Natura &Co Holding SA (NTCO) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Natura's 2012 First Quarter Conference Call. Today with us we have Mr. Alessandro Carlucci, the CEO, Mr. Roberto Pedote, the CFO, and Mr. [Fadua Stafani], Investor Relations.

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

(Operator Instructions)

We have simultaneous webcast that may be accessed through Natura's IR website at www.naturas.net/investor. The slide presentation may be downloaded from this website. There will be a replaced 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. Please, sir, you may now begin.

Good morning, everyone, and welcome to our earnings conference call for the first quarter of 2012. We are pleased to once again have an opportunity to share our results with you.

As we mentioned in our conversation for the fourth quarter results during this first quarter we saw last year's operational difficulties and returns to the level of service quality. We have traditionally offered in terms of both delivery time and products availability.

We continue to pursue higher efficiency in our sales and marketing actions and we have already begun to reap the rewards of these efforts by obtaining more effective promotions and achieving a better balance between our central lines and regional management efforts. The evolution of our strategy in Brazil from expanding penetration to increasing the productivity of our consultants continued to be implemented and the impact should be felt gradually over the coming quarters.

I would also like to share with you the market data from 2011 recently released by [Aero Monitor]. In Brazil we maintained for the seventh straight year our leadership in the overall cosmetics, fragrance and toiletry markets with market share of 14.5% which represents an increase of 30 basis points from 2010.

In our international operations we reached a market share of 2.2%, increasing 50 basis points from the previous year. In the operations and consolidation Argentina achieving will we reached a market share of 4% and in the operations and implementation, Mexico and Colombia we reached 1%, which did market share gains reflecting the investment we have made in our brand, channels and infrastructure.

So in 2011Natura maintained its consolidated market share. As for the financial results of this first quarter our consolidated net revenue grew by 11.3% with net revenue in Brazil growing by 8.3%. This result which is higher than in recent quarters reflects the recovery in our service quality, particularly in terms of product availability and delivery time.

International operations, which this quarter accounted for 11% of Natura's total net revenue once again registered strong growth of around 14% in weighted local currency. The visibility continues to evolve with EBITDA margin reaching 9.5% in the operations and consolidation.

And we are closely monitoring the more challenging institutional scenario in Argentina for any potential impact in our operations. The sales channel continues to post strong growth closing the quarter with 1.4 million consultants for a growth of almost 17%. In Brazil the number of consultants grew by 14% and in the international operations this growth was 13%.

The innovation index was 67% in the quarter with investments in research and developments continuing in line with our strategy at around 3% of our net revenue.

The first quarter was this year represented the consistent phase on the path we have set for expanding our competitive advantages by achieving a new level of service and quality, increasing the productivity of our consultants, and consumers and continuing to advance our business model. Over the coming cycles we will make innovations to our sales model that will allow us to gradually boost productivity of our consultants and consumers in order to increase the frequency of purchase and expand the baskets of material products in Brazilian households.

In Brazil we are confident that we now have a huge opportunity to leverage the base we have built over the last few years with 1.2 million consultants, 60% penetration in households and 47% when preference. We also remain very enthusiastic on the evolution of our business in Latin America, which continues to grow and achieve gains in brand preference and profitability.

Those were the topics I was in support of today, so I will now hand the call over Roberto.

Good morning, everyone. As Alessandro mentioned our consolidated net revenue grew by 11% in the first quarter compared to the year ago period with net revenue growing by 8% in Brazil and by 40% in international operations in weighted local currency. Consolidated EBITDA was [BRL207.2 million] with EBITDA margin of 21.2% compared to 22% in the first quarter of 2011.

After excluding from both quarters the non-recurring impacts from other operating revenue and expenses EBITDA margin was 21.5% in the first quarter of this year and 21.8% in the first quarter of last year, with nominal EBITDA growing 9.5%. Gross margin expanded 130 basis points to 7.4% driven by the gains captured from better managing our costs and promotions and by the favorable foreign exchange impact and efficient gains in our international operations.

Our planning expenses increased 15% on the year-ago period, while general and administrative expenses increased 17%. These increases reflect the market investment made in the international operations, the additional costs with the appreciation in IT and the different timing compared to previous year.

This year we implemented a more robust expense management above the (inaudible) version as we mentioned in the previous conference call. We continue to focus on productivity gains in all quarters throughout the Company. We are confident in our capacity to achieve our objectives and manage our expense base in order to ensure we have funds needed to continue investing in our growth drivers.

Our consolidated net income reached BRL152 million with free cash flow up BRL127 million, which increased 87% from the first quarter of 2011 due to the lower working capital requirements. Inventory remained at levels above our planning and we believe the planning model it has adopted will allow us to repeat inventory coverage over the course of the year.

Our recoverable taxes which reflect the revision of credits from (inaudible) impact in 2011 should also be converted into cash over the course of 2012. The annual shareholders' meeting will be held on April 13, 2012, approval the payment of BRL763 million in dividends and BRL52 million in interest and equity. These payments will give to 2011 with the net-net earnings of BRL1.89 per share

Those were the main points I wanted to go over today. Thank you very much. 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). Our first question comes from Ms. Daniela Bretthauer from Raymond James.

Hi. Good morning, everyone. So as you mentioned in your opening remarks you have, Natura has adopted a zero base budget strategy for this year. But we still have not seen the benefits of that in your first quarter results as you didn't really get any operating leverage despite a reacceleration of your top-line growth. So what can we expect at the SG&A from for the rest of 2012? That's the first question. I have a follow-up question.

Hi, Daniela. We -- the zero basis budget does not apply to only one line of the results. As we mentioned we are looking for productivity across all focus and across all lines of the Company. What we are confident is that this will allow us to manage all the expenses of Natura in a proper way during the year that would allow us to achieve our targets to the level that we want, only continue to finance the growth drivers. Specifically in quarter one we have I mentioned we had some different savings from the planning from this year and what happened in last year.

Okay. And then perhaps linked to that you have record second best gross margin in the Company history in the first quarter, and in terms of that I understand there were some management of your promotions that benefitted that and so is effect, but what should we expect for the rest of the year? Is the new level of profitability for Natura of 81% or is it more around the 70% and this was kind of a one-off gross margin if you could comment on that is I appreciate it. Thank you.

Daniela, the gross margin the continuity of again productivity that we had in our supplier base just looking for more the medium term we should expect this year much more in this election of a maintenance of gross margin, but for the year. That's we this quarter we had some specific benefits from promotions that we did in the first quarter of last year from this year, but I think that the costs quite equation should be more the normal continuity of gross margin will include the --

So more around the 70% range rather than the 71.5%.

Yes. Well I'm saying throughout the year because the gross margin it's changing quarter by margin according to leverage of probably to volumes, but your base should be more in line with previous year.

Okay. Thank you.

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

Hi. Good morning and congratulations for getting the systems issues behind you and starting out the year on a more optimistic tone. I wanted to ask two questions, but let me start in Brazil. Can you give us any color on how you're adopting your marketing mix? It sounds like you've already started to change some of the incentives and how you think about the execution on that and any initial feedback you've gotten from the system on how they are reacting to the changes?

Hi, Lore. This is Alessandro. How are you? Let me share with you the -- I'm going to call the pillars of this evolution of the strategy to increase productivity. We have six pillars. The first one is to use the service as a competitive advantage, so how can we really decrease any time and better lower [stock outs]? And this is something that we have been working and this is the first one.

The second one is to occupy some white spaces where there are not sort of brand is not already. And this is going to happen not in the short term. This is going to happen in the next two to three years.

The third pillar is promotional planning. And what we are doing we are redesigning the concept of our promotional planning to focus more for the activity than activities. In other words until last year and the beginning of this year all the promotions were focusing to increase the level of activity of all consultants, in other words to motivate them to put in order.

From now on we are going to regulate our efforts to not only put in order, but to guarantee that your offer is big. So it's more important to have more items in the order than more orders. So we are going - redirecting -- we are redirecting the focus of our promotional strategy.

And also we are going to start to do some cross category and cross branding promotions. And this is something new for Natura and we believe that doing this we are going to motivate the customers, final customers to buy not only a fragrance or a soap, but to buy also a shampoo or a body cream. So and these are the two things in the third pillar that is promotional planning.

The fourth one is sales management. We are going to and we are at this moment changing the indicators and also the way that we compensate our sales force, our employees that are our GRs, but also our independent resellers, the CNO and the [C-end]. And we are going to focus those indicators and their compensation to productivity.

The fifth pillar is relationship. So we are going to invest training and also recognition requirements to focus all our sales people to productivity.

And then the sixth pillar is communication, so the Natura magazine, our advertising, and all the other communication cues are going to reinforce productivity, showing different kind of products, different kind of brands in another way to also leverage the productivity of the customer.

So sorry about the long answer, but these are the six pillars that sustain with the productivity strategy that we believe again is going to produce results, but gradually. We don't believe that we are going to have a huge movement in productivity in the short term, but we believe that we are going to do step by step an improvement in the consultant productivity based on the fact that the customer is going to buy in a more frequent way Natura products.

And you don't have any feedback as you're starting to make these changes how the system thinks about these changes?

A good question. Again most of those actions they weren't yet implemented, but we already started to change some small things and also the speed for sales from salespeople we did this in our annual meeting. We said to them, look, now we are going to promote an evolution from penetration to productivity. And the feedback is very good.

They also believe that this is the time, they believe that we have a huge opportunity to develop consultants to increase their productivity. So in other words it was very well accepted, but again most of those initiatives are under implementation so I can give you better feedback in the next until the rest of the year, the next months, but the first times are very good.

Okay. And then just on the international operations we've seen some really nice improvement in the productivity or so I'm sorry, profitability of those operations, but yet you're having some really good growth as well, maybe this is a philosophical question, but kind of how do you see the balance between the opportunity to sort of continue to gain share versus improving margins in international? Where is the balance in terms of how you want to manage the business over the next one, two, three years?

In this year is a sign that you mentioned in two, three years. We want to have both things happen. We believe that we can still gain market share and also raise profitability. So we are focusing to have both things together simultaneously.

Okay. Thank you.

Oh thank you, Lore.

(Operator Instructions). Excuse me. 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.

Well thank you for participating in today's conference call. I would like to reinforce the message that in this first quarter we have already begun to enjoy the initial results of the action we have meted out and communicated to all of you last year. And we are very confident that this will support Natura's continued expansion going forward.

Thank you and I look forward to our next meeting in July to discuss the results for the second quarter of the year. Good day, everyone.

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