Welcome to Natura & Co's Fourth Quarter and Full Year 2022 Earnings Call. On this call today are Fábio Barbosa, CEO of Natura & Co, and Guilherme Castellan, CFO of Natura & Co. , will join for the Q&A session. The presentation they will be referring to during this call is available on the Natura & Co investor relations website. I will now hand the call over to Fábio Barbosa.
Thank you. Good morning or good afternoon to all of you, and thank you for joining us today. Very happy to be with you again. Gui will comment on the results shortly, so I will provide a more qualitative commentary. As you know, 2022 was a difficult year, and we continued to operate in fourth quarter in a challenging environment, marked by high global inflation that is affecting discretionary spending and changing consumer behavior, as well as rising energy costs, foreign exchange volatility, and of course, the geopolitical fallout resulting from the war in Ukraine. In this environment, we decided in mid-2022 to reassess the group's growth model in the short term and shift the focus from sales growth to profit margins and cash conversion.
As part of this shift, we took a hard look at our cost structure and the role of the holding company, with significant savings already achieved. We are also reevaluating our global footprint to concentrate on profitable markets. In full year 2022, we posted stable revenue at constant currencies, while adjusted EBITDA margin decreased 160 points. In the fourth quarter, sales growth improved at constant currency, and we delivered further progress in cash conversion, in line with our priority. We have some reasons for such action, notably continued strong momentum at Natura, especially in Brazil, and also a continued good performance at Aesop. We also saw a solid performance by Avon in the beauty category in Latin America.
This bodes well for the second wave of integration of our business in the region that is getting underway, aiming at harmonizing the distribution and sales systems and optimizing the product portfolio. At TBS, we continue working on costs and optimizing footprint of stores and geographies. At Avon International, we are focusing on countries with high growth potential while revisiting business model at several other countries. At the same time, reducing the cost structure. A lot has been done and takes a while to show up at results. This is, as I like to say, at Transatlantic. A lot has been done, by all means, but a lot has to be done yet, and we are undertaking every effort in that direction. At the same time, I want to remind that the group continues to focus on its ESG agenda.
We remain as focused on our commitment to our environmental agenda, the Amazon and its biodiversity, social inclusion, female empowerment, and other matters that constitute Natura &Co's DNA, are at the core of our Commitment to Life 2030 vision and give us a competitive advantage and make us a differentiated company. With that, let me now hand over to Gui to comment on our fourth quarter performance in greater detail. Gui?
Thank you, Fabio. Hello to everyone. I'll start with Natura &Co's consolidated revenue on slide five, which stood at nearly BRL 10.4 billion and grew by 3% in constant currency, improving sequentially despite the challenging macro environment. In reais, sales were down 10.8%, mainly reflecting the depreciation of the British pound, the Australian dollar, and the Argentinian peso, among other currencies versus the real. We'll look at the performance by business unit shortly, but in a nutshell, we post a solid constant currency growth at Natura &Co Latin, with a strong performance by the Natura brand, notably in Brazil, and by Avon in the beauty category. While Aesop again posted double-digit growth at constant currency. Avon International's fundamentals improved, but performance was still impacted by the war in Ukraine and by one-off supply chain issues.
The Body Shop had another difficult quarter, as The Body Shop At Home is seeing a return to pre-pandemic levels. In the full year, revenue rose 0.4% at constant currency and was down 9.5% in BRL to BRL 36.3 billion. We turn to adjusted EBITDA margin on slide six, which stood at 10.5% in Q4, down 280 bips. This reflected different moving parts and business units dynamics. First, the main positive impacts are an improvement of holding expenses down 23% year-over-year. This is the result of our efforts to create a leaner and simpler organization, as mentioned by Fábio, but impacted by the BRL 25 million of phasing expenses mentioned in the previous quarter.
In full year 2022, corporate expenses already show a 30% decrease compared to full year 2021, even though the adjustments only started in the second half. Improving margins at Aesop, supported by strong top-line growth and constant currency. 90 basis points year-over-year improvement of selling expenses as percentage of net revenues, benefiting from financial discipline across all businesses with a focus on improvement efficiency and simplifying the business model. These were more than offset by the combination of, first, pressure on margin at Natura &Co L ATAM and Avon International due to higher G&A expenses. Second, additional margin pressures at The Body Shop amid a challenging top line. G&A as percentage of net revenues increased by 290 basis points in Q4 '22 on a year-on-year basis.
Q4 '22 was particularly impacted by increased costs related to phase of expenses, including incentives provision, as there were almost no incentives in the first nine months of 2022. In the full year, adjusted EBITDA margin was 8.7%, down 160 basis points. On slide 7, we focus on net income and underlying net income. Net income in Q4 was a negative BRL 890 million compared to the net profit of BRL 696 million in Q4 '21, driven mainly by lower EBITDA, higher net financial expenses, and a higher loss from discontinued operations. EBITDA was impacted by a non-cash impairment of BRL 383 million. It's worth highlighting that Q4 '21 net income had also benefited from tax gains related to credit recoveries.
Q4 2022 underlying net income, which is net income excluding transformation costs, restructuring costs, discontinued operations, and PPA effects, was a loss of BRL 49 million. You see the bridge on the slide, with the main impacts coming from PPA effect for BRL 367 million. Restructuring costs, discontinued operations, and other effects for BRL 357 million. Finally, transformation and integration costs were BRL 117 million. On Slide eight, we focus on free cash flow, which is a particular focus of ours and which show a sharp improvement in full year 2022. Free cash flow was an outflow of BRL 1.7 billion compared to outflow of BRL 2.4 billion in the previous year.
Despite the negative impact from net income in the year, which was +BRL 1 billion in 2021 to -BRL 2.9 billion in 2022, cash flow from operations improved to -BRL 280 million from -BRL 1.2 billion in 2021. The improvements are mainly driven by, first, operating working capital that improved across all business units as a percentage of net revenues, was partially offset by business unit mix. The business units that are growing the most carries higher structural working capital. Main driver for working capital improvement was inventory, which was partially offset by receivables with the growth in LatAm. Working capital also benefit from lower advances to suppliers. Significant improvements on income tax and social contribution was seen as well.
On top of the significant improvements in cash from operations, we continue our resource allocation efforts, which resulted in lower CapEx, down 25% year-on-year, while still investing in our main priorities. As previously mentioned, management continues to be strongly focused on optimizing cash conversion and continues to work on several fronts. First, improving working capital management, where we still see furthering opportunities for improvement. Second, thorough discipline in capital allocation and CapEx optimization. Third, continued improvement in the cash tax rate. On slide nine, we look at our liquidity profile. We ended the quarter with a cash position of BRL 6 billion, up BRL 1.4 billion versus the previous quarter and in line with our cash position in Q4 of 2021.
Our net debt to EBITDA ratio is still at 3.5x at the end of the year, up from 2.85x at the end of Q3 and 1.5x one year ago. Although net debt improved on a quarter-on-quarter basis to BRL 7.4 billion from BRL 8.8 billion, reported EBITDA was particularly impacted this quarter by non-underlying expenses, including BRL 383 million of impairments. Talking about debt capacity payment, as you see on the second graph, our cash position of BRL 6 billion is higher than the total of our debt payments through 2027. We face limited debt repayments until 2028.
As part of the group's continuous efforts to improve its capital structure and actively addressing upcoming maturities, Natura & Co Luxembourg Holdings enter on November 14th in a $250 million club loan maturing in 2025, guaranteed by Natura & Co Holdings and Natura Cosméticos. The funds were used primarily to prepay a $150 million loan under the group revolving credit facility maturing 2024 and a GBP 70 million loan of The Body Shop with the UK Export Finance Agency. In December 2022, Natura Cosméticos repaid BRL 913 million related to its 10th issuance of debentures. At the same time, Natura Cosméticos received an inflow of approximately BRL 1 billion in October 2022, resulting from the issuance of certificates backed by real estate receivables, known as CRI.
It is important to note that the repayment of the 10th issuance of debentures eliminates all group financial covenants. Sorry. Let's turn now to our performance by business unit, beginning on slide 11 with Natura &Co LatAm, which posted a solid performance. Total net sales were up by 10.6% in constant currency and down 3.2% in BRL. This was driven by double-digit growth at Natura brand, which grew by 7.5% at constant currency. While the Avon brand was also up slightly in constant currency at 2.2%, thanks to the growth in the beauty category. The Natura brand posted strong momentum with year-on-year growth of 17.9% in Brazil, supported by price increases and mixed effects, which result in 14.9% growth in consultant productivity in the quarter.
The average available consultant base is broadly stable at 1.16 million in Q4, 2022, up by 1.7% versus Q4, 2021, and by 0.9% versus Q3, 2022. This is aligned with our ongoing strategy of focusing on increasing productivity with a more stable consultant base. In Hispanic LatAm, net revenue was up 16.9% at constant currency, despite a challenging situation in several countries in the region. Revenue was down 18.6% in BRL. Growth in constant currency was mainly driven by Argentina, Colombia, and Mexico acceleration, boosted by channel mix and productivity gains. Excluding Argentina, sales in Hispanic markets were up in mid-single digits at constant currency, despite softer performance in Peru and Chile. At the Avon brand in LatAm, net revenue grew by 2.2% at constant currency.
In Brazil, trends continued the sequential improvement we have seen every quarter in recent periods, Avon entered positive territory in Q4, growing by 7.5%, albeit on a soft comparable base. The beauty segment continued to grow, accelerating to 12%, while Fashion & Home was down 10%, in line with our portfolio optimization strategy. In Hispanic markets, net revenue was down 1.1% at constant currency and down 19.5% in BRL. Performance was good in Argentina, impacted by a decrease in Mexico, which was higher exposed to the Fashion & Home category, as well as in Peru and Chile, which were affected by political and economic volatility. The beauty category grew 7.3% in constant currency, this was more than offset by Fashion & Home, which was down year on year.
On slide 12, we turn to Natura &Co LatAm's Q3 Adjusted EBITDA and margin. As shown on the graph, Adjusted EBITDA decreased to BRL 526 million from BRL 741 million in the same period last year. Adjusted EBITDA margin was down 320 basis points to 8.9%. Margin benefit from strong top-line performance and strict financial discipline, but this was more than offset by 60 basis points drop in gross margin and higher G&A as a percentage of net revenues. G&A growth was mainly driven by higher investments in R&D, notably at the Natura brand, expenses deleverage at Avon LatAm, and increased quarterly phasing expenses, including accrual for incentives provision. Let's now move to Avon International on slide 14. Revenue was down 9.9% at constant currency and 23.8% in BRL.
This drop continues to reflect the situation in Ukraine. Excluding that, sales were down by a more limited 6.2% at constant currency. Revenue in the quarter was also impacted by one-off supply chain challenge related to mascara products, which had an estimate unfavorable impact of 2% point. The TMEA and APAC regions show year-on-year growth, while Western Europe posts a softer performance. Even in a tough microenvironment, Avon International was able to pass through inflation and effects pressure to prices, which also benefits rep productivity. As expected, the number of representatives is still down 20% amid the new commercial model rollout and the footprint optimization impact. We continue to see good progress on fundamentals. For example, penetration of the Avon ON app reached a 30.6% in Q4, 2022 compared to 25.5% in Q4, 2021.
Activity, units per rep, and productivity continue to show sequential improvements as well. Gross margin was 61.1%, up 230 basis points, driven by price increase in a positive product mix, which more than offset pressure from cost inflations and effects headwinds. Adjusted EBITDA margin was 5.8%, down 490 basis points, as gross margin expansion and continued focus on transformation savings were more than offset by the sales deleverage and phasings of expenses in the quarter. We now move to The Body Shop. Q4 net revenues declined by 8.4% at constant currency and 20.6% in BRL. Still showing challenging results, these figures mark a sequential improvement over the previous quarter, which had seen constant currency sales decline of 19.5%, albeit on a softer comp.
Combined sales of core business distribution channels, in other words, stores, e-commerce, and franchisees, show a low single-digit decline in constant currency, an improvement over the high single-digit decrease in the previous quarter. This underscores the significant impact of The Body Shop At Home, which returned to pre-pandemic levels. However, the tough macro environment, particularly in the U.K. and the rest of Western Europe, continued to impact retail and same-store sales sellout was -4.8%. Franchisees sell-in grew in the quarter, but softer sales sell out impacted the trend of franchise partner inventory normalization seen in the last quarter. Q4 2022 EBITDA margin was 21.4%, down 80 bips year-on-year. This represents a 270 bips efficient gain on SG&A as % of net revenues despite the sales deleverage impact, partially offset 350 bips of gross margin pressure.
2022 was a very challenging year. Management is focused on stabilizing the core channels, top line, and the implementation of cost savings initiatives to deliver margin expansion and support cash generation. Strict cost containment measures to management headcount levels and discretionary spend were complemented in the quarter by the first phase of structural cost reductions, including the right sizing of The Body Shop At Home's overhead structure, reductions in leadership and IT transformation. The restructuring of the business continues. In early 2023, management announced several additional steps to improve long-term profitability. These include the announcement in January of the closure of at-home business in the U.S. and of the dedicated distribution center in the U.K.
In February, we announced a restructuring of our global management structure, reducing leadership positions by 25% as well as 12% reduction in the rest of global overhead staffing. These actions are part of a broader recovery program that will support margin expansion, cash generation, and net revenue stabilization in 2023 and beyond. On slide 18, Aesop again recorded an excellent performance with another quarter of double-digit growth in constant currency, up 18.2%. Revenue in Reais was down 2.1%. All regions delivered double-digit growth despite the challenging environment. Retail and wholesalers showed solid growth, partially offset by a softer e-commerce performance reflecting post-COVID normalization of consumer behavior. From a category standpoint, fragrance sales grew at more than twice the overall pace, aligned with Aesop's category diversification strategy.
The fragrances market has outgrown the market as a whole, especially the premium segment, indicating the importance of this category for the future of the company. The highlight of the quarter was, of course, Aesop's successful China market entry, with the launch of two physical stores along with the Aesop.com platform and a domestic Tmall operation. Performance has exceeded expectations, and the stores are already the top two sellers among Aesop's 287 signature stores worldwide. Q4 adjusted EBITDA margin was 28.6%, up 190 bips year-over-year. Still pressured by planned investments to deliver sustainable future growth, notably in technology, supply chain enhancements, and China market entry, but more than offset by sales leverage and other efficiencies. As mentioned in the notice to the market published on November 30th, Natura & Co continues to evaluate strategic alternatives for Aesop.
We will keep the market updated as soon as we have something concrete to communicate. Let me now hand back to Fabio.
I think now we're ready here to go for the Q&A, and we can start. Who is that? Joan Santos, help me here. Cannot read from here.
We will now begin the question and answer session. If you have a question, please press the star key followed by one on your touchtone phone. If you wish to be removed from the queue, please press star then two. At this time, we will pause momentarily to assemble the roster. Our first question will come from João Soares of Citibank . Please go ahead.
Thank you very much. I have two questions, if I may. First one, I just wanted to understand better what's happening in LatAm. I understand there was a big impact of Argentina, some accounting issues. If you could talk a little bit more into how that the revenue of that operation, how should we expect the performance of this operation and understand the margin dynamics of that operation as well? I think that seasonally we're expecting a better fourth quarter. If you could understand, I mean, after all the initiatives that you took throughout the year, how should we think about the recovery rate of that EBITDA margin? If I may, just one last one on TBS. There was a big improvement sequentially on EBITDA margin.
I just wanted to understand how sustainable is this margin recovery at TBS, please. Thank you.
Go ahead, please.
João, can you please repeat the first part of your question? It's not clear here for us if it's only LatAm or if it's everything. If you can repeat, that'd be great.
Sure. Sure, Gui. Just especially looking to Hispanic, both Natura and Avon, I just want to understand because there was big impact of Argentina and accounting as well. If I could please understand the underlying operation, specifically on Hispanic, which was for, at least for us, it was worse than what we expected. Thank you.
Thank you, João . I'm gonna tackle here the first part of the question. Then I'm gonna pass to João to talk a little bit about the situation and the operation specifically in Argentina and the rest of Hispanic, right? First, let me just be extremely clear that there is no accounting changes whatsoever from this year to previous years, right? We're still following the accounting practices related to IFRS 16, to IFRS, sorry, it's 100% in line with what we have done in the past, right? Argentina, of course, it has a special situation given the hyperinflation, which as you know, João, it impacts all the lines of the P&L, right?
It's not only the revenue, not only the costs, but it's throughout the P&L, of course, through the price dynamics in revenues and of course, through the inflationary dynamics in the cost side, right? There's no difference whatsoever to what we have done in the year. Now, given the very high inflation that we saw in 2022, especially in the second half of the year, especially compared to the previous year, 2021, of course, you can assume that those adjustments that especially impact the EBITDA margin, they were higher in 2022, so a headwind compared to 2021, right? It's important to mention that the business there remains very healthy. Natura specifically, and João is gonna comment a little bit on that, doing extremely...
Continues to do extremely, extremely well. The margins of Natura in Hispanic LatAm, not only in Argentina, but Argentina as well, but in Hispanic LatAm in general, they continue to be healthy. Of course, as we have communicated before, the main issue in Hispanic LatAm has been the profitability of the Avon brand, which is the main focus of the ALO project going forward. This is why we have been communicating that ALO is the cornerstone, it's transformational for us to get that margin for LatAm back to the levels where we want it to be. I hope that is clear from a accounting perspective, there is absolutely no change whatsoever.
There is a headwind, of course, given the inflationary pressures that we saw, in the second half of last year, which was unprecedented. Now I'm gonna pass to João, so he can comment a little bit more on the operational results.
João, I wonder if your question is inferring that the drop in Latin American profitability is coming from Argentina. I just want to reinforce that that's not the reason why you see the reduced profitability in Latin America, which comes from other effects, I can comment later if you prefer. You know, just talking about the operation itself, preliminary data indicates that Natura & Co in Latin America defended its market share throughout the year, increasing market share in the second half. In Hispanic Latin America, Natura grew market share, whereas we lost some market share in Avon. We do see macro socio-economic headwinds in some countries. Chile, as you've followed from other companies, consumption has dropped.
Peru, in the 4th quarter, had to face some political issues which led to strikes, you know, on street, demonstrations. In Argentina, we faced difficulties with the shortage of goods. There were restriction in imports of goods, which reflected on a softer top-line growth in those countries, only partially compensated by our performance in Mexico and Colombia. As I said, Natura it continues to grow, albeit in a bit softer than before because of these macro headwinds, as I said. As Gui just mentioned, in the case of Avon, we are restructuring the operation more thoroughly at this point in time, restricting Fashion & Home by choice, in preparation for Wave 2. Overall, the operation is pretty healthy as well its margin.
João, let me talk about the second part of your question, which is related to The Body Shop. First, of course, let me remind everybody that from a seasonality perspective, The Body Shop has historically a very strong Q4 compared to the previous quarters, right? That's again, the quarter where margins and cash flow for The Body Shop are the highest. In the case of The Body Shop in this particular quarter, we had some headwinds coming from gross margin, right? Given the inflationary pressure. As we also have discussed before, right, the fact that we were not that aggressive from a net price increase perspective, right?
Given the changes, the momentum of the retail, especially in some markets and the head franchisees' inventory level. That impacted the gross margin by 350 basis points negatively. Of course, through the cost containment actions that we exercised during the last quarter of the year, we're able to offset great part of that amount through SG&A, right? Those actions, of course, most of them, they are structural changes and they will remain. There are some small technical changes as well, technical movements as well, in the last part of the year. It's very important to say and to comment that our focus on rightsizing The Body Shop organization is there, right?
Again, there are some actions that we disclosed that we took in the first quarter of 2023, which of course they don't reflect in the numbers of last quarter, of Q4 2022, such as the closure of TBS At Home in the U.S. and the dedicated distribution center in the U.K., as well structuring of the global management structure, right, by which we reduced the leadership positions by almost 25%. Again, further headcount reductions in the rest of the global overhead staffing. All of those things, again, we continue to deliver in order to protect the margin of The Body Shop. Yes, it's a big focus and we are expecting The Body Shop to improve margins compared to 2022 going forward.
Thanks. Thanks, guys. Very clear.
The next question comes from Danniela Eiger of XP Investimentos. Please go ahead.
Hi, good morning. Thanks for taking my question. I have two from my side. The first on ESOP. Something that caught our attention was actually the restatement of the past results of the company, mainly on the gross margin line. If you could just provide some color on why that was done throughout the past quarters, that would be great. Also, I think that one is for Guy, is mainly related to leverage. The picture of the quarter called the attention, especially when looking at EBITDA ex-IFRS 16, reaching almost eight times. I understand that you don't have, like, a short-term financial issue in terms of liquidity because you actually... Sorry, I'm not sure if Fábio was cut.
I understand that you don't have any, like, short-term liquidity issues. Just wondering how we should think about the deleveraging process in terms of levers to get that done and also the speed throughout the quarters. Thank you.
Thanks, Daniela. So, just to confirm, your first question was on the ESOP standardization in terms of the gross margin from SG&A, right? The reclassification that we did. The second one was related to leverage and how we see that going forward. Is that correct?
Yes, that's it.
Again, the ESOP was an accounting adjustment that we did, there is no impact on previous numbers in terms of EBITDA or net income, right? It's just a reclassification from some logistic costs that were sitting in selling expenses, basically they were reclassified to the gross margin, right? That's why, again, there was a negative impact when you look at the gross margin of the company, even though it was just an accounting reclassification to standardize the way that we look at numbers correctly across the BUs, right? Again, there's no. As you can see, there's no impact in previous numbers in terms of EBITDA, net income, or anything below EBITDA.
Just to be clear on that. That will be the way that we'll continue to present ESOP's numbers going forward. On leverage in particular, right? I mean, we of course we finish the year with a high leverage, and that is mainly explained by the very low reported EBITDA in the quarter and of course in the year, right? The reported EBITDA, of course, was impacted by the performance of the business, needless to say, but also through several one-offs impacts.
Those one-offs are transformational restructuring, corporate rightsizing and impairments, which were again, a big number, especially in Q4 of the year, which brought the reported EBITDA of the year to low levels compared to historical numbers. Of course, if your denominator is low, your leverage is high, right? Despite the fact, of course, that we have a significant improvement in terms of cash conversion, and that will remain the focus. On that, I would like to say that of course, we continue to focus as a company all across the BUs and in the holding. We continue to focus on our two priorities for 2023: EBITDA margin and cash flows. Margin has to improve, right?
Again, 2022 with less than 9% adjusted EBITDA margin the year. Of course, that number has to significantly improve going forward. The BUs and the teams are working on that. We need to continue our efforts in terms of cash conversion, right? Which again, we already start seeing that in Q3 and Q4, and that effort will remain in 2023 in order of course, to continue to reduce the net debt impact. On top of that, right, which again, it's important to mention, as Fábio has said.
We are working on our capital structure, right? We are working on actions to take to improve our capital structure. Of course, as soon as we have concrete news on that, we will communicate the market. It is a big focus for us, as of course you can see the impact of net interest expense in our results and how interest rates is impacting, of course, not only the cash but the P&L profile of Natura &Co.
The next question comes from Thiago Mac ruz of Itaú. Please go ahead.
Thank you. Guys, my question is regarding a potential divestment of the Aesop operation. I mean, I want to understand how you guys would be taxed on a potential transaction like that in terms of capital gains. Is there any sort of tax shields that you guys could eventually use to diminish that amount? Is my question. Thank you.
Hey, Macruz. Thanks for the question. Let me revert to public information to what we can say. As you can see in the material facts that we issued to the market, we are evaluating and studying structural and alternatives for Aesop going forward, right? Of course, that process, that project is ongoing, and we cannot communicate anything to the market, right? Several alternatives were on the table and of course, as we continue to evaluate and as we continue to study, we continue to funnel those alternatives to what we believe is the right thing for Natura &Co at this moment. I know that Macruz, you appreciate that we cannot say anything that it's again, not yet communicated.
Of course, we're not gonna comment on tax or anything like that at this point. As soon as we have news on the Aesop process, we'll communicate the market in a more comprehensive way.
Okay. I understand. Thank you very much, Gui.
The next question comes from Robert Ford of Bank of America. Please go ahead.
Good morning, everybody, and thanks for taking my questions. JP, Natura Brazil growth was very impressive in the quarter. Can you comment a little bit on pricing, competitive dynamics, gross margin, and the operating profitability for Natura Brazil, as well as the momentum for the brand in early 2023? You know, Gui, how are you thinking about market exits, and Fábio as well, right? How are you thinking about market exits for Avon International this year, the fixed cost structure of The Body Shop and further restructuring and impairment charges for 2023? Thank you.
Hi, Bob. JP here. Indeed, we are passing prices across the entire region. You can probably appreciate that when you see that we are catching up in terms of gross margin and there's still room to continue to price in a couple of countries, right? A significant portion of our growth across the region came from prices, but not sacrificing volumes in any significant way. We are pretty glad with that. Notably with Natura in Brazil. Natura in Brazil is living through a very good moment. We see an acceleration of the digitalization, personalization features throughout our business model, which is definitely helping us to navigate through the changes in the market. Very glad with that.
I also want to say that, behind, you know, the aggregate numbers, even when you look at Avon, when you see increased profitability for CFT, you know, that is showing that we are able to price up across the region. We are facing other difficulties related to the shrinkage of the Fashion & Home category, as previously announced. But even there, with Avon and CFT, I'm pretty glad with the fact that we are being able to price up. Okay? Thank you. Let me handle hand over to Gui.
Hey, Bob. Thanks for the question. Yes, as Fábio have mentioned, again, I'm gonna start, and of course, if Fábio has anything to add, feel free, right? Especially in the short, medium term, the revision of print is an action that both Avon International and The Body Shop were taking in order to improve profitability, right? Just talking a little bit about Avon International, right? We continue to see good momentum coming from a few geographies, right?
Especially when we look at the Middle East and Asia, particularly Middle East and Asia region, and when we look at APAC with a very high weight and performance of Philippines. Those regions continue to do well. Of course, Central Eastern Europe in 2022 was impacted by the war in Ukraine, but we see resilience. We see some countries improving results. And that is also seen in the operational KPIs, especially with the new commercial model. Western Europe, again, mainly the developed markets are the regions that we're seeing softer results, right? The strategy for Avon will continue to go twofold.
First is, of course, looking at markets with the end cashflow, particularly cashflow, have been negative. Again, with no plans to turn around that quickly, right? We'll continue to exit them, those markets, as we have seen in 2022, and we are working on that. Of course, that exiting markets is not just pressing a button, right? It requires a lot of work, and again, hopefully we have more good news to communicate to the market as we progress. The second part is to continue to work on the transformational costs in the markets that we operate. More recently, we announced the One Europe structure for Avon, right?
In which basically we're merging the two SBUs into one leadership team only, with a significant reduction of headcounts and a more lean and agile. Of course, giving more focus as well to the countries that we believe that will make a difference in the future. That, again, will also continue. Should expect to see more news from Avon in terms of market exits as soon as well as more news in terms of transformational savings across the BU. On The Body Shop, you are also correct, Bob, that more recently also became a focus of ours to look again at our footprint and focus not only the core channels, right?
That are basically retail, e-commerce and franchisees, the franchisees model, which is very important for The Body Shop, but also at the right geographies, right. A few markets that we used to operate on a standalone basis, right. Those markets were significantly impacting EBITDA margin, especially on a few channels. That's the case, of course, of the U.S., as we communicated, that we are basically ending the operations of The Body Shop At Home in the country. Of course, also looking to optimize the rest of the channels in North America in general, right. We'll continue, of course, to focus on the markets that we believe that we have, again, a strong competitive advantage, U.K. being, of course, our main market, right.
Also, some very strong markets that again, we have our own stores or our franchisees models in Europe and the rest of the world. Again, you should also expect to see some news about right-sizing and exiting some markets for The Body Shop during 2023.
Just to add, if you allow me. In terms of Avon International, we are revisiting our presence in countries which are not profitable, and we will invest in countries which are growing and being profitable. Revisiting the ones which are not profitable means also going from full presence, possibly to head franchise, possibly to distribution, possibly to an exit. All this, and that's depending on our penetration, our brand, depends on what kind of agreement we can reach. The Body Shop, it may be something like that, although we are largely with a head franchise when outside the key countries. Just to clarify, that is not from presence to exit, but there are scales in what kind of presence we wanna have in markets where we may have some opportunity.
With no investment only in the countries where we have seen growth.
Just to be clear, sorry, I make a correction if was not clear. The Europe plan that I announced for Avon is basically the merger of CE and Western Europe in one cluster is the marketing and the brochure plan, and of course, some in leadership positions. As I mentioned, we'll continue to focus on the right markets for the region. I just want to clarify that.
No, that's very helpful. Thank you very much. Just one little follow-up, and that is, JP, can you comment a little bit about the momentum for Natura Brazil going into early 2023, please?
Yes. Well, it's a strong operation that remains strong as we speak.
Very helpful. Thank you so much.
The next question comes from Joseph Giordano of JP Morgan. Please go ahead.
Hi, good morning, everyone. Thanks, Gui, Fábio, for taking my question. I have a few ones I want to touch upon on LatAm results. First, I would like to see if you can help us quantify the impact of IAS 29 impacts on the conversion of Argentina sales, given the hyperinflation. You just mentioned, like, headwinds and tailwinds, we saw that throughout the region in companies that are operating i n Argentina that results for the fourth quarter actually had like massive accounting headwinds that actually distorted the P&L in the sense that it kind of hides the material cash flow improvements you guys have been showing. That's my first question. Try to quantify a little bit the IAS 29 impact on Latin America.
The second one is about the higher bonus provision. I think like the market wasn't expecting such provisions given the EBITDA decline. My question to you and again, like the EBITDA decline, and it goes back with the cash flow improvements, right? Maybe EBITDA is not a good proxy in Latin America to the cash flow generation at this point.
My question to you is like what changed in terms of KPIs for the variable compensation? Last but not least, like, if you have like any kind of like short and midterm leverage targets to kind of guide us through the potential improvements of free cash over the next quarters. Thank you very much.
Thank you, Joe. Let me start of course, answering your questions here, and I'll pass to João if he wants to say anything else about LatAm, right? On the IAS 29, to your point, right, as I mentioned in the previous answer, we had a headwind in Q4 coming from LatAm. Of course, when we say LatAm we're talking mainly about Argentina, right? Now, to quantify that, you can estimate that the headwind impact on margin was around 70 basis points, right? It's not again that meaningful given the weight of Argentina in LatAm.
Was significant given, of course, what we saw in terms of hyperinflation and the FX dynamics in the country, right? Again, it's very difficult to estimate and to project what that impact is gonna be in 2023. That was basically what we saw in terms of LatAm impact only. I'm not saying consolidated results, but LatAm impacting margins for Q4 of 2022. Of course you can get more information on the IAS 29 and the hyperinflation on how we account for that in our financial release right in the ITR. That was basically just to answer your question on how to quantify that. I think that goes a little bit to what I just said.
The impact on G&A, of course in Q4, there was a significant impact, especially when we look at even LatAm and even international. Basically, let me start saying that again, that we're phasing off expenses and it's not only related to incentives, right? That we're phasing off different expenses, Q3 to Q4 and also Q4 to Q1 of this year that impacted the results of the quarter, right? Also inflationary pressures on G&A. In the case of LatAm, costs related of course to Avon and of course R&D as well, which we'll continue to invest for the Natura brand. On the incentives part, I wanna be a little bit clear, right?
First of all, this is not again, an allocation to one person or to only a group of individuals, right? This is basically an extraordinary change that the company did in the half of the year, in which we try to allocate a higher weight of incentives to cash flow performance as we have communicated to align on our priorities, right? Of course, that was an extraordinary change that we did in 2022, with also the clear separation of H1 and H2 results. Now we had accrued basically none to very little incentives in the first 9 months of the year.
With the stronger cash performance coming the second half, especially of course, given by the high seasonal Q4, that's where again, we saw the higher impact, given again that we have communicated and will continue to communicate, the cash flow is a strong priority for ours. Now, you should not expect that level of G&A as part of the underlying business, just to be clear. Okay? That was Q4 was impacted by significant one-offs, one of them being just what I described. Going forward, you should not expect to see the same levels of G&A, not for LatAm, maybe international, or for the group.
I'm gonna pass to João just to see if he has anything else to mention about LatAm, and then I'll come back to answer your last question on leverage.
Thanks, Gui. I do want to comment, Joseph. As I read most of your reports earlier today, I fully understand that the EBITDA margin of, you know, Latin American EBITDA margin came as a negative surprise. However, I just want to reinforce my full confidence on our journey to recover profitability. I wanted to take you through some of the elements. As just mentioned a few minutes ago, our business in Brazil are doing extremely well. Natura, a highlight and Avon stabilized and with improved profitability.
In Hispanic Latin America, we faced some macro headwinds, but as we speak, in Q1, they are less ex-strict than they were in Q4, in Argentina and Chile and Peru. The Natura brand has proven a long story of profitable growth there. As regards Avon, all the restructuring that we are doing, which will create turbulence in terms of top line, is targeted at improved stability and cash generation. Moreover. Oh my God, what is going on here? Sorry. I hope I'm still on. I was.
First call from Gia.
What's going on? Okay. What? Okay. Sorry Joseph, are you hearing us?
I'm still here, but I'm hearing the operator.
Shall we try again? Just a second, people. Okay. Yeah. Shall we try again?
You guys are back.
Oh, good. Thanks. I described what we are doing in terms of top line. I was developing gross margin. I just mentioned our efforts to price up and recover gross margin, which has been a successful movement so far. And finally, you know that we have, you know, a story of trimming down our G&A, capping it to a healthy level, which we continue to do, which will be easier now with Wave 2, right? As Gui just mentioned, a significant portion of the G&A in Q4 related to phasing of non-recurring items. Just to say that we are pretty confident in our journey to recover profitability going forward. Gui?
Yeah. On the leverage, Joe, we haven't communicated basically what is the optimal level of capital structure for the company. Of course, the focus right now is to work on the capital structures to reduce leverage. As Fabio mentioned, right, in the beginning, by doing that, allowing us to have the right firepower to invest in our priorities. You can of course assume that we'll continue to work on the two priorities that I mentioned, which are profitability and cash conversion, but also in structural items to improve the capital structure in the short term.
Once we are in that position, then we'll communicate what is the optimal leverage for the company, the optimal capital structure for the company going forward.
Perfect. Gui and JP, just a follow-up here. You guys mentioned, like, both about, like, non-recurring G&A expenses, both at the perimeters of Latin America and Avon International. Can you help us quantifying that so that's, like, really, really useful? Thank you very much. I'm sorry for the extra question.
Joe, you can assume that a significant portion of the G&A increase is coming by those non-recurring, okay? We're not gonna break down, but you can assume that is the majority of the G&A increase in the quarter is coming from what we see here as non-recurring expenses. Again, part of that, they were again, a way, distribution of quarterly phases. Part of that, they were tactical decisions that we decided to invest. You can assume that most of those, most of the increase or actually the decrease that we saw in EBITDA and the increase that we saw in, yes, G&A in particular for Avon International and LatAm, they are non-recurring going forward. As João mentioned, we're confident in our plan to improve EBITDA margin this year.
Perfect. Thank you very much.
The next question comes from Eric Huang of Santander. Please go ahead.
Hi, good morning, thank you for taking my question. From our side, we have seen these improvements in cash generation. We would like to better understand if you could break down how much of these improvements were related to seasonality and how much were structural. Going forward, where are the biggest opportunities still to be captured in the cash flow side? Thank you.
Thank you, Erica. I'm gonna take that one. Again, needless for me to repeat the focus of the company in this particular item going forward, so I'm gonna skip that. When you look at the cash flow results that we had, especially in the second half of the year, right? You can see that the bulk of the improvement, even though EBITDA margin was compressed, the bulk of that improvement comes from cash conversion items, right? With that, basically, I mean, working capital, the net CapEx, and the cash tax rate as well.
The biggest item of improvement in the last quarter of the year, and in the second half in general and full year, was inventories, right? Given where we were last year and what we communicated again, that we wanted to be in the big focus on reducing inventories across the region, but with a strong focus in some LatAm countries, right? Great part of that is coming from Fashion & Home and the bulk of the inventories reduction is coming from finished products. We are in a very good position right now in terms of supply and service level, at least in our view.
Of course, as we mentioned, there is seasonality that impact the business, but the important thing is that when you look at the 12 months combined, we continue to deliver optimizations in terms of working capital as percentage of the revenues. On the payable side, we remain flat in the year, mainly caused by a reduction in CapEx and of course by lower expenses as well. In terms of some important items in Q4, lower purchase which impacted of course the payables items. Even though we have implemented in the second half of the year some important actions that we're confident that we'll continue to see results going forward in 2023.
Receivables in particular, of course, negatively impacting the cash flow, but that's a mix of BUs. As you know, most of our receivables, they sit in LatAm, and with LatAm, in particular Brazil, showing a strong growth in the quarter again, with Natura growing more than 17%. Avon for the first time in the last 6 quarters in positive territory, posting high single digits in terms of growth with Fashion & Home actually in that equation. That is why again, we're seeing the headwind in terms of receivables. CapEx as well, again, as I mentioned, optimization that you should expect to continue and the same thing on cash tax rate.
In terms of seasonality, again, there is of course quarters that impact the cash flow, but the important thing is that when you look at the past 12 months, this number has improved and will continue to improve with our actions that we're taking. We're confident on that. The org is mobilized on that, on that topic.
Perfect. Gui, thanks.
The next question comes from Andrew Ruben of Morgan Stanley. Please go ahead.
Hi. Thanks very much for the question. I'd be interested to hear more about the Wave 2 integration plans and specifically how that's going to differ for Brazil versus the rest of LatAm. We saw in the release some of the regions, Wave 1 and Wave 2 would occur simultaneously, so curious what that would involve. You mentioned with integration costs that could be offset with some LatAm asset divestment. I'm curious if you could provide more detail on what that might include as well. Thank you very much.
Hi, Andrew. JP here. As previously announced, we are starting Wave 2 in Peru in Q2 this year, which followed by Colombia and Brazil in the second half. Indeed, we are looking at divestment of some assets that could partially offset the investments related to the implementation. And the difference in Brazil is, well, I think it's twofold. Brazil is the largest, so we need to be mindful of how to implement it in a sort of phased way, although to get it behind us before the end of the year. And the other thing is that Avon in Brazil has already gone through most of the structural changes which are necessary for this combination. Which is not the case in every single country.
When you look at Peru, the first one we are doing, I mean, there, we are simultaneously making structural changes to Avon's business, commercial model and combining it with Natura. That puts additional pressure on the Peruvian operation, which would not be the case in some other countries. These are the main differences.
That's very helpful. Thank you.
I'm gonna go next.
That's all the time we have for questions today. I would like to turn the call back over to Fábio Barbosa for closing remarks.
Thank you very much. Thanks everyone for following the call here. It was a good dig into the details and so on, so that we do not lose the perspective of what is the strategy that we are following. I will quickly go through them again. First, the structural steps are in motion across the group to improve our performance. These include accelerating integration of Natura and Avon in Latin America, optimization of Avon's international footprint, and right sizing The Body Shop. At Aesop, we are evaluating strategic options aiming to improve the company's capital structure. Second, our priority to focus on cash generation and improving the company's capital structure build the path to unlocking significant value with some first green shoots appearing in the first quarter numbers already. The whole organization is mobilized and incentivized to achieve these goals.
Third, looking forward, we are confident that the actions we are taking will position Natura Cosméticos to focus not only on profitability and cash, but also return to focus on growth. Fourth, 2023 will likely be another challenging year, but we expect a continuous improvement in revenues as well as a better profitability and cash generation while continuing to invest in the transformational actions just mentioned. We are continuing our ongoing work to improve the fundamentals of our brands and businesses. Our priority remains very clear. We are strongly focused on improving margins and generating cash flow, and the teams in the view are all mobilized and incentivized to achieve these goals. Thank you very much for your attention from everyone, and we'll be ready to talk in the next weeks and days. Days and weeks. Thank you.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.