Natura &Co Holding SA (NTCO) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time I would like to welcome everyone to Natura's 2014 fourth-quarter conference call. Today with us, we have Roberto Lima, the CEO, Roberto Pedote, the CFO and Fabio Cefaly, the Investor Relations Manager. We would like to inform you that this event is being recorded. (Operator Instructions).

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. Roberto Lima, the CEO. Mr. Lima, you may begin the conference.

Thank you. Good morning everyone and welcome to Natura's earnings conference call for the fourth quarter of 2014. Five months after coming here I wish to underline my confidence in the capacity and potential of Natura, a company with very strong fundamentals, a unique and contemporary value proposition and a powerful network of relationships.

And that is the reason for its success. And an outstanding position and logistics capacity that enables us to raise the level of growth compared to what we have seen in recent months.

Moving to the recent results, the fourth-quarter performance of our Brazil operations fell below our expectations and below Natura's capacity. However, our international operations maintained their high growth rate and strong performance. Later on Roberto will go into more details on our revenue, EBITDA, CapEx and other information.

In this scenario our top priority is to recover growth in Brazil. For this, we will work even more closely to support our consultants, offering them not just quality products for sales to end consumers, but also new drivers that can increase the efficiency [and results].

By drivers, we mean a strategy of more direct communication with our [final] customers, using traditional media and also by intensifying the use of digital communication to stimulate in them a greater desire to contact our consultants and enjoy the benefits offered by our products.

We are also talking of an [individualized trade] policy that use the most modern scoring techniques based on information and mathematical models. We will offer the consultants (inaudible) applications not only to access information, but also to place orders and also to provide alternatives for payment and receipt of customer payments such as credit and debit cards.

And finally provide direct support to the group of consultants who have their points of sales and offer cash and carry services. In parallel to these initiatives, which are aimed at improving the efficiency of our traditional channel, we are after the national [rollout] of (inaudible) Natura late last December that has brought positive results, concluding the series of adjustments in order to speed up its adoption by consultants and consumers during 2015.

Another of our priorities is to ensure that Natura remains an agile, simple and efficient Company. We will intensify our focus on costs, on budget management and on improving our working capital and investments. But that will come (inaudible) that this year our CapEx will be 24% lower than last year.

For example, we recently set up a team dedicated to buying non-productive material [and service] and CapEx, which will focus on a more efficient use of our resources. We must be increasingly now prepared for a scenario of stronger competition and a challenged macroeconomic environment.

Outside of the Group in Latin America our plan is to maintain the good momentum with strong revenue growth, margin gains and growing a preference for Natura brands.

At Aesop the results have been consistently very good. We will continue to focus on organic growth by opening new stores, including in other countries, while at the same time developing an efficient online network for the brand.

I now turn to Roberto who will provide the results and highlights. Roberto, you have the floor.

Thank you, Roberto. Good morning. Our consolidated net revenue grew by 5.7% in the year and by 0.8% in the fourth quarter. In Brazil, our main market, revenue grew by 1.9% in the year, while decreasing 3.5% in the fourth quarter. Despite the good results of our fragrance launches this wasn't enough to leverage the productivity of our consultants.

In the international operations we maintained our accelerated growth phase to close the year with revenue growth of 26% in Brazilian real. In the Latin American operations revenue grew by 28% in local currency, while Aesop continued its strong growth phase to close the year with 98 stores in 14 countries. [These results] outperforming expectations.

In 2014 our combined international operations contributed with approximately 20% of our total revenues. (Inaudible) profitability when we ended the year with consolidated EBITDA down 3.4% and EBITDA margin decreasing two percentage points, from 23% in 2013 to 21% in 2014. In the fourth quarter we saw an 8.8% reduction in EBITDA.

We have mentioned in previous quarters that we expected profitability in the second half of 2014 similar or close to that of the second half of the previous year, with recovering gross margin and productivity gains throughout the Company's processes.

We achieved EBITDA margin of 22.7%, or 1 percentage point lower than in the second half of 2013. On the one hand, we achieved gross margin recovery and significant nominal reductions in logistics, administrative, selling, projects and IT expenses.

While, on the other hand, we maintained an investment in market innovation. At the same time, delinquency levels remained high, at the same levels as the second quarter.

The 0.7% decrease in sales in Brazil in the second half of the year, suffering from the fourth-quarter performance, resulted in a negative balance in between productivity gains and investments, producing this 1 percentage-point [profitability].

In a competitive, macroeconomically-challenging scenario Natura grew [with] strength its agenda for productivity gain, capturing benefits from [best] investment and on more initiatives.

In combined international operations, including Natura and Aesop, we saw margin and EBITDA gains of BRL54.1m in the fourth quarter and BRL150m in the year, increasing 2.2 times over the previous year and accounting now for 7% of Natura's EBITDA.

Consolidated net income, excluding non-cash and temporary impacts from market-to-market adjustments, fell by [8.7%] in the fourth quarter and by 12.1% in the year compared to 2013, affected by lower EBITDA and higher debt.

If you consider the impact for mark-to-market adjustments net income decreased by 23% in the quarter and 13% in the year. It's important to remember that since we hold our debt to term this market -- mark-to-market impact is temporary and non-cash and it's not the calculation base used for the distribution of profit via dividends or for [income tax].

We ended the year with CapEx of BRL505m, which is in line with our planning, with investments concentrated in concluding our logistics network in Brazil, in expanding our production capacity at our [Plajama] plant, building the [airport party] complex in Para and expanding Natura networks nationwide.

With this, in 2014 we concluded an investment cycle that over the last four years has allocated around BRL2b to take our logistics, productive and technological infrastructure to a new level, the benefits of which have yet to be fully captured.

In 2015 CapEx will reduce to BRL385m, 25% lower than in 2014. And we will focus on technologies for developing our commercial model and also in our international operations.

Cash generation fell in both the quarter and the year due to the lower net income and the higher investment in working capital, especially due to higher inventories.

In December we had a one-off reduction in accounts payable due to an adjustment in production to optimize the chain due to lower sales volumes in the quarter.

For 2015 improving the working capital is one of our priorities, for which we have ongoing concrete actions in inventory management in both Brazil and the international operations, as well as opportunity [and actions in] suppliers and [taxes]. Our capital budget for 2015 assumes and has a target of reduction in working capital.

Those were the main points I wanted to cover and we can now start the Q&A session. Thank you.

(Operator Instructions). John Ferreira, Nau Securities.

Good afternoon, there are two questions if I may. Could you be a bit more specific on the specific initiatives you have in place for tackling working capital over this year?

And the second question is do you have a medium-term target for the sale of non-cosmetic products through your direct sales channel? Thank you?

Hello, John. Talking about working capital, the first is to reduce the inventory levels. In Brazil the main initiatives are we are reducing our target of inventory cover and we are being much more realistic together with the sales team to really do the proper planning according to the sales.

In Brazil what happened last year is that there was -- frustration in the sales was high and we didn't have enough time to adjust our stocks during the year. And now we are being more flexible and also making more [growth] to the [first thing].

In Latin America we are implementing new tools. Today we are (inaudible) we will expand and implement SAP in all the operations. And we -- together with this we are revisiting all the planning processes for Latin America and it will reduce the stock coverage [in this direction].

Also, as we have local production in Mexico, Colombia and Argentina, the increase of this local production will naturally also reduce stocks in Latin America.

In Brazil also we are implementing some measures with our suppliers that will allow us to increase accounts payable. I think that these are the main areas of actions in working capital that we are already implementing and we expect significant positive results in 2015.

Now, can you just repeat your first question?

Yes. The second question was did you have -- do you have any medium-term objectives with regard to the sale of non-cosmetic products through your direct sales channel?

Yes, so it's true that we have a product. We are developing a line of fashion and home products. And what we did is to keep on working on the products and we are forecasting the launching for the year 2016.

So we already developed some vendors, some suppliers for the products that we want to launch and will test that online (inaudible) Natura and is part of our digital [competence].

First results are positive and we will be trying to move the product not spending all the money that we are supposed to spend. We are reducing CapEx and in this case we decided to forecast the launches for 2016.

Thank you.

(Operator Instructions). Mr. Joseph Walsh, Capricorn Capital.

Hello, one question from me. I was just wondering if you could speak to the competitive environment in Brazil and your pricing strategies for the year ahead.

So last year you implemented two price increases, one I understand was a natural inflationary pass-through and the other was to deal with cost pressures on the FX line. In light of a toughening consumer environment is there any material change to the way you're going to price going forward?

So first part of your question was about the competitive environment. And we have to recognize that Brazil is a very, very interesting market. And so we have all the major international companies here and we have some local companies that are doing [good].

And part of that came to the direct sales channel. And it's true that we are sharing the channel with [these] companies and this is our main challenge. So the competition I think that will stay for 2015. And then we have to work a lot on pricing and also product and also the advertising, which means all the elements of the marketing operation.

But on your question specifically about price, we are readjusting in average our price by [3.7] now. This is applied differently in each of our categories and products and we will see how the market reacts to that then to establish he policy for the rest of the year.

It's true that we have to stop losing market share, so we should be aggressive, but it doesn't mean that we will cut our margins. What we are doing is to increase more effort to reduce costs and reducing CapEx for us to create some room to be more flexible on prices.

The second part of your question was about consumer. It's true that markets will keep on growing fast in Brazil even though we see a difficult environment for 2015; high interest rates; inflation; maybe some reduction in credit.

But we still think that CFT is one of the markets that will not losing its strength in this year. And we should be very attentive for not [lose] some opportunities. If I have answered your question, I think this is what I had to say.

Yes. No, thank you very much.

Alex Robarts, Citi.

Hi, thanks very much. Two questions, I guess, I have at this point. When we think about Natura network and the work that you've done with the pilots and such last year, we have the impression that at least you're going -- that the rollout is happening.

And I guess when we think about the contribution this year to sales, to profitability, do you think it's fair for us to assume that there will be a material impact on sales and earnings from Natura network this year? Or is it still perhaps too early and maybe really it's a 2016 project? So that's the first question.

The second one relates to CapEx. We heard also on the Portuguese call that you're coming down to about BRL380m this year. That's a 20%-plus decrease from last year. And just wondering what were the areas that you have eased up on?

And as we think about next couple of years is this going to be a more ongoing level, or normalized level, BRL380m, BRL400m? Or might we think about seeing an increase in that CapEx level over the next couple of years? Thanks very much.

So, Alex, thanks for your question. The first part of your question is about the Natura -- the Rede Natura as we call the Natura network. And it's true that we deployed in a national way during December 2014. We have been making the fine tuning that we need to increase the customer experience in Rede Natura.

We created the [cyclicality] in the network because we want to consider the consultants in the network. But I think that there's one or two other issues that we could represent and now we have a platform that works overall.

We had to add some marketing elements, promotions and advertising, (inaudible) [potential] consumers to the network and the respect that we feel [will] increase the level of participation. But I am not in a position to give you some guidance about the importance of the -- of Rede Natura in our sales for 2015.

It's true that, first of all, we have to recruit new consultants to [adapt] to the system. We have to make some (inaudible) customer retention. We're going to do that. But we'll do tests every time.

So we will do -- we will try to analyze the results of each step we make to be sure that we will not fail on this project. This is the future for us. This is social commerce and this is where we want to be. And then this is a very important project [and to be] considered like that.

In what concerns CapEx, we have the same level of ambition. We will keep on investing in everything that is important for Natura from product side to new technologies, new channels up for our distribution, everything.

What we decided to do is not to accumulate all the products at the same time. And products that could take a long time we are dividing in two or three smaller projects and trying to be [fast] to go to the market and not to put all things in the same place at the same time.

So what we will do is phasing our products, expanding the [some delays], but cutting (inaudible) stage to implement parts of the project that are already ready, instead of waiting for a bit of it to be ready. We will launch some lines before launching an entire category, for example.

So this is what we will try to do. So I cannot assume that the level of CapEx will stay at BRL380m for the next [six] years. Maybe we'll have some opportunities. Acquisitions is something that we learn on how to do. Aesop was a very good example of (inaudible). But for the moment this is what we have, the plan in 2015 BRL385m as [capital] expenses.

Alex, just to complement, this year we are investing -- [in some ways] we still have some carry over from -- to finish some things from last year. But we are investing especially in the IT for the innovation and to improve our commercial model.

And also we are investing this year in our international operations. We are -- as I mentioned, we are implementing SAP in all of our countries. Then this allows us to operate [with this] level and I think that the dynamic, especially international operations, this year is a very heavy year, so (inaudible) allows space for other things looking forward.

Great, thanks -- yes. No, very helpful. Thank you.

Thank you.

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

Thank you. So we are the leaders in the Brazilian market, which is one of the world's largest, best and most competitive CFD markets. I'd like to reiterate my confidence that we will capture more efficiency gains in the local markets by leveraging on the Company's fundamentals, as well as its brand, products and relationship network, and on investments we made in the recent years in infrastructure and information technology.

In Latin America we want to leverage on the [beautiful] cycle of accelerated growth in our consultant base. With a (inaudible) of profitability gains we're investing money in the business and building off the Natura brands.

We will work in a way that is consistent with the Company's history, whose business performance has always been marked by excellence and [based on that proxy] in sustainability and social development, and which maintains intact its ambition to expand its value proposition and take it to more and more people.

I thank you all for participation in this call and we will meet once again in April for the first-quarter earnings. So thank you all very much again and I hope to (inaudible) 2015.

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