Natura &Co Holding SA (NTCO) 2011 Q4 法說會逐字稿

Gentlemen, at this time, we would like to welcome everyone to Natura's 2011 Fourth Quarter Conference Call. Today with us we have Mr. Alessandro Carlucci, the CEO, Roberto Pedote, the CFO, and Helmut Bossert, the 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. At that time, further instructions will be given. (Operator Instructions).

We have simultaneous webcast that may be accessed 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 now begin the conference, sir.

-- to discuss 2011 results. I would like to begin my comments by recalling how over the last few years we have brought about profound transformations at Natura. Between 2007 and 2011 we practically doubled in size.

Our consultants increased from 700,000 to 1.4 million. EBITDA went from BRL700 million to BRL1.4 billion. The contribution from the international operations rose from 4.4% to 9% and we went from 9 million to 17 million orders per year with over 50,000 orders per day and almost 500 million units sold last year.

To accompany this growth and prepare for the coming years, in 2011, we made the largest investment ever in our history, allocating around BRL350 million to CapEx in production, logistics, and technology projects.

As we mentioned in last year's call, we recognized that simultaneously implementing new systems for capturing orders and developing our logistic model with the inauguration of new DCs led to instability on our operations which in turn affected the quality of our services and led some products to be out of stock, especially in the second half of the year.

Today, both our system and logistics structure are stable and operating normally. Although the number of products out of stock has decreased, we are still not at the levels we want which we should achieve within the next few months. At the same time, we faced a drop in the efficiency of the promotional process. The combination of these two factors impacted our results and required adjustments to our planning during last year.

Today, we are dedicated to ensure the success of our promotions by better balancing the parts done, centralizing and regionally. We remain focused on capturing efficiency gains in the Company's various processes which will generate the funds needed to operate in a more competitive market.

We are certain that we are on the right path to taking our infrastructure to a whole new level in order to ensure our products reach consultants faster which will allow service quality to reach a differentiated standard boosting the competitiveness of our company.

In Brazil, the strategy in recent years has been based on increasing our penetration in order to take advantage of the fact that our market was expanding by 15% to 20% per year which was the correct strategy and was well implemented. Now, we have 1.2 million consultants and our penetration in Brazil households has reached 60% with around 100 million consumers.

Going forward our strategy will now will seek to leverage these assets, taking advantage of our brand preference to increase the consumer purchase frequency and the variety of products they buy. For this, we are shifting our marketing mix to support this evolution in our strategy, the results of which should be seen gradually over the course of this year.

In parallel, we also continue to invest in innovation which is focused, not only on brands and products, but also moving into new areas of the market where we currently do not have a presence.

Another highlight was our international operations which posted very strong results. We remain confident and enthusiastic about Natura expansion in the region which is fast becoming a relevant business platform. At the same time that we are promoting development of multiple fronts in the short term, we are also moving towards a new outlook for the business. We are motivated in particular by the future of direct sales.

We have always believed in the entrepreneurial and transformational capacity of people who are engaged in a common purpose in a world even more connected digitally in which the personalized treatment of each consumer gains greater relevance. Direct sales have an excellent opportunity to continue expanding.

We see a future in which the relationship between consultant and consumer will be supported by high technology and social networks and services can evolve dramatically while leveraging the creation of value for all involved.

In conclusion, we have an excellent opportunity to expand our competitive advantage by improving our service quality, redirecting our marketing mix to increase buying frequency and the shopping baskets, taking advantage of Natura high penetration and brand preference, while continue to execute our expansion plan in Latin America.

Those were the main points I want to cover. I will now ask Roberto to give us some details on the results.

Thank you and good morning. Natura's consolidated net revenue of BRL5.6 billion grew by almost 9% in 2011. In the first 10 months of last year, Natura achieved market share in Brazil of 23.2%, maintaining its leadership position even though the share was down 36 basis points from 2010.

International operations we registered very strong growth of 40% in local currency. Note that there was significant improvement in profitability in Argentina, Chile and Peru with EBITDA margin in the year expanding to 12%.

2011 was marked by adjustment and a greater focus on managing the Company's expenses. The higher profitability in the last quarter was due to various factors which included first, the adjustment in expenses, second, the favorable comparison base in relation to the fourth quarter of last year, and third, the non-recurring impact from the recognition of PIS and Cofins taxes from other periods.

We also took advantage of 2011 to improve our methodology for planning and controlling costs with the implementation of a zero-base budget. We continue to concentrate our efforts on capturing productivity gains in various profits throughout the Company in order to generate the resources needed to ensure our competitiveness.

EBITDA margin was 25.5% in the year or 100 basis points higher than 2010. After excluding the non-recurring tax from other operating revenue expenses, the EBITDA margin was 24.4%. Consolidated net income was BRL831 million growing by 12% from 2010. Free cash flow was lower than last year, reflecting the higher CapEx and higher consumption of working capital.

This last sector was impacted by an increase in inventory coverage due to the lower than expected sales and by the higher recoverable taxes, mainly due to PIS and Cofins tax credit, I mentioned, which should be converted into cash over the course of the first half of this year.

We project significant improvement in working capital in 2012. Investments reached BRL346 million in 2011. The projects were concentrated in our logistics, MIT.

For 2012 we estimate a CapEx of BR420 million. We continue to improve our technology and logistics including a new distribution center in Sao Paolo. 2012 should also be marked by important investment in industrial capacity with the expansion of our plant in [Caishamass] and our industrial unit in Benevides in the state of Para.

This investment will leave us ready for growth, increase the efficiency of our logistics and production process and take us to a whole new level in terms service and quality.

We ended the year with a cash balance of BRL516 million and net debt corresponding to 0.4 EBITDA. On the 15th of this month, the Board of Directors approved the payment of dividends and interests on equity related to the results in fiscal 2011. This dividend and interest on equity along with the amount already advanced in August last year represent dividend per share of BRL1.89, 50% higher than the amount declared for fiscal 2010. Thank you very much and let's go now to the Q&A session.

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

Yes, hi. Good afternoon, Alessandro, Roberto, Helmut. Well I have one question regarding CapEx for 2012 that is higher than anticipated. I'm just wondering if you could give us some breakdown or approximate breakdown of these in terms of how much will be for IT, production, and logistics. And also do you see a risk of distortion in terms of volumes as it seems that the intensity of the new projects continue this year? Thank you.

Reinaldo, basically, what happen in 2012 is that we are still in the end of the cycle -- of this logistics cycle. The logistics cycle we started in 2010, '11, and is the last part of this in 2011, and we have start investment in production in 2012. Then we have an overlap of two important cycles of investment in the Company in 2012. I'm not sure if I understood the other question, but if it's related to problems that we can have with implementation of the projects.

That is correct. Yes.

Yes, okay. We learned a lot last year. We did a lot of learning and we are going to be much more conservative in the way that we are going to implement projects and we are going to run less risks and we are [earning] all the future implementation with this approach. Then we expect to do in a much better way the following projects.

Okay, great, and also, what sort of efficiency gains in terms of general and administrative expenses were you able to achieve this quarter and if you see that those are sustainable for 2012?

Reinaldo, we mentioned we are approaching efficient gains in all areas of the Company, not only in general and administrative. Even in marketing, sales, all the areas of the Company we are looking for efficiency. Then we are entering 2012 with a more optimized expense base all across the Company and we expect to continue to improve this process through 2012.

Okay, great. Thank you.

Excuse me, our next question comes from Ms. Margaret Kalvar with Harding Loevner.

Yes, good morning or afternoon, there. I was wondering if you could give me a little more detail about the white spaces that you've talked about going into -- in terms of increasing the consumer's frequency and the size of their basket, as you've kind of entered a new phase as you're basically highly penetrated in terms of initial purchase.

What kinds of products, particularly given the increase in modern retail penetration in Brazil, are you focusing -- are you continuing to focus on products that are really more the department store channel than the hyper markets type of purchase?

Hi Margaret, here is already afternoon. So 22 past 12. And let me talk a little bit about white spaces. Mainly we are talking about two different things. The first one is to offer new categories where Natura is not present yet, like for example oral care, other categories that we don't have any offer to the customer.

Another -- the opportunity is to offer new price points with new value proposition in the categories that we are already now. So for example, today we have only two offers in the hair care and as we mentioned before, we can offer more differentiated products, more expensive, more professional-like, and at the same time, we can offer also some [massage] products for hair care.

And both of those things we don't have today yet, so these are the two examples of initiatives that we should see in the next years happening in Natura.

And also adding to this only to repeat that an important part of this new strategy to increase the frequency of the consumer purchase is to shift our marketing mix to productivity, to frequency, adapting our promotional campaigns, our communication, the recognition, the compensation of our sales force putting all our marketing mix to support this strategy, where the white spaces are one-off the initiatives.

But we must not forget that we have a very rich marketing mix when you compare with retail consumer companies because we, in some ways, between [comer] we own the channel. So we can drive the channel to look for productivity while the typical consumer goods companies, they can't because they are not the owner of the channel. So that's why we have a very rich marketing mix and we are going to work on this.

Okay, but at the same time, oral care and hair care are two very competitive areas, globally in terms of multi-national presence and penetration. And I've read that L'Oreal is starting up a research center in Rio and I'm just a little bit concerned that if you're planning on growing in those areas, you may have somewhat more promotional environment than in the basic CFT products.

You have a point, but on the other hand, if we take a look of our performance in the soap industry, that probably is the most commoditized category in our industry. Typically, totally led by those companies that you mentioned, Natura, after three or four years of offering new price positioning with innovation, became the second largest soap industry in Brazil.

So I totally believe that we can do similar things in categories where typically consumer goods in retail are the leaders and we can become, maybe not the leader, but a relevant player.

So this is our challenge but we did before and I really strongly believe that we can also be very well succeeded in categories like hair care, like sun care, like the other ones, like oral care, a lot of categories where retail typically is the best channel that we can really become a relevant player like we did in soap.

Okay. Thank you very much.

Thank you for your questions.

Excuse me, our next question comes from Ms. Lore Serra from Morgan Stanley.

Hi, I guess good afternoon and thanks for taking the questions. Let me ask a couple questions, but I'll ask them one at a time. Can you just put for us in context where you are in terms of the systems issues and the stock-outs? I think you mentioned in your opening comments that the systems are stable but that you're still working on improving your level of ability to deliver products and it will take a few months.

So I just want to understand what that means and what the implications are for kind of -- what that means for the sales outlook into the first half of the year.

Hi, Lore, how are you? Alessandro speaking. As we mentioned in the beginning, we are in a very good situation now regarding the stability of our IT systems and also our logistics. So all the problems that we faced in the last quarter, now they were mostly solved.

On the other hand, regarding the stock-outs, even though we decrease significantly the number of stock-outs we are still far from the place that we want to achieve. And mainly because we need adjust all the suppliers and this sometimes needs some months so all the chain must be balanced.

And we believe that we will need probably two or three more months to really decrease the number of stock-outs and to reach the level that we want to reach to offer a good service for our consultants.

So this is the actual moment that we are living and we are really sure that the worst is gone and now we are -- we have some -- still some things to be done but the worst part is already in the last year.

Okay, that's not clear to me. What you're saying is you have supplier issues? Because I would think that if you've got your systems aligned then it's just a matter of making sure -- within your chain you've got the products in the right place.

No, the problem is not the suppliers but we had problems in the IT solutions and the IT solutions help us to integrate all the supply chains and the supply chain reaches the supplier. The IT solution is ready, but the planning to the suppliers was wrong because the IT had some problems. To adjust, to rebuild all the supply chain, we need now some months to be well balanced again all the chain.

So the problem is not in the supplier, it's in the connection and in the planning for the suppliers that now are adjusting their production also to supplies.

Okay. Maybe I can ask a little bit about your perspective for growth this year, and I know typically you guys don't like to give a growth outlook, but I guess given the -- it's difficult, I guess to separate how much of last year's lower growth both for you and the market was related to issues in the economy versus issues specific to the executional challenges that both you and your primary competitor faced.

So can you give us a sense of how you think about this year in terms of growth? I guess it's a difficult for the organization to plan when you don't really know if you're going to grow this year at whatever pace, right. But what is your perspective or what's your best thoughts on how much you or the industry will grow this year? And how much should we expect this systems thing to continue to be a drag into the front end of the year in terms of achieving what you think is a potential growth that the market will support?

Okay, Lore, without giving you any guidance, I can share with you some of our expectations. First of all, talking about the market, we believe that this year, 2012, the market should grow between the levels of 2011 and 2010. So between the 15% of 2010 and 7% of 2011, so something around 11%, maybe 12%. This is our expectation for the market this year.

And regarding our strategies, it's totally focused to recover growth in our company. That means that we are putting our effort to speed up the growth of the Company but this is going to happen gradually during the year. So you probably are not going to see suddenly in one quarter a huge change, but you should see during the year a gradual recover in sales growth.

Okay, I'm sorry to ask so many questions, but I appreciate the opportunity. The consultant base continues to grow at a very fast pace despite all of the issues that you had last year, right. It was still a growth of 14% off of a high base. It's growing very fast, and yet, you're talking about shifting the mix to productivity which makes a lot of sense. I wonder if you give us your perspective on where the channel is right now.

How much will go grow this year? What's driving that growth despite all the executional challenges? How concerned are you that -- when we saw the 10% decline in rep productivity this quarter, and I understand that you had issues, but that's -- I think the largest drop we've ever seen. I would love to understand your perspective on both the growth and kind of the health of the channel.

It's a very good question, Lore and in some ways your question is -- the answer of your question is supporting the change in the strategy that we are implementing now. We realize that we are going to have much more efficiency in improving the frequency of the consumer purchase than increasing penetration because we already reached a very high penetration of 60% for a brand is very high.

So marginally speaking, the profits and the gains of increasing penetration are going to be lower and lower and a way to see this is the decrease in productivity and on the other hand, the opportunity is let's put efforts and investments to increase productivity, to use this new capacity of the penetration -- the assets of the penetration and also getting advantage of the fact that we have the preferred brand.

So that's why we are moving from one strategy to the other and we believe that it was the right strategy until now because the market was growing between 15% and 20% and when the market grows so fast, I think the rule of the game is let's penetrate. Let's now occupy all the places.

And now, we, as I mentioned before, our expectation is that the market is growing -- is going to keep growing but in lower levels, so this is the time to use this penetration and to increase productivity. Productivity, I mean not only the consultant productivity, but especially the consumer purchase frequency.

Great, and my last question, I just wanted to ask two things on the innovation calendar. One is that it seems to me that most of the innovation you've done in the last couple of year, at least the sort of break out kind of innovation, has been more in the high end and I'm thinking about Una and some of your fragrance launches.

I wonder if you could tell us two things or give us some color on two things about your innovations this year. One is, when you're talking about filling in white spaces and launching new things should we think about the tilt being -- continuing to be in that sort of upper income space? And I know the three-tiered strategy, but it seems like you haven't tilted as much recently into some of the mid to lower points or maybe the lower points.

So can you give us some sense of where you will tilt this year and if you could also give us a sense of timing in terms of when we can see some interesting innovation from you guys? And that's it, thank you.

Lore, our strategy to occupy the white spaces is based on both sides. We are going to keep offering some higher priced products. But it's also lower pricing products, so you are going to have -- you are going to see both things happening. So it's difficult to say which one is going to be more important depending the category, we have opportunities down or up, so -- and we have products especially this year and next year where we are going to offer both things.

So it's not based only on Una or high priced products. We are going also to launch cheaper ones. Of course, as we like to mention, excluding the lower price points of the market because in this area we are not going to compete because we can't offer the level of quality of our brands and also we are excluding the luxury price point because as a positioning of our brand we are not a luxury brand.

But excluding those two extremes, we have opportunity in both parts of the market and we are going to launch products in 2012 and 2013 to occupy those spaces.

Okay and any color in terms of the timing of your innovations?

The color? Sorry, maybe --

Not color, but -- should we expect to see some important innovation in the first half of 2012 or is this mostly going to be in the back end of the year into 2013?

Lore, sorry, this I can't answer. So the color is too bad but I can't answer to you.

Okay, I appreciate it. Thank you.

No, thank you for your questions.

Excuse me, our next question comes from Andrea Teixeira from JPMorgan.

Hi, good afternoon, everyone. Thank you for taking the question. And I'm sorry to insist on this innovation, but I guess this one of the few -- one of the -- a couple of things that I believe is actually something you are going to be focusing on.

And I understand you have easy comparisons for sales in 2012 and in some sense you have some tailwinds to invest more money in innovation, so correct me if I'm wrong, can you help us reconcile how much you invest -- I remember it was something around 5% would be the kind of historical number.

Would you -- given that you have been -- you'd sorted out your DCs, and your distribution. I understand 2011 was a year where you had a lot of investments as your prepared comments Alessandro, suggested that you're pretty much done with that process and your stock-outs and distribution seems to be seemless now.

Is that an year where -- you've just discussed in the previous answer that you're going to be investing more? Should we see some reinvestment in margins or the level of margins that you have right now are probably reoccurring into 2012?

Hi Andrea, is Alessandro. Would you mind to repeat the question because we missed the last part?

I'm sorry. It was a long question. But just as a -- the last portion of the question is to help reconcile the innovation spending in 2012. If that would mean that you're going to be increasing as a percentage of sales, and if that could have an impact on your margins, so in other words how should I -- should we project your margins into 2012? And by the same token, kind of like more the strategic side, if you are pushing more into innovation, vis-a-vis what you spend in 2011?

Okay. Thank you. Now we understood. So the level of investment in innovation is going to be around or between 2.5% and 3% of net revenue and this is what we have been investing in the last three to five years and we are going to keep this level of investments.

And you need to keep in mind that those investments are only -- not only for the projects that we are launching in the year, but a relevant part of this investment is for basic research for projects that we are going to launch in three years. So it's not totally correlated with the impact or the relevance or the quality of the innovation in the year. So it's more a long term -- medium, long-term strategy, that's why we don't want to change so much and the level is going to be always around 2.5%, 3%.

And it seems -- I'm sorry Alessandro, I don't want to interrupt you.

Andrea, related to the overall EBITDA margin of the Company, 2011, the 25.5% was an advantage of other operating revenue and expense about 1%. I think that should work for us excluding this 1% extra from 2011. I think that is a good base to look for us.

So roughly around 24.5% would be the --

Yes, this is the basis for us and then we always manage in a way that we are always looking for opportunities for productivity gain in all areas of the Company and to [reinvest] despite part of that being competitive in the market.

Many thanks for that, but just one back to the point about what Alessandro -- I thought it was very interesting what he said, lastly when I was talking about innovation. Given that you are -- it sounds to me that you are launching more new categories, right, oral care and also potentially some other lines in hair care.

Should we think about a different mix of innovation that we're going to -- involving what you just said that will be more of a long term investment, would we think that -- is it fair to say that you're going to be having a bigger, longer term investment because like the low hanging fruits of the categories that you are already in are -- obviously there's still a lot of white spaces, but you're taking new categories, so it would be more of a long term effect of these innovations investment.

I think it is a good question, Andrea. But there is one thing that is important to share with you, that the investment in innovation is also dedicated to improve the actual brands and the actual price points on the categories that we are already.

So for example, last year we launched -- we re-launched all the Ekos line that is one of the most important lines in our company, and we put a lot of money in innovating because we are using recyclable plastic bottles. We increased the percentage of natural ingredients we extracted from the local communities, whole new formulas and this is an innovation investment. So when you see those 2.5% to 3%, we are not talking only about to fill the white spaces, but it's also to renew and to improve the actual brands, and value preposition of the Company.

You are going to see also the low hanging fruits, not in white spaces because you are right, when you fill white spaces, you have less, but you are going to see other important lines renewing and improving the actual brands and actual products of the company.

Perfect, thank you very much. Lastly, on the international operations, you are -- and I'm sorry if you had answered your question before on the Portuguese call which I'm reading now the summary. But with international operations, do you expect -- do you have an excellent year for international operations?

And I know you're still -- the last couple of years you're organizing another structure there, what should we see -- like the pace of growth -- actually do you think we're actually accelerating to 2012 or you think it's going to be possibly the same kind of level in '11 given that some of the countries are still growing -- actually many countries are growing must faster than Brazil.

Of course that because we are becoming more relevant in the markets, we should expect lower growth rates, but in the short term, Andrea, we are expecting something similar for the past years.

So we are doing a lot of investments to support this level of growth in the region. As you know, we now have a team dedicated to Latin America, excluding Brazil and Buenos Aires that they have the responsibility to localize all the marketing initiatives, communication, category strategy, and also logistic and other things. And we are doing these investments to support and to maintain the actual level of sales growth.

So in the short term, we expect to keep the same levels, but you are right, in five years ahead probably, we are going to have lower sales growth.

Yes, perfect. Thank you very much again.

Thank you.

Excuse me, our next question comes from Mr. Bob Ford from Bank of America.

Hey, good day everybody and congratulations on the quarter. It was nice to see a recovery even if it's not on the top line but certainly in terms of profitability.

I had a few questions, like some of the other callers. Specifically, when you talk a little bit about your efforts to maybe improve the frequency, Alessandro, can you talk a little bit more specifically, and I know you went into this briefly on the Portuguese call. But if you talk a little bit about the incentives that you are providing CNOs today to grow the network or maybe in the past, and how those are slowly migrating and what you're doing to drive greater frequency. That would be very helpful.

Hi, Bob, thank you for your comments and let me share with you some things that we are planning to do. And answering your question, specifically speaking about the way we compensate the CNOs. Today, they are mostly compensated and rewarded by the number of consultants they have and also how active those consultants are.

And what we would like to do is to decrease the relevance of those two indicators and to increase and add a way to recognize and to reward them for productivity. In other words, say to them that, look, now, more than increase the number of consultants, we would like you to improve (inaudible) and their productivity, the size of the baskets, the different number of categories that they buy.

So there are ways to finalize and to drive the sales more to productivity than to penetration. Another thing, probably we will decrease a little bit the number of new CNOs because when you start a new CNO, they start to grow the channel and our relationship manager need to coach the new CNO.

Also for our internal people, we want them to develop the actual ones, CNO instead of recruiting new ones. So these are two examples of things we are going to introduce and together with a new promotion plan, motivating more cross category promotions, our different level of communication, and other things regarding samples. For example also we can really shift our marketing mix to penetration to productivity.

Okay, and it sounds as if you're going to put a little bit more marketing spend behind samples as you go after some of this white space just to drive trial, if nothing else. Is that a good interpretation of that comment?

Yes, but it will depend on the category because for example, let's use only as an example the oral care. The oral care is a category where probably we will not need samples because it's not a very expensive product so the customer probably is open to try [into] a product or a product that we offer.

Different from skin care, for example, in skin care, people are worried, maybe I have some allergy or I don't know if my skin is going to accept well this moisturizing. So in this category, samples are really more important as also in fragrance. So depending the category, we will spend more, depending the category, we will not need. We can use the promotional planning to increase the number of customers trying the products.

Okay, and it sounds as if part of the frequency will be improving the service levels. Is that fair? And producing some of the fulfillment times, and I know you've worked very hard to make some big strides in logistics, can you tell us a little about where you are today and where you think you can go over time and I suspect this kind of ties in, at least peripherally, to this bigger biosphere vision of the Company.

Okay, Bob, let me see if I understood your question. Today, I think that we on average would need five days -- the total lead time to deliver an order to the consultants is between six to five days and then we have a plan to decrease to two days, especially in the main cities.

And this is going to happen in the next -- within the next two years. This is of course a way to leverage all the biosphere project even though an important part of the biosphere project is not only decreased the delivery time, but also to offer a new way for the consumer to put an order for the consultant, digitally and at the same time an order that we can see.

And because today, as you know, the relationship between the consultant and the consumer belongs only to the consultant, we don't know what is happening today between them. We know what is average, we know doing research, but we don't know individually speaking, and if we can know who is the customer, what the customer is buying, we can help the consultants to offer a better service, better promotions, and increase in our view, significantly the productivity.

But the biosphere is a project that if in one hand is going to probably transform our business model on the other hand it will happen in the medium term -- medium and long term. In the short term, even though we are going to start and pilot in the next two months, we don't expect that before two years this is really going to impact our business, but we are sure that it is going to impact, but more in the medium long term.

When you look at fulfillment times -- because you're running a three-week cycle and most consultants are placing a single order in the cycle, are you looking at ways to further shorten that fulfillment from the actual client need by changing the pricing maybe a little bit for fulfillment and -- or fulfilling regionally more frequently within a cycle?

Yes, talking about the actual model, not talking about Biosphere, all the logistic new foot print was designed to decrease significantly the lead time. So for example, today with our distribution center closer to the main cities, we can deliver to those cities in two or three days instead of late or the -- last year where we need to ship from Sao Paolo.

So even without biosphere, we are decreasing this lead time and as I mentioned we believe that within two years we can reach an average of 90% of the others arriving in two days, in 48 hours. And this will help this increase in frequency for the consumer.

The other question I had and maybe this is -- this might my feed into how you fund this. But you made some big strides in terms of the cost structure. I know there's some one-offs and I know part of it was some variable comp that hopefully will come right back this year. But when you look at the cost structure, can you give us a sense of maybe the order of magnitude that you have to go after in terms of some inefficiency that you may be able to redeploy in higher service levels when it comes to logistics or have your markets expand in some of the new samples or -- just general brand equity investments and what you might be able to return to the consumer -- to the shareholder in terms of slightly higher margins?

Hi Bob, we are implementing in the last years and we improve in the last quarter the implementation of those productivity programs where one of them is the zero-based budget. And you will see this happening in different lines of the P&L, not only the G&A line. And we believe that we still opportunities this year and also next year to have productivity gains.

On the other hand, we believe that we will need those resources to increase the level of competitiveness of our company, not only innovation, marketing, but also the investments in IT and other things that are going to allow us to implement, for example the biosphere project.

In other words, what I am trying to say is that we are going to have productivity gains, but you should not expect a better margin because of this, because we have -- this is going to be a source of funds to invest in things that are going to keep Natura being competitive and keep growing the market.

Great, and I think that leads me to my next question which is the dividend. When you look at the big CapEx number that you're putting out this year or -- I mean last year, can you sustain it because you're paying out almost all the net income and given the heavier investments that you're making, do you plan to maybe trim back the dividend a little bit this year?

Bob, we have -- we finished the year with a net debt divided by EBITDA of 0.4. That's a very comfortable level and we expect to have for 2012 a very good working capital. Some of -- some part of the bad working capital that we had in 2011 was due to inventories and inventories, we will decline inventory coverage in the time. We just need really to adjust all the system.

And also we had some tax we call -- tax issues or tax opportunities that was in profit but not in cash so far and will be converted in cash naturally in the beginning of this year. Then, for 2012, we can continue to invest in CapEx. Probably we will have a good benefit of working capital and we can maintain a very low leverage as we have today, 0.4, 0.5, and continue in principal with this magnitude of dividends.

And as you mention it I recall, it's just a big improvement you had in payables, right? I think that's where a lot of the working capital benefit came from despite higher inventory levels in the fourth quarter. And it looks as if you're pushing supplies out a little bit, but you had gross margin improvement in every market. And I was curious as to whether or not that's sustainable and how you're generating both improvements in gross margin as you push out those payables.

Bob, I didn't understand the relation -- I can't mention about gross margins. In the international operations, like gross margins, they are affected by doing a better price management in the Company. The fact that we put this team in Buenos Aires much more closer to the countries, helping to drive categories and certain brands in the country, helping us to do better pricing in the Company.

The second is that they are taking advantage of a very good program of cost management that today is based in Brazil in our raw materials and all of this. And also we are beginning the local production in that county, the good effect of local production which they don't have because they are not relevant. But we are producing Argentina. We are producing in Colombia. And this year we will be producing in Mexico.

And then like I think that we have an opportunity to sustain an improved margin in the international operation in terms of gross margins.

I promise you this is my last question. Thinking I'm probably making everybody tired. And that is that when you -- what I understand, you're only doing fragrances in Argentina and you're only doing soaps in Venezuela. When you look at the percent of what you can do, in outsourced international market places, where are you right now and where do you think you can get?

And what is this contributing, in terms of how much is it lowering your cost in those categories and how much of an impact is it having in terms of your working capital because of reduced inventory needs?

Bob, we are in the beginning of --

[Because] Venezuela, by the way, I meant Colombia, I apologize.

We are in the beginning of this process and this will be relevant because we want to be a relevant player in these places and there is no relevant player in any of these countries that doesn't have a local facility there. I think that during the next two or three years, we are going to be 30%, 40% something in this range that we are going to be more local driven in terms of production.

But can you give me a sense of -- in categories that you're looking at, just an order, like a level of magnitude in terms of what it means for reducing your cost to get sold.

We are talking about fragrance. We are talking about soaps. We are talking about hair care. I think that -- and body care also.

Are we talking about 1,000 basis points of margin when you look or more when you look at a fully landed cost exported from Brazil versus domestically produced or is it more than that?

Bob, I think it varies across categories. Of course, the categories that we are choosing to put there are the categories that we have most the benefit, but it's changed. I cannot really give a figure to you and also like the margin management, and I think that this is what happening there that's very good.

They are looking not only for cost, they are looking for price, they are looking for the value of the brand as much as the brand gets better preference there. We have opportunity to manage in a better way how much we are plated against our competitors. We are doing a whole work on this.

In the short term, what will really influence the margins is exchange rate of the countries versus Brazil because most of the production today came from Brazil. Then in the short term, we are still subject to some changes about the relative exchange rate of Brazil in the countries. In the medium term we will be much less exposed to this.

That's great. Thank you very much.

Thank you, Bob.

Thank you, Bob.

Excuse me, our next question comes from Ms. Margaret Kalvar from Harding Loevner.

Hi, thanks for taking another question from me. I just wanted a little bit more clarity on the EBITDA margin because you had mentioned, and I'm going through the numbers here, it really appears that most of the increase was because of the other income and the declines in employee profit sharing.

So how much percentage wise in terms of basis points can you attribute to the efficiency gains coming from the investments that you've made or have we really -- are we really going to see that in 2012? And was the increase in -- that we saw in 2011 really based on these other factors?

Margaret, 2011 we had different priority price that I mentioned that if I exclude these other expenses then investment, [it's in 4.5]. You are right that there is lower variable pay in 2011 because it didn't meet internally all the targets that we had.

I think that the second -- this part you should not take into consideration looking forward because this is normal that in years that we have a better year, we can pay more. A year that don't have, we can pay less. And this will be let's say self finance by good years and bad years. I think that this is -- there.

We had in 2011 similar margins, [in earlier] that we made adjustments during the year because we started with a higher expectation of sales and then we were able to manage to run in similar margins.

This is what I can mention. I cannot give any guidance for 2012, but I think that excluding these other expenses, it's a good base to think about our business and our ability to manage a productive gain and more competitive in the market. And that is a good base to think about 2012.

Okay, thank you.

Thank you, Margaret.

Excuse me, ladies and gentlemen, 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.

I would like to thank you once again for participating in this conference call and I looking forward to talking with you again in April when we will discuss the results for the first quarter of 2012. And I wish you a good carnival to everyone. Good day.

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