to expect volatility in top line, but with margins improvements in the full year, particularly excluding Argentina. I'm excited to build upon the success of the past year and leverage it on our long-term objectives.
We're now available to take questions.
Thank you. Ladies and gentlemen, we will now begin the Q&A session. Remembering that to ask questions, you must click on the Q&A icon at the bottom of the screen and type your question to join in the queue. Upon being announced, a request to activate your microphone will appear on the screen, and then you must unmute your microphone to ask questions. We kindly request that all questions be asked at once. Our first question comes from João Pedro Soares, Citi. João, we will now open your audio so you can ask your questions. Please proceed.
Thank you. Thank you. Appreciate it. And good morning, Fábio, hi. Good morning, everybody. A couple on my side.
The first one, I just want to understand capital structure going forward after the dividend payment and looking to the first quarter where you have a seasonally worse cash cycle, right? And as well as, I think, looking I think just the point that we want to get is what would be the optimal capital structure now in looking specifically at leverage, right? The second point that I wanted to discuss in Brazil, I understand that you already solved the delayed deliveries, but we still see some issues with the inventory management, right? The inventory shortfall in the fourth quarter. So I want to understand if this is fixed, right? If you should expect other effects. And also wanted to discuss in terms of the rep base, right? We still see a decline in the rep base in the fourth quarter. Where are we exactly in that cycle, right?
When we should see a reversion in terms of the rep of the rep base. And lastly, if I may. Sorry about that, but lastly, if I may, what would be the recurring EBITDA and the recurring earnings excluding the effect of Argentina? Thanks. The area's depreciation, that is. Okay.
Hey, João. Thank you for the question. I hope everything is well. So I'm going to take the first question here on capital structure. I'm going to pass the ball to João so he can defend a little bit more on Brazil and your questions on inventory. And then we can talk a little bit about the last one. But yeah, so on capital structure, let's remind everybody that this is something that we have been talking to the market since we closed the Aesop transaction back in the second half of last year, right?
And there are basically two drivers now that allow us to move to a more optimal capital structure, right? Those drivers are the first one, the strong balance sheet position. As you can see, we finished the year with BRL 1.7 billion in cash. The second one is the strong free cash flow to firm generation, right? As you probably remember, João, we have been consuming cash on an annual basis, mainly driven by, yes, free cash flow for operations, but also due to the high interest expense that we had on an annual basis. And now with the liability management with our cash position, that number is much better, of course, right? It's not impacting us negatively as before.
Plus, the confidence that we have in the plan that shows us that, again, we are in a very good position to go back to strong cash conversion, strong cash flow generation in the upcoming years. Even keeping in mind that in 2024, we have potential one-offs such as continued transformation costs and tax expenses related to capital gains of 2023. But having said that, again, we're confident on the plan, and we believe that allow us to announce the BRL 979 million in dividend for 2023, which is the maximum of our profit reserves, and also allow us to move to a more optimal capital transaction because, as we have been disclosing to the market, should be around 1-1.5 times leverage, which is not going to happen overnight, okay? I'm going to reiterate that point.
It's not something that we're going to move immediately, but of course, we're going to be targeting that level as the business progresses. With that, I'm going to pass the word to João.
Thank you, Gui. Hi, João. As regards our Brazilian operation, indeed, delayed deliveries have been sorted out at the end of the year, and it's now back to normality. As regards product shortages, we experienced a very high figure throughout Q4 as we started stabilizing and learning more about the combined demand of Natura and Avon. And currently, we are operating at a much lower number than we experienced in Q4, although higher than our historical levels. So we are still learning from this new combined portfolio and also learning from the improving trend of our business in Brazil. Gui, I think the next one goes to you on the recurring margins expert team. Yeah.
So João, I think you probably had a chance to look at the release where we put a table there indicating what is the impact of the hyperinflation. I reaffirm here that even though we should expect big macro volatility in the country, Argentina continues to be a paramount region for us and one that we have extremely well in the last few years. And we'll continue, of course, to be focused in region. Of course, there's a hyperinflation impact, which, as you probably saw on the table, impacts negatively the Latin America margin expansion. And again, we should continue to expect some volatility of that type during 2024. Having said that, it's very important for us to reaffirm and echoing what Fábio said here, right? That we are expecting to see margin improvements in Latin America, particularly excluding Argentina.
It's very difficult to predict what is happening in Argentina. What will happen in Argentina, especially in the scenario of consumer constraint? But we are confident that the plan is working. And of course, with that, it results in continual margin expansion. So I hope that the table helps. And of course, if you have any other questions on that, we can take it offline. Thank you.
Thanks, Gui. Thanks, João.
Our next question comes from Joseph Giordano, JP Morgan. We will open your audio, sir, so you can ask your question. Joseph, please proceed.
So good morning. Good morning, Fábio, Gui, João. Thanks for taking my question. There are a few ones, actually, here. So the first one goes into the Latin perimeter. Those are maybe simple questions.
So we still have the wave should be implemented in Brazil, but in the fourth quarter, we did see some acceleration in the shrinkage of sales reps in Brazil. So the question here is when we should be seeing that normalizing. The second one in Latin America goes with what Gui was commenting now, just trying to exclude the noise from Argentina. So if you could share what is the margin level in Latin America, excluding Argentina, and why we ask that? Because when we look on a constant currency basis or anything like that, we still have some inflationary gains on inventories that tend to distort the reported margin figures. Then moving to Avon International, I have two questions on this front. So we do see, okay, top line still contracting, but a much, much healthier EBITDA margin level.
So the question here is, one, how far are we from having this operation at a cash flow neutral stance? And the second one is if you have any updates on the potential spin-off of this operation. Thank you very much.
João, sorry, just before the question on the spin-off, what was your other question? I'm sorry, I missed that.
On Avon International, it's related to the cash flow neutral stance on the operation. So top line is contracting, but margin is quite healthy. Okay.
So I think João is going to kick off with Latam, and then I'll take the other ones.
Hi, Joseph. Basically, our rep account base has stabilized at the end of the year. And that happened also in Peru and Colombia, so it's now stable. And the operation is progressively back to normal, regular standards.
And I want to call your attention, of course, that the productivity gains have been huge, especially in Brazil. So as of Q1, you will see sort of regular trends progressing. Gui?
May I just add that our objective has been to clean up a little bit the basis. And going for the consultants, which are actively operating and thus, João Paulo emphasized here that the productivity goes up. So it's not a matter of course, there is a limit on what I'm saying here. But the idea, more than going for more and more consultants, is to make sure that we have consultants which are active and very productive. And that's what João Paulo is working on, which, by the way, is also the case in Avon International.
Indeed, Fábio.
And by the way, Joseph, let me call your attention to the fact that if you look at Brazil Q4, Natura brand grew, and the Avon brand, which was -24% in Q3, is now -11% in Q4. And that is an ongoing trend, very positive trend going forward. So we are focusing on the productivity gains as Fábio just highlighted. Gui?
Yes, João. So thanks for the question. So I'm going to start talking a little bit more about Argentina and, again, making a link to what I say to João in the first question, right? And I apologize, João, if I didn't understand your question correctly, but I think I can answer both right now. Argentina has historically a very high EBITDA margin. Let's start with that, right?
Especially driven by the Natura brand and, of course, especially driven by the high market share that Natura has in particular, but of course, both Natura and Avon have in the country. Now, we don't disclose that margin, but you should expect that margin to be above the average of Latam, especially driven, again, by Argentina. Now, if I can flag a couple of things related to Argentina, right? And I keep saying, João can expand more, that Argentina remains a key country for us, right? It's a country that we have a huge market share. It's a country that Natura brand has a huge brand equity and is performing extremely well. Yes, we operate in Latin America. We face countries that are volatile. Again, we remain very much focused on winning in Argentina, even amid this short-term volatility.
Having said that, Argentina, which in the past represented almost 15% of our results, now, as you can see in the ITR, in the financial release, you're going to see that represents less than 8%, right? So of course, the devaluation of the country, the devaluation of the currency has an impact on the total weight. So even though Argentina has a very strong margin and by the way, the margin in 2023 was impacted by the macro volatility there, so it's not as strong as before. But even though Argentina has a very good margin above the average of the country, we should expect the Argentina weight in the total mix of things to diminish, right? So that's all I can say as we don't close margin by country. Now, moving to Avon, right? Avon has been on a journey. It has been three years since the acquisition.
I think that in the last three years, we have been mainly focusing on stabilizing the business. And I think that the team there, led by Angela and now, of course, Kristof and the team, has done a fantastic job in being able to stabilize the business. The results, they speak for itself, right? When we talk about improvements, when you compare the results of Avon International in 2023 compared to 2021 and even 2022, not only, João, you see a margin expansion, but you also see a big improvement in the way the cash has been managed, right? Now, there's still a small cash consumption coming from Avon, but the improvement has been tremendous. And again, we expect to see Avon printing positive cash in the upcoming year.
So we're very excited to see the plan evolving in the right way, even though, again, there are some uncertainty, of course, related as well to the countries that we operate in. We may expect to see some volatility in top line as we have disclosed in the release. Now, this links to your next question, which is the studies on the potential separation. And just to be clear, right? Of course, that in the end of the day, we're aiming to unlock shareholder value, right, with those studies if that's the decision from the board. But in the end of the day, we're only in a position to announce something like that because of the work that Avon has done in the last years, right?
Because what we're trying to do as well in the end of the day is to seek the best outcome for both Avon and Natura brand, right? Which, as we have basically disclosed in the past, are our core assets, right? And in the end of the day, we're only able to announce these results because of the results that we are there today. The results, they were announced basically, as we mentioned before, because we don't see a lot of synergies between the two regions. It's a continuation of what Fábio has announced back in the middle of 2022 of simplification of the business, giving more autonomy to the BUs and letting, of course, the BUs have flexibility on their investment capacity. And of course, again, in the end of the day, we see that we are in a potential position that we can announce something like that.
Of course, if the board approves, execute it. As Fábio mentioned, we're in early stages. We don't have anything else to announce at this point. I know that the market gets anxious and curious, but we don't have anything else to announce at this point. We'll continue. It's not something simple, as you can imagine. There's a lot of things that have to be carefully analyzed. We'll continue to study. Of course, we understand that we have a commitment to the market return soon. We're in a position on that, and that's what we're going to do.
Perfect. Thank you very much.
Our next question comes from Gustavo Senday, XP. Gustavo, we'll open your audio so that you can ask your question. You may proceed, please.
Hi. Good morning, everyone. Thank you for the questions. I have two.
The first one, I think it's more towards João. Looking at wave two, in the release, you mentioned that cross-selling has evolved, right, in the quarter. But you could provide more details in terms of categories being cross-sold and what is the percentage of Avon's base that is already cross-selling with Natura and how that trend compares by country. And also that given that the operational challenges were adjusted in Q4, can we continue to expect the logistical integration of both brands to take place in Q2 in Brazil, or that plan has been slightly postponed? And the second question, I think it's more to Gui. So G&A control was a positive surprise in the quarter. Just wanted to understand if we can expect further gains going forward or the main adjustments have already been made. Thank you.
Hi. João here.
As regards to cross-selling, I think we mentioned in previous occasions that it's extremely high, extremely high in the Andean countries, Peru and Colombia, where we first started. In Brazil, it's not as high because, as you noticed, logistics have not been integrated. There are some additional barriers to placing combined orders in Brazil. Having said that, the number is much higher than we expected, although lower than what you see in the Andean countries where that has already been integrated. By the way, we have just launched Chile where we see the same very high cross-selling numbers that we saw in the first countries and now with no operational issues whatsoever. Back to Brazil. Yes, we are working to integrate logistics. The distribution centers in the northeast part of the country have already been physically integrated.
The ones in the south and southeast will take longer. Having said that, we are preparing another round of commercial integration and order simplification by mid this year between June and July.
Thank you, Gustavo, for the question. Great to hear from you. So yes, I think as we have been telling the markets, cost control has been one of our priorities in the last few months, right, since basically 2022, second half of 2022, alongside, of course, margin and cash conversion. It's very important to mention that we'll continue to evolve in this agenda. I think a lot has done. You can see the results as we disclose on the holding site. But you can also see the results on the BUs, right, especially there, especially in Latam and, of course, in Avon International.
Now, it is important that as we have disclosed one year ago, it is important for us to be clear as well that we benefit from an easy comparable in that sense as well, the phase of expenses that happened in Q4 of 2022. But even without that and even without the relocation of the lines between sales and marketing and G&A in Latam, we have been able to deliver significant gains in G&A in the year. And this is something that the market needs to put us in check, right? Because as we have been disclosing, we are investing a lot in transformational costs. We are investing a lot in restructuring costs. As you can see in the release in 2023, both in Avon and in Latam, there were significant expenses related to those transformational costs. And of course, they have to pay yields, right?
Of course, not all those numbers that we have disclosed here, they are cash-related. There are some non-cash impacts there. But most of them, they have to pay yield, either to optimize the structure of the business or to generate more efficiencies in our technology. But they have to pay yield. And this is something that the market should ask us on a continual basis because our commitment to continue to work on costs and continue to work on margins going forward.
Very clear. Thank you.
Our next question comes from Ruben Couto Santander. Ruben, we'll open your audio so you can ask your question. You may proceed.
Good morning, everyone. Actually, I want to do a couple of follow-ups, Gui, particularly on these what I just mentioned about non-recurring expenses in 2024.
Can you share a bit about how much you're expecting for the year and how you're working to reduce these going forward? And a second one is still on Natura Brazil sales. Can you guys quantify how much of sales growth would actually have been, if not for the inventory shortages that you faced in the quarter? And a little bit on the competitive environment in Brazil, how you're seeing competitors reacting to the adjustments at Avon, falling sales at Avon. Are you seeing some moves to try to capitalize on that? How you're seeing this competitive environment evolving throughout the year as well? Thank you.
Hey, Ruben, thanks for the question. I'm going to start with the first one, and then I'm going to pass to João so he can talk about Natura Brazil.
But yes, look, I think that the best source for that will be the presentation that we did to the market on Wave Two back in August, right, where, again, we mentioned a little bit about the transformational costs that we have in Latam there. Most of the transformation, actually, I could say that if not all, basically, almost all of the transformational costs that we have in Latam is related to Elo, to the Wave Two integration in the short term. So as we disclose about that in the past, you should still expect to see those recurring expenses high in 2024, however, not in the same magnitude, not in the same magnitude of 2023, just to be clear, right? And basically, in 2025, that number has to be significantly smaller.
Of course, the situation is fluid, and we can decide to accelerate or postpone projects depending on how things evolve. But that is the plan that we have right now, is to continue with those transformational costs, which are purely related to Elo, wave two in Latam, but not, I repeat, not in the same magnitude of what we had in 2023. And related to Avon, right? Avon has been in this journey for three years. You've seen transformational costs, especially related to what we call here the central costs of Avon, right? And of course, as Latin America continues to progress on Elo, we should continue to see reduction in central costs from Avon International as well. And of course, that will incur expenses in the short term. So we're not expecting to see significant deviations in terms of transformational costs, especially compared to the past.
But again, I repeat as well, right? As Fábio has mentioned, the capital allocation will continue to be key for us in the short term, especially in Avon. There are going to be some key bets in specific countries for us to win. And of course, that may indeed generate some volatility in those transformational costs in a single quarter. But the expectation is on a recurring basis for us to still see significant costs in 2024 but diminishing significantly in 2025, not in the same magnitude of 2023, though. Thank you, Ruben.
Hi, Ruben. João here. So as regards to the shortages in Brazil during Q4, I can tell you that the effects on top line were not marginal. Or else, we would have seen significant top line uplift if not for those shortages. As regards to the competitive environment, we're not seeing anything different from previous quarters.
The market as a whole is not showing significant volume increases but still benefiting from price increases in general. We are monitoring price competitiveness very close. Thank you.
Thank you.
Our next question comes from Andrew Ruben, Morgan Stanley. Andrew, we'll open your audio so that you can ask your question. You may proceed.
Hi. Thanks very much for the question. Curious if you could dig in a bit more on the gross margins. In Latam, we saw expansion through the year. You've mentioned the pricing passed through, the mix, the commercial adjustments. So I'm curious how much more room to run there is on these initiatives. You talked about the 2024 outlook. That mentioned some margin improvement on a full-year basis. So trying to get a sense how much of that could be gross margin-driven still. Thank you.
Andrew, I'm going to pass the word to João.
He can talk a little bit more about Latam, and then I can talk a little bit more to consolidate it. Is that okay?
Yeah.
So Andrew, as Gui mentioned before, we're still looking ahead. We still see room for margin expansion in Latam, including gross margin. There's a mix of countries. Remember that second half of last year, we basically were implementing Elo in a few countries. So we're not yet stable now. We are getting into stability in half of the countries, more than half of their revenues. So that should reflect somehow. We still face challenges with standalone Avon operations in Mexico, Central America, Argentina, where we've been building more efficient solutions going forward. So as regards to pricing, as I mentioned before, we keep an eye on the competitive landscape, and we are pricing accordingly.
So overall, I mean, we do see still some room for gross margin improvements, as Gui mentioned before.
Yeah. And I think the same thing can be said about the overall consolidated numbers, right? We're benefiting from a mix impact here as well, of course, mix of regions, but especially mix of categories as we continue to deprioritize fashion and home as well, both in Avon Latam and in Avon International. And again, as we mentioned in the last quarter, right, we continue to analyze price increases. And we're going to be more tactical on that depending on the category, depending on the country, depending on the situation, the macro situation of the country.
But I think overall, comparing apples to apples, we definitely see space for us to continue to expand gross margin, even though it is important to mention that we're seeing some pressuring costs coming from a few places.
I just want to add, if you allow me, that I mean, in both cases, Natura brand or Avon brand, we have been working on price. And I would say that even the strengths of the Natura brand, I mean, it was, I would say, well accepted. I mean, we did not have a major decline just because we were recuperating margins. In the case of Avon, likewise, to a smaller extent, of course. But we are working also on strengths in the brand so that you can work on prices instead of being competitive just because of price strategy or something like that.
So we're very glad to see that reaction of the market and also that is in line with what we said from the beginning, that instead of focusing on major increase in sales, we are focusing much more on increasing margins, okay, of course, having an eye on sales all the time. But we are very happy that we are implementing that strategy successfully. Makes a lot of sense.
Thank you for the color. Our next question comes from Irma Sgarz, Goldman Sachs. Irma, we'll open your audio so you can ask your question. You may proceed.
Yes, hi. Thank you for taking my question. So quick question on the working capital. I know in the fourth quarter, there was obviously many moving parts with Brazil taking more share in the overall revenue mix. And there's obviously some impacts from deconsolidation year-over-year.
I was hoping you could just provide us a little bit more color on how we should think about this working capital dynamic going forward. What are some of the opportunities that you're working on? And yeah, when should we start seeing a more normalized or stabilized trend? And just maybe, yeah, just on the restructuring expenses, could you just provide a little bit of some examples, some color on where these are cash expenses? Obviously, very clear where restructuring or transformation expenses are related to write-downs, right? That's separate. But where these are cash-related expenses, could you just provide a little bit more? I mean, I probably think there's some right-sizing of maybe sales of employee or headcount. But other than that, what type of expenses go through there? I assume the Natura brand support expenses are not going through that line.
But yeah, if you just could provide a couple of examples of what goes through that line and then provide also an outlook for the Natura brand support expenses that you highlighted in the press release and that you did in the second half of the year, how should we think about that into 2024, if that's something you foresee to put continued investments behind?
Hey, Irma. How are you? Thank you for the question. I'm going to answer it and pass to João, of course, and Fábio if they want to add anything. But I'm going to kick off here. And I'm going to start with the working capital. It's very difficult in this age, of course, that we are and the very good performance of Natura Brazil for us to offset the mix impact on receivables, right? So let's start with that, right?
Natura Brazil is where we have the highest receivables terms. It's basically where we have low debt provisions, by the way, where we manage very well those loans historically. And of course, it is a country that we need credits, right, for the consumers, for the consultants to make the business prosper, right, different, for example, than other regions where you have much smaller receivable terms and where, again, most of the transactions sometimes are even paid directly upfront. So it is important to highlight that. Having said that, we are far from where we want to be in working capital. So that's on us.
I think that we have still a long way to progress when we decided to work on conversion, when we decided to focus on cash conversion a couple of years ago with that specific focus on working capital, cash tax rates, and CapEx on the investment side. We have made some important evolutions on working capital, but not to the extent where we want to be. And I think, as I mentioned before, on the receivable side, it's very difficult to offset the impact, the country mix impact there. But on payables and inventories, I do believe that we ended the year not where we wanted to be. And that raises, of course, a big yellow flag for us to act on that.
And this is something that we'll continue to work in 2024 with the aim of finishing the year reducing working capital as a percentage of net revenues, especially when you take aside the mixed impact caused by receivables in Brazil. Now, on the restructuring side, on Latam specifically, in the release, we talk about the breakdown of those transformational costs. So basically, there is 30%. There are several costs. Of course, you can assume that most of that, if not all, is cash-related. There is 20% that we say that are write-offs of some Avon assets, which are related, by the way, to the wave two integration, right? Most of that are non-cash items, right, just to be clear, right? And you still see some IT investments and other OPEX investments, which are cash-related.
So again, the majority, of course, are linked to cash expenses, especially related to severance and IT investments. But there are more or less 20% of the equation there that you should assume at least for 2023, there are non-cash-related. And the same thing for Avon. We don't produce that breakdown for Avon in terms of transformational costs. But you should assume that the vast majority for Avon there are cash-related expenses. I'm going to pass the word to João if he wants to add anything to that point on Brazil and Latam.
Yes. Hi, Irma. Still. Inventory optimization. Just wanted to call your attention to three potential levers for that optimization going forward. First is the harmonization of Avon's portfolio across the region. We are slightly halfway through, give or take, and that will help optimizing inventories. The second lever is the increase in local production.
We are pushing more volume into the Mexican factory, the Argentinian factory, and the third-party manufacturer in Colombia. Finally, the third lever is to do with demand planning systems where we are trying new AI-based demand planning algorithms that could help us optimizing inventory as well. You also asked about the level of support to the brands. We remain committed to increasing the support for both brands, Avon and Natura, going forward. We publicly announced new support for the Natura brand that was seen on TV. We do want to reinvest part of the new efficiencies into both brands going forward. We have a very strong innovation pipeline behind the two brands this year. We want our consumers to know that. The reaction so far has been very positive. We are tracking the return on those investments.
We know that there's important room to increase those investments with expected returns in top line.
Irma, I'll take the advantage. That was not your specific question, but also because Gui mentioned a lot of the non-cash items. Just to highlight what we did on the fourth quarter, which was the sale of TBS, which carried, of course, a loss vis-à-vis what was in the book, but also cleaning up the balance sheet. We looked into the impairment of Avon International, okay, of Avon, sorry. We did an impairment. The idea is to streamline this and move forward so that we can pave the way for us to get into a new life at cash situation. We had lots of cash one-offs this year. We cleaned up everything, but these were non-cash events.
Does that impact at the end on what could be paid as dividends, okay, because of these non-cash items? But we thought we had to be transparent and clean the balance sheet as much as we can. And that's what we did in the fourth quarter. Does the loss that you guys see on net profit? I think it's an important highlight to be made here. Thank you.
Great. Thank you so much.
This concludes today's Q&A session. I would like to invite Fábio Barbosa to proceed with his closing remarks. Please, sir, go ahead.
Thank you, everybody. I mean, of course, we will be at your disposal. And I mean, we, as Helena, Gui, and everybody, myself too, if necessary, will be at your disposal. Thanks very much for the attention. And let's stay in touch. Thank you.
This earnings conference call is now concluded.
The investor relations department is available to address any further doubts and questions. Thank you very much for your participation and have an excellent day.