Natura &Co Holding SA (NTCO) 2012 Q4 法說會逐字稿

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

Good morning, everyone, and welcome to Natura's conference call to discuss its results in 2012. I will begin by highlighting that 2012 was a year of major advances for Natura, with a recovery in the pace of sales growth in Brazil, a return to positive growth in consultant productivity, Latin America consolidating its position as a relevant business platform and continued progress on projects that will play important roles in differentiating our brand in the future.

In Brazil the main initiatives implemented in 2012 to increase the productivity of our consultants, such as [My] Natura, the adjustments to sales team incentives and the launch of products in new segments where we did not have a presence have already started showing positive results. As a result, in the fourth quarter, consultant productivity increased by 2.9% on the previous quarter.

Another development that allowed us to increase productivity was the improvement in the level of service quality; in fact, we achieved the highest levels of the last 10 years. We filled 19m orders and sold over 445m units. We delivered 25% of orders within 48 hours, up from just 5% in 2011, and the number of stock out items fell dramatically.

Based on data from [Cepitas] in the first 10 months of 2012 our target market registered strong growth of 17.9%. We ended the year with 22.4% market share, one more year as the leading company in the CFT market, with 90 basis points lower, which is due to the higher than expected growth in certain personal hygiene categories, such as hair care and deodorant products.

In the cosmetic and fragrance categories we increased our market share by 50 basis points to 34.5%, and especially in the second half of 2012 we enjoyed many successful fragrance launches in the segments where we had a limited presence. For 2013 we are working with an innovation pipeline that will leave us even more competitive, especially in the toiletry categories, from the second quarter.

In our International operations the results, once again, were excellent, reaffirming the importance of this business platform. In the group of five companies in which we operate, our sales grew by 28% in local currency, generating revenues of BRL734m in the year with profitability also improving significantly.

In the countries in consolidation we ended the year with EBITDA margin of 16%, while in the countries in the implementation we almost reached breakeven. Note that we also inaugurated in the city of Manaus the Natura Amazon Innovation Center, which is part of our commitment to act as an agent for promoting the region's social and biodiversity. We also began building an industrial facility based on sustainable principles in Benevides in the state of Para, which should be inaugurated by mid-2013.

In December we took another step in our long-term strategy by acquiring 65% of the Australian brand Aesop, which gave us access to an aspirational and powerful global brand that offers excellent products through a unique buying experience at its concept stores. This transaction will increase our exposure in markets beyond Latin America and also allow us to share important competencies between the two companies.

And last, we have taken the first steps towards executing our vision for the future, in which we see technology supporting the consultants' relationship with the final consumer to improve the buying experience of our customers. We hope to strengthen even further the relationship with our 1.5m consultants and their almost 100m consumers, while improving at the same time the quality of our service and our relations.

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

Thank you and good morning. In the fourth quarter our consolidated net revenue grew by 13.5% on a year earlier, with Brazil growing 10.3% and International operations growing 45.8%, or 28% in local currency. In Brazil we observed a mismatch in the quarter between gross revenue and net revenue growth, which was due to increase in August 12, 2012, in the VAT in the state of Sao Paolo. For 2013, given this increase in the VAT, we expect the tax rate to remain around 27%, as well as a gradual reduction in this mismatch over the coming quarter. In March we'll increase prices by around 3.5%, which will contribute to rebalance our gross margin in Brazil.

Consolidated EBITDA was BRL1.5b with margin of 23.8%. Compared to the previous year and after adjustment for non-recurring effects, mainly PIS and Cofins tax credits, and for the reversal of the provision for profit share in 2011, the fundamentals of our business supported EBITDA growth of 17%. Our business evolved in terms of profitability in both Brazil and the International operations. In the latter we are confident in the continued success of our plan of accelerated growth with significant gain in profitability.

Consolidated net income in 2012 was BRL861m, with free cash flow of BRL884m, or more than double last year. Our working capital improved, due to structural factors such as the improvement in inventory levels, the recovery of tax and progress in accounts payable. Performance in 2012 also benefited from the high comparison rate in 2011, a year affected by higher working capital due to the reversal of the provision for profit sharing and the recognition of PIS and Cofins tax credits.

We continue on a path to structural improvement in working capital, with reductions in inventory coverage and recovery of debt. For CapEx in 2012 we invested BRL437m, which practically concludes the cycle of investment in logistics and information technology for Brazil from the transactional standpoint.

For 2013 we estimate investments of around BRL450m, which will be allocated to the capacity expansion projects at Cajamar and Benevides, to the evolution in our IT [sector] to support the incorporation of digital technology for enhancing the consultant/consumer relationship and to improvement in our systems for international operations.

And last, on the 6th of this month, the Board of Directors approved the proposal for the payment of dividends and interest on equity for our results in fiscal year 2012, which will now be submitted to the Annual Shareholders Meeting. This amount, combined with those prepaid in August 2012, represent a payout of BRL1.97 per share and correspond to 100% of net income for the period.

Those were the main points I wanted to go over today. Thank you very much. Let's go please 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. Bob Ford with Merrill Lynch.

Thank you and good day, everybody. I was intrigued by the reference, I guess it's page two of the press release, the English press release, in its second paragraph -- no, third paragraph, where you mention enabling Natura's network of relationships to expand even further by offering new grants, products, services and businesses. And I was hoping you might expand on those last two references to services and businesses, particularly within the context of Brazil, please.

Hi Bob, it's Alessandro. Thank you for your question. In this paragraph we intend to share with you our vision for the future, so in other words it's not something that we are going to implement in the short term. But on the other hand, when we see all the opportunity that we have to use technology, digital technology and informational technology, to enhance the relationship between the consultants and the customer and also offering outstanding logistics services, we believe that with this new platform, where our consultants can know all the characteristics, all the needs and follow the purchase of each of their consumers, we could be able to offer to our consultants other kinds of products, other kinds of categories and maybe using other brands than Natura.

So this is more regarding the vision of the future, where we are going to move forward to this new way of doing direct selling, connecting people and knowing their behavior and their needs. And using this platform we believe that we can leverage the portfolio of products and service that we offer them. So it is with this vision that we are putting this paragraph for you. It's not something that we are going to start in the short term without a direction, but it's something that we would like to achieve in the future when we have this better platform and this connection with our consultants and their consumers.

That's very interesting.

Another thing to add, of course that when we think to expand the portfolio opportunities for our consultants and their customers, we are always thinking about brands and products that in some way are aligned and they can keep building our corporate reputation. So, in other words, they must fit with Natura values. We don't see ourselves as a company that can sell anything, even if we have this new platform in place. We are always going to do things that, in some way, are correlated with our values or our attributes. But taking this in consideration, we believe that one day we could expand and not only extend the categories that we have today and maybe even other brands.

That makes sense. And out of curiosity, can you talk a little bit about the pilot that you have right now, Campinas, maybe some of the early learnings and then if you've got plans to roll it out more broadly?

Yes, as you know, three months ago we started a pilot in Campinas that now, in this month -- we started with only 1,000 consultants in Campinas and now we are expanding the pilot, it's still a pilot, for all the city, so 6,000, 7,000 consultants. And we started to learn a lot of things, because you can imagine that when you offer something new for our consultants, they react. So we need to learn what we did well, what we did wrong.

So we started to learn a lot and I believe that until the end of this year we are not going to have enough data to conclude anything. But in one year ahead I believe that are going to be able to share with you some of the results and also to share what are the next steps regarding this project. But I can guarantee you that we started learning a lot of things. And we are sure that we need and we are going to invest more and more in technology to enhance the productivity of consultants and their relationship with the customers. And this is the main reason why we are going to keep investing in CapEx this year, when a reasonable part of the BRL450m is going to be directed to this area.

Okay, great, thank you. And then one last question if I might. You mentioned that the current environment or at least the first 10 months of 2012 grew at 17.9%, right, almost 18%. And most of that is coming from shampoo, conditioner and deodorants, right? Then you're also referencing the expectation of being much more aggressive or much more competitive in those segments in the second quarter.

Can you talk about the current environment that you have right now? And as you go into the second quarter to try to take advantage of a growth in these categories, how do you manage that without cannibalizing what's typically a very strong period in terms of Mother's Day for you in the second quarter? Because I was surprised to hear the timing of the launch would be in the second quarter.

Thank you for your question, Bob. As you already said, last year we saw our market growing even above our expectation, 18%, especially in those two categories, hair care and deodorant, that typically they used to grow in a lower pace than the average market; and then last year happened the opposite, so 18-something percent for each one of them. But maybe to start, it's seems possible to share with you that in the beginning of this year we saw the year starting a little bit slowly, so we're not sure that -- if those numbers are going to be repeated.

And even though we saw this year starting a little bit slower than we expected, we are very confident that, because of our innovation pipeline, there is not going to be only in those categories, but we know that in some of them we have very good new products that are going to be launched from the second quarter. It doesn't mean that everything is going to happen in the second quarter, but from the second quarter we are going to see some important launches in the toiletries categories. And as you know, we have our campaigns, our cycle campaigns, that allow us that even if it's in the same quarter we can have one campaign of model, and then we have the next one that can be dedicated to one category or one brand and then you have the other one.

To give you an idea, in one quarter we have from four to five promotional cycles, so we are able to have different initiatives and different marketing approach in the same quarter. But again, the pipeline innovation is not going to happen only in the second quarter, but from the second quarter on.

Great, that makes perfect sense. Thank you very much.

Thanks for your question.

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

Yes, good morning. Just a question on the development of both the direct sales channels and potentially retail channel, vis-a-vis the learnings that you may gain from the Aesop acquisition. In terms of the direct sales channels, my understanding is that the consumer will not be able to buy Natura products online directly ever, so that they will have to continue to go through and develop the relationship with the consultants. I just wanted to verify that, and also to ask if there will still be the personal interaction, how the online consultants will reach out to the consumer? Because if it's an online only, I think because there's a little bit less potential loyalty to the consultants.

And then the other question is would you consider -- particularly with the concept store idea that Aesop has, would you consider ever going into the retail -- the direct -- the retail channel in a limited fashion, and is that -- either in your home market or Latin America or elsewhere? And is that a part of the Aesop interest as opposed to just the brand? So if you could go and give me a little bit more color on those, that would be very good.

Hi Margaret, thank you for your questions. They're very strategic ones. So the first one is that we strongly believe in the future of direct sales and we believe that all the online digital technologies are going to enhance the direct selling model and increase the relationship and also the buying experience for the customer, and not substitute. In other words, what we believe is that the consultants are going to have a better relationship with the customers if they have also the opportunity to do these relationships online. And because we could gradually start to offer an amazing and an outstanding logistic service direct for the customer, we will focus the consultant in the relationship to explore the benefit to do the marketing of our products and not the logistics part.

So we don't believe that this is going to cannibalize; we only believe that the online is going to reinforce the relationship between the consultant and the customer. And every time we speak online, we say online, is the online between the consultant and their customers, and not the online between Natura direct to the final customer. So we strongly believe that this is going to be a very powerful tool to improve all the direct selling model in our case.

Talking about the second point, the concept store, we don't intend -- we don't want to open stores to increase the penetration of our brand, neither in Brazil, neither in Latin America, because we believe that direct selling is an amazing model with all these opportunities that I mentioned previously to do business in this region.

What we can do in this region, and we started already in Brazil, is to have one or two concept stores very well located, but to only build the brand, not as a channel, not to improve penetration. This is in the region that we are today.

On the other hand, when we think about new markets where eventually the direct selling is not a good system to view the brand and to start the operation, we are open to think the possibility to have some concept stores, like Aesop. Not the same stores of course; Aesop, even though it is a brand with a lot of similarities with Natura, it is a different value proposition than Natura. But when you think about the kind of stores that they have, stores where you can tell the story of the brand, receive the customer, have a personal relationship in a very small place, low costs, and a very high level brand building, we believe that this could be a good tool, a good way to start to do business in some markets, especially in those ones where direct selling is not the best channel to start up the operation or to build the brand.

So in other words, here in Brazil and Latin America, we don't believe that we should do business using stores, only brand-like flagship stores. In new markets, where direct selling is not the best way to build the business and to build the brand, we are open to think the possibility to use this kind of retail approach, these concept stores, but we are in the beginning of the learning process. One of the most important benefits of Aesop, like you said, it not only has a very good brand but also to learn how operate and after to learn decide if and where we could expand our business using these kind of concepts.

Okay, that makes sense. And could you just verify for me the fact that in Brazil a customer will not be able to bypass the consultant and buy online directly to get Natura products? In other words, they will have to go through the consultant channel.

Yes, exactly this.

Okay.

We don't want to offer any kind of way to bypass the consultant. What is going to happen is that with all these initiatives we are going also to start to attract a new kind of profile consultant, consultants that are more used to use technology, to use social media. So in other words it's going to be easy for these new customers to find a consultant because it's going to belong to their relationships in the Facebook or wherever. But we don't want and we are not going to pass the consultants.

Okay, thanks very much.

Thank you for your questions.

Excuse me, our next question comes from Mr. Ricardo Boiati with Bradesco.

Hi, everyone, just one quick question. You mentioned that the accounts payable was positively impacted by the calendar in 2012 and by the concentration of CapEx in the last two months of the year. Could you explain a little further these two points, especially the calendar impact? What exactly was the impact and the reasons in 2012? Thanks.

Hi Ricardo. The calendar effect was very simple, because there was holidays on the 29, 30 and 31. Then everything that should be paid in these three days was paid after that, I'm saying. No actions behind this; it's only that there was a holiday in these three days here in Brazil, it was Saturday, Sunday and Monday, or something like this.

The other part is that we had a great concentration of CapEx in media and our accounts payable in the position of December was greater than the same position as December the previous year. And this is not a structural change in the working capital; it's just the moment that we were in then. We estimate that around BRL60m more or less of that position that we had in accounts payable was more due to non-structural evolution; it was just a position at the end of the year.

Okay, very clear. So I assume that these two effects explain the bulk of the improvement in accounts payable, right? Or there were any renegotiations with suppliers or anything like that?

No, structurally speaking, we improved the number of the days, especially with non-productive suppliers that we have a lot of them, during the year we improved the payment terms with them. In accounts payables we have both actions. One is the structural ones that we did and that will continue to do and other one was more control related to the phasing of the December.

Okay, perfect. Thanks a lot.

Thanks.

Excuse me, our next question comes from Mr. Alex Robarts with Citi.

Thanks, good morning, everybody. Two questions on Brazil, first on consultant growth and the second on productivity growth. When we look at the consultant growth here in the fourth quarter year-on-year in Brazil, together with what happened in the third quarter, seemingly there's an inflection point here where growth is decelerating. I mean, you're in the high-single-digit range as opposed to the double-digit growth on consultants that we saw over the previous eight quarters. Can you tell us a little bit, or give us some sense of where you see that consultant growth evolving in this year? Do you think it will kind of stay in this mid-to-high-single-digit range of growth year-on-year? What might be the factors that could influence that? So that's the first question.

The second one relates to the productivity growth. Clearly the 2.9% in the fourth quarter here in Brazil is a very robust number. It also cycles the trough before 2011. So I guess as we think about might Natura, the CNO incentive structure changes, how can we look at the first half of this year vis-a-vis productivity growth, what might be some of the things that you could highlight that could keep this 1% to 3% growth in productivity? Thanks very much.

Hi Alex, it's Alessandro speaking. Well, regarding the consultant growth, what we should expect is that we could project almost the same rate that we saw last quarter, as you mentioned, a mid-high single-digit. That is a new level compared with the previous one that we used to be between 13% and 15%, so -- and this was expected from us. When we decided last year to balance a little bit more the strategy between speed up channel growth and also the productivity, we were expecting a decrease or a deceleration in the consultant growth. But now [we've seen] the new level and you can project more or less these numbers that you already mentioned, and this is expected.

Again, as I mentioned I think in the Portuguese call, we are not limiting the attraction of new consultants -- this is very important for all of you to know -- not only because there is an ethical issue here that we accept anyone that wants to be a consultant. But also it would be not intelligent to limit the number of new consultants. On the other hand, we balance a little bit more the investments on the productivity, so that's why we are in a new level of consultants' growth.

Regarding productivity, as also I mentioned before, it's very difficult to predict a precise number because productivity reacts as a combination of very different factors. And we are sure to say that the increase that we saw, the reflection of the curve in the productivity last year, was mainly because of the initiatives we did. And I can share with you the most important ones. The first one is the improvement in the service levels; the second one was the redirection of the marketing mix to promote productivity for the consultants and for the customer; new indicators to compensate our sales force also driving productivity; and, to finalize, the launch of new products in some segments where we weren't before.

So all those things combined, they pushed the increased productivity. And because it's a combination, it's very difficult to predict exactly what is going to happen. In our opinion in this year we should see almost the same effect because all those things that I mentioned are going to keep impacting positively the results of the company in 2013.

On the other hand, it may be you are not going to see this is in each quarter because, again, each quarter has a different marketing combination; and also you have the market by itself, as I mentioned, this year started a little bit slower. But we are confident that during the year we should see an improving productivity compared with last year because all these initiatives are going to be still in place.

Very helpful, thank you.

Excuse me, our next question comes from [Mr. Rob Parker with Uni Sales].

Hi, thanks for taking the question. My question relates to EBITDA margin in Brazil during the quarter. Besides the VAT increase and some year-ago items, anything else you would highlight that dampened EBITDA margin in the fourth quarter and what level should we expect going forward? Thanks.

Hi Rob. No, I don't think that the Q4 sustainable margin brings anything different from our, let's say, strategy and our way to manage the business. We believe that we have opportunities to improve efficiency in the company and we are working hard in several aspects of the business, in buying, in marketing, in back office, in several areas to improve profitability.

On the other hand we know that we are in a very competitive market and some of these savings we need to invest in some aspects to be more competitive and also to guarantee our long-term future in terms of the key projects that we are managing.

We don't give any guidance of profitability, but the current level that we achieved in 2012 is a good starting point in our view; the consolidated EBITDA of around 24% that we achieved in 2012 is a good starting point.

Great, thank you.

Thank you.

Our next question comes from Mr. Bob Ford with Merrill Lynch.

Thank you very much for the follow up. I think this might be similar to what Ricardo was driving at earlier. But when you look at the free cash flow, it was very impressive, even when you strip out the BRL60m. And it seems to me that you still have opportunities. I mean, you're still not covering just your inventory in terms of your supplier financing. And with the cost of capital as low as it is in the world, particularly with your foreign suppliers, it seems as if that continues to be an opportunity. When you look at cash flow generation in 2013, can you comment within the context of the [BRL459m] in CapEx and the sustainability you see for the current dividend payout, which is just phenomenal?

Bob, just first about working capital. We are in a continuous improvement model here in terms of inventories, we still have opportunities. I think that we advanced quite well in Brazil but we will still continue on that. We still have a lot of opportunity in the international operations. We are integrating now all the international operations with our systems with the local productions that are increasing in the countries, and probably we have space to structurally continue to improve working capital in this area.

The second area of our focus is tax recovery. In Brazil the system is complicated; sometimes we have some taxes that are blocked in some parts or in some states, and these are progressing quite well and we will continue to improve this situation looking forward.

The current scenario that we have, even including Aesop, including income tax that we want, we continue to be very unleveraged; still we finished the year with 0.4, net debt divided by EBITDA, 0.4, and this allows us to continue to practice the dividend that we've been doing in the last years.

Roberto, do you participate increasing debt this year? Because the debt that was incurred at the end of last year sounded like it was just taken on to amortize short-term debt.

Yes, what we did in the end of last year was, we need to -- we have like BRL800m of short-term debt that we are renewing and we took some opportunity in the market in the second half. What I can anticipate is that this model will continue to be unleveraged, reasonably unleveraged, in this range that we are, 0.4 or 0.5, we are in this range of net debt divided by EBITDA. One year it could be a little bit more, another a little bit less, but this level of capital structure will allow us to continue with the practice that we have in the last years.

Thank you very much.

Thank you, Bob.

(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. We continue to focus on the challenge of gradually improving the [versatility] of our consultants while preparing for the future by optimizing our model and improving the buying experience of our consumers. I would like to thank you once again for participating and I look forward to talking with you again in April when we will discuss the results for the first quarter of 2012.

Good afternoon and I hope that you can have a great carnival holiday. As you know in Brazil, we are going to have two days of a great party. So I invite you who has the opportunity to see it by television, to see the Rio Carnival. It's a great show. So thank you for everything and have a great carnival holiday, again.

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