Earnings Transcript for NTCO - Q4 Fiscal Year 2023

Operator: Good morning, everyone. Thank you for waiting and welcome to the Natura &Co's Fourth Quarter and Full Year 2023 Earnings Conference Call. It's important to point out that we have a simultaneous translation tool available on the platform. To access it, just click on the interpretation button through the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. For those who are listening to the video conference in Portuguese, there is the option to mute the regional audio in English by clicking on Mute Original Audio. On this call today are Fabio Barbosa, CEO of Natura &Co; and Guilherme Castellan, CFO of Natura &Co; Joao Paulo Ferreira, CEO of Natura &Co Latin America will join for the Q&A session. The presentation they will refer to during this call is available on the Natura &Co Investor Relations website. I will now hand it over to Fabio Barbosa. Please, sir, go ahead.

Fabio Barbosa: Thank you, and good morning, everyone. We greatly appreciate your participation today. 2023 was a year of key advancements in our strategy operations, financial performance and enhanced overall financial position. I'm encouraged that we delivered solid results in the fourth quarter and for the forward full year, marking significant progress in our transformation. I would like to start with a quick overview of what drove our 2023 performance and contributed to our success. The past year was driven by three key enablers that we had established back in June 20 -- 2022. They were streamline our business, focus on profitability and cash conversion versus revenue growth and advanced structure projects. Beginning with simplification, we closed the sales of both Aesop and The Body Shop in the second half of the year. We also continue to optimize the holding structure by giving more autonomy and accountability to the business units. Then, early this year, we announced the delisting of our ADR from the New York Stock Exchange. And last month, we released a material fact informing the market our plan for assessing a potential separation of Natura &Co LatAm and Avon. As you all know, we are still in the very early stage of this process and of note, there can be no assurance at this time that the separation will be approved by the Board. We will keep you and the market posted with any relevant update on this process. Next, financials. We are pleased that our business is moving in the right direction. We strengthened our margins, improved our cash flow and deleveraged to be in the net cash position at year end. The positive free cash flow to firms, alongside our much stronger balance sheet allow us to start moving to a more optimal capital structure and to announce a BRL979 million dividend payment for this year. Moving to the structure projects. In Brazil, Wave 2 already led to a fourth quarter where we saw enhanced productivity, cross-selling and recovery of the distribution channel activity. Furthermore, the initial challenge mentioned in the last earnings call showed improvements at Avon International. I would highlight that the entire business is already being managed from two lead regions, down from the previous four lead ones, showing further simplification of the business model. Last, our strategic focus and investment in our ESG goals has been and will always be a priority for us and to our -- and our key stakeholders and is totally embedded in our business strategy. In this sense, I want to highlight important initiatives from this year and that we are very proud of, which have to be to do with our people. We not only met our goals to ensure a living wage for all Natura &Co employees, but also reaffirmed our commitment to eradicating the gender pay gap across the organization. With that, I will turn the call over to Gui who will provide more details on our 2023 financial results. Gui?

Guilherme Castellan: Thank you, Fabio, and hello, everyone. I'll start on Slide 6 with consolidated revenue from Natura &Co, which stood at BRL6.6 billion. up 4.5% in constant currency. In reais, sales were down 17.4%, reflecting depreciation of some currencies in the countries in which we operate versus the real and the impact of hyperinflation accounting. Excluding Argentina, this decline was 5.1%. We'll look at the performance review shortly, but in a nutshell, we posted constant currency growth Natura brand, which was up 8.5%, but down 4.7% excluding Argentina, mainly driven by a solid Natura Brazil performance offset by the Avon brand. At Avon LatAm, we saw an expected decrease given the rollout of Wave 2, which included planning reduction in reps coupled with portfolio optimization, especially in the Home & Style category. On a positive note, we could see improvement in the downward trend in Brazil when we compare Q4 to Q3. The changes implemented in the Home & Style category were also responsible for most of the decline seen at Avon International. Now turning to Slide 7, the adjusted EBITDA margin was 10.1% in Q4, expanding 370 bps year-over-year from 6.4% in Q4 '22 and marking another strong quarterly improvement with solid expansion across all businesses. Excluding the hyperinflation accounting impact, the expansion would have been 510 bps year-over-year. This reflects improved results at Avon International with margin expansion of 550 bps year-over-year, driven by both higher gross margin and transformational savings being implemented, along with the stronger impact from SG&A savings. Natura &Co LatAm also registered solid margin expansion of 250 bps year-over-year, also driven by higher gross margin and improving G&A expenses. It is important to note that we saw expansion of EBITDA margin in every quarter during 2023. We're particularly pleased with the trend in corporate expenses, which have declined approximately 40% in over two years, as Fabio also mentioned. The improvement in our cost structure is a big contributor to our improved adjusted EBITDA margin. Moving to slide eight. Let's now look at our bottom line. The reported net loss in Q4 '23 was BRL2.7 billion compared to a net loss of BRL890 million in the same period last year. This is mainly explained by discontinued operations, which includes the capital loss due to The Body Shop divestment and the Avon International non-cash goodwill impairment of BRL664 million. When we look at the underlying net income, which excludes transformational costs, restructuring costs, discontinued operations and PPA effects from net income, we get to a net loss of BRL506 million versus a loss of BRL49 million in Q4 last year as higher adjusted EBITDA was more than offset by higher net financial expenses, mainly related to the peso devaluation, hyperinflation accounting and also tax expenses, given the mix of profitable and unprofitable countries. In the year, reported net income was positive BRL3 billion, an improvement from the loss of BRL2.8 billion reported in 2022. In full year '23, free cash flow from continued operations was minus BRL2.8 billion, mainly impacted by the BRL1.5 billion settlement of the derivatives related to the liability management exercise we executed in the second half of the year and a higher working capital consumption. Free cash flow to firm in the same period was positive BRL59 million, adding back the FX and interest on debt and derivative lines versus negative BRL561 million reported in full year 2022. Working capital was impacted by accounts receivables, given higher revenue sales from Natura Brazil, that is exposed to the longest receivable terms and inventories impacted by write-offs as a consequence of portfolio optimization in LatAm Wave 2. On slide 10, you can see our liquidity profile. We ended the quarter with a cash balance of BRL7.8 billion, up from BRL6 billion a year ago as a direct result of the sale of Aesop. The proceeds from the sale allow us to pay down most of our debt in the second half, becoming cash positive in BRL1.7 billion and reaching a negative net debt to EBITDA ratio of -0.79 times. During the quarter, we also concluded the tender offer of $880 million related to the bonds maturing in May '28 and April '29. The average maturity of our debt now is 4.7 years. Our balance sheet is strong and sufficient to support our investments in growing the business and combined with a positive free cash flow allow us to move to a more optimal capital structure and we are announcing BRL980 million in dividends payment for this year. We will maintain a balanced and disciplined approach to capital allocation with respect to our strategic priorities. Before turning to our performance by business unit, let me update you on our Wave 2 progress. The rollouts continue to evolve with a solid performance from the Natura brand in Brazil and a recovering trend from Avon. We continue to see enhanced productivity and cross-selling, coupled with a recovering distribution channel activity in Brazil during Q4. We're also already noticing improving trends related to some of the issues that we disclosed last quarter. In Brazil more specifically, most of the backlog of delayed deliveries was resolved in the beginning of the year, restoring on-time delivery and lead times for both brands to their pre-disruption level. The efforts to reorganize sales leadership are already showing signs of stabilization and the performance indicators are already aligning with historical norms. The level of inventory shortage has seen improvements on a quarter-over-quarter basis despite the seasonal strong demand in Q4. It is worth noting that these adjustments are ongoing as we speak as we get to better understand the new levels of demand from the combined business. In Hispanic LatAm, the level of service in Peru and Colombia is also better and we saw improved satisfaction from our consultants. With the experience gathered and lessons learned since the first rollout of Wave 2 in August, we're able to implement a smoother integration process of Natura and Avon in Chile in the beginning of this year. Let's now look at performance by business units starting with Natura &Co LatAm. Excluding Argentina, revenue was down 4.7% in reais. The Natura brand continued to post strong momentum with year-on-year growth of 8.6% in the quarter in Brazil in constant currency, demonstrating solid performance despite the operational challenges related to the Wave 2 rollout that I just mentioned. Still, these results was fueled by non-direct selling channels including retail and digital, which we saw significant growth contributing to a larger share of total revenues and improving contribution margins. In Hispanic LatAm, excluding Argentina, revenues were broadly stable year-over-year. Mexico faced challenges due to adjustments in its commercial model, while Chile experienced a dip in performance as it prepared for the early '24 Wave 2 rollout. Now at the Avon brand in LatAm, net revenue in the Beauty category was down 5% in constant currency, mainly impacted by the 12% drop in Brazil, still impacted by the Wave 2 rollout. Although still in negative territory, this was an improvement from the 25% decline reported in Q3. In Hispanic markets, net revenue was broadly stable in constant currency but down 19% excluding Argentina, reflecting ongoing challenges and similar trends to Q3, particularly related to the preparation and execution of Wave 2. Finally, the Home & Style category recorded a 31% revenue decrease in constant currency year-over-year, directly related to the portfolio optimization strategy we announced before. We'll now turn to Natura &Co LatAm profitability figures. The adjusted EBITDA was BRL557 million and adjusted EBITDA margin was up by 250 bps to 11.4%. Excluding hyperinflation accounting impact, margin expansion will have been 410 bps year-on-year. Natura &Co LatAm was again a solid performer in terms of profitability, driven by strong performance from Natura Brazil and an evolution in the performance of Avon in the region. We saw gross margin expansion of 380 bps, mainly by Avon Hispanic, which was boosted by commercial adjustments. Although we're pleased with the progress to date, Avon is not yet where it needs to be. Overall, the improved profitability of Natura &Co LatAm was due to gross margin expansion driven by effective pricing strategies, product mix enhancements, portfolio optimizations and reductions in G&A expenses. These gains were partially balanced by a planned increase in marketing. Now let's turn to the performance of Avon International. Now moving to Slide 16, Avon International Q4 revenue was down 6.1% year-over-year in constant currency and 16.9% in reais, an underperformance when compared the last couple of quarters when it was broadly stable. The main impact here is the Home & Style category, while Beauty revenue was down 2.6%. Avon International is also improving digital sales penetration, which increased by 2.2 percentage points year-over-year to 8.3% of total revenue. Profitability in turn show an important evolution with adjusted EBITDA margin reaching 11.3%, an expansion of 550 bps year-on-year. The expansion reflects gross margin improvement coupled with the declining selling and G&A expenses. The year-over-year comparison base was easier as Q4 '22 was significantly impacted by phasing of expenses, which helped Q4 '23 margin expansion despite sales deleverage. I will now turn the call back to Fabio for his closing remarks.

Fabio Barbosa: Thank you, Gui. 2023 marked a pivotal chapter in the Company's history, setting the stage for the ambitious horizons we aim to reach in 2024 and onwards. We are encouraged with the positive results from the strategy set approximately 18 months ago, but we must continue evolving our strategy as margins and cash remain as a priority in the short term, paving the way for additional investments in brands and technology. During 2024, resource allocation will continue to be a critical driver for future value creation with a focus on investment in key growth markets and projects. We continue to expect volatility in top line, but with margins improvements in the full year, particularly excluding Argentina. I'm excited to build upon the success of the past year and deleveraging on our long term objectives. We are now available to take questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions] Our first question comes from Joao Pedro Soares, Citi. Joao, we will now open your audio so you can ask your questions. Please proceed.

Joao Pedro Soares: Thank you. Appreciate it, and good morning, Fabio, Gui. Good morning, everybody. A couple on my side. The first one, I just want to understand capital structure going forward after the dividend payment and looking to the first quarter where you have seasonally worse cash cycle, right, and as well as I think looking -- I think the point that we want to get is what would be the optimal capital structure now in looking at the -- specifically leverage, right? The second point that I wanted to discuss, in Brazil, I understand that you already solved the delivery -- the delayed deliveries, but we still see some issues with the inventory management, right, the inventory shortfall in the fourth quarter. So I want to understand if this is fixed, right, if you should expect other effects, and also wanted to discuss in terms of the rep base, right, we still see a decline in the rep base in the fourth quarter. Where are we exactly in that cycle, right? When we should see a reversion in terms of the rep base? And lastly if I may -- sorry about that. But lastly, if I may just what will be the recurring EBITDA and the recurring earnings, excluding the effect of Argentina? Thanks. The ARS depreciation, that is. Okay.

Guilherme Castellan: Hey, Joao, thank you for the question. I hope everything is well. So I'm going to take the first question here on capital structure, and I'm going to pass the ball to Joao, so he can expand a little bit more on Brazil and your questions on inventory, and then we can talk a little bit about the last one. But yeah, so on capital structure, let's remind everybody that this is something that we have been talking to the market since we closed the Aesop transaction back in the second half of last year, right? And there are basically two drivers now that allow us to move to a more optimal capital structure, right? Those drivers are the first one, the strong balance sheet position. As you can see, we finished the year with BRL1.7 billion in cash. And the second one is this strong free cash flow to firm generation, right? As you probably remember, Joao, we have been consuming cash on an annual basis, mainly driven by, yes, free cash flow from operations, but also due to the high interest expense that we had on an annual basis. And now with the liability management, with our cash position, that number is much better, of course, right? It's not impacting us negatively as before. Plus the confidence that we have in the plan that show us that again, we are in a very good position to go back to strong cash conversion, strong cash flow generation in the upcoming years. Even keeping in mind that in 2024, we have potential one-offs, such as continued transformation costs and tax expenses related to capital gains of 2023. But having said that, again, we're confident on the plan and we believe that that allow us to announce the BRL979 million in dividend for 2023, which is the maximum of our profit reserves, and also allow us to move to a more optimal capital transaction as we have been disclosing to the market should be around one to 1.5 times leverage, which is not going to happen overnight, okay? I'm going to reiterate that point. It's not something that we're going to move immediately, but of course, we're going to be targeting that level as the business progresses. With that, I'm going to pass the word to Joao.

Joao Paulo Ferreira: Thank you, Gui. Hi, Joao. As regards our Brazilian operation, indeed, deliveries have been sorted out at the end of the year and it's now back to normality. As regards product shortages, we experienced a very high figure throughout Q4 as we started stabilizing and learning more about the combined demand of Natura and Avon. And currently, it's operating at a much lower number than we experienced in Q4, although higher than our historical levels. So we are still learning from this new combined portfolio and also learning from the improving trend of our business in Brazil. Gui, I think the next one goes to you on the recurring margins ex-Argentina.

Guilherme Castellan: Yeah. So, Joao, I think you probably had a chance to look at the release where we put a table there indicating what is the impacting of the hyperinflation. I -- we affirm here that even though we should expect big macro volatility in the country, Argentina continues to be a paramount region for us to win. And by the way, one that we have done extremely well in the last few years, and we'll continue, of course, to be focused in the region. Of course, there is the hyperinflation impact, which, as you probably saw on the table, impact negatively the Latin America margin expansion. And again, we should continue to expect some volatility of that type during 2024. Having said that, it's very important for us to reaffirm and requoting what Fabio said here, right, that we are expecting to see margin improvements in Latin America, particularly excluding Argentina, it's very difficult to predict what is happening in Argentina, what will happen in Argentina, especially in the scenario of consumer constraint. But we are confident that the plan is working. And of course, with that, it results in continued margin expansion. So I hope that the table helps. And of course, if you have any other questions on that, we can take it offline. Thank you.

Joao Pedro Soares: Thanks, Gui. Thanks, Joao.

Operator: Our next question comes from Joseph Giordano, JP Morgan. We will open your audio, sir, so you can ask your question. Joseph, please proceed.

Joseph Giordano: Hi, good morning. Good morning, Fabio, Gui, Joao. Thanks for taking my question. There are a few ones actually here. So the first one goes into the LatAm perimeter. Those are maybe simple questions. So we still have the Wave 2 be implemented in Brazil, but in the fourth quarter, we did see some acceleration in the shrinkage of sales reps in Brazil. So the question here is like, when we should be seeing that normalizing? The second one in Latin America, like those what Gui was commenting now. Just trying to exclude the noise from Argentina. So if you could share what is the margin level in Latin America, excluding Argentina and why we ask that because like when we look on a constant currency basis or anything like that, we still have some inflationary gains on inventories that tend to distort the reported margin figures. Then moving to Avon International, I have two questions on this front. So we do see like, okay, top line, still contracting, but a much, much healthier EBITDA margin level. So the question here is, one, how far are we from having this operation at a cash flow neutral stance? And the second one is if you have any updates on the potential spin-off of this operation. Thank you very much.

Guilherme Castellan: Joe, sorry, just before the question on the spin-off, what was your other question? I'm sorry, I missed that.

Joseph Giordano: On Avon International, it's related to the, like, the cash flow neutral stance on the operation. So top line is contracting, but margin is quite healthy.

Guilherme Castellan: Okay. So I think Joao was going to kick off with LatAm, and then I'll take the other ones.

Joao Paulo Ferreira: Hi, Joseph. Basically, our rep count base has stabilized at the end of the year, so -- and that happened also in Peru and Colombia. So it's now stable and the operation is progressively back to normal, regular standards. And I want to call your attention, of course, that the productivity gains have been huge, especially in Brazil. So as of Q1, you will see sort of regular trends progressing. Gui?

Fabio Barbosa: May I just add, Joao Paulo, our objective has been to clean up a little bit the basis and going for the consultants which are active, operating, and thus Joao Paulo emphasized here that the productivity goes up. So it's not a matter -- of course, there is a limit on what I'm saying here. But the idea, more than going for more and more consultants is to make sure that we have consultants which are active and very productive. And that's what Joao Paulo is working on, which, by the way, is also the case in Avon International.

Joao Paulo Ferreira: Indeed, Fabio. And by the way, Joseph, let me call your attention to the fact that if you look at Brazil, Q4, Natura brand grew, and the Avon brand, which was minus BRL24 in Q3 is now minus BRL11 in Q4. And that is an ongoing trend, very positive trend going forward. So we are focusing on the productivity gains as Fabio just highlighted. Gui?

Guilherme Castellan: Yes, Joe, so thanks for the question. So I'm going to start talking a little bit more about Argentina and again, making a link to what I said to Joao in the first question, right? And I apologize, Joao, if I didn't understand your question correctly, but I think I can answer both right now. Argentina has historically very high EBITDA margin. Let's start with that, right, especially driven by the Natura brands, and of course, especially driven by the high market share that Natura has in particular, but of course, both Natura and Avon have in the country. Now, we don't disclose that margin, but you should expect that margin to be above the average of LatAm, especially driven again by Argentina. Now, if I can flag a couple of things related to Argentina, right, and I keep saying, Joao can expand more, that Argentina remains a key country for us, right? It's a country that we have a huge market share. It's a country that Natura brand has a huge brand equity, and it's performing extremely well. And yes, we operate in Latin America, and we face countries that have volatility, but again, we remain very much focused on winning in Argentina, even amid this short term volatility. Having said that, Argentina, which in the past represented almost 15% of our results. Now, as you can see in the Itahi in the financial release, you're going to see that represents less than 8%, right? So, of course, the devaluation of the country -- devaluation of the currency has an impact on the total weight. So even though Argentina has a very strong margin, and by the way, the margin 2023 was impacted by the macro volatility there, so it's not as strong as before. But even though Argentina has a very good margin above the average of the country, we should expect the Argentina weight in the total mix of things to diminish, right? So that's all I can say, as we don't disclose margin by country. Now, moving to Avon, right? Avon has been on a journey. It has been three years since the acquisition. I think that in the last three years, we have been mainly focusing on stabilizing the business, and I think the team there led by the -- led by Angela and now, of course, Kristof, and the team has done a fantastic job in being able to stabilize the business. The results, they speak for itself, right, when we talk about improvements. When you compare the results of Avon International in 2023 compared to 2021 and even 2022, not only, Joe, you see a margin expansion, but you also see a big improvement in the way the cash has been management, right? Now, there is still a small cash consumption coming from Avon, but the improvement has been tremendous. And again, and we expect to see Avon printing positive cash in the upcoming year. So we're very excited to see the plan evolving in the right way, even though, again, there are some uncertainty, of course, related as well to the countries that we operate, and we may expect to see some volatility in top line, as we have disclosed in the release. Now, this links to your next question, which is the studies on the potential separation, and just to be clear, right, the -- of course, that in the end of the day, we're aiming to unlock shareholder value, right, with those studies, if that's the decision from the Board. But in the end of the day, we're only in a position to announce something like that because of the work that Avon has done in the last years, right? Because what we're trying to do as well in the end of the day is to seek the best outcome for both Avon and Natura brands, right, which, as we have basically disclosed in the past, are our core assets, right? And that -- and in the end of the day, we're only able to announce these results because of the results that we have there today. The results, they were announced basically, as we mentioned before, because we don't see a lot of synergies between the two regions. It's the continuation of what Fabio has announced back in the middle of 2022 of simplification of the business, giving more autonomy to the BUs and lending, of course, the BUs have flexibility on their investment capacity. And of course, again, in the end of the day, we see that we are in a potential position that we can announce something like that. And of course, if the Board approves, execute it. But as Fabio mentioned, we are in early stages. We don't have anything else to announce at this point. I know that the market gets anxious and curious, but we don't have anything else to announce at this point. We'll continue. It's not something simple. As you can imagine, there's a lot of things that have to be carefully analyzed, but we'll continue to study. And of course, we understand that we have a commitment to the market to return soon with a position on that and that's what we're going to do.

Joseph Giordano: Perfect. Thank you very much.

Operator: Our next question comes from Gustavo Senday, XP. Gustavo, we'll open your audio so that you can ask a question. You may proceed, please.

Gustavo Senday: Hi, good morning, everyone. Thank you for the questions. I have two. The first one, I think is more towards Joao. Looking at Wave 2 in the release, you mentioned that cross-selling has evolved, right, in the quarter, but you could provide more details in terms of categories being cross-sold and what is the percentage of Avon's base that is already cross-selling with Natura and how that trends compares by country? And also that given that the operational challenges were adjusted in Q4, can we continue to expect the logistical integration of both brands to take place in Q2 in Brazil or that plan has been slightly postponed? And the second question, I think it's more to Gui. So G&A control was a positive surprise in the quarter. Just wanted to understand if we can expect further gains going forward or the main adjustment has already been made. Thank you.

Joao Paulo Ferreira: Hi, Joao here. So, as regards cross-selling, I think we mentioned in previous occasions that it's extremely high, extremely high in the Andeanian countries, Peru and Colombia, where we first started, and in Brazil, it's not as high because, as you noticed, logistics have not been integrated. So there are some additional barriers to placing combined orders in Brazil. Having said that, the number is much higher than we expected, although lower than what you see in the Andeanian countries, where that has already been integrated. By the way, we have just launched Chile, where we see the same very high cross-selling numbers that we saw in the first countries and now with no operational issues whatsoever. So back to Brazil, yes, we are working to integrate logistics. The distribution centers in the northeast part of the country have already been physically integrated. The ones in the southeast will take longer. Having said that, we are preparing another round of commercial integration and order simplification by mid this year, between June and July.

Guilherme Castellan: Thank you, Gustavo, for the question. Great to hear from you. So, yes, I think, as we have been telling the market, cost control has been one of our priorities in the last few months, right, since basically 2022 -- second half of 2022, alongside, of course, margin and cash conversion. It's very important to mention that we will continue to evolve in this agenda. I think a lot has done. You can see the results, as we disclose, on the holding side, but you can also see the results on the BUs, right, especially there -- especially in LatAm and of course, in Avon International. Now, it is important -- as we have disclosed one year ago, it's important for us to be clear as well that we benefit from an easy comparable in that sense as well, giving phase of expenses that happen in Q4 of 2022. But even without that, and even without the reallocation of the lines between sales and marketing and G&A in LatAm, we have been able to deliver significant gains in G&A in the year. And this is something that the market needs to put us in check, right? Because as we have been disclosing, we are investing a lot in transformational costs, because we're investing a lot in restructuring costs. As you can see in the release in 2023, both in Avon and LatAm, there were significant expenses related to those transformational costs. And of course, they have to pay yields, right? Of course, not all those numbers that we have disclosed here, they are cash-related. There are some non-cash impacts there. But most of them, they have to pay yield, either to optimize the structure of the business or to generate more efficiencies in our technology. But they have to play yield and this is something that the market should ask us on a continual basis because our commitment to continue to work on costs and continue to work on margins going forward.

Gustavo Senday: Very clear. Thank you.

Operator: Our next question comes from Ruben Couto, Santander. Ruben, we'll open your audio so you can ask a question. You may proceed.

Ruben Couto: Good morning, everyone. Actually, I want to do a couple of follow-ups. Gui, particularly on this, what I just mentioned about non-recurring expenses in 2024, can you share a bit about how much you're expecting for the year and how you're working to reduce these going forward? And a second one is still on Natura Brazil sales? Can you guys quantify how much of sales growth would actually have been if not for the inventory shortages that you faced in the quarter and a little bit on the competitive environment in Brazil, how you're seeing competitors reacting to the adjustments at Avon, falling sales at Avon? Are you seeing some moves to try to capitalize on that? How you're seeing this competitive environment evolving throughout the year as well? Thank you.

Guilherme Castellan: Hey, Ruben, thanks for the question. I'm going to start with the first one, and then I'm going to pass to Joao, so he can talk about Natura Brazil. But, yes, look, we -- I think that the best source for that will be the presentation that we did to the market on Wave 2 back in August, right, where again, we mentioned a little bit about the transformational costs that we have in LatAm there. Most of the transformation, actually, I could say that if not all, basically, almost all of the transformational costs that we have in LatAm is related to Avon to the Wave 2 integration in the short term. So, as we disclosed about that in the past, you should still expect to see those recurring expenses high in 2024. However, not in the same magnitude of 2023, just to be clear, right? And basically in 2025, that number has to be significantly smaller. Of course, the situation is fluid and we can decide to accelerate or postpone projects depending on how things evolve. But that is the plan that we have right now, is to continue with those transformational costs which are purely related to Wave 2 in LatAm, but not, I repeat, not in the same magnitude of what we had in 2023. And related to Avon, right? Avon has been in this journey for three years. You've seen transformational costs, especially related to what we call here the central costs of Avon, right? And of course, as Latin America continued to progress on Avon, we should continue to see reduction in central costs from Avon International as well. And of course, that will incur expenses in the short term. So we're not expecting to see significant deviations in terms of transformational costs, especially compared to the past. But again, I repeat as well, right, as Fabio has mentioned, the capital allocation will continue to be key for us in the short term, especially in Avon. There are going to be some key bets in specific countries for us to win, and of course, that may indeed generate some volatility in those transformational costs in a single quarter. But the expectation is on a recurring basis for us to still see significant costs in 2024, but diminishing significantly in 2025. Not in the same magnitude of 2023, though. Thank you, Ruben.

Joao Paulo Ferreira: Hi, Ruben. Joao here. So, as regards the shortages in Brazil during Q4, I can tell you that the effects on top line were not marginal, or else we would have seen a significant top line uplift if were not for those shortages. As regards the competitive environment, we're not seeing anything different from previous quarters. The market as a whole is not showing significant volume increases, but still benefiting from price increases in general, and we are monitoring price competitiveness very close. Thank you.

Ruben Couto: Thank you.

Operator: Our next question comes from Andrew Ruben, Morgan Stanley. Andrew, we'll open your audio so that you can ask a question. You may proceed.

Andrew Ruben: Hi. Thanks very much for the question. Curious if you could dig in a bit more on the gross margins. In LatAm, we saw expansion through the year. You've mentioned the pricing pass through the mix, the commercial adjustments. So I'm curious how much more room to run there is on these initiatives. You talked about the 2024 outlook that mentioned some margin improvement on a full year basis. So trying to get a sense how much of that could be gross margin-driven still. Thank you.

Guilherme Castellan: Andrew, I'm going to pass the word to Joao. He can talk a little bit more about LatAm and then I can talk a little bit about the consolidated, is that okay?

Andrew Ruben: Yes.

Joao Paulo Ferreira: Yeah, so, Andrew, as Gui mentioned before, we're still looking ahead. We still see room for margin expansion in LatAm, including gross margin. There's a mix of countries. Remember that second half of last year, we basically were implementing Avon in a few countries, so we're not yet stable. Now we are getting into stability in half of the countries, more than half of the revenues, so that should reflect somehow. We still face more challenges with standalone Avon operations in Mexico, Central America, Argentina, where we've been building more efficient solutions going forward. So as regards pricing, as I mentioned before, we keep an eye on the competitive landscape and we are pricing accordingly. So overall, I mean we do see still some room for gross margin improvements, as Gui mentioned before.

Guilherme Castellan: Yeah, and I think the same thing can be said about the overall consolidated numbers, right? We're benefiting from a mix impact here as well. Of course, mix of regions, but especially mix of categories as we continue to deprioritize fashion and home as well, both in Avon LatAm and in Avon International. And again, as we mentioned in the last quarter, right, we continue to analyze price increases and we're going to be more tactical on that, depending on the category, depending on the country, depending on the situation, the macro situation of the country. But I think overall, comparing apples to apples, we definitely see space for us to continue to expand gross margin, even though it is important to mention that we're seeing some pressuring costs coming from a few places.

Fabio Barbosa: I just want to add, if you allow me, that, I mean, in both cases, Natura brand or Avon brand, we have been working on price. And I would say that given the strengths of the Natura brand, I mean, it was, I would say, well accepted. I mean, we did not have the major decline just because we were recuperating margins. In the case of Avon, likewise, to a smaller extent, of course, but we are working also on strikes in the brand so that you can work on prices and instead of being competitive just because of price strategy or something like that. So we're very glad to see the reaction of the market, and also that is in line with what we said from the beginning, that instead of focusing on a major increase in sales, we are focusing much more on increasing margins, okay? Of course, having an eye on sales all the time, but we are very happy that we are implementing that strategy successfully.

Andrew Ruben: Makes a lot of sense. Thank you for the color.

Operator: Our next question comes from Irma Sgarz, Goldman Sachs. Irma, we'll open your audio so you can ask your question. You may proceed.

Irma Sgarz: Yes, hi. Thank you for taking my question. So quick question on the working capital. I know in the fourth quarter, there was obviously many moving parts with Brazil taking more share in the overall revenue mix, and there's obviously some impacts from deconsolidation year-over-year. But I was hoping you could just provide us a little bit more color on how we should think about this working capital dynamic going forward, what are some of the opportunities that you're working on, and yeah, when should we start seeing a more normalized or stabilized trend. And just -- maybe, yeah, just on the restructuring expenses, could you just provide a little bit of some example, some color on where these are cash expenses? Obviously, like very clear where restructuring or transformation expenses are related to write-downs, right? That's separate. But where these are cash-related expenses, could you just provide a little bit more? I mean, I probably think there's some rightsizing of maybe sales of employee or headcount, but other than that, what type of expenses go through there? I assume the Natura brand support expenses are not going through that line, but yeah, if you just could provide a couple of examples of what goes through that line and then provide also an outlook for the Natura brand support expenses that you highlighted in the press release and that you did in the second half of the year, how should we think about that into 2024, if that's something you foresee to put continued investments behind?

Guilherme Castellan: Hey, Irma. How are you? Thank you for the question. I'm going to answer it and pass to Joao, of course, and Fabio if they want to add anything. But I'm going to kick off here and I'm going to start with the working capital. It's very difficult in the stage, of course, that we are and the very good performance of Natura Brazil for us to offset the mix impact on receivables, right? So let's start with that, right? Natura Brazil is where we have the highest receivables terms is basically where we have low debt provisions, by the way, where we manage very well those loans historically. And of course, it is a country that we need credit, right, for the consumers, for the consultants to make the business prosper, right? Different, for example, than other regions where you have much smaller receivable terms and where, again, most of the transactions sometimes are even paid directly upfront. So it is important to highlight that. Having said that, we are far from where we want to be in working capital. So that's on us. I think that we have still a long way to progress. When we decided to work on cash conversion, when we decided to focus on cash conversion a couple of years ago, with that specific focus on working capital, cash tax rates and CapEx on the investment side, we have made some important evolutions on working capital, but not to the extent that where we want to be and I think, as I mentioned before, on the receivable side, it's very difficult to offset the impacts, the mix, the country mix impact there, but on payables and inventories, I do believe that we ended the year not where we wanted to be. And that raises, of course, a big yellow flag for us to act on that. And this is something that we'll continue to work in 2024 with the aim of finishing the year, reducing working capital as a percentage of net revenues, especially when you take aside the mix impact caused by receivables in Brazil. Now, on the restructuring side, on LatAm specifically in the release, we talk about the breakdown of those transformational costs. So basically there's 30%, that is severance costs. Of course, you can assume that most of that, if not all, is cash-related. There is 20% that we say there are write-offs of some Avon assets which are related, by the way, to the Wave 2 integration, right? Most of that are non-cash items, right, just to be clear, right? And you still see some IT investments and other OpEx investments which are cash-related. So there is -- again, the majority, of course, are linked to cash expenses, especially related to severance and IT investments, but there are more or less 20% of the equation there, you should assume at least for 2023, there are non-cash related. And the same thing for Avon, we don't produce that breakdown for Avon in terms of transformational costs, but you should assume that the vast majority for Avon there are cash-related expenses. I'm going to pass the word to Joao if he wants to add anything to that point on Brazil and LatAm.

Joao Paulo Ferreira: Yes. Hi, Irma. Still on inventory optimization, just wanted to call your attention to three potential levers for that optimization going forward. First is the harmonization of Avon's portfolio across the region. We are slightly halfway through give or take, and that will help optimizing inventories. The second lever is the increase in local production. We are pushing more volume into the Mexican factory, the Argentina factory and the third-party manufacturer in Colombia. And finally, the third lever is to do with demand planning systems, where we are trying new AI-based demand planning algorithms that could help us optimizing inventory as well. You also asked about the level of support to the brands, and we remain committed to increasing the support for both brands, Avon and Natura going forward. We publicly announced new support for the Natura brand that was seen on TV, and we do want to reinvest part of the new efficiencies into both brands going forward. We have a very strong innovation pipeline behind two brands this year and we want our consumers to know that. And the reactions so far have been very positive. We are tracking the return on those investments. And we know that there is important room to increase those investments with expected returns in top line.

Fabio Barbosa: And Irma, I'll take advantage, although that was not your specific question, but also because Gui mentioned a lot of the non-cash items, just to highlight what we did on the fourth quarter, which was the sale of TBS, which carried, of course, a loss vis-a-vis what was in the book, but also cleaning up the balance sheet. And we looked into the impairment of Avon International -- of Avon, sorry. We did an impairment, so the idea is to streamline this and move forward so that we can pave the way for us to get into a new life at cash situation. We had lots of cash one-offs this year, so we cleaned up everything. But these were non-cash events. Thus the impact at the end on what could be paid as dividends, okay, because of these non-cash items. But we thought we had to be transparent and clean the balance sheet as much as we can and that's what we did in the fourth quarter. That's the loss that you guys see on net profit, I think it's an important highlight to be made here. Thank you.

Irma Sgarz: Great. Thank you so much.

Operator: This concludes today's Q&A session. I would like to invite Fabio Barbosa to proceed with his closing remarks. Please, sir, go ahead.

Fabio Barbosa: Thank you, everybody. I mean, of course, we will be at your disposal, and I mean, we, Helena, Gui, and everybody but myself, too, if necessary, will be at your disposal. Thanks very much for the attention, and let's stay in touch. Thank you.

Operator: This earnings conference call is now concluded. The Investor Relations department is available to address any further doubts and questions. Thank you very much for your participation and have an excellent day.