Natura &Co Holding SA (NTCO) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Natura's 2012 second-quarter conference call. Today with us we have Mr. Alessandro Carlucci, the CEO, Mr. Roberto Pedote, the CFO, and Fabio Cefaly, the Investor Relations.

We would like to inform you that this event is being recorded. 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 simultaneous Web cast that may be accessed through Natura's IR website at www.natura.net/investor. The slide presentation may be downloaded from this website. There will be a replayed 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 any information currently available to the Company. They involved 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.

Good morning, everyone. Welcome to Natura's earning conference call for the second quarter of 2012. We are pleased to once again have an opportunity to share with you the latest information on our performance. We are very satisfied with the results of the second quarter, especially the improvements in our service level, our sales, and our channel, which reached 1.5 million consultants.

Consolidated net revenue grew by 15.4%, with growth of 12.5% in Brazil and 26.2% in our international operations in local currency. First, I would like to comment on some of the main points of our operation in Brazil.

The new level of service quality and the recovery in the efficiency of our promotions made very important contributions to the recovery of our sales revenue in Brazil. We have begun to enjoy the benefits of the strategic, logistic, and IT investments made over the last few years, which will allow us to improve the level of our service quality in relation to last year and our historical levels as well.

To give you an example, in the last quarter our average delivery time to consultants was 4.5 days, compared to the average of six days during the same period of 2011. We continue to evolve in order to improve services, reduce costs, lower CO2 emissions and optimize inventories.

Another important factor was the excellent reception of the Mother's Day kits, which highly exceeded our expectations. Because of this, revenue growth on the second quarter exceeded our expectations.

In July we also continued to make gradual progress on implementing the set of initiatives to increase the productivity of our consultants. The innovation index stood at 67.9% with investments in research and development closely aligned with our strategy. We made relevant product launch during the first half of the year, such as perfumes Kaiak Urbe and Humor no Ar.

I would also like to share with you our market-share data for the first four months of the year. According to Sipatesp, our target market grew by 14% in the periods, while our market share contracted by 160 basis points to 23.8%.

In our international operations, which have already grown to represent 10.8% of consolidated net revenue, we continued on a path of consistent growth and high profitability. In Chile, Colombia, and Peru we concluded the implementation of the CNO model and are confident that it will leverage growth in our consultant base. In Mexico, after implementing the Sustainable Relations Network Model, we continue to make adjustments based on the learning process.

In Argentina we are feeling the effects of the more challenging institutional environment, which has led to higher product shortage compared with historical average. We are managing the situation and intensifying local production, which today stands at around 30% in order to meet the demands from consultants and customers. Note that the recent clearing of imports in the country have allowed us to rebuild our inventories for the short term.

I also want to highlight our social and environmental results, which registered important progress in line with the commitment assumed in the start of this year. For example, we reduced our greenhouse-gas emissions by 6.4% compared to last year and have already raised BRL6 million through the Crer para Ver project, which is allocated through initiatives that improve product education through Instituto Natura.

Those were the topics I wanted to cover today, so I will now hand call over to Roberto, who will present the details of our financial results.

Good day, everyone. Well Alessandro mentioned our consolidated net revenue grew by 15% in the second quarter compared to the year ago period, with growth of 12.5% in Brazil and 26.2% in international operations in local currency.

Consolidated EBITDA was BRL391 million with EBITDA margin of 24.3%, bending by 90 basis points from a year ago. Gross margin in the quarter expanded 30 basis points to 70.7%, driven by the improvement in our international operations, which benefit from the better management of costs and promotions, as well as the favorable foreign exchange impact.

During the second quarter, we observed a slight decrease in the core levels, but we don't see any signs of further deterioration and expect to return to historical levels in the second half of the year.

Consolidated net income in the first six months of the year was BRL366 million, with free cash flow of BRL433 million for improvement of 180% on the same period last year. This improvement was driven by a lower working capital as a consequence of better management of inventories and suppliers and recovery of tax.

In closing, I would like to comment also that the board of directors approved the payment of dividends and interest on equity for the first six months of the year in the net amount of BRL0.83 per share, which will be paid on August 15 to shareholders on reports from July 31.

Those were the main points I want to cover today. Thank you very much. So let's go now to the question-and-answer session.

Thank you. (Operator Instructions). Excuse me, our first question comes from Ms. Lori Sera from Morgan Stanley.

Good morning, and thanks for the call and congrats on the results. I just wanted to ask a couple of questions. Maybe I could ask you first, Alessandro, for your perspective on some of the initiatives you're implementing right now in terms of trying to incentivize more the productivity of consultants, how you see that progress, and give us any sense of kind of the timing of when you hope to see improvements on the same basis in terms of your productivity. In the second quarter was a good piece of news, but obviously that's been the challenge you've had in the past couple of years. That would be really helpful.

Hi, Lori. How are you? Well, as you know, we started to focus the Company to increase productivity and six last months of the year, and from that moment, we start to implement some initiatives. The first two of them that are already impacting our results are, as I mentioned, the improving services and also the better efficiency in the promotions, and we are already improving the productivity -- well, not improving, but we are changing the curve and starting to decrease the rates on productivity. So, those two things already happened.

What we are doing now, we are starting to implement also some change in the sales-force management, driving our salespeople to boost productivity, and also we are changing a little bit the way that the CNO -- they receive their commission, also to boost productivity. At the same time, we are implementing better communication and better relationship initiatives like training recognition to boost into the rest of the year the productivity.

And on top of this, we are also working -- and this is not something that we started now. We've been working in the last years to produce innovation to acquire some white spaces with new categories, or sometimes with new price positioning.

So, this is the set of initiatives that are going to improve productivity, and as we mentioned to you before, the effects of all these programs we are going to see gradually during the year. So, this is mainly the description of the program that we presented to you some months ago.

Great. Can I ask a question about the market share? And I understand it's only four months, but when I look at the market-share decline in toiletries, it's real strong relative to your share in toiletries, and maybe on a longer database it'll look different, but can you comment on what you're seeing in that space? What are the areas where the market share is under more pressure. And I know you don't want to talk about innovation, but do you see this trend changing as we look out over the next one to two years?

Lori, first of all I would like to remember that Sipatesp's market data is based on the industry revenue. In other words, it's more sell in market share. Therefore, growth in the first four months of the year could have been influenced by a stocking trend at retails.

When we look at the first two months of the year, which registered growth of 17% and this was driven by toiletries such as soap, which is a category of high penetration that does, in fact, appear to have been a stocking trend at the retailers and not a change in consumption. And when you compare the 17% of the first two months with 11% of the third and the fourth month, we strongly believe that this is more a sell in effect in some categories than a change in the consumption.

In addition, this indicator does not yet consider the acceleration in Natura revenues, especially in May and June, which registered a recovering growth. We expect market growth this year to be slightly stronger than last year. Therefore, we expect Natura to maintain its market share stable this year. At the end of the year we believe that we are going to be either slightly higher or slightly lower but we've sign us ability in market share.

Okay. And I guess last question for Roberto, you talked about a goal of having flat EBITDA margin this year, excluding some of the one-time income you got last year from some tax credits, and you're doing a really good job on margin so far this year, but the fourth quarter of last year was a really strong margin quarter for you. Are you still comfortable with the view of that flat EBIDTA margin for the year?

Hi, Lori. Yes, we are. We believe that we continue to say that to look like to look -- for last year, excluding the nonrecurring items. I think that's a good basis to think about this year, a little bit higher, a little bit lower, but this seems to be a good basis for the year.

Thank you very much.

Thank you, Lori.

(Operator Instructions). 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.

Thank you for your participate in today's conference call. I would like to emphasize that the second-quarter results reaffirm that we are moving in the right direction. We continue to focus on the challenge of gradually improving our service quality and productivity of our consultants while investing to optimize our model and enhance the buying experience of our consumers over the medium term.

Thank you, and I look forward to our next meeting in October to discuss the results for the third quarter of the year. So, good morning and have a nice weekend, everyone.

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