Natura &Co Holding SA (NTCO) 2012 Q3 法說會逐字稿

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

We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After Natura's remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions). We have simultaneous webcast that may be accessed through Natura's IR website, 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 the results to differ materially from those expressed in such forward-looking statements.

Now I would turn the conference over to Mr. Alessandro Carlucci, the CEO. Mr. Carlucci, you may begin the conference.

Good morning, everyone, and welcome to our earnings conference call for the third quarter of 2012. We are very pleased to share with you the very solid results achieved that clearly show the progress made in executing the strategy we announced at the beginning of this year.

I would like to start by reminding you that the strategy is focused on growth in Brazil, supported by a higher consultant productivity, accelerated and profitable growth in the international operations, and investments that will improve our commercial model in order to offer a more customized service to our consumers.

In Brazil, we continued to implement the set of initiatives to increase consumer buying frequency and boost consultant productivity that we announced at the beginning of the year. These initiatives are based on innovation, improving the efficiency of promotions, a very high quality of service, and evolving our commercial model. We have also consistently improved the quality of our service with shorter delivery times and lower out-of-stocks, and we are now operating at levels above our historical average. With these advances, we have been reversing the downward trend in productivity, which this quarter rose by 1.4%, which will help ensure a better balance between growth in the consultant base and increases in productivity.

This quarter, we also had two important launches with sales surpassing our expectations. The body splash, Natura Tododia, and the other platform, Natura Una, both of which are in price points less explored by Natura until now with unique and innovative value propositions.

Based on market data collected by Sipatesp for the first six months of the year, Natura's target market grew by 16.8%, surpassing our expectations. We ended the period with market share of 23.2% for a contraction of 150 basis points. Keep in mind that we have seen higher investments and more launches in the personal care segment, especially in the hair and deodorant categories, in more mass market price points. In the second half of the year, we expect our growth to be more aligned with that of the overall markets.

Another highlight was the international operations, which continued to grow at an accelerated pace and with growing profitability, demonstrating the consistency of our strategy over the last few years. With the CNO model implemented in three of the countries and the Sustainable Relationship Network model implemented in Mexico, our consultant base continues to register strong and sustainable growth. I would also like to highlight that the international operations registered positive EBITDA of BRL1.2 million, which compares with EBITDA loss of BRL14.8 million last year.

And another highlight was the EBITDA margin of 18.4% in the Operations in Consolidation, Chile, Peru and Argentina. We continue to invest in optimizing our commercial model. We are preparing to begin testing soon new tools, services and cost savings that over the middle term using digital technology, mobility and CRM will lead to significant improvement in the experience of our consumer and consultants while promoting more customized relationships.

We also made significant progress in our social and environmental results, in line with the commitments assumed this year. As a result of the increased use of biofuels in our production process and the improvements in our logistics chain, we registered a reduction of 5.3% in our relative greenhouse gas emissions compared to last year.

In August, we inaugurated, in the city of Manaus, the Amazon Natura Innovation Center, which has the mission of fostering the development of an extensive research network with the goal of increasing our contribution as one of the players in the sustainable development of the Amazon region.

I would like to take advantage of this opportunity to invite you to participate in the Natura Day 2012 on November 9 when we will be able to talk in greater detail about the key topics of our strategy. Now I will hand the call over to Roberto Pedote, who will present the details of our financial results. Please, Roberto?

Thank you, Alessandro. Good morning, everyone.

In the third quarter, our consolidated net revenue grew by 14.8% on the year-ago period with growth of 11.4% in Brazil and 47.4% in international operations, where growth measured in local currency was 24%. Consolidated EBITDA was BRL385 million with EBITDA margin of 24.3%, for margin expansion of 20 basis points on a year earlier. Consolidated gross margin in the quarter expanded 130 basis points to 71.3%, which is basically explained by the better management of prices, costs and promotions as well as the favorable foreign exchange impact in the international operations.

In Brazil, our net revenue was impacted by the revision of the value-added margin for CFT products sold by direct sales in Sao Paulo that took effect on August 1st. As we commented last quarter, at the end of September we increased 2% our prices as part of our effort to manage margins in response to the cost pressures caused by the weaker Brazilian real.

Consolidated net income in the first nine months of the year was BRL604 million with free cash flow of BRL573 million, for improvement of 140% on the same period last year. This improvement was driven by the lower investment in working capital, as a consequence of better management of inventories and suppliers and the recovery of taxes.

Turning to CapEx, we have already invested BRL202 million in this first nine months of the year. As we mentioned in the conference for the second quarter, total investment in the year should come in 10% to 15% below the guidance of BRL420 million due to changes in the timetable of projects.

Taking advantage of favorable moment in markets, we carry out funding operations to be used to amortize short-term debt. As a result, we increased our gross debt to BRL2 billion while keeping our net debt/EBITDA ratio stable at 0.56 times.

The financial result was better in the quarter due to non-cash effect from the marking-to-market of financial hedge instruments. Excluding this impact, financial expenses in the quarter were BRL16 million, reflecting the actual net debt. In the first nine months of the year, marking-to-market generated a non-cash impact of BRL3 million.

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

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Mr. Gustavo Oliveira with UBS.

Hi. Good morning, everyone. I have just two questions. The first one is we saw a deceleration in the number of consultant additions in Brazil and it was a little bit slower than I was expecting. I don't know exactly what happened, if it's you perceive something seasonal or if the focus on productivity at this stage is so strong that it's natural to expect deceleration in the rate of consultant additions. But I'd also like to understand how you're thinking about consultant additions for the next two years.

And the second question is regarding your finance expenses. What happened in this quarter that the finance expenses are also much lower than expected? Those are the two questions. Thank you.

Hi, Gustavo. The level of recruiting is solid in this quarter. There was a higher level of ceased consultants with low frequency and productivity and their sales are migrating to the more productive consultants. As planned, this effect was concentrated in the last months due to the adjustments in our commercial and compensation model.

For the future, we expect that the consultant base expansion will keep being an important driver for revenue growth, but in a more balanced way with the increase of productivity of our consultants. In other words, we expect that the level of growth in the number of consultants are going to be a little bit lower than our historical levels, but is going to keep being an important driver for revenue growth, but in a more balanced way with productivity of the consultants. So, in this quarter we had a very specific effect that was -- I mentioned.

And then, well the next question.

Gustavo, we had a BRL16 million positive effect in the financial results due to marketing-to-market of financial hedge instruments. This is a completely non-cash effect. And as we are going to take to term all of our debt, this will be zero in the end of each one of our contracts. This is because the accounting rules asked us to do this quarter after quarter, take into consideration the fluctuation of the currency coupons.

In the quarter, was BRL16 million positive, year to date, nine months, was BRL3 million positive. But these are non-cash items. There is no economic sense on these values and, as I mentioned, it will be zero in the end of each one of our debt conference.

Okay, understood. Thank you.

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

Thank you very much. I wanted to ask a couple of questions about the cost line. Why is --? Could you give us a sense of what the growth was in the administrative expenses if you strip out profit sharing in the third quarter?

Lore, could you repeat, please, the question?

Sure, sure. The administrative costs increased a lot, because a year ago you hadn't been allocating for profit sharing and this quarter you did. I just wondered what the underlying trend was in administrative costs in the quarter.

Lore -- hi, Lore. The main effect in this line this quarter was the variable pay that we reverted in quarter three last year. This was the main -- if we exclude this effect, we should have as a percentage of net sales aligned costs. In this line, what we can mention to you, aligned to our strategy, is that we've been investing more in IT and as a strategy from the Company. Then, IT costs, that is part of G&A, are increasing and will increase in the future years. But excluding the variable costs, the remuneration variable payments, remuneration effect, the G&A was in line with previous year.

Okay. And the selling costs were very tight. Was there any --? You cited in your press release better efficiencies from the distribution, but you've been doing that for a while. Was there something in the quarter that is changing and now you will see lower selling expenses, or was it just particularly low this quarter?

Lore, we have two effects here. Some of them are a structure that we are improving the costs in the logistics. Whenever we have a better balance between productivity and channel, this reflects in lower costs, in our sales costs also because we have for the same structure we have more sales per box in the end that reflect positively in all of our P&L.

There is always one part of this that is correlated to the level of activities to our calendar of the quarter, what we have planned, what we are planning to do in quarter three this year versus quarter three last year. Specifically, we had a lower level of activities in comparison with quarter three last year. But generally speaking, all of this efficiency that we are getting in logistics and even in the sales force as a total due to more productivity in the channel, they are trends that we are going to see in the future years.

Okay, and last question for you. The receivables, they seem to be -- some of the receivables are aging a little bit, some of the longer-dated ones. What is the reason for that? And is there any concern on your part with that trend?

Lore, the receivables, they were higher, but there was no change in our commercial policies and there was no issue with bad debt or something like this. The key effect was a calendar effect, because there was a weekend when many receivables were due. And they don't pay in the weekend, they pay on Monday. Then the key change -- and also, there was a holiday in September in the -- 21 days earlier. There was then three days that we moved from the quarter, the receivable, but only due to calendar effects. There is no structural change in our policy nor in our bad debts and delinquencies.

Okay, thank you.

Thank you.

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

Yes, good morning. I wanted to ask about the slight market share declines, both in toiletries and in cosmetics and fragrances, and it was slightly greater in toiletries. Could you expand a bit on how you view that, whether it was multi-nationals, hypermarkets, modern retail being more aggressive on the toiletry segment and competitive pressures on the cosmetics side as well?

Hi, Margaret. Yes, what's happened --

Hi.

-- in this quarter was a major investment, an effort especially on the -- of the multi-national company and brands, and in main two categories, the hair care and the deodorant -- and based on the retail side and in a more mass price position. So, this was the main effect and this speed up the growth of the market to the 16% that we shared with you. In the cosmetic and fragrance, as you can see, we are growing aligned with the market, so the main effect was in the toiletries in this area that I mentioned.

Okay. What about the growth of the small store formats, such O Boticario, [Locsitan]? Is that becoming a more intense area of competition, or is it about the same as it has been?

These kinds of brands and companies, they still represent a very small part of the market. So I don't believe that they have relevance impact in market share. On the other hand, of course, that they are brands that in some way are competing in the share of mind of the consumer, so we are -- we must be aware and to put our efforts to keep building our brands, to keep being the preferred brands in the markets, as you know that we are.

So they are more important in the share of mind than in the share of market because they are very small, very niche companies, so this is the way that we are looking for this competition.

Okay, thanks very much.

Thank you, Margaret.

Our next question comes from Ms. Lore Serra with Morgan Stanley.

Thanks for taking the follow-up. I just wanted to ask if you could comment on any of your recent innovation and how you see it performing in the market. And I know you've thought about it and you are testing -- or about to test some of the lower priced -- or a more moderately priced line of toiletries, and I wonder how you feel about that given sort of what is the action you're seeing in the market right now with the multi-nationals. So any comment you could give us on sort of your innovation platform, I'd really appreciate.

Lore, recently we had two very good examples of innovation, both of them in the fragrance area. One was the Tododia body splash and the other one was the other perfume from Una. And both of them, they surpassed our expectations, so we are very happy with those two launches.

And also, as you know, we are testing a new brand, focusing on the toiletry area in a more -- in an upper mass price position. And until now we don't have results to share with you, but we started the tests a month-and-a-half, two months ago. And as soon as we have conclusions and decisions if we are going to roll out or not, we are going to share with you.

Great. Thank you.

You're welcome.

(Operator Instructions). This concludes today's question-and-answer session. I would like to invite Mr. Carlucci to proceed with his closing statement. Please go ahead, sir.

Thank you for participating in today's conference call. I would like to emphasize that the third quarter results reaffirm that we are moving in the right direction. We continue to focus on the challenge of gradually improving the productivity of our consultants in Brazil, growing fast and with profitability in international operations, while preparing for the future by optimizing our model and improving the buying experience of our customers.

Thank you, and I hope to see you in person on November 9 at Natura Day. Have a nice weekend.

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