For another quarter, the results of Natura&Co (NTCO3) highlighted the scenario full of challenges for the cosmetics company. At 1:42 pm (Brasília time), NTCO3 assets were down 13.94% to R$13.71, standing out among the biggest drops on the Ibovespa after a net loss of R$766.7 million in the second quarter of 2022 The company, thus, reversed a profit of R$ 234.8 million from the same period last year, which was explained by higher financial expenses and taxes.
Natura reported weak results in the face of macro deterioration, exchange rate appreciation, conflict between Ukraine x Russia and cost pressure, highlights XP, with consolidated sales down 9% on an annual comparison basis.
Profitability was the main negative highlight of the result again, analysts reinforce, with the Ebitda margin (Ebitda, or earnings before interest, taxes, depreciation and amortization, on net revenue) adjusted by 6.3% (down 2.3 pp .P.).
The main margin offenders were: i) higher raw material and freight costs; ii) negative exchange rate effects; and iii) operational deleveraging due to the drop in revenue, mainly in Avon and TBS; which was partially offset by gains in efficiency and synergies.
Bradesco BBI, in turn, described the results as a “roller coaster”. For analysts, there are major positive highlights, with Natura Brasil sales growing 14%, Avon Brasil sales 5% higher in the Beauty category and Hispanic markets growing well at constant exchange rates.
However, there are also some major frustrations, such as the contraction in gross margin, a painfully low Ebitda margin of just 3% at TBS and weak Avon International, albeit with limited deterioration when excluding Ukraine and Russia.
“It is fair to say that the ‘engine’ of Natura & Co in Latin America, particularly Natura – looks better than it has been in several quarters, with strong growth and a stable EBITDA margin of 10.8%”, points out the BBI. However, he says, the question mark over TBS has grown (retail channels are struggling with lower traffic, but other channels are no longer accelerating), with weakness in that business adding to the list of issues that need to be fixed.
A positive step in this direction has been communicated – management expects to be able to cut corporate headquarters expenses by at least 40%, which equates to almost 6% of last year’s Ebitda – and analysts expect further news about the new corporate structure in the coming years. months.
“That said, the CEO’s comment that ‘margins will remain tight in the short term’ is likely to cause some concern and potentially lower consensus estimates (BBI is nearly 7% down),” the analysts note. Therefore, while there are certainly new launches at Avon Brasil, and Natura continues to perform well as a brand across Latin America, BBI believes that the results probably did not bring comfort over the estimates and the conviction of a recovery in the second half of the year that investors were looking. As a result, they reduced the target price from BRL 30.00 to BRL 29.00 per share at the end of 2022.
JPMorgan saw a positive message, even if the results were poor.
Analysts highlight some points for greater optimism. Firstly, the tone of simplification and corporate restructuring, which was clear in the message of the new CEO, Fábio Barbosa. In addition, capital discipline is already starting to generate recurring savings in results, in addition to material improvements in cash flow generation trends (although still negative). Finally, clearer and more transparent communication with the market
“In addition, we believe that the focus should be on the Group’s new strategic plan, focused on rationalizing its structures, especially at the holding level, to have a leaner and more agile operation, with greater autonomy”, points out JP, which follows with a neutral recommendation for the asset.
In a conference call with the market after the results, the CEO of Natura highlighted that he sees a challenging scenario for the 2nd semester, but also with a trend of improvement in sales.
The pressure of commodities and inflation will continue to impact gross margin and, in this scenario, the company remains cautious, but will operate in the management of discounts and through the mix of categories that will be the focus of most of the company’s units. “As we saw in 2Q22, revenue should improve”, points out Fábio Barbosa, noting that there should still be “a lot of pressure” in the short term.
The 2Q22 results, according to the CEO, reflect the challenging scenario in the period. But, in his view, the company has made good decisions to achieve better results.
Barbosa says that Natura seeks a leaner, more decentralized organization, with greater autonomy and allocating capital to better defined priorities. Significant savings in corporate expenses have already been identified and all businesses continue to focus on protecting margins and generating cash flow in all units.
According to Guilherme Strano Castellan, CFO, the priority is to continue working on general expenses and profitability. He highlights that the cash position remains solid, with a focus on ongoing liability management. The final cash balance in June was R$ 4.3 billion, with a maturity of 3 to 6 years. Leverage is 2.6x net debt/EBITDA.
The company is in constant reassessment of possibly exiting some international markets, and complete review of the company’s overheads. He states that the teams were assertive in the changes in revenue management, in the face of high commodity prices and due to inflation – if there were no such movement, the indicators would be much worse, says Guilherme Strano Castellan.
“Even with Avon Internacional’s deleveraging and gross margin pressure, we managed to offset part of the drop in general expenses”, points out the CFO.
According to João Paulo Brotto Gonçalves Ferreira, CEO of Natura in Latin America, two stores will be opened in Shanghai, and the expectation is to expand further in the Chinese market in 2023. “We are very optimistic about the opening in China”, he highlights.
Castellan, in turn, admitted that the company is considering closing operations in regions where it has lower profitability, as Natura&Co seeks to recover profit margins in a “still challenging scenario”. The executive, however, did not detail which are these geographies.
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