What risks remain that could offset the positive cash generation, such as integration challenges or macroeconomic headwinds in key markets?

Risks that could dampen the cash‑generation story

- Integration execution: While the “Wave 2” integration of the Natura‑Avon portfolio is already delivering cash in mature markets (e.g., Brazil, Mexico), the full‑scale merger still faces classic integration hurdles – aligning IT platforms, consolidating supply‑chain logistics, and harmonising brand positioning across 20 + countries. Any delay in achieving the projected cost‑synergies (e.g., 5‑7 % EBIT improvement) would erode the cash surplus and could trigger a one‑time integration charge that would offset the current operating cash flow. Moreover, the “brand‑mix” risk – over‑crowding the Avon portfolio with Natura’s premium positioning – could dilute margins if price‑sensitivity forces discounting.

- Macroeconomic headwinds: The bulk of the cash is generated in Latin America, where inflation remains above 7 % YoY in Brazil and Argentina, eroding real consumer spending on discretionary cosmetics. Currency depreciation (BRL‑USD down 8 % YTD) can also shrink reported profit and increase import‑costs for raw‑materials sourced in Europe or the U.S. A slowdown in Brazil’s GDP growth (forecast 1.5 % for 2025) or renewed fiscal tightening could curtail discretionary demand and tighten working‑capital cycles, especially if the regional consumer confidence index drops below 70.

- Avon International divestiture: The planned sale of Avon International within 12 months is a “visibility catalyst,” but the transaction is subject to regulatory approvals and buyer‑price negotiations. A lower‑than‑expected valuation or a delayed closing would keep a sizable, less‑integrated business on the balance sheet, dragging on cash conversion and adding uncertainty to the earnings outlook.

Trading implications

- Technical: NTCO has been trading in a tight 4‑day range (BRL 13.0–13.8) after the earnings beat, with the 20‑day SMA acting as support at ~BRL 13.2. A break above the recent high (13.78) on volume could signal a rally on the “cash‑generation” narrative, while a dip below the 20‑day SMA may reflect risk‑aversion to integration/ macro concerns.

- Actionable stance: Maintain a neutral‑to‑slightly‑bullish position with a tight stop‑loss just below the 20‑day moving average (≈BRL 13.2). Monitor for two catalyst events: (1) a clear update from management on integration milestones (cost‑synergy targets, integration timelines) and (2) macro data (Brazil CPI, consumer‑confidence indices) that could test the cash‑flow outlook. If integration metrics beat expectations and the Avon sale price is confirmed at a premium, a short‑term upside target of BRL 14.2 is realistic. Conversely, any integration delay or a 2‑point slide in the Brazilian consumer‑confidence index should trigger a defensive exit.