Good morning. Welcome to Natura & Co's first quarter earnings. 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 over the call to Fábio Barbosa . Please go ahead.
Morning or good afternoon to all of you. Thank you for joining us today. I'm very happy to be with you again. Natura &Co performance in the first quarter is in line with our plan and previous communication. This is reflected in our Q1 numbers with a solid improvement both in gross margin and adjusted EBITDA margin. In this meanwhile, the company continues to put in action important structural changes in its portfolio, focusing on simplifying its structure and improving its capital structure. Excluding Aesop, Q1 2023 showed a strong profitability improvement, mainly driven by gross margin expansion across all business units and continuous cost control that were partially offset by sales deleverage at The Body Shop and Avon Latam. This quarter's gross margin is driven by price increases carryover and more favorable mix, more than offsetting the inflationary environment we continue to experience.
As per the normal seasonality of the business, cash consumption in Q1 was high as planned, and working capital management was impacted by buildup of inventories for Q2 and change related to the continued integration of the Natura and Avon brands in LATAM. From a revenue standpoint, the highlight remains the Natura brand, which continued its strong momentum from last year, with Natura Brazil sales growing 25%, along with volume and productivity growth. Shortly after the close of the quarter, Natura &Co announced decisive strategic steps. First of all, the group announced it has entered into a binding agreement to sell Aesop to L'Oréal for an enterprise value of $2.525 billion. The transaction is still subject to customary regulatory approvals and is expected to close in quarter three 2023.
The proceeds from the sale of Aesop will strengthen and deleverage Natura &Co's company's balance sheet, freeing up resource to sharpen our focus on strategic priorities with discipline, notably implementing the second wave of integration of our brands in Latin America, further optimizing Avon International footprint, and accelerating The Body Shop's transformation agenda to generate sustainable and profitable growth. On the second wave in Latin America, we launched full integration in Peru. Initial KPIs are encouraging. Finally, The Body Shop announced it was entering its next chapter, with Ian Bickley taking over as interim chief executive after David Boynton stepped down. Our ESG agenda continues to advance, I'm very proud of the progress we made on our Commitment to Life 2030 sustainability vision. We made further progress on the share of renewable or natural ingredients, as well as on the biodegradable formulas.
Natura &Co also released its third-party equity report, which also looks at gender balance across 73 markets. We maintain our target of equal representation, with 52.7% of women in leadership roles, direct and above, at Natura &Co. Let me now hand over to Gui to comment on our Q1 performance in greater detail. Gui?
Thank you, Fábio, and hello to everyone. I'll start with Natura &Co's consolidated revenue on slide 5, which stood at just over BRL 8 billion and grew by 3.4% in constant currency, improving sequentially despite the challenging macro environment. In reais, sales were down 2.8%, reflecting the depreciation of some operating currencies versus the real. We look at the performance by BU shortly, but in a nutshell, we post a solid constant currency growth in Natura &Co LATAM with a very strong performance by the Natura brand, notably in Brazil, with growth in the mid-20s%. Furthermore, Avon Brazil and International were in positive territory in the beauty category. Avon International's fundamentals improved, but performance was still impacted by the war in Ukraine.
The Body Shop had another difficult quarter, with trends quite similar to the previous quarters in core channels, while The Body Shop At Home continued its steep decline. Aesop also continued to grow double digits, following the trends of the previous quarters. As you know, Aesop is now classified under discontinued activities pending the closing of the transaction with L'Oréal. Excluding Aesop, Natura &Co's Q1 2023 consolidated net revenues stood at BRL 7.3 billion, up 2.2% in constant currency and down 3.8% in reais. We turn to adjusted EBITDA margin on slide 6, which stood at 10.5% in Q1, marking a strong improvement of 330 bps year-on-year. This reflected different moving parts and business unit dynamics.
The main positive impacts were, first, a strong margin expansion at Natura &Co Latam, up 400 basis points, mainly driven by higher gross margin. Second, an improving margin at Avon International, up 170 basis points, also boosted by gross margin improvement, transformational initiatives, and phasing of expenses, partially offset by sales deleverage, investments in lead markets, and inflation increase on fixed expenses. An improvement of holding expenses down 36% year-over-year. This is the result of our efforts to create a leaner and simpler organization that we started last year. These were partially offset by two factors. First, slight margin pressure at The Body Shop, mainly due to sales deleverage, partially offset by strict financial discipline and some gross margin expansion. Also continuing investments at Aesop that led to a drop of 320 basis points in its margin.
Excluding Aesop, adjusted EBITDA margin was 9.7%, up 370 basis points year-on-year. On slide 7, we focus on net income and underlying net income. Net income in Q1 was a negative BRL 652 million, broadly in line with a net loss of BRL 642 million in Q1 of last year, and a sequential improvement over the last quarter. Higher EBITDA was more than offset by higher net financial expenses, which should be addressed by the Aesop transaction and by higher losses from discontinued operations. Q1 2023 underlying net income, which is net income excluding transformational costs, restructuring costs, discontinued operations and PPA effects, was a loss of BRL 372 million. This compares to a loss of BRL 155 million in the same period in 2022.
You see the bridge on the slide with the main impacts coming from restructuring costs, discontinued operations and other effects for BRL 150 million, PPA effect for BRL 82 million, and transformation and integration costs for BRL 83 million. In Q1 2023, free cash flow from continuing operations was an outflow of BRL 1.813 billion, compared to an outflow of BRL 2.140 billion in the previous year. Despite the positive impact from net income in the year, cash flow from continuing operations was slightly worse to -BRL 1.542 billion from -BRL 1.425 billion given working capital dynamics.
Working capital increase in Natura &Co Latam, supporting the strong growth in the Natura brand, offset by improvements across The Body Shop and Avon International as a % of net revenues as we continue to prioritize cash generation and working capital management. Latam increase was driven by inventory buildup for Q2 2023 and accounts receivable, which is primarily due to the strong growth of the Natura brand and adjustments to Avon Latam representative payment terms in several regions to be more aligned with Natura in anticipation of Wave 2. These effects were partially offset by continued working capital management activities, particularly in accounts payable, as discussed in prior quarters, and other assets and liabilities, including recoverable taxes.
As mentioned last quarter, we continue our disciplined resource allocation efforts, which resulted in lower CapEx in Q1 2023, an outflow of BRL 258 million, 8% lower year-over-year, while still investing in our priorities to maintain a sustainable and healthy operating company. As planned, cash consumption in Q1 was high, following the normal seasonality of the business, and working capital management was impacted by the buildup of inventories for Q2 and changes related to the continued integration of Natura and Avon brands in Latam. Our priorities remain the same, and we continue to expect improvements in cash conversion on a full year basis, though we may experience some volatility between the quarters. On slide 9, we look at our liquidity profile. We ended the quarter with a cash position of approximately BRL 4 billion.
Our net debt at the end of the quarter was BRL 9.4 billion, and the net debt to EBITDA ratio is 2.96 times, up from 3.49 times at the end of the year, and 2.13 times 1 year ago. Despite improving EBITDA year-on-year, the BRL 2 billion increase in net debt versus the previous quarter was mainly due to seasonal cash consumption combined with increases in inventory and accounts receivable, mainly due to the strong growth of the Natura brand. As you know, the sale of Aesop, which we expect to close in Q3, will bring sufficient proceeds that will allow us to largely eliminate our debt and put us in a net cash position.
As you see on the second chart, our cash position of BRL 4 billion is higher than the total of our debt payments through 2027. We face limited debt repayments until 2028. Let's turn now to our performance by business unit, beginning on slide 11 with Natura &Co Latam, which posted a solid performance this quarter. Total net sales were up by 9% in constant currency and 2.4% in reais. This was driven by solid double-digit growth at the Natura brand, which grew by 25.1% at constant currency, while the Avon brand was down 9.8% in constant currency, but saw growth in the beauty category. The Natura brand posted strong momentum with year-over-year growth of 24.9% in Brazil.
Growth was supported by volume, but also price increases and mix effect, which led to a strong 20.4% growth in consultant productivity. Retail also had an excellent performance this quarter, in line with our channel diversification strategy. The average available consultant base was up 3.6% year-on-year, but slightly down versus the previous quarter, given normal seasonality of the business. 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 by strong 25.5% at constant currency, despite a challenging situation in several countries in the region, notably Argentina and Chile. Revenue was up 6.7% in Reais. Growth was mainly driven by acceleration in Argentina and Colombia, boosted by channel and productivity gains.
Excluding Argentina, sales in Hispanic markets were up in mid-single digits at constant currency, despite a decrease in Chile. At the Avon brand in LatAm, net revenue was down 9.8% at constant currency, a deterioration versus the previous quarter. In Brazil, revenue was broadly flat at -0.6%, slowing down from the 7.5% growth in the previous quarter, but against a stronger comparison base. The beauty segment continued to grow by 5.6%, while fashion and home was down 18%, in line with our portfolio optimization strategy. The beauty segment in Brazil again saw a high-single digit gain in consultant productivity. In Hispanic markets, the total number of available representatives decreased 25.4% year-on-year, as expected, amid the rollout of Wave 1 and preparation for Wave 2 in some countries.
In addition, in preparation for this rollout, adjustments to commercial incentives, minimum order tickets increase, and fashion home portfolio adjustments were made in several regions to move towards integration, which also impact the number of total representatives. In such context, net revenue was down 14.8% in constant currency and down 22% in BRL, impacted by a decrease in Mexico, which has higher exposure to the fashion home category, as well as in Chile, which were affected by political, economic volatility. The beauty category was broadly stable in constant currency, beauty productivity per representative is up more than 20% year-over-year. As Fabio mentioned, we began the full integration of Natura and Avon in Peru. While still early days, we're seeing encouraging first results in terms of increasing cross-sell activity level and consultant productivity.
On slide 12, we turn to Natura &Co Latam's Q1 adjusted EBITDA and margin. As shown in the graph, adjusted EBITDA grew by a strong 47.6% to BRL 633 million from BRL 429 million in the same period in the last year. Adjusted EBITDA margin was up by a solid 400 basis points to 13%. The margin expansion was driven by a 450 basis points improvement in gross margin, benefiting from price increases, richer category mix, and marketing efforts, but is still partially impacted by input prices and effects dynamics. It's important to highlight that Q1 '23 benefits from full price increase carryover from the previous year, as most of price increases last year happened Q2 onwards.
There were additional price increases in some countries during Q1 2023 related to expected commodity and effects pressure to arise in the upcoming quarters. While we expect to continue to see year-on-year gross margin expansion the next 2 quarters, it won't be of the same magnitude as in the 1st quarter of this year. We also benefited from SG&A efficiencies by the Avon brand in Brazil, while the Natura brand continued to make investments, and Avon Hispanic show operational deleverage amid the rollout of Wave 2. Let's now move to Avon International on slide 14. Revenue was down 7.5% at constant currency and 12.8% in BRL. This drop continues to reflect the war in Ukraine. Excluding that, sales were down by a more limited 3.7% at constant currency.
Net revenues were also impacted by the earthquake in Turkey, which we estimated had a negative effect of one percentage point. The beauty category enter positive territory, growing low single digits in constant currency, excluding Russia and Ukraine, driven by fragrance and color categories. Fashion and home decreased by 21% in constant currency, in line with our strategy to focus on beauty. The TMEA region show year-on-year growth, while Western Europe posted softer but improving performance. As expected, the number of representatives is still down 19% amid the new commercial model rollout and the footprint optimization impact. Digitalization is showing good progress and the use of digital tools reach a 30.4%, while other KPIs such as units per rep and activity rate are also improving.
adjusted EBITDA margin was 6.1%, up 170 bps year-on-year. The gross margin expansion of 480 bps and continued focus on transformational savings were partially offset by sales deleverage, brand investments in lead markets, and inflation on fixed expenses. It is worth highlighting that the comments made for Natura &Co Latam gross margin are also applicable for Avon International. On slide 16, we now move to The Body Shop. Q1 net revenue declined by 9.4% at constant currency and 16.5% in BRL. Combined sales of core business distribution channels, in other words, stores, e-commerce, and franchisees show a long single-digit decline in constant currency, in line with the trend observed in the previous quarter, but on a softer comparable base.
This reflects a macro environment in the U.K. and Europe that remain challenging, impacting retail sales. Revenue was also impacted by a decrease at The Body Shop At Home, which continued its steep decline. Gross margin show an inflection point, expanding 50 bps year-on-year to 78.6%. This was mainly driven by mix and pricing, partially offset by continued high inflation. Despite the operational deleverage, adjusted EBITDA margin stood at 6.1%, down a limited 30 bps year-on-year, given the slight gross margin expansion and strict cost control in line with the previous quarter. As Fabio mentioned, Ian Bickley assumed as interim CEO. Jointly with the executive leadership team, he will be working to refine The Body Shop's current business plan and transformational agenda, while continuing to prioritize profitability and cash conversion.
On that note, as mentioned last quarter, management already took some important steps to improve long-term profitability. This includes the announcement in January of the closure of the at-home business in the U.S. and of dedicated distribution center in the U.K. In February, we announced a restructuring of our global management structure, reducing leadership positions by 25%, as well as a 12% reduction in the rest of global overhead staffing. The benefits of this restructuring will accelerate throughout the year. On slide 18, we turn to Aesop, which as mentioned, is now classified as discontinued operations. Aesop again recorded a solid performance with another quarter of double-digit growth in constant currency, up 16.8%. Revenue in BRL was up 9.2%. 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. Gross margin was 86%, down 30 bps versus the same period last year. It was mainly driven by price increases, but still impacted by inflationary cost pressure, mainly higher freight costs and unfavorable channel mix. Adjusted EBITDA margin was 18.5%, down 320 bps year-on-year. Still pressured by planned investments to deliver sustainable future growth, mainly in technology and supply chain enhancements and Aesop's China market entry. Let me now hand back to Fabio.
Thank you, Gui. I will conclude now on slide 20 with our key takeaways. First, strategic actions are underway across the group to improve our performance. These include accelerating the integration of Natura and Avon in Latin America, optimization of Avon International's footprint, and continuing to rightsize The Body Shop. At group level, we are simplifying the structure and improving our capital structure. Second, the sale of Aesop, which we expect to close in the 3rd quarter, as I said, will enable significant deleveraging and free up resources to invest with discipline in our strategic priority and unlocking value for our shareholders. Third, Natura &Co continues to focus on profitability and cash conversion. This is our priority that we have set already since the beginning, since the midlast, last year.
Fourth, while 2023 will likely be another challenging year, our strategic priorities are clear, and the first results give us confidence that we are on the right track. We expect a continuous improvement in full-year adjusted EBITDA and cash flow, though we may see some volatility from one quarter to the next. Thank you very much for your attention. Gui, J.P., and I are now happy to take your questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star one on your telephone now. If you wish to be removed from the queue, please press star, then two. Please hold while we gather your questions. Our first question comes from Danniela Eiger with XP Investimentos.
Hi, good morning. Thank you for taking my question. I have two from our side. The first one on margin dynamics. Can we think about this margin expansion that you posted, especially on the gross margin level, as a structural one going forward, obviously respecting seasonality? Also, are there any more levers to be used on the gross margin levels, or should we see margin gains coming from more on SG&A efficiency in the coming quarters? My second one regarding Wave 2.
I know you mentioned it's too early to reach more final conclusions, but it would be interesting to hear if the rollout has been evolving according to the plan in Peru, or if you already mapped some adjustments needed, and also what we could expect in terms of next moves in the coming quarters, including the timing of the rollout in Brazil. Thank you.
Gui, you can take the first question, J.P. will take the second one. Gui, go on.
Okay. Thank you, Daniela. Thanks for your question. Thanks for listening to the call. I'm gonna talk a little bit about the margin dynamic, as a question and of course, the levers of EBITDA margin expansion going forward. Look, I think strong quarter in terms of gross margin expansion, right? On a consolidated basis, more than 350 bps. Latam itself delivering 400 bps, even international with 450 bps of margin, gross margin expansion.
It has been a focus for the team and of course, especially in the last 12 months, as you know, we have been follow a very disciplined strategy of price increases to mitigate the challenging inflationary environment that we experience today, and of course, additional effects pressure that comes with it. Having said that, I think that it is important to highlight that Q1 has the full carryover of price increases from 2022, because most of the price increases last year, it happened in Q2 onwards, right? We have the full carryover in Q1. In addition to that, the teams acted strategically in some countries, in some categories with additional price increases in the beginning of this year to have the full impact in the year.
Of course, to protect the margin going forward versus expected inflationary pressures that we may see coming up in our P&L in the rest of the year, especially in the second half. I think we were clear, and I repeat what it is in the release, that we are expecting to see gross margin expansion a year to go on the quarters. However, given again the full carryover of this of the 2022 price increases and the anticipation of price increases in the Q1 of this year, most likely it won't be to the same magnitude as we are looking ahead, right?
As we saw in Q1, compared to what we're looking ahead. Having said that, moving to your second question, I don't think that we're done in gross margin. To be quite honest, I think the teams, they have done fantastic job in the last 24 months, expanding gross margin. If you look at the trajectory of even internationally, if you look at the trajectory of Latam, specifically those two, right? It has been really an effort of not only price increases, but really focusing on the right mix, right? The strategy of deprioritizing fashion and home and prioritizing CFT plays a big role on that.
Even within CFT, there is a very strong revenue management strategy to focus on the right categories and of course, the products with better mix. I think that there are room, of course, for expansions of gross margin going forward. However, of course, given potential seasonality of inflationary pressures, that may not be linear every single quarter. Definitely there are room for us to see more gross margin flowing into EBITDA. You're right, there is a lot of room in SG&A, right? I think there's no particular any one-off for us to highlight this quarter.
As you can see, in the case of Latam, most of the EBITDA margin expansion is coming from gross margin. There is of course additional efficiency for us to seek with the Wave 2 and João and the team, they are pretty much 100% focused on that, and he can talk a little bit more about that later. In the case of Avon International, as you probably saw, the main impact, right, for not seeing the full flow through of the gross margin to EBITDA margin was the operational leverage. I invite you to think about sales stabilization of Avon International, right? When is that gonna happen?
Because the operational leverage has been one of the main detractors, right, for EBITDA margin because the effort that the team has done on the transformational savings, it's really visible and by the way, it's really protecting the P&L and it's one of the reasons why we continue to see a good, not only gross margin, but a good EBITDA margin expansion in Avon International for this quarter as well. I hope it helps. I'm gonna pass now to João so he can talk more about the Wave 2.
Thanks, Gui. Thanks, Danniela. As regards the full Natura Avon, Wave 2 integration, we have just gone live in Peru. We haven't yet closed the first campaign.
However, as mentioned before, the first results are encouraging. We are pleased with the cross-penetration of both brands into the combined, new network of consultants, with its consequent productivity gains. It looks like the activity level is pretty healthy. I need to be cautious, but the first results are encouraging. I'm also pleased with the fact that, from an operational standpoint, systems, IT infrastructure, logistics, all work pretty well without any major incident, which in combination gives us the confidence to roll this initiative out to Colombia by around the middle of the year. Okay?
Okay. Just on the rollout for Brazil, does that depend on how Colombia evolves?
It's planned for the second half of the year as previously announced. We are sticking to that plan unless any unplanned news arise.
Perfect. Thank you. Thank you very much for the answers.
Thank you. Our next question comes from João Soares with Citigroup.
Hi, good morning, everybody. Thanks for taking the question. I have two questions as well. Just the first one, in Brazil, we're clearly seeing Natura performing very well, gaining market share in its F macro, and growing at 20+% versus Avon's beauty category growing at mid-single digits. I was wondering if you could elaborate the dynamics behind the performance of these units. What explains such a big outperformance of Natura in Brazil? Is it the price increase, the comps? Is it demand for fragrances and soaps that are far outperforming the core beauty categories of Avon? The second question is on The Body Shop. You're carrying out a big structural cost reduction as you pointed out in the release. I just wanted to understand the timing, right?
Should we start to see this big margin expansion coming in, right? The timing of these restructuring costs? Thanks.
Just coordinating here. JP, you take the first one. Gui, you take the second. Just say one thing. We are here in São Paulo. Gui is United States. We are trying to coordinate this via virtual. That's why I'm saying here all the time. JP, please.
Okay. Thank you.
Ladies and gentlemen.
Yeah. Thanks for the question. Natura is actually performing well for several quarters already reflecting, you know, the strength of its brand, its multiple channels where it acts and also the digitization of its sales force. What you see there is a consequence of all those elements combined, which is not yet the case for Avon. As you know, we are adjusting the portfolio. We are optimizing the number of Avon reps. That has a relative weaker effect than what you saw in Natura. That's basically it. Gui?
Yes. Thank you. Thank you, João, for your question. I'm gonna talk a little bit about The Body Shop. I think... Look, the way to think about it is the team, as you mentioned, they have done, and they're still doing by the way, right, it's not complete, a lot of work on the transformational of the company, especially focus in SG&A. As you saw also in the Q1 results, right? We changed the trend in gross margin. In the last few quarters, we were seeing gross margin contraction. Now we're seeing gross margin expansion.
One of the reasons for that, I think the discipline on the discounts, right, and the price increases flowing in full, into the results, which is very important for us. Again, as we have said, it's one of the pillars for The Body Shop transformation since the L'Oréal acquisition, right? The way to think a little bit about the future is with, as you mentioned, the main lever for the EBITDA margin expansion coming from SG&A in The Body Shop case. Especially coming in the second half of this year, where again, most of the transformational actions will be taken by then. It is important to highlight that the revenues of The Body Shop, they remain under pressure, right?
They should remain under pressure in the near future. Again, we are at this point expecting revenues to stabilize more towards the second half of this year. I think the same rationale that I explained for Avon International in the previous question, right? The sales leverage is playing and is making the Body Shop an important role in terms of EBITDA margin because there is inflationary pressure in the SG&A. It is very important for us to basically stabilize the revenues. Again, we expect that to happen towards the second half of this year. There's a channel mix story there that is important to highlight, right?
We expect increase of sales from stores and franchisees specifically, which from a mix perspective, should benefit more the EBITDA. Again, I think that mix will again be more visible in the second half of this year. I hope helps, but glad to take any follow-up on that.
Yeah. As well, I just want to add to what Gui said here, talking about the gross margin and saying how much this has to do with the strategy we have been following, which is, as I said, to give priority and incentivize margins and cash generation rather than sales. We increase the prices, we gain gross margin. Of course, we are working on the brand so that we do not have to work as much on discounts as it was the case. Some stores have already been renewed or rejuvenated, if you will, so that we can work on that with better margins, a less complex SKUs, portfolio and so on. That's was the strategy and some of the results are showing up.
On the difficult economic scenario in main countries like U.K., which is the one of the key for TBS. That's just to give the context. Thank you. Go on now.
Thank you, Fabio, and thanks to you too, Gui.
Thank you. Our next question comes from Joseph Giordano with J.P. Morgan. Please go ahead.
Hi, good morning, everyone. Thanks for taking my question. I actually have a few ones. The first one, looking into Latin America, we do see like sales at Avon being rationalized with a significant impact on the sales rep base. Here, like I would like to understand what's the marginal profitability of those sales reps that are leaving the base? It looks like that those sales were highly unprofitable when looking at the bigger scheme of things. The second one goes into the working capital, right? We had higher sales, and apparently, we are about to see a very good Mother's Day season ahead. My question to you is when we should be seeing some working capital normalization?
Last but not least, on the holding structure, we do see the structure shrinking significantly over the past quarter. My question to you is if we should see further gains from this front. Thank you very much.
J.P. you get the first two ones, I get the third one.
Sure. Joseph, as you know, the restructuring and the optimizations we are doing at Avon in Latin America, they are meant to deliver a more profitable and healthier business and channel. For instance, we have been increasing minimum order. We have been reducing the portfolio on non-profitable items and lower ticket items. We've been reducing incentives and pushing the churn down. Overall, you know, the goal is to remain with the most productive reps on the base, which then prepares that base for the full integration with Natura. All that we are doing is to try and improve the health and the profitability of the Avon business immediately.
In terms of the holding, I mean, we have made from the beginning when I started here, maybe I think it was June, about 10 months ago, something like that, we had important reductions and we keep on working on that, okay? We cannot give any guidance on what is gonna happen, but the idea is it's an ongoing effort that we will continue focusing on, Joe. Thank you.
Joe.
All right.
Hi. You get the three of us now in the same answer. I'm gonna talk a little bit about the working capital, because I think that was your second question, right? You're right. I think that the dynamic of the first quarter was an increase in inventories and increase from accounts receivable. There is again, nothing unusual in those numbers. I think that the inventory, of course, is mainly driven by the big performance of the Natura brand in the region. Of course, preparation for Mother's Day, preparation for Valentine's Day in the second quarter, which are important events for us, right?
The increasing accounts receivable was also due to the increasing in revenues, especially in Latam, especially in Natura in Brazil. That drives, of course, accounts receivable higher. Also some normalization from accounts receivables terms in other countries. The main impact coming from Brazil. We still expect to see working capital pressure in the next quarter. As we were clear in the release, right, we're looking at this on a 12-month basis. When we look at the full year 2023, we expect to see significant cash conversions improvements, not only in Latam, but in all views, right?
In Avon International as well, and The Body Shop. Of course, that's flowing through to the holding, given the point in rates of the lower holding expenses in the year, right? We still expect to see a significant cash conversion improvement on a full year basis. Though we may expect some volatility in between some quarters.
Perfect. If I may, like, ask about, like, this inventory normalization. Can you add any comments around, like, what you're seeing around Mother's Day? Thank you.
You want me to talk about the Mother's Day in LatAm? I think it's Budi will do.
Well, without saying much, I'm pleased with our performance for the Mother's Day campaign.
All right. Thank you very much.
Thank you. Our next question comes from Irma Sgarz with Goldman Sachs.
Yes, thanks for the opportunity to ask a question. Just very quick follow-up on Natura Brazil. Quite strong growth, which is, I think why a lot of questions are focused on this. I'd love to understand just how the sellout was. We're seeing sell-in being strong and there's some sellout also in the number because of the retail component. I'd love to hear on the, on the level of the reps. How much growth of that growth also came from sellout, and if you think that the inventory levels in the channel are very healthy at this point.
Then on logistics integration between Avon and Natura in Brazil, if you could just spend a minute on updating us where that is and what the next biggest steps are in that integration process. The third question, briefly, gross margin for Avon, for the Avon brand in Latin America, how much of the gap that you currently have to the Natura brand do you believe you can close? Thank you.
JP, go on. A lot of questions. There's no indication that our reps are overstocked so far. We keep continuous tracking of that, so it seems to be okay. Having said that, Irma, I think that consumption in general in Latin America, including Brazil, is getting softer towards the rest of the year. That's no news. We follow your reports as well, and if the macroeconomic environment stays challenging, I think consumption will end up paying a price. Having said that, there's no indication that our consultants are overstocked at this point in time. The second one has to do with logistics integration in Brazil between Avon and Natura. Basically, we keep integrating distribution centers and manufacturing capabilities.
That continues. That will be even more important as we enter the Wave 2 integration, full integration towards the end of the year. Finally, on gross margin, well, we are bridging that gap, so we are not there yet between Avon and Natura. You know, we are making a much stricter selection of the portfolio, both in terms of Fashion Home and Beauty. You probably noticed that we've been pricing products accordingly. Some of them are still below their ideal price tiers. Of course, that with further manufacturing logistics integration, that will end up delivering additional benefits also to the gross margin. The gap is being bridged. That's as much as I think I should comment at this point in time.
Thank you very much.
Thank you. Our next question comes from Eric Huang with Santander.
hello.
Hi, there. Good morning. Thank you for taking our question. A very brief question from our side. Looking specifically at capital structure, since the announcement of Avon deal, has management seen, or, seen an updated view on its optimal capital structure going forward? Any updates on this side?
Gui, I'll pass it on to you in a second. Just to make the comment that, I mean, we are very committed to have discipline on the allocation utilization of the capital. Gui will talk a little bit about, I mean, what we think in terms of capital structure. I have been reassuring internally and externally that we are being very disciplined in terms of financial returns that we can have on backing up investments in each one of our suite deals, okay? This is something that we have been very proud of, being very rigid on the last year. Gui, talk a little bit about what are our thoughts about capital structure itself.
Okay. Thank you, Eric, for the question. Look, I think that this thought on capital structure, it is something that we have discussed a little bit with the market in the previous quarters, right? I'm gonna repeat a little bit what was said. I think that thinking about optimal capital structure and the percentage of debt that we should have in our total capital, I think that this conversation makes a lot of sense when the company is operating net profits, right? Because then, of course, you can use your tax shields accordingly and try to maximize the value of your discount rates and therefore maximize the value of the firm.
The focus in the short term, of course that, as we mentioned, right, part of Aesop's proceeds will be to de-leverage the company, so it's important to highlight that, right? Just that the Aesop proceeds will put the company on a net cash position. The focus in the short term is for us to continue to work on profitability, right? Profitability, of course, in the gross margin, profitability in the EBITDA margin, and profitability in the net profit as well, right? We continue in that route, in the short term, to maximize our bottom line.
Having said that, right, and again, as we have mentioned before, once that we have the right capital structure in place and of course we are back in operating in net profits, we expect that the optimal capital structure for this company will be in something approximately 1.5 times. Of course, then the dynamic exercise, it moves as the company continues to deliver improved results. Again, in the short term, I repeat, we are focused not only in the right capital structure, we're focusing to make sure that we have the right capital structure, but also the right profitability in the P&L.
thank you. Perfect.
Thank you. Our next question comes from Robert Ford with Bank of America.
Good morning, everybody, Fabio, Jeremy, JP, and thanks for taking my questions. JP, if I understand correctly, you're intentionally driving a further contraction in the seller base in Wave 2. How abrupt is that transition, and how do you expect productivity and network growth to play out following the implementation? You know, how much of Avon Latam sales is that home today, and how should we think about the pace and magnitude of that wind down? Why was there a need to build up inventory ahead of the Natura Avon integration in Latam? You know, how much of that is transitory, if any? How big was the effect in AIS? How exactly have the Avon receivables terms changed? Again, what's that impact in AIS?
lastly, Ian's been on the board for a few years now and is very familiar with The Body Shop. What's his assessment of what's broken and what are his KPIs? Thank you very much.
Bob, JP here. I felt I need to show you the entire business plan with your questions. You know, I'll try my best. Anyway. Well, look, as regards the channel contraction, the first point of your questions, I suggest you look at our Avon Brazil, 'cause that's where we implemented the all of the structural changes altogether, around May, June last year, right? And you saw the level of contraction, around 20% of the channel. Right now we are contracting fashion and home beyond what we did at that time. You know, if you want to use general figures, I think this is a reasonable one. As said, you know, fashion and home is bigger in some other Hispanic countries.
More than 50% of revenue is, say, in Mexico, for instance. It puts additional pressure on that. With the accumulated experience, we are trying to do to contain that contraction around similar levels we saw before. If I'm not wrong, you ask about inventory building. Is that correct, Bob?
Yeah, inventory building and then, you know, if it's transitory kind of a one-time effect as you consolidate some of the manufacturing. That's what it sounds like. I was just wondering what that impact was in AIS and also on the receivables side. You know, how much did the actual receivables terms change with Avon? I guess obviously more likely recurring.
Right. There is no structural inventory change. Everything that we are observing right now is temporary. No structural reasons for increasing the inventory. As regards payment terms, they'll be aligned with Natura's payment terms, which always comes with higher productivity. We only give credit to more productive consultants anyway. The net effect should be or all those effects should be netted in the medium term. I hope it helps, Bob.
No, absolutely. just one question on The Body Shop, right? The assessment of what's broken-
Yeah.
You know, the KPIs please.
Gui, you wanna complement something?
No, Bob, if I just may say, I think that João was extremely clear. I just want to reinforce, I think that the first question, right, which is that you should expect to see as we mentioned last quarter and we continue to repeat this quarter, right? Avon Hispanic sales into significant pressure in the next quarters, right? I think as you all mentioned in the previous quarter, the main focus is gonna be EBITDA margin, right? Again, it's gonna be for course, for the profitability of the channel to improve significantly, right? You should expect to see that trend to continue, right, with the softer, weaker revenues, especially in Hispanic LatAm.
Of course, in the medium long term with a significant improvement coming from EBITDA margin, right?
Yes, you do that.
On
I don't mean to interrupt you, but as you do that, Gui, can you help us understand the brand equity evolution? We're gonna be looking at some pretty negative numbers probably in terms of the network and sales consolidated. We won't be able to see the breakdown of sales that you see. Whatever you can help us to do to understand the brand equity dynamics in the most important markets in LatAm would be super helpful.
Okay. Thanks for the feedback, Bob. We'll take that into consideration and of course, share what we think it's necessary for the market to have the right visibility going forward. On The Body Shop, Bob, because that was your last question, I'm gonna let Fabio talk a little bit more about Ian's first day. All I can say that his KPIs remain very strong focus on the profitability and cash flow for The Body Shop. Again, we should expect to see strong results coming from those two lines already this year. I'm gonna pass to Fabio a little bit to talk about the first days of Ian in the role.
Thank you, Bob, for your question. Ian has been there for something like 20 years, 20 days. I have been there with him. We went there. He was very enthusiastic, I am having almost daily calls with him. He's excited. He loves the brand. I mean, he has been working on that for a long time. His background, he was a CEO of Coach, he was within the board, the person responsible for what we call the TBS committee. You know, in other words, people which were focusing on one of the different business model than focusing on TBS. He has some knowledge there. His first impression is just that, I mean, there are lots of things to be done.
Some of things which are being done are in the right direction, like reducing SKUs, like, rejuvenating the brand, like working on stores and so on, working with the head franchisees. He's excited about that, but we have to accelerate that. Dave has done a job, has put some things into place, but all we need is to accelerate and focus on profitability. This has been my mantra since day one here, which is increase margins and, improve cash generation. That's what his focus will be. Probably at the next call, with him there for 90 days, I will be able to talk more. For the time being, I mean, his first insights are there are quick wins to be made, and, his team is behind him, and he will be working on that. Thank you, Bob.
No, thank you, Fabio. All of that's self-funded, correct?
All of that's self-funded, yes. We are not at this point in time, we do not have any new project. As I said, discipline and capital allocation is the name of the game. On what TBS was doing, there was a budget for this year. We haven't changed that. There are only minor investments in some stores, but only to the magnitude that could be self-funded by TBS, yes.
Thank you very much.
Thank you. Our next question comes from Andrew Ruben with Morgan Stanley.
Hi. Thanks very much. Most of my questions have been answered. Just one quick follow-up. On the inflation environment, called out again as a headwind on the gross margin side. Curious if you have any visibility on when inflation might ease and potentially become a tailwind. Any view on the progression would be very helpful. Thank you.
You're saying about Brazil, about worldwide?
Worldwide. Any pockets, any color you can have to disaggregate would be helpful.
Gui, go on then.
Andrew, thanks for the question. The way that we're looking at this right now is that we're not expecting the inflationary pressure to significant improve in the next quarters, right? That's why, again, I mentioned in the beginning of the call, we took actions in terms of our price increases also in Q1, right, to mitigate part of, again, those potential pressures that can arise in the remaining of the year, right? I think we follow our strategy even though, again, we don't expect to see inflationary pressures to ease significantly.
Of course, we may have some quarters with better comps, but we expect this trend to continue in the short term, at least until the end of 2023. I think we follow our strategy of course, giving prices, but with different dynamics between brands, categories and countries, right? I think it's also important to highlight that. I think I don't know, João, if you wanna complement anything for Latam, I think that Latam and Brazil follows the same standard here as I mentioned before.
No, no further comments.
Is there?
No, no further comments, Gui.
Okay. Just before the operator passes to Fabio, I just want to say that, unfortunately, the time is almost up for a call. There are several questions that unfortunately we didn't get to answer. Of course, the IR team will get back to you with the respective answers.
Thank you. This concludes today's question and answer session. I would like to invite Fabio Barbosa to proceed with his closing statements. Please go ahead.
Thank you. I just want to stress what he said, that investor relations team is at their disposal. There are many questions to be answered. We are ready to. I mean, it's our obligation, but our pleasure too. Thank you very much for being with us today. As you saw from the presentation, we are operating a challenging environment, but we have clearly defined priorities and are mobilized to deliver them. We see the first results coming. We are happy with it. Thanks for your attention and have a great day.
The conference has now concluded. Thank you for attending today's presentation for Natura &Co. You may now disconnect your lines.