Natura &Co Holding S.A. (NTCO) Q2 2023 Earnings Call Transcript

Natura &Co Holding S.A. (NTCO) Q2 2023 Earnings Conference Call August 15, 2023 8:00 AM ET

Company Participants

Fabio Barbosa - Chief Executive Officer
Guilherme Castellan - Chief Financial Officer
Joao Paulo Ferreira - Chief Executive Officer of Natura &Co Latin America

Conference Call Participants

Danniela Eiger - XP Investments
Irma Sgarz - Goldman Sachs
Ruben Couto - Santander
Thiago Macruz - Itau BBA
Joseph Giordano - JPMorgan
Robert Ford - Bank of America
Joao Soares - Citibank

Operator

Good morning, and welcome to Natura &Co's Second Quarter 2023 Earnings.

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 be referring to during this call is available on Natura &Co Investor Relations website.

I will now hand over to Fabio Barbosa.

Fabio Barbosa

Good morning or good afternoon to all of you, and thank you for joining us today. Very happy to be with you again.

Natura &Co continues to deliver on its roadmap in the second quarter with a performance that was broadly in line with first quarter. We posted another quarter of top-line growth at constant currency with sales up 1.9%, and we also posted a significant improvement in adjusted EBITDA margin of 230 points. This was mainly driven by a solid 430 basis point expansion in gross margin, benefiting from mix effects, partially offset by investment and inflation.

Net income continues to be impacted by high financial expense, which will be addressed upon closing of the sale of Aesop. We expect closing to occur in third quarter 2023. The proceeds from the sale of Aesop will strengthen and deleverage Natura &Co's balance sheet, freeing up resources and sharpen our focus on our strategic priorities with discipline.

We continue to see good momentum of the Natura brand in Latin America. Avon International fundamental continue to improve as it further adjusted its commercial model while the Body Shop faced persistent top-line challenge.

We remain strongly focused on cash conversion. And this quarter, we saw further improvement in operating working capital dynamics, partially offsetting seasonal cash consumption in the quarter. We will continue to drive our cash conversion improvement, notably among other things, through the working capital and net CapEx optimization. We are confident in our ability to capture further opportunities on this front, although we may see volatility from quarter-to-quarter.

Q2 '23 was also a landmark quarter for us as we kicked off Wave 2 of the Natura Avon integration in Latin America, beginning with Peru and Colombia, and we are very pleased with the initial results. We saw a meaningful acceleration of cross-selling between brands and, more importantly, significant CFT productivity growth, resulting in greater prosperity for our beauty consultants, who benefit from a richer and more compelling offer that features the best of both brands. Our focus now turns to the rollout of Wave 2 in Brazil. We will build on the initial learning from Peru and Colombia, and we are confident that they will support us to deliver strong results for our biggest market in the region and those that will follow.

We also continue to make advances in ESG, which remains in the forefront of our strategy. I am pleased to announce that Natura &Co obtained approval from the science brand -- based targets initiatives for its ambitious plans to reduce absolute scopes 1, 2 and 3 greenhouse emissions by 42% by 2030 from a 2020 base year. Our target is in line with the 1.5 percent -- degrees trajectory required by the Paris Agreement.

With that, let me now hand over to Gui to comment on our Q2 performance in greater detail. Gui?

Guilherme Castellan

Thank you, Fabio, and hello to everyone.

A quick note before going to the numbers to say that Aesop has been classified as discontinued activities, pending the closing of the sale to L'Oreal. So, the Q2 operating numbers exclude its performance and the comparable 2022 numbers have been restated accordingly. Net income includes discontinued activities.

I'll start with Natura &Co's consolidated revenues on Slide 5, which stood at BRL7.8 billion and grew by 1.9% in constant currency. In reais, sales were down 4.1%, reflecting the depreciation of some currencies versus the real. We will look at the performance by BU shortly, but in a nutshell, we posted solid constant currency growth at Natura brand in LatAm, notably in Brazil. Avon International's fundamentals improved again with another quarter of some growth in the beauty category. The Body Shop continued to face challenges in the top-line, with trends broadly similar to the previous quarters as core channels posted a mid-single-digit decrease, while The Body Shop at Home continued its steep decline. Finally, as expected, Home & Style is still showing trend down amidst the rollout of Wave 2.

We turn to the adjusted EBITDA margin on Slide 6, which stood at 9.7% in Q2, marking a strong improvement of 230 bps year-on-year with expansion across all businesses. These reflect different moving parts; with a strong 430 bps improvement in gross margin, continued strict cost control, notably at holding company level and at The Body Shop.

In terms of BUs, the main positive impacts were: first, a strong margin expansion at Natura &Co LatAm, up 250 bps, mainly driven by higher gross margin; second, an improving margin at Avon International, up 110 bps, also boosted by gross margin improvements; third, a profitability improvement at The Body Shop of 210 bps compared to the same period last year, driven by slight gross margin expansion and SG&A excluding depreciation efficiencies, notably on rental costs amid the footprint optimization process as well as ongoing operational costs. These were partially offset by three factors: continued investments in the Natura brands; deleverage at Avon Hispanic LatAm; and finally, investments in lead markets and phase of expenses at Avon International.

On Slide 7, we focus on net income and underlying net income. Net income in Q2 was a negative BRL732 million, broadly in line with the same period last year. Higher EBITDA was more than offset by higher investments in transformation and integration, notably at Avon International, and higher losses at discontinued operations, particularly impacted by lower margin at Aesop. Q2 '23 underlying net income, which is net income excluding transformational costs, restructuring costs, discontinued operations and PPA effects, was a loss of nearly BRL219 million. This compares to a loss of BRL262 million in the same period in 2022. You see the bridge on this slide with the main impacts coming from transformation and integration costs for BRL239 million, restructuring costs, discontinued operations and other effects for a little over BRL157 million, and PPA effect for almost BRL117 million.

Let's turn to Slide 8 to our cash flow. In Q2 '23, free cash flow from continuing operations was an outflow of BRL965 million. This compares to an outflow of BRL611 million in Q2 of the previous year. The deterioration is mainly related to high leverage and interest rates, which increased our financial expenses by BRL242 million and by FX headwinds, which represented an outflow of BRL29 million versus an inflow of BRL134 million in the same period last year. It's also important to highlight that Q2 '22 benefited from a positive one-off of BRL136 million related to a legal dispute at Avon International.

Excluding the one-off in Q2 last year, free cash flow to firm would represent an outflow of BRL303 million versus BRL326 million in Q2 '22. This was mainly driven by, on the one hand, an improvement in operating working capital, with inventories and accounts receivable consuming less cash compared to the same period last year, and accounts payable releasing more cash versus Q2 '22. Operating working capital improved at all BUs, even with solid growth of the Natura brand and consumed BRL117 million compared to BRL674 million in the same period last year. On the other hand, these effects were partially offset by the other assets and liabilities line, mainly due to further investments in transformation and restructuring plans. In addition, CapEx cash consumption increased by BRL87 million year-on-year, giving phases between quarters.

On Slide 9, we look at our liquidity profile. We ended the quarter with a cash position of BRL3.7 billion. Our net debt at the end of the quarter was BRL10 billion, and the net debt-to-EBITDA ratio stood at 4.17x, up from 3.96x at the end of Q1 and 2.46x one year ago. Despite improving EBITDA year-on-year, the increase in net debt versus the previous quarter was mainly due to increasing high financial expenses and seasonal cash consumption. As you know, proceeds from the sale of Aesop, which we expect to close in Q3, will be sufficient to allow us to largely eliminate our debt and put us in a net cash position. As you see on the second chart, our cash position of BRL3.7 billion is higher than the total of our debt payments through 2027. The average maturity of our debt is 6.2 years, and we face limited debt repayments until 2028.

Note that post closing of the quarter, we repaid in August most of Avon's 2043 bonds through a tender offer for an amount of $246 million. This repayment is an important step of our continuing liability management strategy as it removes certain distributed covenants and improves the overall cost of debt.

Let's turn now to our performance by business unit beginning on Slide 11 with Natura &Co LatAm. Total net sales were up by 5.8% in constant currency and down 1.7% in reais. This was driven by solid double-digit growth of 19.5% in constant currency at the Natura brand, while the Avon brand was down mid-single digit in beauty category, and the newly renamed Home & Style category, previously called Fashion Home, saw a sharper decline.

The Natura brand continued to post strong momentum with year-on-year growth of 14.7% in Brazil. Growth was supported by price increases and improved mix, and it also benefited in particular from strong campaigns for Mother's Day and Valentine's Day. In Hispanic LatAm, net revenue was up by 30% in constant currency and 7.7% in reais. Growth excluding Argentina was mainly driven by an acceleration in Peru and Colombia, boosted by the rollout of Wave 2 in those countries. The average available consultant base reached 1.1 million in Q2 '23, down 7.9% year-on-year. Including Peru and Colombia, beauty consultants in the base, the distribution channel, we have shown a steeper decrease amid the rollout of Wave 2 in those regions, as expected.

At the Avon brand in LatAm, net revenue in beauty category was down 4% in constant currency. In Brazil, net revenue showed a slight decrease of 1.8%, impacted by the expected and temporary hit in the distribution channel amid preparations for the rollout of Wave 2 with further portfolio optimization and an increase in Avon's minimum order, among other adjustments. In Hispanic markets, net revenue decreased by 5.6% in constant currency. As a consequence of the total number of available representatives decreasing 23.1% year-on-year, as expected, amid preparation for Wave 2. In the Home & Style category, Avon posted a steeper decline of 36.9% in constant currency as we continue to execute our strategy to focus on the beauty category.

On Slide 12, we turn to Natura &Co LatAm's Q2 adjusted EBITDA and margin. As shown in the graph, adjusted EBITDA grew by strong 20.8% to BRL727 million from BRL601.7 million in the same period in the last year. Adjusted EBITDA margin was up by a solid 250 bps to 13.3%. Margin expansion was driven by 510 bps improvement in gross margin, benefiting from price increases and richer category mix. The main driver of improved gross margin was Avon Brazil. This was partially offset by SG&A investments and deleverage at Avon Hispanic LatAm, as expected. The investments are mainly related to Natura's marketing and R&D expenses amid the rollout of Wave 2.

Let's now move to Avon International on Slide 14. Revenue was broadly stable versus the same period last year, down 1.3% in constant currency and down 8.1% in reais. In terms of categories, the beauty category posted another quarter of growth, up 3% despite the expected hit in distribution channel, driven by fragrance and color. The Home & Style category for its part, continue last quarter's trend with a steep decline. Adjusted EBITDA margin was 4.4%, up 110 bps year-on-year. Improving profitability was driven by gross margin expansion of 460 bps, driven by carryover of price increases and a positive product mix to improve contribution of innovation and cult products. This was partially offset by investments in lead markets and phasing of expenses. Cash conversion was also a highlight given the continuous working capital improvements.

On Slide 16, we now move to The Body Shop. Q1 net revenues declined by 12.5% at constant currency and 12% in reais. Combined sales of core business distribution channels, in other words, stores, e-commerce and franchisees, show a mid-single-digit decline in constant currency, a slight deterioration compared to the trend observed in the previous quarter. Revenue was also impacted by a decrease at The Body Shop at Home, which continued its steep decline. Despite the operating deleverage, adjusted EBITDA margin improved by 210 bps to 5.4%, driven by gross margin improvement and strict cost control in line with the previous quarters. The year-on-year improvement in SG&A, excluding depreciation, was mainly driven by rental costs as The Body Shop continues to optimize its footprint as well as employees' expenses following the restructuring announced earlier this year. As mentioned last quarter, The Body Shop continues to focus on structural cost reduction and strict cost containment measures to drive a culture of cost discipline throughout the organization as we work to improve net revenue strengths and focus on margin expansion and cash generation in 2023 and beyond.

Let me now hand back to Fabio for his concluding remarks.

Fabio Barbosa

Thank you, Gui. I will conclude now on Slide 18 with our key takeaways.

First, Wave 2 of the integration of Natura and Avon in Latin America is underway. We saw encouraging results from the launch of Wave 2 in Peru and Colombia, and we will take those learnings to make a success of the rollout in Brazil, which begins now in the third quarter.

Second, we are continuing to simplify our operations and to turn around our international assets.

Third, the sale of Aesop, which we expect to close still in the third quarter, will enable significant deleveraging and free up resources to invest with discipline in our strategic priorities, unlocking value for our shareholders.

And fourth, our strategic priorities are clear, and the first two quarters of 2023 results give us confidence that we are on the right track. We will continue to be focused on improving profitability and cash conversion, though we may see some volatility from one quarter to the next. All this should unlock sustainable shareholder value driven by our triple bottom line agenda.

Thank you very much for your attention. And Gui and JP and I are now happy to take your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question comes from Danniela Eiger with XP Investments. Please go ahead.

Danniela Eiger

Congrats on the results. I'll leave my Wave 2 questions for tomorrow's call. So, I had two regarding the results. The first one is regarding restructuring costs. They surprised us in this quarter in terms of level across all BUs. So, it would be interesting to know from you guys how we should think about this line behaving going forward? How -- like if we should see some deceleration into the second half or if it should be sustained at current levels?

And my second one is regarding the Home & Style optimization, and when do you expect that to stabilize in results?

Guilherme Castellan

Hey, Danni, thank you for your question. This is Gui. I'm going to take the first part of the question, talk a little bit about the second part, internationally, and then Joao can talk a little bit about the process in LatAm. And by the way, I appreciate you leaving the questions for Wave 2 for tomorrow's call. That's the intention.

So, you're right, I think, again, as expected, it's important to say, as planned, this quarter, we had a high number of transformation and restructuring costs in the base. If you look at it, it's mainly coming from Avon International. We have been saying already for a while that Avon International is going through a big restructuring, right, especially in order to improve profitability by reducing the central costs, right? And of course, there may be volatility during the quarters depending on the pace and execution of our plan.

If you go to the release, you will see there that basically, we're saying that 40% of those transformational costs is coming from severance, 20% is coming basically from the dual running of our R&D facility in Suffern. As you know, we are shutting that down and of course, moving to Cajamar. And the remaining is related to the size of line reduction as we put it there.

So, you should expect to see continuing transformational costs coming across the board, right, from all our BUs as LatAm goes through the transformation as The Body Shop continues to deliver their savings agenda. And of course, as I just mentioned, Avon International, and that is, of course, focusing on a more sustainable and higher EBITDA margin in the future.

Now going to your second question, Home & Style had a big hit in actually both LatAm and international this quarter. So, if you see the CFT revenues for Avon International, it grew low single digits this quarter. And of course, we had a significant reduction, double-digit reduction in Home & Style as part of the plan as we have been communicated that you should expect to see that volatility across the board, especially for the next couple of quarters as we continue to execute our plan internationally.

Now, I'm going to pass to Joao so he can talk a little bit about LatAm.

Joao Paulo Ferreira

Hi, Danniela. JP here. As regards Home & Fashion here, the portfolio has been significantly reduced already across all of our operations. However, there is still some slow movers in the inventories, which are flowing out through the second half. So by and large, should stabilize throughout the second half.

Operator

Our next question comes from Irma Sgarz with Goldman Sachs. Please go ahead.

Irma Sgarz

I wanted to just ask about The Body Shop. I know your focus there remains on profitability and cash generation. But how should we think about the revenue trajectory for this trend into the back half? On the previous call, you had talked about stabilization into the second half in terms of revenue, constant currency revenue trends. Could you share some of -- and so could you just sort of confirm what you're thinking for the second half is? And could you just sort of share maybe some high-level first actions that Ian was focused on over the last couple of months? And I know you're in constant dialogue. So, just love to hear what's been coming out of that.

And then just a very small second question. In the general expenses for Avon International, you had a 10% increase, and you talked about the phasing of expenses. Could you just explore that point to touch more and again, also talk about how we should think about this line going forward?

Guilherme Castellan

Thank you, Irma. Thank you for your question. Yes, I'll start talking about The Body Shop and then we go to the SG&A of Avon International in particular.

Yes. So, we had still a challenging quarter in terms of top-line for The Body Shop. So, you saw that our core distribution channels basically had a reduction of mid-single digits in the quarter. It's worse than the Q1, but not significantly worse. And we continue to see basically The Body Shop at Home with a very steep decline, right? And that part of the equation, of course, as it continues to decline more and more, you should start to see, of course, a lower impact in the overall size of revenues of The Body Shop.

But as you mentioned, look, this is a new chapter for The Body Shop. And again, we have focused a lot on a few priorities, right, since Ian arrived a few months ago. Basically, there are four fronts that we are working. The first one is channel, right? And again, there is a strong focus from the team on the rebalancing of the channel distribution to really meet beauty consumers. This is something that Fabio has been talking a lot as well in the calls about the change in consumer behavior, where they used to shop before, where they are shopping right now, and of course, how we try to optimize our store fleet. And of course, our franchisee business as well to meet the best of this demand, right?

Digital is something that is a big focus for the team and a big area of expertise of Ian as well. Ian has been focusing a lot with the team, right, to try to speed up and accelerate digital sales for The Body Shop and should expect to see, of course, less focus -- much less focus and a big deprioritization on The Body Shop at Home channel, which, by the way, was never the core channel for The Body Shop.

The second one is product, right? So again, I think that The Body Shop is known already for a long time to launch very high-quality products, but there is a sense of basically revamping a little bit the R&D and of course, to focus more in some categories such as skin care while continuing to defend Bath & Body.

And as you know, Irma, The Body Shop usually has a very strong last quarter in the year, in Q4. One of the reasons for that, of course, is the holidays, but mainly pushed by the Christmas gifts, right, that we do. And one of the strategies right now that we are doing in The Body Shop, by the way, copying what JP and the team has done a lot in LatAm, is to bring the gifting occasion all year around, right, so for Mother's Day, Father's Day, Valentine's Day and so on. The brand is something that we already have been talking a little bit about investments on reinvigoration of the brand and establishing a clear point of differentiation.

And finally, it's the operational model. As I explained in my previous answer, we'll continue to find savings, especially in non-working money for The Body Shop in the next two quarters in order to continue to optimize the margin.

So, we don't give guidance in terms of revenue. But again, you should continue to see, again, challenging trends, of course, in the short term. But we expected that as we see good results coming from those initiatives that I saw, we expect to see some stabilization of the revenues coming soon for The Body Shop.

On SG&A for Avon International, one of the biggest impacts in this quarter was related to phase of expenses. We don't break down what those savings are, Irma, but they are basically admin-related savings. So it really impacted the margin in this Q2. And of course, as we mentioned before, as the operational deleverage goes away, right, because you see that basically in constant currency, Avon International was almost flat this quarter, minus 1%, right? And as we continue to work on the stabilization of the top-line there and as the operational deleverage goes away, and of course, these one-offs, these phases of expenses, they also stabilize more as we're expecting to see that in H2, you should expect to see higher margins for Avon International going forward.

So this is it. I'm not sure if I missed anything, but I think that I got both of your questions.

Irma Sgarz

Great. Thank you.

Operator

Our next question comes from Ruben Couto with Santander. Please go ahead.

Ruben Couto

Good morning, guys. On Natura &Co LatAm, since the first quarter, you have been talking about that we could see some profitability volatility between quarters to higher investments in marketing, and I think Fabio just repeated that. But it's going to happen already in this quarter? I mean, our marketing expenses did show a sequential increase on a year-over-year basis. So just wanted to understand if we should see more of this increased spend in marketing, or was this mostly done already in the second quarter? Overall, what should we expect in terms of SG&A expenses in Natura &Co LatAm for the second half of the year? That would be helpful. Thank you.

Joao Paulo Ferreira

Hi, Ruben. JP here. Yes, you should see us investing more behind our brands and behind innovation going forward. So that's one. I mean we expect to gain efficiency in many other lines, but we do want to strengthen both Natura and Avon going forward. We are pretty confident on a very strong innovation pipeline, soon to hit the market as well as new positionings for both brands. And that comes in a very good moment as we implement [indiscernible] across most countries, especially in Brazil. So yes, expect to see further investments behind our brands.

Ruben Couto

Great. Thank you.

Operator

Our next question comes from Thiago Macruz with Itau BBA. Please go ahead.

Thiago Macruz

Hi, guys. Good morning. You mentioned that you were able to repurchase roughly 90% of Avon bonds due 2043. And other than the restrictive covenants that you're going to fix from now onwards, what other benefits do you expect as a consequence of this transaction? Does this unlock any sort of tax management opportunities? This is my question. Thank you very much.

Guilherme Castellan

Hey, Macruz, thank you for the question. Look, you're right. Let's take one step back, right. Basically, if you look at the liability management strategy that the company has adopted in the last couple of years, basically, you will see that this is the odd man out there, right, is the only legacy bond that we have from Avon, right, the other outstanding one was the '27 that we repaid last year. And basically, the covenants and the characteristics that we have in this bond, they are completely different than the last bonds that we have issued, both sustainability-linked bonds and the '29 last year, right? So there's a -- those bonds, they have basically, they're almost investment-grade like while the '43s, there were legacy bonds that again had some covenants, which, by the way, as repaying those covenants not only allow us to eliminate some reporting obligations, as you mentioned, but other -- simplifies a little bit our structure as well, which is something that we're pursuing, right?

Tax was not a reason why we repay this. This is part of our liability management process, has a very expensive cost of debt, overall cost of debt. But you should assume, of course, going forward, right, and this is why [indiscernible] is so important in LatAm and the turnaround of our international assets is so important outside that, again, any leverage that we remain with the company, we'll try to allocate, of course, in countries where we have profits in order for us to take advantage of the tax shot, right?

But no, taxes was not one of the reasons. There is no tax restructuring related to the '43s, but was an important milestone, an important step for us as part of our liability management process as this was something that we were trying to do, right, the repayment of the '43s, something that we're trying to do already for a couple of years.

Operator

Our next question comes from Joseph Giordano with JPMorgan. Please go ahead.

Joseph Giordano

So my question here goes on the gross margin front. I would like to understand a little bit better which were the main drivers. So, you mentioned in the release portfolio optimization pricing carryover and cost. So if you could attribute like which were the main factors behind this gross margin, how should we think about it going to next quarter, it would be great.

And my second and I think smaller question is that how are you guys seeing the potential impact from the devaluation of the Argentine peso that started to accelerate recently? Thank you.

Guilherme Castellan

Hey, Joe, thanks for the question. I'm going to talk a little bit about that, and then I'm going to pass to JP so he can add anything on Argentina in particular.

So, another strong quarter of gross margin. We're quite satisfied. We've been in this journey, Joe, I think you probably remember since we announced this in the Q2 results of last year, right, that as the inflation was increasing across our Bus -- inflation costs was increasing across our BUs, we had even a stronger focus, right, at the time, mainly, of course, at Avon International and at LatAm to focus on gross margin, right? And of course, as Q4 came to the books, we started saying the same thing about The Body Shop. And I think you saw the results in Q1. And of course, where we are here in Q2 with very strong results, especially coming from Avon International and from LatAm.

So the -- I mean the main reason for that, again, being super straightforward, has been the carryover of the price increases that we have done in the last 12 months. As we mentioned in the last quarter, right, that carryover started to catch up in Q2, and we should continue to see that Q3 onwards, but we'll continue to defend our gross margin by tactical price increases in our BUs. As we have said in the last quarter, right, most of our BUs, we did an acceleration of price increases in Q1 of this year in several countries. So now we're being more tactical for additional price increases and of course, for reduction of promotions and things like that. So, if you look at both Avon and LatAm, the carryover has been a very important part of that. And of course, additional tactical price increases in Q2 is also part of that explanation, and we can continue to assume that we will continue to use this weapon going forward.

Now the other important topic, Joe, is that we have a complex business in terms of different countries with different margins and so on, right? So, if you look at LatAm in particular, right, not only you have the impact of category mix, but we have a big impact of country mix, right. As Natura Brazil, which is basically our highest margin, continues to overperform continues to show a strong momentum as it did in Q1 and in Q2 of this year, we should continue to see some benefit coming up from country and region mix, particularly in the case of LatAm.

Now in the case of international, we see that basically coming from -- the mix impact coming from categories, right, especially as Angela and the team continue to focus on cult products and skin care, and this is something that, of course, has benefited us since Q1 and we saw the same benefit in Q2.

So, as we said in Q1 last year, right, we can expect to see some volatility in gross margin, not necessarily every quarter. We'll continue to report gross margin growth of 500 bps versus the previous year. But again, we're confident with the strategy that we started taking one year ago, and we are happy with the results so far. And again, as our revenue continues to stabilize, especially outside LatAm, we should see the flow-through of that gross margin falling to EBITDA more and more in the next few quarters.

On Argentina, again, I think you saw what we disclosed, right, in terms of the margin, excluding Argentina. Of course, we're following very closely the events in the country. I just want to highlight, and Joao will talk more, that Argentina is a very important country for us, has been part of our strategy for a while. We have a big network there, committed network to both Natura and Avon. And of course, in Latin America, we're not operating in volatile environment, this not news for the team, right?

So I'm going to pass the word Joao so he can add anything on the case of Argentina.

Joao Paulo Ferreira

So, a few additional remarks on our Argentinian operation. First of all, we are by far the number one player in CFT there. Our brands are beloved by our consumers and consultants. And more important, we have a very talented team managing the operation there. And that's the reason why we were able to achieve such leadership amongst very volatile times there. So going forward, of course, that we had planned for currency devaluation only that we didn't know exactly when that would happen with such an intensity. And by the way, it could happen even more in the near future. So because of that, we have prepared for some volatility. We have inventories there. We are able to adjust prices on real-time, which are associated with the quality of our management there tells us that we're going to get through it. I mean there might be noise in the transition. But I'm pretty confident that we will stabilize in a period of time and defend our leadership.

Operator

Our next question comes from Robert Ford with Bank of America. Please go ahead.

Robert Ford

How are you thinking about The Body Shop and the weakness there? And how much of that is by choice as you make the changes in the channel efforts as well as economic and competitive environment?

And when it comes to Home & Style in Brazil and Latin America, how big is that as a percentage of revenue? And where do you expect that to stabilize? And JP, you mentioned slow-moving inventory in Home & Style. How should we think about clearing that?

And then lastly, can you discuss competitive dynamics in Brazil and Latin America as well as maybe discuss how the business is trending so far in the third quarter?

Fabio Barbosa

Well, let me take just the TBS, and then I'll pass it on. But as was mentioned here by Gui on the previous question, I mean, Ian is coming through a very deep analysis on what are the issues that we have to be touching, and I think some of these points were listed there. We did not expect that I think it took over -- it was in February, March, it's very early. So a very short period of time for any result to be seen.

But what we are glad to see is that we are touching the points which we thought were not the ones that should have been emphasized. So we're looking to costs. Again, we're looking to channels. We are revisiting. I mentioned several times that there's -- after the COVID and the pandemic, we see different behavior and different locations and so on. So we are reassessing all those things, okay? So we are looking at the plants and so on. We're not promising anything here. But I think the concrete message here that -- concrete results that we'll see will be much more beginning on cost and some adjustments on store location then on revenues picking up immediately. Okay. Gui?

Guilherme Castellan

Yes. Bob, sorry, I just want to -- again, I'm not going to repeat the question on The Body Shop. I think Fabio gave the answer. Just want to make sure that for all your questions, the first one is about the Body Shop. The second one, you asked about Home & Style, and that was LatAm, right, in LatAm?

Robert Ford

Yes, hard question on, yes, percentage of what it represents the revenue and where you expect that to stabilize as well as the inventory that seems to be slow moving and the need to clear it?

Guilherme Castellan

So I'm going to pass to Joao so he can answer. Sorry.

Fabio Barbosa

And then just to confirm here, by the way, Ian was indicated on April, not even March. So it's a short period of time for him to show the results. Go ahead, JP.

Robert Ford

Very sure. Understood.

Joao Paulo Ferreira

Hi, Bob. We disclosed before that Fashion & Home, as we called it then, represented around 30% of Avon business in Latin America. You recall that, that's on average, varying from 20% to 50%-plus in some countries. And we also disclosed the revenue decline this quarter, 30% or so. And as I said, I mean, the portfolio reduction has been already implemented apart from flowing out some slow movers.

So, given that we remove a third of this 30%, so going to get close to 20% of the -- on an aggregate level of what was Avon business here, which will again be further diluted when we combine with Natura as a percentage of the total business, we are flowing these slow movers basically bringing them back to campaigns more frequently. We are not giving deeper discounts, if that's what cross your mind because we are focusing on increasing profitability of that portfolio.

You also referred to the competitive dynamics in the region. And as no real change from last quarter, the industry increased prices along the last 12 years -- 12 months, sorry. That seems to be a movement that stabilized. Volumes are flattish or so on average, skewed to personal care and no significant change from the ones that we referred last quarter.

Robert Ford

Thanks, JP. And just where would you like to see Fashion & Home stabilize? So if you were 30%, let's assume now you're close to 20%, what do you -- what's the right proportion, if any, of the category?

Joao Paulo Ferreira

Well, if we're -- if we achieve our goals in terms of profitability and cash generation, I will be pleased if it stabilizes where it is now.

Operator

Our next question comes from Joao Soares with Citibank. Please go ahead.

Joao Soares

First of all, I just wanted to explore Avon International and margins. And I think there's a broader discussion, and I don't know if it's time to revisit that discussion on where should we see that profitability stabilizing, right? Before we had a guidance that is no longer valid, but it was pretty ambitious, right, getting to mid-teens margins. So I just wanted to discuss in broader terms, where do you currently sit in terms of the contribution margins of the overall geographies and what's the potential here? If we can have any visibility on that, it would be interesting.

And the second point is on the working capital. As you pointed out, there were some improvements, especially in payables and inventories. So, I just wanted to explore that with you, Gui, if possible. Where should we see that going forward? Thanks.

Guilherme Castellan

Hey, Joao, thank you for the question. Yes, so look, you're right, right, on Avon International. I think let's take one step back and basically look at the -- a little bit all the steps that we have taken in Avon International. Basically, in the last three years, it has been 100% focusing on fixing the fundamentals, right? In the middle, of course, we got a big cyber incident that impacted the channel. We got COVID. We got a lot of turbulence in some markets.

But I think it's fair to say when we look at the results that we are seeing in the channel, even though, right, there are still addition changes in the commercial channels, there is still going on. Remember that we start changing our commercial channel in Avon International basically in September, October of last year. So even though we are in that -- we are almost one year out, we're still seeing basically adjustments in the channel going forward.

And there is some encouraging KPIs that we can see in the channel. But of course, as we mentioned also in the past, this is a journey. And of course, as time passes, we make other adjustments, but we are confident that we are in the right track. As you see, revenues, especially on CFT, stabilizing more and more.

Now we are entering to a period now of basically as the -- we fix the fundamentals, we're entering into the period of stabilizing those revenues. Because as we have been saying, the operational deleverage has hit us a lot on the margin, right, has hit us a lot on the margin because the pace that we can deliver our transformational agenda was not the same pace that we saw revenues declining. So, we are entering this phase of more stabilization on the revenues, of course, with some volatilities depending on the external scenario. And a scenario that again we'll be able to see more and more the transformational costs flowing in full to the EBITDA.

So, we're confident, look, that we're on the right track there. And the role of Avon International right now is not a role of growing top-line, and we should not expect that big growth in top-line for Avon in the short term -- short to medium term. But it's a role of improving profitability. It's a role, of course, of getting the EBITDA margin improvement every single quarter compared to previous year, and that's what we're trying to do. We were able to deliver that in Q1. We were able to deliver that in Q2 albeit it's marching, more improvement. And we're targeting to do the same thing in H2 to finish with a good momentum.

Keeping in mind that the transformational agenda will continue because we need to do more savings to come in Avon International. Now as you know, we basically -- we took out those -- that guidance that you referred in the past. So the guidance is not valid anymore. But of course, we'll continue to focus on delivering a sustainable solid margin for Avon International in the short to medium term.

On the working capital, we had a good quarter in terms of improvements. It's not where we want to be yet, just to be clear. There's a lot to be done. Again, we have been talking the last few quarters about payables in particular. This quarter, we had a better quarter in payables. Of course, that -- as LatAm continues to overperform, especially Brazil, you can imagine that, that adds some pressure in terms of receivable, which the team has been able to match quite well. And inventories will follow our strategy across the countries and regions to minimize that. And of course, the stack of migrating Home & Styles specifically to consignment sales is going to definitely help us on the track.

So, as Fabio mentioned in his letter, right, in the release, we still see additional benefits coming from working capital, especially if you compare on a full year basis, right, because there may be volatility within quarters. And as we mentioned, again, we don't give guidance, of course. But we're now happy to have a positive working capital percentage of net revenues, right? As the business continues to grow, that adds pressure basically in the cash consumption that you have in your balance sheet. So, we are in that journey, and it has been a big focus for the company. And we will continue to do so as incentives are aligned for the company to deliver better working capital and free cash flow dynamics.

Operator

There are no further questions at this time, so that concludes our question-and-answer session. I would like now to turn the floor back over to Fabio Barbosa for his closing comments. Please, sir, go ahead.

Fabio Barbosa

Thank you very much for being with us today. Our results improved in first half 2023. We are still not satisfied with them. We continue to be strongly focused on delivering our strategy, further position Natura &Co on the course towards strong profitability and low leverage, allowing us to pursue meaningful and sustainable growth in the future. Closing the sale of Aesop, implementing Wave 2 in LatAm, continue to work on simplifying and turning around our international assets while delivering our ESG agenda are all fundamental steps that will help us achieve our ambition. Thanks for your attention, and have a great day. Thank you.

Operator

The conference has now concluded. Thank you for your participation, and you may now disconnect. Have a good day.