Natura &Co Holding SA (NTCO) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Natura's 2013 second quarter conference call. Today with us we have Alessandro Carlucci, the CEO; Roberto Pedote, the CFO; and Fabio Cefaly, the Investor Relation. 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 a 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 after the event is concluded.

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 would 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 earnings conference call for the second quarter of 2013.

In the quarter, net revenue grew by 7% while EBITDA grew 5%. In Brazil, we had expected slight acceleration in our sales growth compared to the first quarter which did not materialize, and we will go over this in more detail later on. In the international operations, our sales growth accelerated and we continued to obtain significant gains in profitability.

In Brazil, after the good performance of sales in the Mother's Day cycle, sales lowered in June which led growth in the quarter to fall short of our expectations. In addition to this lower and more uncertain consumer market, we believe the slow growth in Brazil is explained by a reduction in the buying frequency of our consultants in the period.

Recruiting levels remained solid and the consultant loss rate is very close to the historical average. Therefore, the Natura Consultant activity is an attractive business. What happened is that the existing consultants became less active especially towards the end of the quarter.

As we have mentioned before, the impact from our main efforts to adjust revenue growth, whether through new product launches or other enhancements to the model, will be concentrated over the second half of the year. In addition to the set of initiatives implemented over the last few months, we have focused on some short-term actions that will allow us to recover consultant buying frequency and accelerate growth in Brazil over the second half of the year.

Drawing on lessons learned in the first quarter, we recently made some adjustments to the MAIS Natura Program to make ordering attractive for consultants with lower sales volume which should help increase the buying frequency of these consultants.

Another highlight was the launch of the SOU product line, which offers an innovative and unique proposal of conscious consumption through which we gain access to an unexplored market that offers significant potential for incremental revenue.

In the first half of July on Cycle 11, we launched two categories in the SOU line, liquid soaps and body moisturizers, and this will be followed by a launch of shampoo and conditioners in the second half of this year.

Note that this should be the year's most important launch in terms of incremental revenue and occupying white spaces. In addition to the SOU line, we have more launches planned for the second half of the year that will be especially important for improving our competitiveness in the cosmetic and the fragrance categories.

We have also intensified our market investment to support these launches and the activities of our consultants confident in seeing improvement in revenue growth over the second half of the year. And this higher investment will be financed by our cost-efficiency program with the aim of balancing the Company's profitability.

In our international operations, we remain very confident in our business plan. This quarter, we posted strong revenue growth of 32% in local currency with robust improvement in our profitability as well.

In the countries in consolidation, Argentina, Chile, and Peru, we ended the quarter with EBITDA margin of 23.8% while the countries in implementation, Mexico and Colombia, registered significant EBITDA margin expansion. We expect growth in this region to continue accelerating and also with significant room for improvement in profitability.

Our projects with impact over the medium and long terms, and that will allow us to connect and strengthening our relationships while providing a better buying experience for our consumers, continue to advance as planned.

After eight months operating the Natura network in the city of Campinas, over the next few months, we will formulate a plan for rolling out the network's initial functionalities in Brazil.

In short, we are confident that over the next few months our ongoing actions will boost our competitiveness in the market and help accelerate growth in Brazil.

This was the points I wanted to cover, so I will now ask Roberto Pedote to give us some details on the results. Please, Roberto.

Yes, thank you and good morning. In the first quarter, our consolidated net revenue grew by 6.7% on the year-ago period. As Alessandro already mentioned, revenue growth in Brazil fell short of our expectations.

Meanwhile, in the international operations, net revenue grew by 36% or by 32% in local currency showing the evolution of our strength in these countries. Consolidated gross margin stood at 71% in the quarter, increasing 30 basis points from second quarter 2012 mainly due to the gross margin expansion in the international operations which benefited from the more effective management of promotions and the depreciation in the Brazil real against the basket of currencies of the countries where we operate.

In Brazil, the gross margin contraction of 20 basis points was due to the hike in the tax rate in August 2012 which was partially offset by better management of prices and costs.

Consolidated EBITDA was BRL410 million, increasing 5% from the year-ago quarter. In Brazil, EBITDA decreased 1.6% which was directly due to the lower than expected sales and higher selling expenses which were partially offset by nonrecurring effects. And the international operations once again made a positive contribution to consolidated EBITDA.

I would like to note here that the decision to intensify our marketing investments as mentioned earlier will be financed by the initiatives of our cost-efficiency program with the aim of balancing the Company's profitability.

Consolidated net income in the period was BRL240 million, increasing 12% from the second quarter of 2012. The reduction in the financial expenses was due to the gain this year of around BRL17 million from the marking-to-market of hedge positions which compares with the expense of BRL18 million last year.

Note that this adjustment is non-cash and will be zeroed over the life of the loans since the operations are held to maturity. Excluding this impact, the financial expenses were 7% higher than in the same quarter last year, reflecting our higher average debt balance.

The increase in total debt reflects the temporary need to invest in working capital, the CapEx in the period, and acquisition of the 65% stake in AESOP.

In the first six months of the year, international cash generation grew by 12% on the prior year period to reach BRL509 million. The amount was allocated to working capital needs and to CapEx resulting in a free cash flow of BRL12 million.

In 2013, the phasing of our CapEx was different from that in 2012 with a higher concentration in the first half of the year. We have already invested BRL186 million in 2013 compared to BRL97 million by this point of 2012. In total year the investment in CapEx will be similar. Last year was around BRL438 million and this year will be BRL450 million.

The bulk of these investments were made in our plant in Para and Cajamar, in molds for new product launch, in production capacity for the SOU product line, and in information technology. We invested BRL310 million in working capital, mainly accounts receivable, which is due to the longer payment term extended to our consultants for purchases during the Valentine's Day cycle which we typically offer in our strategies for Mother's Day and Christmas. And also -- and the second reason is inventories due to the lower than expected sales.

Bear in mind also that the position of December 2012 was bolstered by around BRL8 million with a calendar effect in CapEx in mid-year. Therefore certain factors that worked to increase working capital in the second quarter of this year will undergo a reversal over the next few months. This means that cash flow will improve over the second half of the year.

In closing, I would like to comment also that the Board of Directors approved the upfront payment of dividends and interest on equity for the first six months of this year, the net amount of approximately BRL0.84 per share -- BRL0.84 per share which will be paid on August 15 to shareholders of record on July 31st.

Those were the main points I wanted to cover today. Thank you, and let's go please to the question-and-answer session.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

Guilherme Assis, Brasil Plural.

I have one question actually. I would like to understand a little bit about your innovation that you are seeing for the second half of the year specifically on the CNF segment which was a segment that was -- had more market share erosion during the first four months of the year.

Can you give us some color about launches, if it's new launches that you have? I know it's not anything as big as the SOU line, but I would like to understand if you're having -- whole different products have been launched or you're just re-launching or revamping the existing portfolio that you have in that segment? That's my question. Thank you.

Hi Guilherme, this is Alessandro speaking. Well, first of all, I would like to reemphasize that SOU individually speaking is the best and more important launch for the second half of the year. And we are going to also have some relevant launches on the Cosmetic and in the Fragrance area, but I don't have any way to go in more details with you, because as you know we have our competition following Natura. So we don't want to share any more detail, but I'm sure to say that we are going to have a robust innovation pipeline for the second half, SOU in the Toiletry areas and several, a mix, a combination of new ones, revamping existing ones, projects in the second half, also in Cosmetics and Fragrance, but unfortunately because this is only strategic information I prefer not to share.

Now just if I can exploit that just a little bit then like -- because in the first half you had the re-launch or repositioning of the Plant and Aquarela product lines, right? Is this the kind of strategy that we should expect for the CNF segment in the second half of the year, or are you planning on new products? I know nothing like the SOU line, but more new products for the semester?

First of all, Plants and Aquarela, they were launched in the last part of the quarter, so they are going to keep boosting revenues for the rest of the year. And yes, we are going to have similar things, some new products and some renovations in other areas in Natura, not only in hair care and makeup, but also in the other categories that we operate. But again, sorry Guilherme, I can't give you any more detailed information.

No, that's all right. Thank you.

Thank you.

Lore Serra, Morgan Stanley.

I wanted to talk a little bit more about the market growth and share trends in the first part of the year, and you've indicated that your momentum was pretty good and then it slowed at the end of the quarter, and then the market data you showed is for the first four months of the year so it doesn't capture that sort of period.

So I guess I'd like to understand if you think there is something that's not quite right about the data, because the data would suggest that you were pretty stagnant and losing share before the slowdown happened that you're talking about, and I'd like to understand kind of -- we'd never seen this kind of deterioration in market share in your core portfolio, and I'd like to understand why you think it happened.

We've seen it in Toiletries and I know there has been a lot of launches there, but the magnitude of this kind of a drop, we've never seen. So what's going on?

Hi Lore. First of all, the numbers that you see in the market numbers are based on the selling for our --- from our industry, and the numbers that you see from Natura are sellouts, so -- and especially because we know that our consultants, they don't have relevant inventories. So you need to take care about conclusions in the short term.

If you see on a year basis, you can conclude something, but if you see trying to split the quarters you need to take in consideration that the market numbers are based on the selling from the industry to the retailers, and the retailers, they have a significant more amount of inventory than our consultants, then in some way our numbers are more connected with the sellout numbers that are not these ones that you are seeing in the numbers of the markets for the four first months of this year.

What's happened, to explain why we dropped this level of market share again is mainly in the Toiletry, we keep seeing the markets in Brazil growing very fast as we never saw before, I mean, in the last 15 years, in hair care and in the other ones.

There are categories where the retail is more relevant and also with a lower price. In the last --- in the second bimester of the year, we also lost some market share in the Fragrance, and this is going to be recovered in the second of the year because as we already mentioned we have a robust pipeline in the Cosmetic and Fragrance categories also.

And with the SOU line -- and as we already shared with you -- we are going to have the launch of the hair care products during the second half of the year, and also with the launch of the Plant, we believe that we are going to be able to keep the actual level of market share of Natura in the Toiletries and also in the Cosmetic and the Fragrance. So this is the reason why.

Yes, no, I understand, but I want to talk about Cosmetics and Fragrances. I understand the Toiletries and I understand the SOU launch. What I don't understand is the 290 basis point market share drop. So are you saying that there was -- that you believe that there was a lot of loading in the first four months of the year, and that industry growth number of 10%-11% on (inaudible) is not correct?

Sorry. This is an hypothesis. I don't know, but I'm sure that those numbers in the market reflect the sell-in, not the sellout. So this is one hypothesis.

The other thing, and I think is important for you to take in consideration, when you see the market share in two months, sometimes this is due the fact that we had less promotions in this year in those categories than that we had in the last year, and maybe one of our competitors, they have an important launch. So this is more a short-term sign.

I think that we need to wait at least six months to see or to confirm that this is a trend. Sometimes this is only because of the calendar of the marketing initiatives from Natura and also from our competitors. So my suggestion is that don't look so seriously about variation in the market share that's happened only in two months.

If we are going to keep seeing this, we can see that this is a trend, we can say that this is a trend. But from now on I should not say that, Lore, I think that really is because of the sell-in effect that we see in the retail market, and also because of the fact that we have a better innovation pipeline in the second half of the year than we had in the first half of this year.

Okay, so I understand, it is four months of data, but I understand it's not six months or a longer trend. But it also comes at the same time that your [rep] growth has slowed, right? And I understand what you said about activity, but your reps have become less active, let me put it that way, and your core categories have slowed down, which are more direct sales categories in the market.

So when you talk to your reps, when your sales people talk to your reps what are they saying are the reasons for the inactivity? Is it that they're selling somebody else's product? Is it just because Plant didn't resonate or Aquarela didn't resonate? What are they saying, because it's a sharp change in trend, and it's an important issue of reacceleration in terms of the activity level? So why did reps say they were less active?

No, they said that especially in the end of this quarter it was tougher to sell to the customer. They are not saying that they are selling -- they sold more another brand. And when we took a look at our initiatives we saw that we could in -- and we are going to do to improve the investments in marketing to guarantee that independent of the market situation and the intention of the consumer to buy, we are going to motivate both of them, consultants and also customers with a better marketing and more efficient investments to buy Natura products.

So they didn't say to us that there is a special reason why they didn't bought as they used to do in the last part of the quarter.

Okay. Thank you.

We are very confident that in the second half of the year we are going to accelerate the growth of the Company, again, because we have a more robust innovation pipeline, as we mentioned since the beginning of the year, and because several of the initiatives that we already decided are being implemented in the last month and now.

And also adding to this, we are going to increase the investments in marketing. So we are very confident that we are going to accelerate the growth of the Company, and keep the market share and keep the competitiveness of Natura.

Okay. Thanks. And just one last question maybe for Pedote, or maybe for you, I'm not sure. But this trend of offering more installments like you did on Valentine's Day, is that something you're seeing in the industry, is that something that is being started by one of your competitors, or what's causing that trend?

Well, yes, we are seeing in the last years in Brazil more relevance in the new methods of payments from the consumer, especially using credit card with more installments. So we are piloting and testing new ways to offer these kinds of benefits, if I can say like this, to the consultant and to the customer.

And when we conclude that this is something that can add economically speaking to Natura, we are going to implement -- or like we did in the Valentine's Day or we can also offer new methods of payment. Now we are going to keep doing the same, but we are again studying, and if we realize that this can have a relevant economical value for the Company, we can start to offer for our consultants and also for our customers new way to pay Natura.

Great, thank you very much.

Thank you, Lore.

Margaret Kalvar, Harding Loevner.

Could you give me a little bit more color about -- again back to the reps, and do they feel that the consumer is pulling back because of this general uncertainty and the turbulence that's been occurring in Brazil, and the inflation, and the other impacts?

And then also particularly, I believe Coty is becoming more active in the market, and there are more companies that are going to be setting up their own manufacturing in Brazil, and therefore won't be penalized price-wise by the import tariff.

How do you view that going forward? Do you feel that you have kind of a first-mover advantage that will continue, or are you watching them and strategizing specifically to combat that impact?

Well, Margaret, there are -- first of all, of course, that in this quarter we -- probably we were impacted by external environment in Brazil, but we are focusing more on the things that we can improve and do better internally. And we already knew that our innovation pipeline was better. It will be better in the second half of this year.

And we realized that probably the marketing mix that we offer to our consultants were not good enough to keep the activity level, and this is also we are increasing the second half of the year.

So in other words, even though we could be impacted by not so good external environments, we are focusing on the things that we know that we can do better. And this is our main initiatives in the second half of this year.

Regarding the competition, we didn't see anything specific in this period. But we've been seeing, as we already mentioned, in the last four or five years a gradual increasing in competition. And to face this competition we are working to be more innovative to raise, as I said, the marketing investments to guarantee the competitiveness of the Company.

But I don't think that one specific competitor was -- like you mentioned, Coty for example, was the reason why this happened. I think that as an overall, the Brazilian market is being more competitive, and we need to be better and do more innovation and more efficient initiatives to guarantee the competitiveness of the Company, and to keep having the level of market share that we have today, and of course to leverage the preference of the brand. As you know, Natura is the preferred brand in our market, so we are in a good position to really leverage the preference of our brand in the consumer markets.

And just as a follow on, what do you see is the margin impact of the additional marketing investments?

No one because we have a list of initiatives to reduce cost and to increase efficiency that are going to balance this higher investments in marketing. So we are not going to see any kind of impact in the EBITDA margin in this year because of this.

Okay. And just finally, in terms of leveraging brand preference, I think at one time there has been some discussion about interest in putting other kinds of products, possibly related on the health and beauty platform through the network. Are you doing any more consideration of that, and should we be expecting that in the next year or two?

Yes, this is a part of our medium and long-term strategy. We strongly believe that improving the buying experience to our customer and also developing a new product in different categories under the Natura concept, this can amplify the value proposition of the Company. So we are working on that. This is more for the medium and long term.

In the short term, we are working to occupy the white spaces in the CFT industry where Natura is not there yet, and also to keep innovating with new products and new concepts in the areas or in the space that we are already there. So in the medium and long term, you are going to see probably we offering new categories outside the CFT also.

Okay, thank you very much.

Oh, thank you, Margaret.

Kartik Nehru, ESG.

I just wanted to echo some of the other questions that have already been asked when it comes to competition. I guess we've obviously seen Boticario growing quite rapidly and also cosmetics and fragrances being available in drugstores. So if you were to estimate in the first couple of quarters this year -- and I know it's a difficult thing to estimate -- but what percentage of the slowdown has come from competition versus just internal issues with respect to the cycle and with respect to initiatives regarding productivity, how much of this slowdown is competition versus other things?

Kartik, I think that the answer is mainly because of us, and I'm saying this because we already know what we could do different and also because we know that we are going to face more competition. So competition is not something new for us. So we are able and we are going to be able to predict in some way the competition movement and to be ready to do better initiatives, more innovations. So I think that is mainly because of us that we saw a slowdown in the growth of the Company.

And that's why I'm -- we are confident that in the second half of the year we are going to grow more to accelerate the growth of the Company even though we are going to keep having competitors trying to grow also.

So the answer is mainly because of us, because there is nothing really new in the competition, and we already know that they are going to keep working to grow also. So competition is part of our life and we need to be prepared to really be better and to do what we need to do.

Got it, thanks.

Alex Robarts, Citigroup.

Just two questions. I wanted to ask about something that came up in the earlier call, trying to get an understanding of the rep growth in Brazil, I mean last year I guess you were around 8% in 2012.

In this first half we've seen, as well as in the second quarter, about 2% growth. And I think the issue that you were talking about earlier today in the earlier call was taking a look at the reps that are actually putting orders, right? But I guess if you could kind of just talk to a little bit about why we're seeing this deceleration in the rep growth and help us -- (technical difficulty) -- the magnitude of this? That's the first question.

And the second one is on AESOP. I mean, we appreciate you breaking that out for us. This is the first I guess full quarter, right? And if I did the math right it looks like you are around kind of single-digit EBITDA margin in that business. And just wondering if you could kind of comment about how that's going, what things have you been kind of learning that you could share with us? And can we think about that business expanding the margin and kind of adding to the overall consolidated margin movement? Thanks very much.

Hi Alex, let me see if I understood your first question. If you want to have a rough idea about our expectations, about the reps growth excluding this effect in the second quarter of 2013, you should use the level of the second quarter of last year, because last year we grew, but in different levels if you compare the first quarter and the second quarter.

So if you use the second half of 2012, it's a good orientation. It's not the guidance, it's not the precise number, but it's around this level, is our expectation on the sales growth -- the number of rep growth. So round this, so this is our expectation.

Regarding AESOP, the business is growing fast, it is growing more than 30%. The EBITDA margin, you are right, is single-digit, but is also going to grow because the Company is growing and diluting some costs even though the AESOP is expanding through also new stores. So in the future, they are going to add, yes, profitability to the Company because they are going to keep growing fast and also increase in profitability.

Today the one-year EBITDA margin is almost double-digits. And in the numbers that we reported, we included also some costs of depreciation there. But as Alessandro said, the business doing well, it is growing 35% -- 30%-35% per year. The one-year EBITDA margin is already reaching double-digits and the plan is [imparting] improvement over the years.

Okay. Okay, that's very helpful. Just -- sorry, just the last classification on my earlier question on the rep growth, and I appreciate the guidance that we can use or the base that you think we should use. But I think the other way maybe I can ask it is this; I mean do you feel -- or in your numbers do you feel that your -- the rep growth in Brazil is decelerating, and if you think it is, what could you perhaps share with us to help us understand that comp issues or other things, that would be great. Thanks.

We are not seeing this, Alex. We decided internally in the half of last year to decrease the acceleration of growth in the number of reps and to work more to increase their productivity. It was an internal decision, it wasn't an external effect. So we are not seeing a deceleration of the direct selling industry in Brazil.

And it was mainly an internal decision because I think as you know Natura has a very relevant level of penetration in Brazilian households and now we see a huge opportunity to leverage this penetration, increasing the frequency of the consumer purchase. So to reinforce that, we decided to put more effort to increase productivity in the concerted -- in a year-basis, not in the short term, and not put so much energy to keep growing the number of reps. So it was an internal decision.

Got it. Okay, thanks.

Thank you.

Robert Ford, Merrill Lynch.

Alessandro, I was wondering if you might address some of the nuances in terms of the recent compensation changes, or maybe some of the point modifications in terms of consultant orders, and what those were designed to do, and any signs of a change maybe in the behavior of the network?

Well, as you know, we did a small modification. It's small, but relevant in the MAIS program adding a 100 points compensation level that we didn't have before, and this is very important to help to activate our -- the smaller consultants that are also very important for us.

And also recently, in this month, we did some adjustments in the CNO model to compensate their -- them, also to -- regarding the activity of the consultants. Just sharing with you two of the initiatives, and the reception of those two were very good.

We are only starting the second half of the year, so it's too soon to give you any good data. But I can say to you that the reception of our sales people, it was very good regarding all the initiatives, and I'm mentioning only two of them. But the reception was very good.

That's great and very helpful. And then when you talk about getting to the same level of EBITDA margin, right, I think is what we -- you decided -- with this year relative to last year on a consolidated basis, you referred to a dramatic improvement in international operations.

And when you look at Mexico, certainly it's the biggest market that you have internationally, but today not very profitable, but the move toward a multi-level model, I would argue transfers the growth of the network to the network itself, right?

And as that business scales, where are you in maybe the evolution of the business cycle? Do you feel that you're at that point in maturation where we begin to see disproportionate contributions to profitability from Mexico, or do you feel you need to continue to make incremental investments in advertising to -- and other forms of marketing to continue to maintain the growth rate of Mexico?

Thank you for asking, Bob. Mexico, as you said is a very important market for us and a little bit different from the rest of the other markets. That's why we developed the more multi-level approach, but using the Natura principles.

And now we are -- in this moment in Mexico, we recovered growth, so we are very enthusiastic about the moment that we are living in Mexico. And we expect from now on to keep growing, of course investing in Mexico because we want to be a relevant player in that market, but also confident that we are going to see better levels of profitability in Mexico.

So from now on we expect Mexico to add profitability to Natura, not only because the operation is going to keep growing in good levels, but also because we're going to be profitable more and more there in some ways diluting the --

Thanks very much.

-- some of the fixed costs that we have already in the operation.

Okay, that's very helpful. Thanks again.

Thank you, Bob.

[Ian Kespore, Sigma Capital].

Can you guys hear me?

Yes, yes, we can.

Okay. I just have three simple questions actually. I'm sorry if I'm rehashing some of the -- some things that have been asked earlier. But one thing I'm a little bit confused about is -- and I agree with your comment earlier, for example, Unilever implementing SAP so they're obviously selling in a lot more into the market than what the sellout is, right? But the first simple question is are you losing share in direct sale? Do you believe that's the case?

In the short term, when we see the second bimester of this year, we lost, but very few points in indirect selling. When you see the overall and the -- a bigger period of time, the answer is no.

Okay. But when you talk about the share losses that you have year-to-date, it's confusing if you're talking about total market or direct selling. And would your losses in direct selling be less than that of the total market?

Oh Ian, when we share market share we are always talking about the total markets. And when we talk about direct selling we talk about not only CFT. So there are other companies in direct selling, selling for example supplements that are growing faster than Natura. So we are losing market share in the channel of direct selling.

When we talk about CFT, we are talking not about direct selling, we are talking about the CFT market including retailers, including franchise drugstores, and also direct selling. So --

Right, what I'm curious about is if CFT in direct selling?

Yes, I don't have this information precisely to give you.

Okay.

What I answered is in the direct selling channel, Natura lost, but especially for companies, smaller companies, selling different kind of products that are growing faster.

Okay, understood. Now, the other thing you mentioned was competition isn't new, and I'd agree with that. However, there's a couple of different things that I think have changed structurally.

I mean, Boticario three years -- I mean, I have covered you guys for six-seven years now, Boticario, three years ago didn't have a 300,000-plus rep force, right? Avon was a mess. They have a new management team implementing other measures. Coty is in the market. So it does sound like while competition isn't new, the pace of competition is increasing at an exponential rate.

And I guess my main question here is it sounds like you need more marketing investments and lower prices, right, so is the cost of business going higher?

Yes, previously I mentioned that the competitive environment in Brazil is being tougher, not only in this last quarter, but in the last three-four years. So you are totally right. And we are investing in two major areas, in innovation, and innovation not only in the product, but also in the consumer experience; and we are investing in technology because we strongly believe that in the medium-long term the customer wants to have a better experience when they buy the products. So we are investing to promote a strong evolution in our business model.

In the short term what we are going to do, we are going to reinforce the more important innovation pipeline projects that we have, and also we are going to raise the investments in marketing. And this means that we are going to have more money put on those things.

On the other hand, this is not going to affect the profitability of the Company because we have several initiatives regarding efficiency gains and cost reductions to balance those more or higher investments and to keep the actual levels of profitability in the Company.

Right, but you need those efficiency gains to maintain margins (multiple speakers) --

Oh, definitely in; in a very -- in a more competitive market you need to work every day to stop doing things that are not adding value to you because you need to be more competitive, you are totally right, and this is what we've been doing in the several --

Got you.

-- in the last year, so you are totally right.

The last question is in regards to the consultants. You made two comments; one of them which was interesting to me which was they were less active towards the end of the quarter and by that I'm taking the month of June, right? There are lot of things going on in the month of June, protests et cetera, this, that, whatever it might be.

I guess the main question on everybody's mind is -- and I think you answered it before is -- did consultant productivity for the CF&T direct selling channel drop for everybody or did it just drop for you because they're selling more Avon products which is a 50%-60% overlap or they're selling more Boticario products?

Well, I don't know Ian. We don't have this information. And as I mentioned before, even though I'm sure to say that all this confusion that we had in the last part of June probably affected our results and the activity of our consultants.

I'm sure to say that we are looking internally for things that we can do better and we already found things that can be done in a better way because we can manage the internal issues on Natura. We can't manage the external effects, especially these kinds of thing that's happened in June.

So in other words we are assuming all the responsibility for the impacts in the last month of the quarter and we are already implementing better things to guarantee that even if we are going to have a bad time again, I hope not, in the external environment, we can have a good business and good results. But I don't have -- unfortunately I don't have this information.

No, I -- yes, actually no -- I think it's very -- I think it speaks to the high quality of your management team that you're not blaming the macro. It's just that I would like your kind of best educated guess here is you think you were the only ones impacted or if you think --

Well, I --

-- channels?

My guess, my guess is that probably everybody was affected. How much, I don't know, and to be honest we are not spending two minutes to understand how -- what is the relevance of the external or internal impact for Natura. As I mentioned we are putting all the efforts to improve internally. But my guess is that probably other companies were affected by what we saw and hear in the market in the end of the quarter.

All right, thank you very much.

Thank you, Ian, for the good questions.

Javier Escalante, Consumer Edge Research.

And I --- mine is two-part, and I still have to admit that I still don't understand why the acceleration you expected for these second quarter didn't take place? I know that the past participant alluded to something that we all know, that rep sales products, not only Natura products, but also Avon products and Boticario products, and it's a little bit surprising that you don't know whether that was an important price cut or change in compensation that could have affected the participation of the reps for you this second quarter and that was what derailed the acceleration that you expected. So this is question one.

The second part is more structural. To what extent this sell-in that you were talking about, the 13% of the market growth and you're growing 1% to 2%, reflects more a structural issue that is going to hit you, and Avon possibly, in the second half which is a fact that retailers are taking more inventory because they are increasing retailer space for beauty products. So to what extent -- what you're going to do to that because you're saying that you don't react to external factors, but you have to, either your prices are too high or there are increasing points of distribution by your -- by other -- in other channel? Thank you.

Javier, I'll answer the second question, but I would like to ask you after I answer to repeat the first one, it was very bad the quality of communication.

So the second one, what I mentioned is that we can't define how much all the social movements in Brazil in this last part of the quarter impacted the Natura result. I never said that we are not going to react for external factors in the markets.

Of course we are here to face the competition and to do all the things that we know and you already know to keep the competitiveness of the Company. I was mentioning, and the question was regarding all the manifest, and all the social things that we saw in Brazil in the last part of June. It was only that.

Regarding the competition, we are of course looking and acting to be more competitive because the environment is being more competitive. So I think that it was a misunderstanding. And if you could repeat the first question because it was very difficult to understand.

Sure, sure. Thank you for allowing me to explain myself better. So on the --- there are two parts of my question. One is more tactical in the short term. So why do you think that the acceleration you expected the second quarter didn't take place? And is it -- another participant in the call alluded that your reps also sell competitors' products. Do you believe that either changes in prices or changes in compensation may have been the reason?

Now I understood. Well, the reason why we didn't see the small acceleration that we were expecting the second quarter is because the level of activity of our consultants was lower, lower than expected. So in other words less consultants put orders in this period as compared with other periods.

And the main reason because of this is because our marketing mix was not good enough to allow this especially because as we already mentioned we have a better pipeline of innovation for the second half of this year.

And now we realize, and that's why we are also raising the investments in marketing, because they were not good enough and the size that they should be in the first part of this year, especially in the second quarter. So this is the main reason, and not because specific competitor decreased price or they changed compensation in the sales model.

So the reason is mainly because of deficiency of our marketing mix in this period of this year. We thought that could be in the right amount, and now we realize that we could have a bigger one. So this is the --

That's very helpful. That's very helpful. So the second part of the question is when you were talking to Lore earlier in the call you basically clarified what was very helpful that the market data reflects sell-in and it's not sellout.

So then the question I see here is shouldn't we be concerned that this very strong sell-in in the retail channel is basically being that retailers are building up product inventory from L'Oreal and Procter and whomever and this increased inventory is essentially representative of increases in display space and shelf in drugstores and so forth, and essentially that is going to be a structural headwind that you're going to have working against you in the second half, so how you're going to overcome that, that's the second part of the question.

No, Ian (sic), I don't know how to answer your question because sometimes the companies that sell to retail, they do some special promotion to raise inventories because they want to launch an advertising program in the next month that in this case we are talking about May and June, so -- and sometimes it's because the retailers, they are out of stock.

But there isn't a rule, so unfortunately I cannot explain this effect. Sometimes it is only a sell-in effect, sometimes it is because the retailers are selling more. I only said to Lore that when we see those data in the short term we need to be aware that some kinds of variations are not conclusive because there is the sell-in effect, there is the promotional impact of specific initiatives from one or other competitor especially when you split the analysis through the categories.

But unfortunately I don't have enough data to explain this to you. I think that when we have six months, eight months, we can start to reach conclusions about trends. But when you see only a bimester, sometimes the variation, it's not conclusive.

Thank you very, very much.

Thank you Javier.

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 today's conference call. I would like to reinforce our conviction that we will accelerate the level of growth in Brazil while continue to expand our international operations, that we'll keep growing in the fast pace, increasing profitability.

Once again, I would like to thank everyone for participating and look forward to talking to you again in October when we will discuss the results for the third quarter of 2013. Good day everyone, and have a nice weekend.

This concludes Natura's audio conference for today. Thank you very much for your participation. Have a good day.