Natura &Co Holding SA (NTCO) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Natura's 2007 second quarter results conference call. Today with us we have Alessandro Carlucci, the CEO, Jose David Uba, the CFO and Helmut Bossert, Investor Relations.

We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After Natura's remarks are completed there will be a question and answer session. At that time further instructions will be given. (OPERATOR INSTRUCTIONS).

We have a simultaneous webcast that may be accessed through Natura's IR website at www.natura.net/investors. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay facilitated 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. First of all, I would like to welcome all the participants to Natura's conference call to discuss the results of the second quarter of 2007. I will begin our conference call highlighting some aspects that I believe [that] are important to be mentioned. And right after that we will move to the Q&A session.

I would like to begin by saying that the Cosmetic, Fragrance and Toiletries market -- CFT market continues to present good performance. From January through April of this year, nominal growth was 13.3% and in this period Natura had a slight gain of 0.2% in its market share.

In the second quarter of 2007 we are, once again, reporting increasing in consolidated gross revenues which was 10.9% in reais. In Brazil, the growth was 9.8% and in the international operations, 43.1%, again in reais.

Natura's consolidated gross revenue in the first semester of this year amounted to BRL1.9b (sic - see presentation) with a 13.7% increase year-on-year, almost in line with the market's performance.

Considering that we can have a higher growth in the domestic market, as already informed, we are promoting advances in our marketing strategies, improving efficiency of the investments and a better balance between short and long term, maintaining our brand positioning and value proposition.

Our revenue performance abroad has continued strong and rose 43.1% in the quarter, as we mentioned before. I'd like to highlight the results of the operations under consolidation;, Argentina, Chile and Peru. If we consider that the profit margin earned from Brazilian exports to international operations was deducted from the cost of goods sold of these operations, we have achieved breakeven results in the first quarter of this year in those three operations; again, Argentina, Chile and Peru.

In operations under implementation we highlight the start of activities in Columbia last June. These operations are undergoing intensive development, which justifies the continuity of our expansion strategy in Latin America.

According to our planning, breakeven should be achieved within five years from the beginning of each [operations]. The Mexican operation continued to advance positively and this year we have started operations in the city of Monterrey.

As for the consolidated margins, we have already noted a visible improvement in the results of the second quarter of this year. Overhead expenses remained stable and part of the result may be perceived in the gross margin, where we had a 100 basis point gained in the second quarter of this year. And [an] initiative in selling expenses remained relatively stable in the Brazilian operation.

The increases in consolidated results were due to expenditures made from expanding operations in Latin America this year, and this is part of our plan.

Our consolidated EBITDA amounted to BRL199m in the second quarter of 2007, with a 25.6% margin showing recovery in relation to the margins of the first quarter of this year as we look at more efficient management actions of the operations. It is important to highlight that, in the Brazilian operation individually, operating performance was very positive. The EBITDA margin had 100 basis points gain between the second quarters of 2006 and 2007.

I would like to highlight that our estimated CapEx for 2007 has been revised from BRL190m to BRL175m, which is not updated in the second quarter presentation that you have, but reflects our updated projections.

Finally, I would like to say that we have several challenges ahead which encourage us to develop projects that are going to improve our performance. One of them is the implementation of the next -- on next September of the CNO Super Reps Project in the Brazilian operation.

The continuity of the logistic decentralization with new distribution centers over the next few years will be implemented in order to obtain [savings] in freight costs and higher agility in the delivery of our products to our consultants, giving better service to our end consumers.

In addition, the expansion of the Natura [houses] based on the existing units we have in Argentina we will gradually be accomplished.

Finally, the construction of our new R&D center in the city of Campinas will enable us to continue to invest in innovation.

Thank you for your time, and let's go to the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from [Margaret Cavert] -- [Calvert] -- excuse me, of [Harding Lovner] Management. Please go ahead.

Yes, hello, good morning. I have two questions. The first concerns the innovation index. I believe you usually show a slide on that, and maybe I missed this, but I didn't see one in this presentation. And could you discuss if you have a number for what it is and what is the direction that it's going?

And then the second question refers to the overall competitive environment in the Brazilian market and whether or not the consumer is slowing in their purchases of CFT products in general, if they see any displacement of income to other things as interest rates are coming down in the country. Thanks.

Hello, Margaret. Good morning. His is Alessandro speaking.

Good morning.

First of all, you have the numbers on the presentation that is on slide about -- the broadcast about the innovation index.

Okay.

But I can talk about it.

Okay.

In this quarter we have -- we had a decrease in the total index innovation and this is a fact that we are probably going to see the next few -- probably two quarters and is due because we had some bad launches or bad product performance that were launched in 2005.

Basically, we are talking about the fragrance part of our products. And they are going to still count on this index until the end of this year. And this is the main reason that -- because we are seeing some decreasing in this index. But again, you have seen the broadcast presentation and you can take a look.

Okay.

Okay? And talking about the competitive environment in Brazil, as we said before, it's -- in the last three or four years, our market is more and more competitive. And regarding your question about the changing in the consumer behavior, investing more money in other categories than the CFT, I think that we are seeing this in Brazil, even though our market is still growing, as you can see in the numbers.

So probably we are seeing other industries growing more than the history. And in our case, we don't see a change in the growth pattern in the cosmetic industry, but we are talking in high numbers. 13% in the beginning of this year is -- it's a relevant number in our industry. But, for example, we are seeing in Brazil that some of our industry is growing faster than in the past, the automobile industry, too.

So there are some industries that are growing more so they are having a better performance in the pocket share of the customer than compared to the CFT even though, again, the CFT is growing well as we saw the -- in the last years here in Brazil.

Okay. Could you do -- could you expand a little bit on the market -- on your changes in marketing strategy that you say you're making in the earnings release?

Margaret, unfortunately, I can't give you so much detail because this is very strategic for us and it would be nice to our competitors. But I can say to you that we are working hard to be more efficient and to reach a better balance between our investments in the short and the long term.

And, of course, we are going to give a better value proposition, better products, more innovative and evolution. And part of this evolution we mentioned, like the CNO, that is an evolution of our commercial structure. The [Casa Natura] is another one. But they are examples of the things that we are going to do. And in the short term we are going to be more efficient and probably -- we hope to accelerate the growth of the Company.

Would you say --

Sorry. Especially in the Brazilian, market because we believe that we can grow a little bit faster than we are growing.

Okay. Would you say that you're moving from a single-level direct-sales model to more of a multi-level, then, across the board?

No, it is not a multi-level. It's a bi-level, because the CNO is not going to have a fixed percentage of the sales of their Group. So it's more a bi-level than a multi-level. Even though the CNO is not an employee of the Company, they are going to be representatives. They are going to buy and re-sell our products, but they are not going to have the same scheme that the multi-level has. So they are not going to have [ones] based on the amount of the sales that their group have.

So -- and we are talking to give you more information that if -- we are going to implement gradually the CNO in the whole country in the next two years. We started the project in a specific region and now, in the next two years, we are going to rollout the project to other countries. And imagining that today we -- we're already all the country operating with the CNO. We imagine that we will have 6,000 CNOs in all the Brazilian markets, just to give you a rough idea about the project.

Okay, thank you.

No, thank you.

Our next question comes from Celso Sanchez of Citigroup. Please go ahead.

Yes, hello. Good morning or, I guess, good afternoon, Brazil. I just wanted to get a bit more clarity, if we could, on the productivity -- the drivers of the productivity. Obviously, it's been a trend now for a while that it's been declining. I think to some extent there was always the sense that that would happen as you grew reps very -- consultants very rapidly.

But to what extent do you think this is really a function of, perhaps, just not getting the merchandizing strategy right? I know you've talked about it in a couple quarters in the past. But one has to wonder if that's actually becoming more of a factor than just the new reps, because you've been growing at a very high rate of consultants for a while. And it only seems to have appeared in the last few quarters.

So could you comment on how much of the productivity shortfall or drop you would attribute, on a relative basis, to just the newer members of the sales force and how much you attribute to the merchandizing or marketing strategy or product selection, I suppose, in the market. That's the first question, please.

Hello, Celso. Good morning. This is Alessandro speaking. I think that even though, of course, there is always an impact of the lower productivity of the new consultants, I don't believe that this is the reason why we saw a decreasing in our productivity because, as you know, in the last four years we are growing fast the number of consultants.

So this is not an explanation why we saw this decreasing, even though it always has an impact on the number. I think that this decreasing is based on the fact that we are growing the revenue less than the channel. And as we mentioned, we really believe that we can grow a little bit more in Brazil and this is mostly based on the marketing strategy that, as I mentioned, we are going to -- we are -- we started in the beginning of this year to plan and to implement some adjustments. So this is the main reason.

I think that there is a positive issue on that. That is the fact that the channel is still growing 14%. And this is a very important number and represents the preference and the acceptance of people to be part of Natura business. And I think that this is a good point to share with you.

But I would agreed that the growth of the channel, obviously in my opinion as well, is a lot more encouraging. However, one has to wonder, longer term, if the marketing strategy doesn't keep up, the strengths of recruitment and retention, your very low turnover rate, I wonder if it becomes an issue at some point where the product mix isn't -- your merchandizing strategy isn't keeping up with the successful recruitment efforts. And if this then, it becomes an issue of a cycle of people looking at the product portfolio wondering if there are other opportunities with other product portfolios out there. I guess that's more of the concern.

So I guess, along those lines, do you have any -- do you feel like we're -- you're going to see -- do you expect to see results in the second half of this year from your marketing strategy tactics that you might have implemented in the last few months that will really start to show a turnaround in that trend? Or do you think it's a much longer evolution, in the order of quarters rather than months, to see those marketing changes pay off?

Celso, certainly because we are working hard to make those adjustments, we expect some changes. It's difficult to give you some expectations about how much and when they are going to occur. But we, of course, expect some changes in the growth of the Company.

Okay, thank you. If I could just follow up, then, on the CNO development, first of all, it's great news to hear that you've got the confidence now to share with us some details. Can you give us a little more color, though, on how you think it will -- how you think the rollout will go? You said next September. I assume, just to clarify, September of '07, i.e., in two more months, not next year, right?

And then the second part of that is, can you give us a sense for how you see the cost structure evolving as you hire, or as you look to get as many as 6,000 of these folks out there? And if I remember correctly it was the target, each one would be responsible for about 100 to 130 consultants. Is that still a target?

And then, we can obviously do our own math to decide what that means in terms of total consultant force eventually. Just basically the economics of how it rolls out and also the way the structure will work in terms of personnel, please. Thanks.

Hello, Celso. We -- let me see if I understood your question. First of all, we are announcing the beginning of the projects on -- in the first new region on September and we are going to need probably two years. So at -- in the middle of 2009 [and] at the end of 2009 we are going to complete all the implementation in Brazil. And we are going to start announcing in September and probably on March, February, the first CNO are going to be -- are going to work in the next new region. And we are going to implement regionally, as I said.

Regarding the costs, in the short term we are going to see probably a slight -- a higher cost slightly, but a higher cost in the sales expenses. And in the medium and long term, a lower cost and it is like -- it's little. It's not so relevant that we have today.

So in the average, the cost impact of the project is almost zero. So we are not -- we should not see something relevant, even in the short as in the long term. But in the beginning it's going to be a little bit higher and in the long term it's going to be lower than the cost that we have today.

But this is not relevant. This is not relevant in our projections. And we are going to have around 100 and 120 consultants first, as you mentioned. This is still the plan. That's why we believe if that we were, today, running the Company -- with the [all] CNO implemented we will have 6,000, so, almost 100 per CNO.

Okay, thanks. And just lastly, on the -- you said the costs shouldn't be too material. How about the benefits on the revenue side? Do you think it helps -- if you had to order them in priority, productivity, recruitment, retention, which of those is the biggest benefit of this rollout, do you think?

Celso, the most important benefits of this project are the recruiting and the retention, because we believe and we saw in the pilot that the relation between the consultant -- the Natura consultant and the Company is stronger when the CNO, it's in the middle, because it's something else to establish relationship with the consultant.

In the long term we could see some gains in the productivity because if they sell more, as you know, the productivity is higher. But we only are going to see those effects in the long term. In the short term we saw gains in recruiting, in retention and in satisfaction, of course, because they feel better in the relationship with Natura.

Thank you very much.

You're welcome. Thank you.

(OPERATOR INSTRUCTIONS). Excuse me. Our next question comes from Mr. [Matzu Kawazaki] from Unibanco.

Hello. Just a quick question. I didn't get the new CapEx for 2007. Can you repeat please and explain why will you increase it?

Matzu, this is David speaking. Actually, we are decreasing the CapEx for the current year. It was planned to be BRL190m for 2007 and now we are decreasing it BRL15m to BRL175. And the main reason is that we have some projects taking more time than we expected.

You can see that the total investments we made in the first half of the year was BRL48m -- I'm sorry, BRL43m. If you compare to last year it was BRL60m. So we are expecting some project -- some delays in some of our projects, so that's why we're decreasing the expected investment from BRL190m to BRL175m.

Okay, thank you.

Thank you.

Our next question comes from Mr. Gustavo Hungria with UBS Pactual.

Hello, and good morning everyone. I have a question, again, on the innovation index. I also couldn't see that from the presentation. Actually, I couldn't get the presentation. I don't know if there's something wrong with the website but I didn't see the figure there.

And as we were seeing, and as Alessandro mentioned in the beginning, this rate has decreased over the past quarters and you expect it to continue going [down up] to the year end because of products that, if I understood correctly, were launched in 2005. So I just -- I would like to see if you have an index that only takes into account the products launched over the past 12 months. So in that way we could see how these newer products are doing. Is there any way we can see that? Do you monitor that as well?

Hello, Gustavo. How are you? This is Alessandro.

Good. How are you?

We don't have this index because we decided -- in fact, we could calculate this index on 12 months, on six months, but we decided to use the 24 months because it gives more stability of this index. We are a very promotional industry, special, not because of the cosmetics, but because of direct selling. So a way to decrease those specific effects on promotion efforts is using a longer time to use those index. So we decided to use 24 months.

So unfortunately, I could not give you any information about that -- about this good information even though, as I mentioned, we believe that we are going to see some decreasing in the next two quarters. And probably in the next year we could see this number getting higher, especially because of those fragrance launches in 2005 that we didn't succeed as we expected.

Okay, so -- but you do have evidence that these newer products, let's say, the products launched over the past 12 months, they are showing a different behavior than those ones that were launched in 2005. So that, I mean, once -- once these product launches in 2005, they get out of the sample, then we should see a recovery of this trend. That's the thing that I'm trying to understand.

Yes, yes. We expect to -- we saw better results in launches of last year and this year, so that's why this index should be better next year than in this year, exactly what you said.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Our next question comes from [Guido Giamatti] of Ryder Capital Management. Please go ahead.

Good morning. I apologize; I joined the conference call a little bit late so I apologize if this question has already been asked. But could you give us, [Alessandro], the feeling of the competitive environment? And secondly also, we noticed a big improvement in the gross margins. If you could work me in a little bit for that, if it's sustainable? Thank you.

Guido, this is David speaking. I will start with the impacts on the gross margin, then Alessandro will explore a little bit of the competitive environment. [You] have to expect this improvement in the gross margin is sustainable.

We [exchange] from two main sources. The first one was a dilution of our fixed costs in the manufacturing [part], which had -- our overhead expenses in the manufacturing processes were fixed from last year to this year. And that's already an impact of our decision to keep the other overheads -- the overhead of all processes (technical difficulty) fixed in the next years.

So that had something like 40 basis points effect in our gross margin. The remaining [effect] came from a better negotiation with our suppliers and also we remind you that we had an in increase in our selling prices in March. We adjust our selling prices every year in March to reflect the inflation in the domestic market.

So the combination of better terms with our suppliers and the real price adjustment, [actually], resulted in the remaining impact in the gross margin. And, as I said, we expect it to remain for the rest of the year.

And hello, this is Alessandro speaking. I -- as we mentioned several times, the competitive environment in Brazil regarding, specifically the cosmetic industry, is getting tougher and not this quarter, but in the last two or three years. Brazil is an important market. Our CFT market is growing fast in the last five or six years. So all the competitors want to get profits off this good market that we have in Brazil.

So the competitiveness is getting higher, but as in the other industries in Brazil too, because we are talking about a huge market in the world, so we are facing probably what other industries are facing too the same.

All right. Thank you very much.

Thank you.

Thank you. You're welcome.

Ladies and gentlemen, 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 -- all of you to participate on our conference call and invite you for the next one for the results of the third quarter of 2007. And so, see you soon, and thank you for your time.

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