Natura &Co Holding SA (NTCO) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Natura's 2011 Second Quarter Conference Call. Today, with us we have Mr. Alessandro Carlucci, the CEO, Roberto Pedote, 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 listen-only mode during the Company's presentation. After Natura's remarks are completed, there will be a question-and answer-session. (Operator Instructions).

We have simultaneous webcast that may be accessed through Natura's IR website, at www.natura.net/investor. This live 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 Security 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 all 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 now begin the conference.

Good morning to all, and welcome to the conference call on the second quarter results. First of all, I would like to reinforce the methods that we gave in the previous quarter related to our growth. It was very much related to our decision to anticipate the price increase and the possible approval of the provisional measure 497.

The change in the tax burden expected in the measure, actually, did not happen. But, there was an impact in our planning cycles. I begin this consideration because at that time we had some signs of deceleration in the CFT market. But, as we have no official and final data, we could not affirm that this was actually happening.

Well, now, regarding the results of the second quarter that were below our expectations, we already have the industry data of the first four months of the year. Which confirm a slowdown in our markets, in which, is the scenario, we are going to see for the rest of this year. Nevertheless, we have gained market share in Brazil during this period. We had very positive results in international operations, which continue to show strength, growth and improvement in profitability.

In Brazil, as I said, our industry grew 9% over 13% year-on-year. At the same time, as the market grew less, its level of competitiveness increased. In this scenario, by the industry growth for this year, what we are going to do for the second half. We are adjusting our initiatives, to keep growing in market share. So, we have a marketing brand which includes, product launches and evolutions in our marketing tools. We also have an even greater focus on efficiency and productivity gains in the second half of the year.

In order to adjust expenses, and, in this scenario, be able to reach, at the end of this year, a similar level of consolidated EBITDA margin of last year. We remain very confident about the future of the Company, and we have expectations that these measures taken by the government, in order to cool down consumption, should have more impact this year. The next year, the situation will be different. We will be able to see higher growth rates in our industry.

Above all, we have high confidence in the fundamentals of our organization. We have a strong brand, a good leadership team, and a channel that continues to grow at significant rates. As well as opportunities to fill-in spaces for Natura, the preferred brand, is not yet present in either category or price range.

It is important to tell you that we will keep investing in strategic projects and in innovation because, they insure our long-term growth. I stress that we are very confident that, even in this lower growth scenario of the market, we will continue to gain market share and achieve good levels of profitability. Now, I'm going to pass this on to Roberto Pedote to share with you some finances.

Thank you, Alessandro, good morning everyone. I would like to highlight some points that help us better understand Natura's performance in the quarter. As you have noticed, gross margin increases as a result of efforts we have made in our supply chain. That practically has offset cost pressures.

Some expenses were affected, because, we were prepared for higher growth than what actually occurred for example, we had some [inspect upon city] in our logistics as well as an increase in inventories.

[As these adjusted] expenses increased due to increases in innovation investment and in the strategic projects that will make out future growth and productive again, as you have in this quarter. With regard to net cash flow, in addition to the increases in inventories we have already mentioned, the recoverable taxes have increased due to a fiscal fees credit on capital gains and [ISMS] on inventories.

In the second half, we are realigning our company to a more realistic growth level with the current market situation so as to avoid idleness of some process. We are also dealing with expenses from various areas in processes in order to anticipate productivity opportunities. These adjustments of the operation and expenses should be gradually reflected throughout the half.

To close, I would like highlight that the Board of Directors approved payment of dividends and interest on equity for the first half of 2011 in the net amount of BRL0.76 per share, 50% higher than last year to be paid on August 12th, 2011 to shareholders as of July 26th. The Board also approved the buyback of 4 million shares at market price to cover options exercise for the following years. And that will begin on August 1st and continue for a year. Those shares will be held in treasury. Thank you very much, now we can move on to questions and answers.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Mr. Reinaldo Santana, from Deutsche Bank.

Hi, good morning all. I have two questions. The first one is that, you mentioned some adjustment that you will make in terms of expenditures, given the slower market growth, do you also plan to make adjustments in your capital expenditures plans that I understand will reach BRL300 million this year, and probably the same amount next year. Specifically, in terms of logistics, as you were planning to open several distribution centers and hubs?

Hi, Renaldo, no, we are not, as we mentioned, the most important in any strategic project that we have, that are related to -- as we mentioned to include -- to finalize our logistics plan. We'll continue in a very fast rate. We are not going to decelerate this program. This program is very important for us. In order to allow us to improve service level for our consultants. And, also, is a good basis for us for future innovation, to reduce the cycle to the final consumer.

There are several things related to this project that make it very important, even for productivity gains. Like, it will be cheaper when we finish all of this project. Also, we'll have benefit us in cost. Then we are not going to change these and we maintain our BRL300 million of guidance for CapEx for the year.

Right and my second question, could you elaborate on how much you're expending in research and development at a percentage of sales? And, the level you plan to reach, let's say, in three years? And, whether you have changed this in the last six months due to the higher competitive environment?

Hi, Renaldo, it's Alessandro. We didn't change our strategy, that is, gradually raising the investments and innovation. So, we are around 2.7%, 3% of net sales. And, for the next three to four years, we want to increase, probably to 3%, 3.5%, something like this. So, in other words, we didn't change the strategy. We strongly believe that this kind of investment is very important for the future of the Company and there is no reason to change this.

The only thing, as we mentioned that we are adjusting, is in the short-term view. Some expenses of the Company and, also, our initiatives to guarantee that we can deliver a good profitability this year and also gain market share in a new environment. This year our market is going to grow but is going to grow a little bit less than we saw in the last years.

Our next question comes from Mr. Marcelo Nashito from Merrill Lynch.

This is actually Bob Ford again, masquerading as Marcelo Nashito from Merrill Lynch. But, thank you for taking my call. On your early call there were a lot of questions with respect to competitive dynamics. And a big part of that is because when you listen to the sell in, and I think Alessandro was very careful to say sell in on the earlier call.

And I [figure around] I think the sell in in the last quarter was 16.5% in Brazil (inaudible) expect to be 23%. And I was curious, as to, whether or not you're seeing comparable levels of sell out in the products that may compete with your offering a little bit more directly, for those rivals in particular?

Bob, it was --

Or, if you even monitor them, I'm not sure if you monitor them that carefully with the Nielson data or not?

Bob, sorry, it was very difficult to hear you. We are having --

Interruptions --

Interruptions in your voice. Could you --

You know what --

Repeat it again, please?

I'll try this again. And I was just curious with respect to -- in your earlier call there were some questions or some concerns with respect to competition. And I think it's because the multi-nationals are reporting such big numbers right now in sell in, in the organized trade. And L'Oreal is indicating that their volumes in Brazil, sell in were up 16.5%. I think in [reais] and P&G is running at a rate of 20% or 30% right now in reais.

And I was curious, if you're observing similar rates of sell out or is it just an initiation of their billing the channel? They may not be experiencing that rate of sell out in the aftermarket.

Thank you, Bob, now I understood. So, first of all, we don't have the final data to see. There is only a sell in or, if we are seeing also a sell out for those companies. What we saw for the first two months of the year, was the same slowdown in the market. We saw that the market was growing less in sell out than last year. But this was only in the beginning of the year. So, maybe it's too early to say that this is a trend.

My perception is that even if those two companies, or maybe other one's, are reaching good levels of growth, the market is slowing down. And again, those few companies are not as big as they used to be in other markets here in Brazil. So, their growth --

Yes --

Is based on a lower size. So, maybe we are growing, yes, and maybe they are selling out also their products. But to be honest, I don't have, yet, good information to share with you. This doesn't change from any of our perceptions that our market is slowing down a little bit. And we, the most important thing is that we must be prepared, and, this is what we are doing, to face the second half of the year with lower growth of the market. So, our adjustments are to put the Company on the right track to manage this new scenario.

Alessandro, when I listen to the innovation pipeline that's coming right now, in the second half of the year, it sounds as if you will also be supplementing that with greater share of voice in the second half. Is that fair? And if so, will you be able to fund it with some of the sources of efficiency that Roberto just eluded to? Or, can we expect continued higher SG&A pressure in the second half as well?

You are right Bob. We are also, but not only, also increasing the share of right. But we are going to also improve some of our marketing tools. On the other hand, we are going to finance this level of investment with efficiency gain. Also, allow the Company, in consolidated terms, at the end of the year, to reach similar levels EBITDA margin of 2010.

That's very helpful. Thank you very much.

No, thank you, Bob.

Our next question from Ms. Margaret Kalvar from Harding Loevner.

Hi, I have a couple of questions. First, on the competitive issues, to what extent are you feeling the impacts of L'Oreal and Proctor and Gamble and other players in the direct sales channel? My impression has been that they've both been very strong in hair care. You do sell some hair care, through direct channel, but that's also heavily a retail product as well. How much differentiation and inflation are you getting right now from your particular mix and from your door-to-door direct sales channel participation? That's the first question.

Well, Margaret, first of all, as you mentioned, those competitors they are strong in categories where their [sally's] is not strong. So, we are not feeling a direct impact from them. Even though they are new competitors and they compete in the pocket share of the customer. But, direct to us, I don't feel a direct competition. Because, they are stronger in hair care, as you mentioned, body care, deodorant, some categories where the retail is stronger and not direct selling.

Regarding the direct selling, you can see that our channel keeps growing in Brazil at a very good rate, a bolder market. So, we don't see any structural change in the direct selling regarding those two or even all the retail competitors in Brazil.

Okay, the other question I had related to pricing and, also, I guess a subquestion to productivity of your sales force. It looked like pricing might have been under pressure a bit in terms of revenues over units. What has your experience been? Also, the sales force productivity. What do you see happening and what are your trends for the balance of the year that are expected?

Okay, thank you for the question. First of all, the price is mostly impacted by our strategy in the short-term. As you know, half of our sales are under promotion. So, that means that we define, in a short-term, the mix of our products and the mix of our price because of the promotional planning. So, this change is not because the market is changing, or, because the customer is buying cheaper products. It's only because we promoted, during this period, cheaper products than we used to do it in last year, for example. So, it's only because of our short-term promotional plan strategy.

The productivity of our consultants decreased mainly because -- growing 16% the number of consultants as Brazil, as you saw, our market grew 9% in the first four months. Because of this, our consultants they sold less than they sold last year. So, it's the only reason productivity decreased. We believe that we are going to keep seeing good levels of growth in the channel in the second half of the year.

I think that we are going to see some decrease, also in productivity, as we saw in the first half of the year. I don't know in which levels. I think that it's good to share with you. We believe that we are going to see some decrease in productivity because of the channel. We will keep growing in high rates at the second half of the year.

Do you expect to come to a point where the number of relatively new reps, who have some seasoning, and therefore, who's productivity starts to rise and overcomes the rate of new rep recruitment? Brand new reps, generally, have lower sales productivity. You've been adding at a rapid pace. As you mentioned, into a market who's growth has been decelerating. Is there a chance for a positive dynamic within the next six to 12 months or more seasoned reps gaining a larger share of the base?

Margaret, the mix effect of new reps, with lower productivity decreasing the average productivity, is also impacting what we saw in the first half. It's going to have the same impact in the second half.

Okay.

This is not --

Okay.

It's important to share with you. The main reason of the decrease in productivity, as we've faced and we are going to keep facing this year, is not because of this. Even though, it's adding to the fact that we are growing much more the channel than revenues.

Okay. Thank you.

Thank you.

Our next question comes from Miss Lore Serra from Morgan Stanley.

Hi, good afternoon. I also wanted to ask a few questions. Let me first ask a little bit about your perspective on the market growth rate. I wonder if you could share with us if you think there's something different going on in the industry? And I know that the economy is decelerating. And I know that food inflation is rising. And I know interest rates have been rising. But, none of those things you would expect to really hit a sector like yours, which is, generally, thought of as being a bit more resistant to those kind of factors.

So I'm wondering if you could give us some perspective on, within your business, are there certain sectors or segments that are weaker? Whether you think that some of the weakness owes to less efficient innovation on yours and Avon's part or others? I'd love to understand the economy between, a still pretty good economy, I think, and some pretty strong deceleration in the industry and in your sales?

Lore, let me share with you something in a high level. We spoke with several economists in Brazil. To be honest, nobody is understanding, very well, why those initiatives from the government are impacting in a different way different industries. I can't give you much better information of what we already gave. Again, we are trying to understand the different impacts of those initiatives from the government. Then, if we know something more, we can share it with you.

Second, it's important to say, look, we are facing a slowdown. For our company our size, the slowdown has relevant impact. We are talking about 9% of growth. This is a high rate of growth when you compare with other industries in Brazil. The only thing that we saw, this is also in a high level analysis, is that, those measures of the government impacted much more the industry than the service categories.

So, products are more impacted than services. This is the only thing that we saw in the beginning of the year. Not only the cosmetic industry, but also other industries. Again, I don't have much better information to share with you, unfortunately.

Okay, just sticking with that theme a bit, it does seem, from looking at the industry data and comparing it to your data, that the sales slowed at the end of the quarter. I know on the Portuguese call you said, don't read too much into a couple months of date. But, is it your view that industry growth is decelerating at a very fast pace? Or, is that just some anomaly of the data?

I prefer to believe that this is more of an anomaly of the data, because, two months are not enough to say that we are going to have a third bimester worse than the first two in the industry. Maybe this can happen. The only thing that I believe is very important to share with all of you, is that, we are prepared, now, because we reset our expectation about the industry to face a second half of the year with a market growing less. How much less? I don't know if the market is going to grow in the same rate that we saw in the first four months, or, we are going to see some deceleration. I don't know, but, we reset our company to manage this new situation.

We strongly believe, then, in 2012, we could see the marketing growing higher, because, we are going to have increase in the level of income, especially for the lower income in Brazil. Also, a lower inflation and those two drivers are important to our industry.

I wonder if you could give us a sense of the innovation calendar for the second half of the year? I know you announced some things in a press release with Echoes. I know it's strategic information. You talked at the start about filling in white areas. Can you talk a little bit, conceptually, about the number of important launches you think you have for the second half of the year?

Lore, I can share with you what is already public. Maybe there is other information regarding the public information that we already gave to the market. The Echoes line is a total new line. Not only new package, new product line, new design, new benefits, this is going to happen gradually because Echoes line is a very big line. We started with hair care, and then, we are going to do this improvement, and this innovation, in the other categories. Also, adding new ingredients.

So, Echoes, for example, is not only something that is going to happen in this first month -- we are going to see in the next three to five months innovations. Also, as we already shared, we are launching a new brand called VoVo. The brand developed products to put grandmothers and grandfathers closer to their --

Grandchildren.

Grandchildren.

Grandchildren. We believe that this is not only a very strong concept that builds our brand, but also, a good gift for Christmas, for Father's Day and other occasions. So, these are 2 examples that we are already informed. We are going to have more. More initiatives. Not only in products, we are going to also improve some of our marketing tools during the second half of this year. Including advertising, but, it's more than this.

Okay, thank you.

Thank you.

Our next question comes from Mr. Celso Sanchez from Citi.

Hi, good afternoon. I just wanted to ask a bit more about the consultant productivity issues. I'm wondering if you might have some numbers you can share with us to give us a sense of if there is a difference in regional productivity? Thinking about the impact of the [CNL] program.

I'm wondering if, perhaps, the growth in the northeast, on the lower GDP per capita in that part of the country, might be helping to explain if the growth is coming more from there from the reps? Perhaps that stands to reason that the productivity there, in general, would be lower. If there's an explanation there? Or, is it possible that the more reps you get, as you grow aggressively, perhaps, a greater percentage are buying just for themselves, or for a smaller base, rather than, for a broader clientele?

The third point, all related is, is there any indication that a rep that with X months or X cycles of experience now is any more or less productive? And, if so, how much than that same experienced level or rep, three years ago before CNL, before CNL four years ago, before CNL? Thank you.

Celso, this is Alessandro speaking. Regarding productivity, we didn't see any region or any segment of consultant where the productivity loss was concentrated. Also, I can add other information for you. When we think about our growth, not only productivity but revenue growth, we saw almost the same level of growth in the different regions in Brazil.

In other words, our revenue frustration was similar in other regions. So, it's not a regional effect. Also, as I mentioned before, it's not a segmented effect in some parts of the channel. Independent if they were CNO or if are they are young or new. This is mainly impacted by the fact that the market grew less. We grew less. The channel grew 16%. So, this is the main reason why the productivity is lower.

Sorry, just to follow up, logically, if the revenues are the same throughout the region and one reason is growing less faster, then, by definition, the productivity associated with that region's reps will be lower, right? So whether that's a tenure issue, in terms of experience, or a product mix in that region issue, I'm not sure, but, revenue growing extremely in different regions doesn't necessarily mean that the productivity -- that there's not a differentiation in productivity, I would assume. Is that the right way to think about?

You are correct, but, the productivity slowed down in the same rate in other regions. So, you are right to say that one thing is not directly related. But, in this period of the year, both things happened.

Okay, very helpful, thank you.

No, thank you Celso.

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

Once again, I would like to thank you all for participating in our conference call and for your questions that always help us reflect and grow. I want to reaffirm, here, that the Company is absolutely prepared to face the current challenges, as we have been assuring you. With a leadership team, that is 100% committed and consistent in our long-term growth.

Results in a typical year, like this one, when we have changes in policy and the economy, are part of any company. We are better prepared for the second half than we were for the first one. We have a more effective marketing plan. With important release, advertising actions and support for the channel. We shall make the necessary adjustments, without affecting investments, for the future growth but seeking more efficiency and productivity gains.

We have strength in our business and solidity enough to continue to grow and gain market share in the medium and long-term. You can be sure that we will take advantage of this period to reinforce our foundations, which are, already solid, maintaining our track record of exceptional growth and expansion of our market share in the coming years. Thank you, again, and we will see you at our next earnings disclosure in October. Have a nice day.

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