Natura &Co Holding SA (NTCO) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Natura's 2007 first-quarter results conference call. Today with us we have Alessandro Carlucci, the CEO, Jose David Uba, the CFO, and Helmut Bossert, investor relations. [OPERATOR INSTRUCTIONS] We would like -- we have simultaneous webcast that may be accessed through Natura's IR website at www.natura.net/investor. The slide presentation may be downloaded from this website. There will be a replay facility for this call on the website.

Before proceeding let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Natura management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Natura, and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Alessandro Carlucci, the CEO. Mr. Carlucci, you may begin the conference.

Good morning everyone and welcome to our conference call. You can follow the slides through the webcast while I give you a brief account of Natura's performance in the first quarter of 2007. At the end of this presentation we will have a Q&A session.

Before moving on to the slides, I would like to talk about some of the highlights of the year's first quarter. One of our priorities is to continue top-line growth, and to increase market share. The preference of Natura brand in Brazil, and the significant growth in our consultant base, has allowed us to grow at higher rates than the direct sales markets.

We are still seeking efficiency gains on many fronts, from the various operating processes, including our marketing tools, as we announced it in our last conference call. As we already mentioned in the last quarter, we are implementing a better balance between marketing actions with short and long-term impacts. However, the increase in the efficiency level of these marketing tools as a whole will be more noticeable throughout the year. As a result of this, we will see a gradual decrease of the price promotion effort [during the --]. As we had already planned and announced it, overhead expenses remained stable as compared to the fourth quarter of 2006.

And finally, results were significant on the international front, the highlight being the 58% growth in the domestic currency revenue of the operation block under consolidation, and the initiation of Venezuelan operations at the end of January.

Let's go through now to the slides, quickly, and show the quarter's main figures. The first slide illustrates our growth in our target market, which has 8.4% year-on-year. Natura's growth was 8.9% in the same period, the first two months, according to Sipatesp and ABHIPEC. Our market share was basically stable in the first two months, with a slight growth from 20.8% to 20.9, year-on-year.

I would like to mention that, due to the fact that the final data from Sipatesp were still not available to -- from three days ago, we used data from the Brazilian Association of Direct Sales Companies, the ABEVD, to disclose the results. These data showed a 9.7% year-on-year growth in the total business volume on the direct sales company in Brazil, and this is related of the first quarter, not only the two first months, as Sipatesp numbers. So we are talking about the first quarter. And also, according to ABEVD, Natura's growth was [15.99%] in Brazil, which means we increased our market share in the direct selling business from 32.8% to 34.7%, year-on-year. Keeping in mind again that this data refers to total direct sales in Brazil, including CFT and non-CFT products.

Therefore we can see the consolidated gross revenue of Natura, which grew 17.6% in the first quarter, year-on-year basis. In Brazil we posted a growth of 16.2%, and 59.4% in our international operations, strengthening our conviction that we are on the right path regarding the Company's international expansion. Our sales channel maintained its strong upward trend, growing 18.1% in the period. Thus our consolidated channel reached 628,000 consultants at the end of this first quarter. In Brazil the number of consultants grew 15.3%, and in our operational -- international operation it expanded by 53.5%.

The results obtained in the first quarter reflect the ethos that we have been putting into [reap] higher levels of profitability. EBITDA reached BRL124.4m in the first quarter, a 10% growth year-on-year. It is worth mentioning that we are committed to keeping this 2007 EBITDA margin at the same level recorded in 2006, which was 23.7% as we mentioned before. The growth of net income when compared to EBITDA was slightly below the previous year's figures due to lower net financial revenue, a higher depreciation, and a higher effective income tax rate.

The operations under consolidation continue to post an impressive performance. Revenue grew by [60%] this quarter, and results are once again following a upward trend, following negative EBITDA margins of -20% in the first quarter of 2006, to -11% in this quarter. The marketing push at the end of the previous year has been delivering positive results this year. This is an important indicator that our objectives to reach the consolidated breakeven in 2008 in these operations is feasible.

The operations under implementation continue to develop. We have initiated operations in Venezuela at the beginning of this year, and we will be starting up the Colombia operations in the near future, probably around June or July. In our Mexican operations, we also plan to begin operations in the city of Monterey, Mexico, in the coming months, gradually expanding our geographic operation in Mexico.

The expenditures forecast for the international expansion for 2007 amounts to BRL48m, as announced in the last conference call.

I would like to conclude by saying that we are happy with our first quarter results. Despite some setbacks, results already show progress towards implementation of the strategy disclosed in February 2007. Actually presenting two important results in Brazil, increased market share and strong growth in our [consultant phase]. This progress, when compared to the fourth quarter of 2006 results, should be understood as increasingly significant throughout 2007.

Finally I conclude my comments, and I think that we could start the Q&A session. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question comes from Lore Serra, Morgan Stanley.

Good morning, I just had a couple. Let me just, if I could, start with just making sure I understand the market growth, and you were helpful in giving us some of the data in terms of the first two months of the year. Both of these growth rates, the 6.5% in the cosmetics and fragrances market, and the personal hygiene, seem low. Both relative to what the growth was last year, as well as the growth you had in the quarter. So I guess I'm wondering, was there something about your March that was a much different quarter?

And could you help us understand, if you have a perspective -- I know you don't like to give growth rates, forecasts, for the year, but help us put the 6 and 10% nominal growth rates into perspective? That would be helpful.

Hi Lore.

Hi.

It's Alessandro speaking. How are you? Even though you are right that the growth of our CFT market was lower than the previous year. In 2006 the market in the first two months grew less than -- the average of the Group was 9%, and the average of the year was around 13, 14. So I think that we should not take this specific growth in these first two months as a pattern to the rest of the year. So I think that it's too early to conclude something about the market growth for this year.

Understood, and that's helpful, but I guess, as you think about March and April, do you perceive that the growth has been a bit stronger in the last few months? Or the run rate is a bit stronger than what you're quoting here in January and February?

Yes, yes. I expect -- we don't have the data, but I think that we are going to see a better growth in the next months of the year.

Okay, and just switching gears to [call] for a second -- I understand that you were successful in reducing the discounting, or the promotions, in the quarter, because we saw a nice increase in your gross margin. I guess I'm trying to understand why are we still seeing a couple of hundred basis points' decrease in the gross margin, and should that level out as you stabilize some of the revenue trends?

Lore, this is David speaking. We actually, in this first quarter, we lost 170 basis points as compared with the first quarter of last year, and 150 came from higher promotion this quarter as compared to the last year, and 20, only 20 basis points as a net cost effect in this quarter.

We -- for the cost, we expect it to disappear as we move ahead in the year. And for the discounts, as Alessandro mentioned before, we have a very precise plan for changing more of the marketing stimulus during the year from discounts toward marketing tools, more related to products, more promotions to the consultants, campaigns with the consultants -- anyway, a large set of marketing tools that will substitute the price discounts along the year. But what we expect is to see a full impact of those changes in the second half of the year.

Okay. Thanks very much.

Our next question comes from Margaret Kalvar of Harding Loevner.

Yes, hi, good morning. Further on the discounts, was this still a holdover of the problem in the fourth quarter? In other words were there still kits that were out there, and the sale of them hitting first quarter contributed to the higher discounting percentage? Or were you finding you had to maintain discounts on new sales in order to keep your market share growing? That's my first question. And then I have a question, another follow-on.

Hi, Margaret, it's Alessandro, how are you? What we saw in this first quarter was not related with kits from the last quarter of 2006. While we are having more efficiency in the marketing tools, and this efficiency we are going to ramp gradually during the year, in this first quarter we had more price promotions. And we are going to see a decreasing during the year on this kind of [cost] because we are going to have better marketing tools, more efficient, so we are not going to use as we used it in the first quarter. But this is going to happen gradually during the year. But it's not related with kits or something that came from the last quarter of 2006.

We could characterize the first quarter then as having a more intense use of promotional activity in terms of price than you've had in prior quarters? Because it seems like you've never really had to intensively promote on price before.

Yes, it's a little bit different when you compare this quarter, the first quarter of this year, with the first quarter of last year. But when you compare with the second part of 2006 and especially the last quarter, we believe that we are seeing an evolution. And as I said, we will want to maintain this evolution, decreasing the impact of those price promotions during the next quarters of this year.

Okay, and then my other question was on the innovation index, which seems to be continuing to decline. Is that expected to continue through the year, or is it that you have more products coming out that will start hitting in the second quarter?

The decreasing that you've seen, the percentage of total innovation, is based on the fact that we had some launches, products launched in 2005 failed. So they are still on the numbers on the index and we are going to see these effects probably during the next one or two quarters. But this impact is related with launches in the 2005, in 2005. For this year we have a lot of launches. In 2006 we have important launches with success. So this is not a relevant aspect, it's only related with those failures in 2005.

But you are going to still see this index lower than the previous year for one or two quarters, probably. But we have very innovative products that are going to be launched in this year. And as you can see, the number of new launches in this first quarter was significantly higher than the previous period of last year. [30] new products compared with five in the first quarter of 2006.

And then, just back to this price promotion. Have you been able to raise prices, as you often do in the first quarter? Will that begin to show up or have you had to hold back on increases?

Yes, Margaret, we usually increase our price between March and April just because of the Brazilian inflation. And this year we did around 5% increase in our prices. So we did, we raised our prices this year, as we did also the previous year. And we do this increasing around the same periods, between March and April.

Okay, thanks.

You're very welcome.

Ladies and gentlemen, as a reminder, if you would like to pose a question, [OPERATOR INSTRUCTIONS]. [Inaudible] Celso Sanchez, Citigroup.

Hi, good morning, apologies if [inaudible] already answered my question on the call a couple of minutes ago, but could you give us an update on your thoughts? You did speak a bit about this in New York at the launch of the [CNL] program. Perhaps with respect you had said might share some conclusions with us I guess was June or July, is that still the timeframe you think you can share them?

And more important, just generally speaking, should we be thinking about this, [inaudible] as a recruitment tool or as a productivity tool, or which of the two would it lean more towards? Hopefully, in terms of the benefits it might bring? Thank you.

Hi, Celso, how are you, it's Alessandro speaking. Celso, we still -- we are still keeping the CNL project as a pilot in a specific region in Brazil, and we don't have a conclusion about the project to share with you, where and how we are going to roll out to other regions in Brazil. I hope that we could be able to decide something in probably two or three months, but, because it's a pilot, I can't be sure that we are going to have a conclusion in this period. And so I can't share with you so much things about the CNL. But I can say that this is a project that probably is going to enhance more the recruiting, and the relation, between Natura and their consultants than the productivity. So I should not expect a change in the productivity, because we implement -- if we implement the project.

Instead of this, in the recruiting and the relationship, the quality of the relationship, yes, we would like to see some increasing. But, as I mentioned before, we don't have conclusions, so this is only [I quote to you], this does not represent the facts that we are facing on the project. Maybe again we could be able to share with you in some months some conclusions, and then decide how we are going to implement, and if we are going to implement, the project in other regions.

The next question comes from [Tatiana Selznic] from Morgan Stanley.

Hi, Alessandro, and how are you guys? Just a question as far as the gross margin and the change in the marketing tools. We saw selling expenses jump to [35.3%] of sales in the quarter, which seems to be the highest level we've seen in a while. I'm just wondering, if you also got 150 basis point hit to your gross margin due to the commercial activity, is this a new level of selling expenses, is this how we should think about it for the rest of the year? Or do we start to see a transition between gross margins and maybe that's even higher as we go forward?

Tatiana, this is David speaking. We had an increase in sales expenses in this first quarter due mainly to higher marketing expenses. And part of these higher market expenses were associated with our catalog that we are revealing. We have redesigned the catalog and you will see a more efficient catalog in the coming months, and -- with a lower cost. So probably you will see a smaller increase in sales expenses for the next quarters.

But at the same time we also have some larger expenses coming from our higher investment in the international expansion. And those effects should remain for the rest of the year.

But you think 35% then as a net number is fair, or do you think if we lose the catalog effect, and the expansion's already at a certain ramp?

Our sales expenses have a strength [inaudible] in that they do not have a repeat effect from year to year, because a large part of those expenses are additional expenses related to promotion, advertisements, investment in communication etc etc. But what we see here, 35%, should not be considered as a percentage for the total year. It's higher. 35% is higher than the total expenses for the total year.

Great, understood, thank you so much.

Ladies and gentlemen, again [OPERATOR INSTRUCTIONS]. Our next question comes from Margaret Kalvar at Harding Loevner.

Yes, hi, it's just another question on the price promotion issue. If you're not going to be -- if you're going to be using other marketing tools more heavily during the balance of the year, could you give a little detail about what they might be?

And also, again, if you could discuss the competitive environment, and whether that is -- how much that has been a factor in your needing to go to a price promotion strategy?

Margaret, it's Alessandro speaking. First of all, the promotional price increasing was more deviation than strategy, so this is not totally related with a competitive environment.

Okay.

So, even though we really believe that we are going to have a more competitive environment for the next year and 2008 is going to be worse. So our marketing is getting more and more competitive every year, and every day, probably. The efficiency in new and the actual marketing tools are going to be based on four or five main issues. And I will try to share with you some thoughts even though I can't give you the precise information because this is a strategic issue.

Okay.

As David mentioned, we are going to decrease the cost of our magazine at the same time that our magazine's going to be more effective, to show the value proposal, the Natura value proposal to the customer, for example. We are going to increase the training area and the events with our Natura consultants. And this is not new. We are only going to increase and to do better events and better training sessions than we did last year. And, of course, we are looking for some new marketing tools to implement during this year. And, to finalize, we are preparing some important launches, products for this year to support our growth and to support our competitiveness in some categories that we operate.

So, without giving so much and precise information, this is a general idea of how we are going to implement and to have more efficiency in our marketing area.

Okay, thanks.

Thank you.

This concludes today's question and answer session. I would like to invite Mr. Carlucci to proceed with his closing statement. Please, sir, go ahead.

I would like to thank you for your participation, your partnership with Natura, and invite all of you for our next conference call. We are always available every day to answer your questions and to talk about our plans of the future. And we are sure that we are going to have a very good year implementing some adjustments in our strategy, but keeping going with the international expansion that we mentioned before. So, thank you again for your presence and your participation.

That does conclude the Natura audio conference call for today. Thank you very much for your participation and have a good day.