For another quarter, Natura & Co.’s (NTCO3) results highlight a challenging scenario facing the cosmetics company. NTCO3 assets moved away from their lowest levels, but closed down 10.36%, at R$14.28, to stand out as the biggest drop in 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 for The same period last year, which was explained by the rise in financial expenditures and taxes.
Natura reported poor results in the face of overall deterioration, exchange rate appreciation, conflict between Ukraine and Russia and cost pressure, as XP highlights, with consolidated sales down 9% year-over-year.
Profitability was the main negative of the result again, analysts stress, with adjusted Ebitda margin (Ebitda, or EBITDA, on net revenue) of 6.3% (down 2.3 pp.).
The most significant margin violations were: 1) higher raw material and freight costs; 2) the negative effects of the exchange rate. c) Operational deleveraging due to lower revenue, particularly in Avon and TBS. which were partially offset by gains in efficiency and synergies.
Bradesco BBI, in turn, called the results “a roller coaster.” For analysts, there are key positive points, as sales of Natura Brasil grew 14%, Avon Brasil sales rose 5% in the cosmetic category, and Hispanic markets grew well at constant exchange rates.
However, there are also some major disappointments, such as the contraction in gross margin, Ebitda’s painfully low margin of just 3% at TBS and Avon International’s weakness, albeit with limited deterioration when Ukraine and Russia are excluded.
“It’s fair to say that Natura & Co’s ‘engine’ in Latin America, especially Natura – looks better than it has in several quarters, with solid growth and a stable EBITDA margin of 10.8%,” BBI notes. However, he says, the question mark has grown on TBS (retail channels are struggling with declining traffic, but other channels are no longer accelerating), with weaknesses in that business adding to the list of issues that need fixing.
A positive step in this direction has been announced — management expects to be able to cut corporate headquarters expenses by at least 40%, which is roughly 6% from last year’s Ebitda — and analysts expect more news about the company’s new structure in the coming years. Months.
However, the CEO’s comment that “margins will remain tight in the short term” is likely to cause some concern and lower consensus estimates (the BBI is down nearly 7%), analysts point out. So, while there are certainly launches New in Avon Brasil, and Natura continues to perform well as a brand across Latin America, BBI believes the results may not have brought relief about estimates and the conviction of the second-half recovery that investors were looking for.As a result, they lowered their target price from 30.00 Brazilian Real to $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 more optimism, first, the tone of simplification and restructuring of the company, which was evident in the message of the new CEO, Fabio Barbosa. In addition, capital discipline has already begun to generate recurring savings in results, as well as material improvements in cash flow generation trends (though 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, which focuses on rationalizing its structures, especially at the retention level, for a more agile and flexible operation, with greater autonomy,” notes JP, who follows with a neutral recommendation for the original.
On a conference call with the market after the results, the CEO of Natura confirmed that he sees a challenging scenario for the second semester, but also with a trend for improvement in sales.
Commodity pressure and inflation will continue to affect gross margin, and in this scenario, the company remains cautious, but it will work in managing discounts and through the mix of categories that will be the focus of most of the company’s units. “As we saw in the second quarter of ’22, revenue should improve,” Fabio Barbosa notes, noting that there is still “a lot of pressure” in the short term.
The 22 second quarter results, according to the CEO, reflect the challenging scenario in this period. But, in his opinion, the company made good decisions to achieve better results.
Barbosa says Natura is seeking a smaller, more decentralized organization, with greater autonomy and better allocation of capital to specific priorities. Significant savings in corporate expenses have already been identified and all companies continue to focus on protecting margins and generating cash flow in all units.
According to Guilherme Strano Castellan, Chief Financial Officer, the priority is to continue working on overhead and profitability. It highlights that the cash position remains strong, with an emphasis on managing continuing liabilities. The final cash balance in June was R$4.3 billion, with a maturity of 3 to 6 years. The leverage is 2.6x net debt/EBITDA.
The company is constantly reassessing the possibility of exiting some international markets, and a full review of the company’s overheads. He states that the difference has been resolute in changes in revenue management, in the face of rising commodity prices and due to inflation – if there was no such movement, the indicators would be much worse, says Gilherme Strano-Castellan.
“Even with deleveraging and Avon Internacional’s gross margin squeeze, we were able to offset part of the decline in overhead,” notes the CFO.
According to João Paulo Proto Gonçalves Ferreira, CEO of Natura in Latin America, two stores will open in Shanghai, and the expectation is to expand further into the Chinese market in 2023. “We are very optimistic about opening in China,” he said, highlighting.
Castellan, in turn, acknowledged that the company is considering closing operations in areas where profitability is declining, as Natura & Co seeks to restore profit margins in a “still challenging scenario.” However, the executive authority did not mention in detail what these geographical areas are.
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