Natura &Co Holding SA (NTCO) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Natura's 2013 First Quarter Conference Call. Today with us we have Alessandro Carlucci, the CEO; Roberto Pedote, the CFO; and Fabio Cefaly, with 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 a 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 after the end of the event.

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 our conference call for Natura results in the first quarter of 2013. In Brazil, the beginning of this year was more challenging. We've got sales growth of 3.7%, which fell short of our expectations. This was due to our promotional strategy, which did not prove very effective in motivating our [consultants] in the first half of the quarter, and to the extended summer vocation periods resulting from this year's Carnival holiday falling close to January.

This quarter, the growth in the consultant base in Brazil of 7.8% was in line with our planning, while consultant productivity declined due to the factors I just mentioned. The significant improvements in profitability in our international operations in Latin America leave us more confidence that we already have a solid and robust business platform that will make us a tough player in the region.

In the countries in consolidation -- Argentina, Chile and Peru -- we ended the quarter with EBITDA margin of 14%, while in the countries in implementation, Mexico and Colombia, EBITDA margin was 6.8%, with both operations showing significant progress. We remain highly dedicated and focused on the initiatives that make up our productivity program. Our logistics continue to improve. Today, 40% of orders are delivered within 48 hours.

In March, we launched the Natura Eu Gosto program, which creates incentives for purchases in cross-categories and cross-sub-brands, based on certain customer behavior profiles. We also are very enthusiastic about our innovation plan. And at the end of the second quarter, we will kick off a series of launches in toiletries categories that will allow us to operate in previously unexplored market segments with new concepts and new sub-brands and innovative packaging.

We also made significant progress on projects with impact over the medium term that will enable us to connect and strengthening our relationships. In February, we expanded the pilot Natura Network, offering the project to all 6,000 consultants in the city of Campinas. And on -- on February 28th, we concluded the acquisition of the Australian company Aesop, which confirms our ambition to leverage Natura value proposition by offering new brands and eventually new categories.

I also want to share with you the market share data for 2012, recently release by Euromonitor. In Brazil, we maintained, for the eighth straight year, our leadership in overall CFT markets, with market share of 13.4%, 100 basis points lower than 2011. As we mentioned in the earnings conference call for the fourth quarter last year, we've seen strong growth in toiletry categories last year, mainly [hair care and deodorant], in which our market share losses were concentrate. As I said earlier, our launches should enable us to recover already this year our competitiveness in toiletries products.

In the operations in consolidation, we expanded our market share by 30 basis points to 4.3% and are already -- and we are already a relevant player in these countries. In the operations in implementation, our market share expanded by 20 basis points. In short, despite the lower start of this year, we remain very confident in our productivity program, led by the innovation program, which should bring material results in the third quarter and with first signs emerging already in this next quarter. We are also very enthusiastic about the progress on our direct sales model with the Natura Network.

Those were the points I wanted to cover, so I will now ask Roberto to give us some detail on the results.

Thank you, and good morning. In the first quarter, our consolidated net revenue, excluding Aesop acquisition, grew by 5% on the year-ago period. As Alessandro already mentioned, the results in Brazil fell short of our expectations. Meanwhile, the international operations grew by 30%, or 18% in local currency.

As already expected, we observed a mismatch between gross revenue and net revenue growth in Brazil due to the increase in the value-added margin of ICMS tax in the state of Sao Paulo since August 2012. Note that this impact will no longer exist in the second semester of 2013.

We also registered gross margin compression of 100 basis points, due to the price-cost ratio and higher taxes rate in Brazil, as well as accounting adjustments, such as the elimination of profits on inventories between the manufacturer and distributor. We expect a rebalancing of gross margin over the coming quarters, driven by the full impact of the price increase implemented in March 2013, as well as the new price increase of 3% already planned for the second half of the year that will take effect in September.

Consolidated EBITDA was BRL262 million, with margin of 19.4%. The international operations, which already represent a robust business platform, made a positive margin contribution driven by higher operating leverage in gross margin expansion. Brazil made a negative contribution to the consolidated results mainly due to the pressure on gross margin already mentioned and the lower dilution of spending on digital technologies and projects targeting the medium and long term.

Consolidated net income in the period was BRL125 million, down at 17.7% from the first quarter of 2012. This reduction was due to the operating results, as already mentioned, and to the higher financial expense, which were impacted by two main factors.

The first is the marking to market of financial derivative instruments in view of the fluctuations in the current coupon, which generates purely non-cash accounting effects that will disappear by the maturity of these debts. And the second is an BRL8 million loss from financial hedge operations contracted to offset the impacts from currency fluctuations between the date of the commitment to acquire Aesop and the payment [settlement date]. Note that this financial hedge contract was entered into to comply with our FX exposure policies.

For the whole year, we do not expect net income growth to diverge significantly from EBITDA growth. Cash consumption was BRL110 million, reflecting the CapEx of BRL60 million and unfavorable variation in working capital of BRL248 million. This variation was impacted by the comparison based in December 2012, which enjoyed a positive non-recurring impact of approximately BRL80 million from calendar effect and on a typical concentration in supplier, as I mentioned last quarter.

The working capital position in March 2013 improved by 8% compared to March 2012 due to the better management of supplier inventories. Note that the behavior of working capital has been in line with our plans. The board of directors also approved the buyback of 2.5 million shares to meet the exercise of stock options. The buyback will start on April 29th and last for one year, with the shares we purchased held in treasury.

Those were the main points I wanted to cover today. Thank you very much. Let's go, please, to the Q&A session.

(Operator Instructions). Our first question comes from Robert Ford with Merrill Lynch.

Hey, thank you, and good day, everybody. Hey, guys, I had a question with respect to Eu Gosto. Could you expand a little bit on what you're doing to drive more cross-selling? I know it's been a phenomenal opportunity for you for a while, and I'm curious as to what you've put into place and how it will be funded.

Hi, Bob, it's Alessandro. Would you mind to repeat your question, please?

Absolutely, Alessandro. It had to do with Eu Gosto, the cross-selling incentives. And I know that -- what, it's just like 50% of consumers only consume one or two categories, right, if I'm not mistaken? And it seems like a massive opportunity and has been for a while. So I'm curious as to what you've put into place. I know that you've put a lot of thought behind it, and I just want to know kind of what the structures generally are like and if it will require any additional funding.

Hi, Bob. It's a very good question. And as you know, the cross-category initiative is part of bigger group, a wider group of initiatives. But speaking specifically about this, we started, first of all, to show to our customer in our catalog a different way to see our problems.

So combined with the regular way that is to the sub-brands, we are offering to our customer, and in a different way, a combination of different categories and different sub-brands. We did a study where we understood that there are, you know, almost 20 different profile of customers. And then using this segmentation, we started a month ago to have some pages in the catalog where we offer different products to the needs of this kind of segments of customers.

So, for example, the women that do sports, the classic man, the products for the bath, for the everyday use, so different kind of profiles where you have a page with different products from different sub-brands and dedicated to this kind of customer.

And we have an intention, also, to start to offer promotions to this kind -- this profile of customer. And, of course, when we are going to have the Natura Network implemented, we are going to able also to offer directly to the right customer, because we are going to need -- to know, sorry, where they are and who they are, individually speaking.

So in some way, it's a way to find not-attended needs of our regular customers that today are buying only one or two categories, as you mentioned. But this is in the beginning. We are only starting the project, and we believe that we are going to have a lot of opportunities to increase the frequency of purchase, adding new categories and new sub-brands for the same customer.

And, Alessandro, you made reference to it, but I'm curious if today in Campinas, are you beginning to do this electronically, at least to the consultants? And I'm curious as to what CRM tools are becoming, I guess, practical within the model in Campinas. It's early days, but I expect you're starting to gather data, and that the data on the final consumer will probably build on an accelerated basis, given the introduction of credit cards?

Yes, yes, totally right. Natura Network is going to allow us -- and as you know, we are piloting the Natura Network in Campinas -- allow us -- it's going to allow us to do a more personalized relationship with the customer using CRM.

But now, Bob, our most important efforts in Campinas is to connect the consultants. And we are putting our major efforts to really help the consultants to start to learn how they can use their own sites, how they can use the mobile equipment. And so all the CRM and all this personalized relationship with the customer is going to be done ahead. So today, we are concentrating our efforts to recruit more consultants to the Natura Network and also to teach them and to learn with them how they can use this, too, to increase productivity.

And in a sequence, we are going to leverage the knowledge from their customers to really increase the frequency of the purchase. But we are going to do this probably ahead, a little ahead. So now we have concentrated our efforts to really have more consultants connected in the Natura Network.

Okay. And then just one follow-up. And you alluded to this, as well, is -- with respect to the greater frequency of purchase. As you -- and you had a lot of questions on the Brazil call or the Portuguese call with respect to Sol -- but as you prepare to launch, do you anticipate any changes or modifications to fulfillment policies, given the greater frequency of use of the -- you know, the personal care lines?

Even though we learned during the pilot that this so increased productivity and, of course, increased the frequency of purchase of the customer, we don't have plans to change in the minimum order yet. And of course -- depending -- not only in Sol -- depending on different indicators, we can adjust the minimum order. But this is not planned because of the launch.

Great. Thank you very much.

Thank you, Bob, for your questions.

Our next question comes from [Lori Serra] with Morgan Stanley.

Good morning. Thanks very much. I wanted to ask two questions. The first is just, any -- any thoughts or color on how Mother's Day sales are shaping up? And then, in terms of cost/margins, you know, you had a lot of growth in administrative costs in the first quarter, and obviously that's tough, with the lack of sales growth.

But as you think about historically, you kind of targeted this kind of 23%-24% EBITDA margin. You know, you're not off to a good start in terms of where the first quarter was. How do you think about that goal of getting to that kind of a margin? And how do you sort of get there with the first quarter starting point, please?

Hi, Lori. This is Alessandro speaking. Regarding the Mother's Day, we are very happy with the results of Mother's Day, even though the good information to you is what I already said, that innovation program is going to bring material results in the third quarter and we first find emerging already in this next quarter.

In other words, even though Mother's Day is going very well, you know that in a quarter we have more than one cycle, because sometimes the cycle is very good and another -- and the second one is not so good. So in the combination, it's important for you to follow this orientation, that we're going to see, you know, some first signs of recover in the next quarter. But the big impact of the innovation program is going to be seen in the third -- from the third one.

Perfect. Thank you.

Hi, Lori. Related to -- to the margin, this -- this line of administrative expense is in quarter one, it included several different things. In the consolidated one, we included even the expenses due to the acquisition of Aesop that are there.

Excluding this, if you just see Brazil, Brazil grew 14% [this time in quarter one]. And it includes investments in projects, for example, [Ready Natura], all the group that's working, all the investments that we're doing there in this line. We are investing more in IT, also, includes innovation, includes several things.

What we expect is that we will be able to balance not only this line, but other investments required for 2013, including a very strong support of the innovation in the marketing expense, and also this line that is a mixture of short- and medium-term investments. We believe that we can balance them in the range of what you mentioned that was the margins from previous year, but we don't expect to see this line growing 25%. That was what happened in the first quarter, because we had some extra costs there, as I mentioned.

Thank you.

Our next question comes from Andrea Teixeira with JPMorgan.

Hi, good afternoon. Thank you for taking my follow-up question from the Portuguese call. I just wanted to see, Alessandro, Pedote, if you can, kind of give us an impression on how the mix has been evolving. I mean, I know it's part of the tests, obviously, for in trying to push the category of toiletries, what are -- you know, just wondering if there is any also we -- that we can do that on the productivity side related to -- to a mix effect?

And lastly, you said that, you know, April numbers have been slightly better, and I know other analysts have tried to ask in a different way, but just, as some call for that, you've seen, like, some of the trends in Mother's Day already, so if you -- if you can give us an impression that the trend continues to be positive from the orders or they have received well your campaigns for Mother's Day and if the trend is -- is positive? Thank you.

Hi, Andrea. Well, regarding the mix in productivity and the Sol launch, what we saw in the -- in the pilot test with Sol is that this new line increased productivity, not because of mix effect, but mainly because brings extra added sales. So the consultant keeps selling all our products, as they used to sell, plus a part of Sol.

So, of course, at the end, the mix change, but it's not because of the mix effect that we raised productivity, but because of the added sales, so extra sales, so this is what we expect to see when we launch Sol in Brazil.

And should we think about the -- about the -- sorry (inaudible)

Oh, no. Sorry, sorry, go ahead.

Yeah, just -- just wrapping up in your comments, when you launched [Viosera Life], I believe you mentioned at the beginning of next year, which is another product that you're running together with the Natura Network, do you believe that you can -- that's when we think we can add -- you guys are going to add the additional categories, and that could be another opportunity to increase productivity? Or should we think in a different way?

Well, first of all, we don't have yet an official date to roll out Natura Network. And I believe that this is not going to happen before half of 2014. So -- but even though we don't have yet an -- an official date.

On the other hand, you are right to say that it's going to be much easier for us to add new categories and new value propositions for Natura and for our consultants if they are connected, because we will not have some bottlenecks that we have today, like the catalog, like the cash flow of the consultant, because in the Natura Network the customer can pay with credit card. So there are a lot of advantages for us to have our consultants connected.

And one of them is increased efficiency and the effectiveness of offering new categories and new value proposition. But this is not going to happen and the Natura Network is not going to be rolled out before of the half of 2014.

And you mentioned also -- just to be sure that I answer your question -- regarding Mother's Day, and as I mentioned to Lori, Mother's Day is doing very well. We are very happy. But, on the other hand, we know that the major impact of the innovation program for this year is going to happen in the third quarter, and we are going to see some first signs of recovery in revenues in the second one. But the most important impact is going to happen in the third one.

In other words, I'm trying to say is that, in the second quarter, we have Mother's Day, but we have also other promotional cycles, and the combination of those ones are going to give us, first, recover in revenues, but the most important one is going to happen in the third one.

Okay. Just to make sure that I understand -- and thank you for the clarity -- the Natura Network has to be coming together with the new -- the Internet sales, right, the new -- or we should think about the Natura Network as being completely different or isolated? Or, I mean, it will be in tandem with that, but not necessarily launched at the same time?

Okay, let me clarify. What we call Natura Network is the [Biosphere] project. We use to call Biosphere when it was an internal project, and now it became public, and the real name is Natura Network. So -- and is the program that invites our consultants to be connected to the Internet and to do their business connected and allow the customer to buy directly from the Internet, paying with credit card and receiving the product in one day. This is what we call Natura Network.

And by doing this, we are going to be able to expand the value proposition of the company and to offer new categories and new brands. And this is the project that I was mentioning that is not going to be rolled out before the half of 2014.

Okay, perfect. Thank you for the clarification, Alessandro.

Oh, thank you, Andrea.

Our next question comes from [Luis Sesta] with [Votarachin Cohetura].

Good morning, everybody. Well, regarding the price increase you take place in next September, as mentioned in the Portuguese conference call, I understand that you are [pricing to cost], but I'm also wondering if such movement in prices is also related to another possible tax increase, as was the case in last year. Well, what I'm trying to understand is, if you are or not expecting another tax increase to take place by the second half, thank you.

Luis, it's Roberto here. No, we are not expecting -- we don't have any information in this direction, and we are not expecting. This is what we know today. And the price increase is only because we saw opportunities in the competitive environment and also because we have some cost pressure, so it's only driven by, how can I say...

Markets.

-- markets and commercial.

Yeah.

And not because of taxes --

Okay, thank you very much.

You're welcome.

Our next question comes from Linda Bolton Weiser with B. Riley.

Hello. I was wondering if you could explain if your share loss, if your market share loss in Brazil in 2012, what -- is due to other direct sellers, like maybe Avon, or if it was more to competitors in the regular retail channels and not direct selling?

And also, maybe you could -- maybe you (inaudible) this data, but for the first quarter just reported, can you tell us what the market growth was in Brazil and then also what you think, you know, if your market share was lost, again, who you think the share loss was to? Thank you very much.

Hi, Linda, it's Alessandro speaking. Well, regarding 2012, what happened mostly is that we lost market share basically to two toiletries category, hair care and deodorant, and those two categories are mainly retail categories.

And we know that some of the big companies in this area invested a huge amount of money in new launches and in advertising. And because of this, the growth of those two categories hit a record of more than 20% of growth. That is something that didn't happen in the last 10 years because those two categories are very highly penetrated in Brazil.

So this was for us a specific effect of last year, and mainly because of this, we lost market share. And when we see our market share in what we call core beauty -- that is the cosmetic area, the fragrance area and the makeup area -- we didn't lose market share last year. So answering more precisely your question, we lost in hair care and deodorant and mainly to the retail companies.

Thank you very much.

Our next question comes from Javier Escalante with Consumer Edge Research. Excuse me, Mr. Javier Escalante, your line is open.

Hello?

Yes, Javier. Go ahead. You can ask with your question. Well, we are missing Javier. So, Javier, we are going to call you after the call so we can answer your question.

(Operator Instructions). Our next question comes from Robert Ford with Merrill Lynch.

Okay. Hey, thank you very much for taking the follow-up and because nobody asked a question on this one. There was a lot of focus, and there's a lot of confidence with respect to Sol. Can you share a little bit about what you've experienced in your pilots?

And you made a comment, Alessandro, in the last call that I thought was very intriguing with (inaudible) into other categories, right? And I interpreted that to be (inaudible) daily-use categories, and I was curious, you know, to the extent you can share something, you know, what -- what you're thinking about doing with the brand this year?

Hi, Bob. So what we learned in the pilots, in the Sol pilots, the first one, that this line being extra sales with very low cannibalization, helped to build the brand, so Natura brand is more admired and preferred by the people that used Sol lines, so in other words, brings innovation, brings freshness, brings a lot of good attributes for the brand. And also, we learned what is the right price to position this line, because we tested in three series with different prices, so now we know the best price to leverage profitability and also sales.

And to finalize, we learned that the customer like it so much the product by itself, so it's very accepted the quality, you know, the concept. So we're very confident that we are going to have a good launch.

And when I mentioned that Sol is going to have some other initiatives in the future, it's because we're not going to launch all the categories under this line in the same cycle. In the toiletries, you have different several categories. And we are going to launch gradually and not all of them in the same commercial cycle. And this is going to happen not only this year, but also next year.

And given the vibrancy of the deodorant category that you referred to earlier, right, where so much of the growth last year in [CSNT] came from shampoo and deodorants, is that a category where you feel you have a value proposition that could be relevant over the -- the near term?

Yes, yes, we believe -- and in this specific category, we are going to have something very interesting next year and we believe that we can play an important role, because not only the preference of the brand, but because also the quality of the products and the fragrance, so we believe that we can keep doing good business.

Okay. And then -- and one of the pilots is the soap. And I don't know if it was a -- I assume it was a bar soap, but I'm not certain -- was so, so phenomenally successful that it did lead to some cannibalization. And I'm curious if you'll -- you know, if you were able to find a price point where you could optimize the portfolio effect, I guess, or if -- if you're still trying to find kind of that -- the correct positioning?

In the bar soap, we are going to keep piloting to find a better marketing mix, because we weren't happy with the results, specific with the bar soap. But with the liquid soap, the results were very good. So we are going to keep testing the bar soap in the region and try find a better balance in the marketing mix to launch, also, the bar soap. But until we don't have a good result, we are not going to launch this specific item.

Okay. Well, thank you very much, and I'm very much looking forward to your launches.

Okay. Thank you, Bob.

Excuse me. This concludes today's question-and-answer session. I would like to invite Mr. Carlucci to proceed with his closing statements. Please go ahead, sir.

Thank you for participating in today's conference call. I would like to emphasize our belief that in 2013 we will reap concrete results from our strategy in Brazil and in the international operations. We continue to advance projects that will enable us on the one hand to evolve and modernize the relationship with our network through the use of digital technologies and, on the other hand, to expand Natura's value proposition through new brands and categories connected with the concept of well being well.

Once again, thank you so much, and we are going to be again together in the conference call for the second quarter of 2013. Good day, everyone, and have a nice weekend.

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