Natura （NTCO3.SA）First Take： 2Q24 shows progress in Latam， but Avon Intl and cash generation visibility still limited

Investment Rating - The report assigns a 12-month price target of R$19 for Natura&Co, indicating an upside potential of 16% from the current price of R$16.38 [16]. Core Insights - Natura&Co reported robust growth in the Natura brand in Brazil, with sales exceeding expectations by 9%, although adjusted EBITDA only beat expectations by 3% due to lower profitability in Latam and weak performance at Avon International [2][3]. - The company continues to face challenges with negative free cash flow of -R$675 million, but management expects to reduce leverage in the second half of 2024 through cash generation and EBITDA growth [3][10]. - The corporate restructuring of Avon Products Inc is a focal point for investors, with potential implications for Natura&Co's operations [3][11]. Summary by Sections Financial Performance - Natura&Co Latam revenues grew by 10% year-over-year, driven primarily by the beauty category, despite a 19% decline in the unified representative base [4][6]. - The Natura brand in Brazil saw sales growth accelerate to 15% year-over-year, while Avon brand sales in Brazil dropped by 1% [6][7]. - Adjusted EBITDA margin increased by approximately 85 basis points, primarily due to improved gross margins in the Latam operation [9]. Corporate Restructuring - Avon Products Inc filed for Chapter 11 in the US, with Natura&Co committing to provide US$43 million in debtor-in-possession financing to support Avon during the restructuring process [11][12]. - Natura&Co plans to bid US$125 million to acquire Avon’s operations outside the US, contingent on a court-supervised auction process [12]. Market Outlook - The report highlights the importance of cash generation and working capital management, noting that accounts receivable have increased due to a higher share of Natura Brazil and productivity representatives [3][10]. - Management anticipates improvements in logistics and inventory management in the second half of 2024, which may lead to temporary volatility in service levels [8].